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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2022

 

or

 

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

For the transition period from ___________ to ___________

 

Commission File Number: 001-16767

 

Western New England Bancorp, Inc. 

 

(Exact name of registrant as specified in its charter)

 

Massachusetts   73-1627673
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification Number)

 

141 Elm Street, Westfield, Massachusetts   01086
(Address of principal executive offices)   (Zip Code)

 

(413) 568-1911

(Registrant’s telephone number, including area code)

 

 

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

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value per share WNEB NASDAQ

 

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

 

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

 

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

 

Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐  Smaller reporting company 
  Emerging growth company   

 

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

 

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

 

At May 2, 2022 the registrant had 22,642,038 shares of common stock, $0.01 par value, issued and outstanding.

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
FORWARD-LOOKING STATEMENTS i
     
PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements of Western New England Bancorp, Inc. and Subsidiaries (Unaudited)  
     
  Consolidated Balance Sheets – March 31, 2022 and December 31, 2021 1
     
  Consolidated Statements of Net Income – Three Months Ended March 31, 2022 and 2021 2
   
  Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2022 and 2021 3
     
  Consolidated Statements of Changes in Shareholders’ Equity – Three Months Ended March 31, 2022 and 2021 4
     
  Consolidated Statements of Cash Flows – Three Months Ended March 31, 2022 and 2021 5
     
  Notes to Consolidated Financial Statements 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 43
     
Item 4. Controls and Procedures 44
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 44
     
Item 1A. Risk Factors 44
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44
     
Item 3. Defaults upon Senior Securities 45
     
Item 4. Mine Safety Disclosure 45
     
Item 5. Other Information 45
     
Item 6. Exhibits 45

 

 

 

 

FORWARD–LOOKING STATEMENTS

 

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

 

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

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

the speed and effectiveness of any COVID-19 vaccines and treatment developments and their deployment, including public adoption rates of any COVID-19 vaccines;

the emergence of new COVID-19 variants, such as the Omicron variant, and the response thereto;

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

changes in the interest rate environment that reduce margins;

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

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

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

changes in business conditions and inflation;

changes in credit market conditions;

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

changes in the securities markets which affect investment management revenues;

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

changes in technology used in the banking business;

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

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

our controls and procedures may fail or be circumvented;

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

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

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

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

 

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

 

 i

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(Dollars in thousands, except per share data)

 

    March 31,     December 31,  
    2022     2021  
ASSETS                
Cash and due from banks   $ 16,983     $ 15,233  
Federal funds sold     2,456       4,901  
Interest-bearing deposits and other short-term investments     43,459       83,322  
Cash and cash equivalents     62,898       103,456  
                 
Available-for-sale securities, at fair value     173,910       194,352  
Held-to-maturity securities, at amortized cost (Fair value of $220,279 and $219,748 at March 31, 2022 and December 31, 2021, respectively)     237,575       222,272  
Marketable equity securities, at fair value     11,643       11,896  
Federal Home Loan Bank of Boston stock and other restricted stock, at cost     2,594       2,594  
Loans, net of allowance for loan losses of $19,308 at March, 31, 2022 and $19,787 at December 31, 2021     1,906,977       1,844,929  
Premises and equipment, net     25,686       26,162  
Accrued interest receivable     7,723       7,775  
Bank-owned life insurance     73,343       72,895  
Deferred tax asset, net     14,981       12,092  
Goodwill     12,487       12,487  
Core deposit intangible     2,469       2,563  
Other assets     23,152       24,952  
TOTAL ASSETS   $ 2,555,438     $ 2,538,425  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY                
LIABILITIES:                
Deposits:                
Non-interest-bearing   $ 630,208     $ 641,284  
Interest-bearing     1,647,956       1,615,614  
Total deposits     2,278,164       2,256,898  
                 
Federal Home Loan Bank advances     1,686       2,653  
Subordinated debt     19,643       19,633  
Securities pending settlement     146        
Other liabilities     36,736       35,553  
TOTAL LIABILITIES     2,336,375       2,314,737  
                 
SHAREHOLDERS' EQUITY:                
Preferred stock - $0.01 par value, 5,000,000 shares authorized, none outstanding at March 31, 2022  and December 31, 2021            
Common stock - $0.01 par value, 75,000,000 shares authorized, 22,742,189 shares issued and outstanding at March 31, 2022; 22,656,515 shares issued and outstanding at December 31, 2021     227       227  
Additional paid-in capital     133,459       132,821  
Unearned compensation – Employee Stock Ownership Plan     (3,307 )     (3,441 )
Unearned compensation - Equity Incentive Plan     (1,943 )     (981 )
Retained earnings     111,358       107,376  
Accumulated other comprehensive loss     (20,731 )     (12,314 )
TOTAL SHAREHOLDERS’ EQUITY     219,063       223,688  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $ 2,555,438     $ 2,538,425  

 

See accompanying notes to unaudited consolidated financial statements.

 

 1

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME – UNAUDITED

(Dollars in thousands, except per share data)

 

                 
    Three Months  
    Ended March 31,  
    2022     2021  
Interest and dividend income:                
Residential and commercial real estate loans   $ 15,343     $ 14,509  
Commercial and industrial loans     2,544       4,542  
Consumer loans     60       69  
Debt securities, taxable     1,923       824  
Debt securities, tax-exempt     3       3  
Marketable equity securities     24       27  
Other investments     25       35  
Short-term investments     21       24  
Total interest and dividend income     19,943       20,033  
                 
Interest expense:                
Deposits     992       1,734  
Long-term debt           273  
Subordinated debt     253        
Total interest expense     1,245       2,007  
Net interest and dividend income     18,698       18,026  
                 
(Credit) provision for loan losses     (425 )     75  
Net interest and dividend income after (credit) provision for loan losses     19,123       17,951  
                 
Non-interest income:                
Service charges and fees     2,174       1,883  
Income from bank-owned life insurance     448       441  
Loss on available-for-sale securities, net     (4 )     (62 )
Net unrealized loss on marketable equity securities     (276 )     (89 )
Gain on sale of mortgages     2       227  
Gain on non-marketable equity investments           546  
Other income     4       58  
Total non-interest income     2,348       3,004  
                 
Non-interest expense:                
Salaries and employees benefits     8,239       7,682  
Occupancy     1,363       1,289  
Furniture and equipment     543       490  
Data processing     723       721  
Professional fees     577       544  
FDIC insurance assessment     286       298  
Advertising     399       338  
Other expenses     2,326       1,965  
Total non-interest expense     14,456       13,327  
Income before income taxes     7,015       7,628  
Income tax provision     1,696       1,837  
         Net income   $ 5,319     $ 5,791  
                 
Earnings per common share:                
Basic earnings per share   $ 0.24     $ 0.24  
Weighted average shares outstanding     22,100,076       24,486,146  
Diluted earnings per share   $ 0.24     $ 0.24  
Weighted average diluted shares outstanding     22,172,909       24,543,554  
Dividends per share   $ 0.06     $ 0.05  

 

See accompanying notes to unaudited consolidated financial statements.

 

 2

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) – UNAUDITED 

(Dollars in thousands)

 

                 
    Three Months Ended March 31,  
    2022     2021  
             
Net income   $ 5,319     $ 5,791  
                 
Other comprehensive income (loss):                
Unrealized losses on available-for-sale securities:                
Unrealized holding losses     (11,468 )     (4,469 )
Reclassification adjustment for net losses realized in income (1)     4       62  
Unrealized losses     (11,464 )     (4,407 )
Tax effect     2,934       1,081  
Net-of-tax amount     (8,530 )     (3,326 )
                 
Cash flow hedges:                
Reclassification adjustment for termination fee realized in interest expense           140  
Tax effect           (39 )
Net-of-tax amount           101  
                 
Defined benefit pension plan:                
Amortization of defined benefit plans actuarial loss     158       234  
Tax effect     (45 )     (66 )
Net-of-tax amount     113       168  
                 
Other comprehensive loss     (8,417 )     (3,057 )
                 
Comprehensive (loss) income   $ (3,098 )   $ 2,734  

 

(1) Realized gains and losses on available-for-sale securities are recognized as a component of non-interest income. The tax effects applicable to net realized gains and losses were $(1,000) and $(14,000) for the three months ended March 31, 2022 and 2021, respectively.

See accompanying notes to unaudited consolidated financial statements.  

 

 3

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED

THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(Dollars in thousands, except per share data)

 

                                                     
    Common Stock     Additional     Unearned     Unearned Compensation-           Accumulated Other        
      Shares     Par  Value     Paid-in
Capital
    Compensation- ESOP     Equity Incentive Plan     Retained Earnings     Comprehensive Loss     Total  
                                                 
BALANCE AT DECEMBER 31, 2020     25,276,193     $ 253     $ 154,549     $ (3,997 )   $ (1,240 )   $ 88,354     $ (11,279 )   $ 226,640  
Comprehensive income                                   5,791       (3,057 )     2,734  
Common stock held by ESOP committed to be released (81,893 shares)                 8       139                         147  
Share-based compensation - equity incentive plan                             231                   231  
Forfeited equity incentive plan shares reissued (19,154 shares)                 (212 )           212                    
Common stock repurchased     (711,635 )     (7 )     (5,770 )                             (5,777 )
Issuance of common stock in connection with stock option exercises     19,400             113                               113  
Issuance of common stock in connection with equity incentive plan (19,827 shares)                 162             (162 )                  
Cash dividends declared and paid on common stock ($0.05 per share)                                   (1,232 )           (1,232 )
BALANCE AT
MARCH 31, 2021
    24,583,958     $ 246     $ 148,850     $ (3,858 )   $ (959 )   $ 92,913     $ (14,336 )   $ 222,856  
                                                                 
BALANCE AT DECEMBER 31, 2021     22,656,515     $ 227     $ 132,821     $ (3,441 )   $ (981 )   $ 107,376     $ (12,314 )   $ 223,688  
Comprehensive income                                   5,319       (8,417 )     (3,098 )
Common stock held by ESOP committed to be released (78,526 shares)                 45       134                         179  
Share-based compensation - equity incentive plan                             301                   301  
Forfeited equity incentive plan shares (6,651 shares)                 (57 )           57                    
Forfeited equity incentive plan shares reissued (7,289 shares)                 71             (71 )                  
Common stock repurchased     (132,358 )     (2 )     (1,178 )                             (1,180 )
Issuance of common stock in connection with stock option exercises     80,881       1       509                               510  
Issuance of common stock in connection with equity incentive plan     137,151       1       1,248             (1,249 )                  
Cash dividends declared and paid on common stock ($0.06 per share)                                   (1,337 )           (1,337 )
BALANCE AT
MARCH 31, 2022
    22,742,189     $ 227     $ 133,459     $ (3,307 )   $ (1,943 )   $ 111,358     $ (20,731 )   $ 219,063  

  

See accompanying notes to unaudited consolidated financial statements.

 

 4

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(Dollars in thousands)

 

                 
    Three Months Ended March 31,  
    2022     2021  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net income   $ 5,319     $ 5,791  
Adjustments to reconcile net income to net cash provided by operating activities:                
(Credit) provision for loan losses     (425 )     75  
Depreciation and amortization of premises and equipment     584       584  
(Accretion) amortization of purchase accounting adjustments, net     (29 )     55  
Amortization of core deposit intangible     94       93  
Net amortization of premiums and discounts on securities and mortgage loans     441       670  
Net amortization of premiums on subordinated debt     10        
Share-based compensation expense     301       231  
ESOP expense     179       147  
Gain on sale of mortgages           (227 )
Principal balance of loans originated for sale     (277 )      
Principal balance of loans sold     277        
Net loss on available-for-sale securities     4       62  
Net change in unrealized loss on marketable equity securities     276       89  
Income from bank-owned life insurance     (448 )     (441 )
Net change in:                
Accrued interest receivable     52       (6 )
Other assets     (954 )     2,603  
Other liabilities     1,661       1,276  
Net cash provided by operating activities     7,065       11,002  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchases of held-to-maturity securities     (20,627 )     (63,973 )
Proceeds from calls, maturities and principal collections of held-to-maturity securities     5,190        
Purchases of available-for-sale securities           (15,821 )
Proceeds from sales and redemption of available-for-sale securities     20       14  
Proceeds from calls, maturities, and principal collections of available-for-sale securities     8,630       17,163  
Loan originations and principal payments, net     (61,603 )     (5,205 )
Redemption of Federal Home Loan Bank of Boston stock           668  
Proceeds from sale of portfolio mortgages           7,801  
Purchases of premises and equipment     (118 )     (907 )
Proceeds from payout on bank-owned life insurance     2,435        
Net cash used in investing activities     (66,073 )     (60,260 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Net increase in deposits     21,275       116,012  
Repayment of long-term debt     (964 )     (15,170 )
Cash dividends paid on common stock     (1,337 )     (1,232 )
Common stock repurchased     (1,034 )     (5,785 )
Issuance of common stock in connection with stock option exercises     510       113  
Net cash provided by financing activities     18,450       93,938  
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS:     (40,558 )     44,680  
Beginning of period     103,456       87,444  
End of period   $ 62,898     $ 132,124  
                 
Supplemental cash flow information:                
Interest paid   $ 1,267     $ 2,046  
Taxes paid     1,020       828  
Net change in cash due to broker for common stock repurchased     146       (8 )

 

See the accompanying notes to unaudited consolidated financial statements.

 

 5

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

MARCH 31, 2022

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations and Basis of Presentation. Western New England Bancorp, Inc. (“Western New England Bancorp,” “WNEB,” “Company,” “we,” or “us”) is a Massachusetts-chartered stock holding company for Westfield Bank, a federally-chartered savings bank (“Bank”).

 

The Bank operates 25 banking offices in Hampden and Hampshire counties in western Massachusetts and Hartford and Tolland counties in northern Connecticut, and its primary sources of revenue are interest income from loans as well as interest income from investment securities. The West Hartford Financial Services Center serves as the Company’s Connecticut hub, housing Commercial Lending, Cash Management and a Mortgage Loan Officer. The Bank’s deposits are insured up to the maximum Federal Deposit Insurance Corporation (“FDIC”) coverage limits.

 

Wholly-owned Subsidiaries of the Bank. Elm Street Securities Corporation, WFD Securities, Inc. and CSB Colts, Inc., are Massachusetts chartered securities corporations, formed for the primary purpose of holding qualified securities. WB Real Estate Holdings, LLC, is a Massachusetts-chartered limited liability company that holds real property acquired as security for debts previously contracted by the Bank.

 

Principles of Consolidation. The consolidated financial statements include the accounts of Western New England Bancorp, the Bank, CSB Colts, Inc., Elm Street Securities Corporation, WB Real Estate Holdings, LLC and WFD Securities, Inc. All material intercompany balances and transactions have been eliminated in consolidation.

 

Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses for each. Actual results could differ from those estimates. An estimate that is particularly susceptible to significant change in the near-term relates to the determination of the allowance for loan losses.

 

Basis of Presentation. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial condition as of March 31, 2022, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results of operations for the year ending December 31, 2022. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

 

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2021, included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”).

 

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

 

 

 6

 

 

2. EARNINGS PER SHARE

 

Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. If rights to dividends on unvested awards are non-forfeitable, these unvested awards are considered outstanding in the computation of basic earnings per share. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by us relate to stock options and certain performance-based restricted stock awards and are determined using the treasury stock method. Unallocated Employee Stock Ownership Plan (“ESOP”) shares are not deemed outstanding for earnings per share calculations. There were no anti-dilutive shares outstanding during the three months ended March 31, 2022 and 2021.

 

Earnings per common share for the three months ended March 31, 2022 and 2021 have been computed based on the following:

 

                 
    Three Months Ended  
    March 31,  
    2022     2021  
    (In thousands, except per share data)  
             
Net income applicable to common stock   $ 5,319     $ 5,791  
                 
Average number of common shares issued     22,705       25,118  
Less: Average unallocated ESOP Shares     (445 )     (527 )
Less: Average unvested equity incentive plan shares     (160 )     (105 )
                 
Average number of common shares outstanding used to calculate basic earnings per common share     22,100       24,486  
Effect of dilutive equity incentive plan     41       28  
Effect of dilutive stock options     32       30  
 Average number of common shares outstanding used to calculate diluted earnings per common share     22,173       24,544  
                 
Basic earnings per share   $ 0.24     $ 0.24  
Diluted earnings per share   $ 0.24     $ 0.24  
                 

 

 

 7

 

 

3. COMPREHENSIVE INCOME (LOSS)

 

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income (loss).

 

The components of accumulated other comprehensive loss included in shareholders’ equity are as follows:

 

    March 31, 2022     December 31, 2021  
    (In thousands)  
             
Net unrealized losses on available-for-sale securities   $ (16,149 )   $ (4,685 )
Tax effect     4,094       1,160  
  Net-of-tax amount     (12,055 )     (3,525 )
                 
Unrecognized actuarial loss on the defined benefit plan     (12,067 )     (12,225 )
Tax effect     3,391       3,436  
Net-of-tax amount     (8,676 )     (8,789 )
                 
Accumulated other comprehensive loss   $ (20,731 )   $ (12,314 )

 

 

 8

 

 

4.       INVESTMENT SECURITIES

 

Available-for-sale and held-to-maturity investment securities at March 31, 2022 and December 31, 2021 are summarized as follows:

 

    March 31, 2022  
    Amortized Cost     Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair Value  
    (In thousands)  
Available-for-sale securities:                                
Debt securities:                                
Government-sponsored enterprise obligations   $ 14,904     $     $ (1,758 )   $ 13,146  
State and municipal bonds     405       1             406  
Corporate bonds     3,022             (26 )     2,996  
Total debt securities     18,331       1       (1,784 )     16,548  
                                 
Mortgage-backed securities:                                
Government-sponsored mortgage-backed securities     163,148       39       (13,489 )     149,698  
U.S. government guaranteed mortgage-backed securities     8,580             (916 )     7,664  
Total mortgage-backed securities     171,728       39       (14,405 )     157,362  
                                 
Total available-for-sale     190,059       40       (16,189 )     173,910  
                                 
Held-to-maturity securities:                                
Debt securities:                                
U.S. Treasury securities     9,981             (461 )     9,520  
Total debt securities     9,981             (461 )     9,520  
                                 
Mortgage-backed securities:                                
Government-sponsored mortgage-backed securities     227,594             (16,835 )     210,759  
Total mortgage-backed securities     227,594             (16,835 )     210,759  
                                 
Total held-to-maturity     237,575             (17,296 )     220,279  
                                 

Total 

  $ 427,634     $ 40     $ (33,485 )   $ 394,189  

 

 9

 

 

    December 31, 2021  
    Amortized Cost     Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair Value  
    (In thousands)  
Available-for-sale securities:                                
Debt securities:                                
Government-sponsored enterprise obligations   $ 14,902     $     $ (676 )   $ 14,226  
State and municipal bonds     405       1             406  
Corporate bonds     3,026       86             3,112  
Total debt securities     18,333       87       (676 )     17,744  
                                 
Mortgage-backed securities:                                
Government-sponsored mortgage-backed securities     171,011       427       (3,929 )     167,509  
U.S. government guaranteed mortgage-backed securities     9,693       8       (602 )     9,099  
Total mortgage-backed securities     180,704       435       (4,531 )     176,608  
                                 
Total available-for-sale     199,037       522       (5,207 )     194,352  
                                 
Held-to-maturity securities:                                
Debt securities:                                
U.S. Treasury securities     9,979             (6 )     9,973  
Total debt securities     9,979             (6 )     9,973  
                                 
Mortgage-backed securities:                                
Government-sponsored mortgage-backed securities     212,293             (2,518 )     209,775  
Total mortgage-backed securities     212,293             (2,518 )     209,775  
                                 
Total held-to-maturity     222,272             (2,524 )     219,748  
                                 

Total 

  $ 421,309     $ 522     $ (7,731 )   $ 414,100  

 

At March 31, 2022, U.S. Treasury securities with a fair value of $4.7 million, government-sponsored enterprise obligations with a fair value of $8.8 million and mortgage-backed securities with a fair value of $55.4 million were pledged to secure public deposits and for other purposes as required or permitted by law. The securities collateralizing public deposits are subject to fluctuations in fair value. We monitor the fair value of the collateral on a periodic basis, and pledge additional collateral if necessary based on changes in fair value of collateral or the balances of such deposits.

 

The amortized cost and fair value of available-for-sale and held-to-maturity securities at March 31, 2022, by final maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations.

 

    Available-for-Sale     Held-to-Maturity  
    Amortized Cost     Fair Value     Amortized Cost     Fair Value  
    (In thousands)  
Debt securities:                                
Due after one year through five years   $ 3,427     $ 3,402     $ 9,981     $ 9,520  
Due after five years through ten years     9,904       8,869              
Due after ten years     5,000       4,277              
Total debt securities     18,331       16,548       9,981       9,520  
Mortgage-backed securities:                                
Due after five years through ten years     1,901       1,823              
Due after ten years     169,827       155,539       227,594       210,759  
Total mortgage-backed securities     171,728       157,362       227,594       210,759  
                                 
Total securities   $ 190,059     $ 173,910     $ 237,575     $ 220,279  

 

 10

 

 

Gross realized gains and losses on sales of available-for-sale securities for the three months ended March 31, 2022 and 2021 are as follows:

 

                 
    Three Months Ended  
    March 31,  
    2022     2021  
    (In thousands)  
             
Gross gains realized   $     $  
Gross losses realized     (4 )     (62 )
Net loss realized   $ (4 )   $ (62 )

 

Proceeds from the sales and redemption of available-for-sale securities totaled $20,000 and $14,000 for the three months ended March 31, 2022 and 2021, respectively.

 

Information pertaining to securities with gross unrealized losses at March 31, 2022 and December 31, 2021, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

 

    March 31, 2022  
    Less Than Twelve Months     Over Twelve Months  
    Number of Securities     Fair Value     Gross Unrealized Loss     Depreciation from Amortized Cost Basis (%)     Number of Securities     Fair Value     Gross Unrealized Loss     Depreciation from Amortized Cost Basis (%)  
    (Dollars in thousands)  
                                                 
Available-for-sale:                                                                
Government-sponsored mortgage-backed securities     39     $ 74,897     $ 5,877       7.3 %     27     $ 70,790     $ 7,612       9.7 %
U.S. government guaranteed mortgage-backed securities     2       1,093       55       4.8       7       6,571       861       11.6  
Government-sponsored enterprise obligations                             3       13,146       1,758       11.8  
Corporate Bonds     1       2,996       26       0.9                            
Total available-for-sale     42       78,986       5,958               37       90,507       10,231          
                                                                 
Held-to-maturity:                                                                
U.S. Treasury securities     2       9,520       461       4.6 %                       %
Government-sponsored mortgage-backed securities     33       198,246       15,523       7.3       2       12,513       1,312       9.5  
Total held-to-maturity     35       207,766       15,984               2       12,513       1,312          
                                                                 
Total     77     $ 286,752     $ 21,942               39     $ 103,020     $ 11,543          

 

 11

 

 

    December 31, 2021  
    Less Than Twelve Months     Over Twelve Months  
    Number of Securities     Fair Value     Gross Unrealized Loss     Depreciation from Amortized Cost Basis (%)     Number of Securities     Fair Value     Gross Unrealized Loss     Depreciation from Amortized Cost Basis (%)  
    (Dollars in thousands)  
                                                 
Available-for-sale:                                                                
Government-sponsored mortgage-backed securities     34     $ 105,221     $ 2,088       1.9 %     18     $ 42,506     $ 1,841       4.2 %
U.S. government guaranteed mortgage-backed securities     2       2,426       142       5.5       5       5,107       460       8.3  
Government-sponsored enterprise obligations                             3       14,226       676       4.5  
Total available-for-sale     36       107,647       2,230               26       61,839       2,977          
                                                                 
Held-to-maturity:                                                                
U.S. Treasury securities     2       9,973       6       0.1 %                       %
Government-sponsored mortgage-backed securities     31       209,775       2,518       1.2                          
Total held-to-maturity     33       219,748       2,524                                    
                                                                 
Total     69     $ 327,395     $ 4,754               26     $ 61,839     $ 2,977          

 

During the three months ended March 31, 2022 and year ended December 31, 2021, the Company did not record any other-than-temporary impairment (“OTTI”) charges on its investments. Management regularly reviews the portfolio for securities with unrealized losses. Management attributed the unrealized losses at March 31, 2022 to increases in current market yields compared to the yields at the time the investments were purchased by the Company and not due to credit quality.

 

The process for assessing investments for OTTI may vary depending on the type of security. In assessing the Company's investments in government-sponsored and U.S. government guaranteed mortgage-backed securities and government-sponsored enterprise obligations, the contractual cash flows of these investments are guaranteed by the respective government-sponsored enterprise; Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), Federal Farm Credit Bank (“FFCB”), or Federal Home Loan Bank (“FHLB”). Accordingly, it is expected that the securities would not be settled at a price less than the par value of the Company's investments. Management's assessment of other debt securities within the portfolio includes reviews of market pricing, ongoing credit quality evaluations, assessment of the investments' materiality, and duration of the investments' unrealized loss position. At March 31, 2022, the Company's corporate and municipal bond portfolios did not contain any securities rated below investment grade, as reported by major credit rating agencies.

 

 12

 

 

5.        LOANS AND ALLOWANCE FOR LOAN LOSSES

 

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

 

    March 31,     December 31,  
    2022     2021  
    (In thousands)  
Commercial real estate   $ 1,039,487     $ 979,969  
Residential real estate:                
Residential one-to-four family     564,339       552,332  
Home equity     100,165       99,759  
 Total residential real estate     664,504       652,091  
                 
Commercial and industrial:                
Paycheck Protection Program (“PPP”) loans     6,052       25,329  
Commercial and industrial     209,890       201,340  
Total commercial and industrial     215,942       226,669  
                 
Consumer     4,252       4,250  
    Total gross loans     1,924,185       1,862,979  
Unamortized PPP loan fees     (255 )     (781 )
Unearned premiums and deferred loan fees and costs, net     2,355       2,518  
Total loans, net     1,926,285       1,864,716  
Allowance for loan losses     (19,308 )     (19,787 )
    Net loans   $ 1,906,977     $ 1,844,929  

 

Loans Serviced for Others.

 

The Company has transferred a portion of its originated commercial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in our accompanying consolidated balance sheets. We continue to service the loans on behalf of the participating lenders. We share with participating lenders, on a pro-rata basis, any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. At March 31, 2022 and December 31, 2021, the Company was servicing commercial loans participated out to various other institutions totaling $78.3 million and $63.2 million, respectively.

 

Residential real estate mortgages are originated by the Bank both for its portfolio and for sale into the secondary market. The Bank may sell its loans to institutional investors such as the FHLMC. Under loan sale and servicing agreements with the investor, the Bank generally continues to service the residential real estate mortgages. The Bank pays the investor an agreed upon rate on the loan, which is less than the interest rate received from the borrower. The Bank retains the difference as a fee for servicing the residential real estate mortgages. The Bank capitalizes mortgage servicing rights at their fair value upon sale of the related loans, amortizes the asset over the estimated life of the serviced loan, and periodically assesses the asset for impairment. The significant assumptions used by a third party to estimate the fair value of capitalized servicing rights at March 31, 2022, include weighted average prepayment speed for the portfolio using the Public Securities Association Standard Prepayment Model (122 PSA), weighted average internal rate of return (9.02%), weighted average servicing fee (0.25%), and average cost to service loans ($83.63 per loan). The estimated fair value of capitalized servicing rights may vary significantly in subsequent periods primarily due to changing market interest rates, and their effect on prepayment speeds and discount rates. For the three months ended March 31, 2022 and 2021, the Company sold $277,000 and $7.6 million in residential real estate mortgages with servicing retained and recorded gains on the sale of mortgages of $2,000 and $227,000, respectively, within non-interest income.

 

At March 31, 2022 and December 31, 2021, the Company was servicing residential mortgage loans owned by investors totaling $85.5 million and $88.2 million, respectively. Servicing fee income of $53,000 and $24,000 was recorded for the three months ended March 31, 2022 and 2021, respectively, and is included in service charges and fees on the consolidated statements of net income.

 

 13

 

 

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

 

                 
    Three Months Ended March 31,  
    2022     2021  
    (In thousands)  
             
Balance at the beginning of year:   $ 693     $ 153  
Capitalized mortgage servicing rights     2       48  
Amortization     (36 )     (15 )
Balance at the end of period   $ 659     $ 186  
Fair value at the end of period   $ 813     $ 235  

 

Loans are recorded at the principal amount outstanding, adjusted for charge-offs, unearned premiums and deferred loan fees and costs. Interest on loans is calculated using the effective yield method on daily balances of the principal amount outstanding and is credited to income on the accrual basis to the extent it is deemed collectable. Our general policy is to discontinue the accrual of interest when principal or interest payments are delinquent 90 days or more based on the contractual terms of the loan, or earlier if the loan is considered impaired. Any unpaid amounts previously accrued on these loans are reversed from income. Subsequent cash receipts are applied to the outstanding principal balance or to interest income if, in the judgment of management, collection of the principal balance is not in question. Loans are returned to accrual status when they become current as to both principal and interest and perform in accordance with contractual terms for a period of at least six months, reducing the concern as to the collectability of principal and interest. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income over the estimated average lives of the related loans.

 

The allowance for loan losses is established through provisions for loan losses charged to expense. Loans are charged-off against the allowance when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated, and unallocated components, as further described below.

 

General component

 

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate (includes one-to-four family and home equity), commercial real estate, commercial and industrial, and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: trends in delinquencies and nonperforming loans; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; and national and local economic trends and industry conditions. There were no changes to the Company’s policies and procedures surrounding the allowance for loan losses during the three months ended March 31, 2022. In addition, during the year ended December 31, 2020, the Company determined that it was prudent to provide an allowance for loan losses related to the loan portfolio acquired on October 24, 2016 from Chicopee Bancorp, Inc. (“Chicopee”) due to the ongoing impacts and extended nature of the pandemic.

 

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

 

Residential real estate. We require private mortgage insurance for all loans originated with a loan-to-value ratio greater than 80% and we do not grant subprime loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. Home equity loans are secured by first or second mortgages on one-to-four family owner occupied properties. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

 

 14

 

 

Commercial real estate. Loans in this segment are primarily income-producing investment properties and owner-occupied commercial properties throughout New England. The underlying cash flows generated by the properties or operations can be adversely impacted by a downturn in the economy due to increased vacancy rates or diminished cash flows, which in turn, would have an effect on the credit quality in this segment. Management obtains financial information annually and continually monitors the cash flows of these loans.

 

Commercial and industrial loans. Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

 

Consumer loans. Loans in this segment are secured or unsecured and repayment is dependent on the credit quality of the individual borrower.

 

Allocated component

 

The allocated component relates to loans that are classified as impaired. Impaired loans are identified by analysis of loan performance, internal credit ratings and watch list loans that management believes are subject to a higher risk of loss. Impairment is measured on a loan by loan basis for commercial real estate and commercial and industrial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

 

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

Unallocated component

 

An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance, if any, reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

 

 15

 

 

An analysis of changes in the allowance for loan losses by segment for the three months ended March 31, 2022 and 2021 is as follows:

 

    Commercial Real Estate     Residential Real Estate     Commercial and Industrial     Consumer     Unallocated     Total  
    (In thousands)  
Balance at December 31, 2020   $ 13,020     $ 4,240     $ 3,630     $ 241     $ 26     $ 21,157  
Provision (credit)     295       (135 )     (60 )     (13 )     (12 )     75  
Charge-offs                 (9 )     (24 )           (33 )
Recoveries           8       1       19             28  
Balance at March 31, 2021   $ 13,315     $ 4,113     $ 3,562     $ 223     $ 14     $ 21,227  
                                                 
Balance at December 31, 2021   $ 12,970     $ 3,964     $ 2,643     $ 197     $ 13     $ 19,787  
Provision (credit)     (639 )     90       89       27       8       (425 )
Charge-offs     (37 )     (16 )     (7 )     (45 )           (105 )
Recoveries           30       1       20             51  
Balance at March 31, 2022   $ 12,294     $ 4,068     $ 2,726     $ 199     $ 21     $ 19,308  

 

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

 

    Commercial Real Estate     Residential Real Estate     Commercial and Industrial     Consumer     Unallocated     Total  
    (In thousands)  
March 31, 2022                                    
Amount of allowance for impaired loans   $     $     $     $     $     $  
Amount of allowance for non-impaired loans     12,294       4,068       2,726       199       21       19,308  
Total allowance for loan losses   $ 12,294     $ 4,068     $ 2,726     $ 199     $ 21     $ 19,308  
                                                 
Impaired loans   $ 9,527     $ 2,976     $ 620     $     $     $ 13,123  
Non-impaired loans     1,025,725       659,784       208,907       4,252             1,898,668  
Impaired loans acquired with deteriorated credit quality     4,235       1,744       363                   6,342  
Total loans   $ 1,039,487     $ 664,504     $ 209,890     $ 4,252     $     $ 1,918,133  
                                                 
December 31, 2021                                                
Amount of allowance for impaired loans   $     $     $     $     $     $  
Amount of allowance for non-impaired loans     12,970       3,964       2,643       197       13       19,787  
Total allowance for loan losses   $ 12,970     $ 3,964     $ 2,643     $ 197     $ 13     $ 19,787  
                                                 
Impaired loans   $ 9,601     $ 3,223     $ 699     $ 22     $     $ 13,545  
Non-impaired loans     965,577       647,098       200,271       4,228             1,817,174  
Impaired loans acquired with deteriorated credit quality     4,791       1,770       370                   6,931  
Total loans   $ 979,969     $ 652,091     $ 201,340     $ 4,250     $     $ 1,837,650  

 

 16

 

 

Past Due and Nonaccrual Loans.

 

The following tables present an age analysis of past due loans, excluding PPP loans, as of the dates indicated:

 

    30 – 59 Days Past Due     60 – 89 Days Past Due     90 Days or More Past Due    

Total

Past Due Loans

   

Total

Current Loans

   

Total

Loans

    Nonaccrual Loans  
    (In thousands)  
March 31, 2022                                          
Commercial real estate   $ 301     $     $ 436     $ 737     $ 1,038,750     $ 1,039,487     $ 660  
Residential real estate:                                                        
Residential     561       270       853       1,684       562,655       564,339       2,846  
Home equity     230             88       318       99,847       100,165       112  
Commercial and industrial     42             24       66       209,824       209,890       370  
Consumer     3                   3       4,249       4,252        

Total loans 

  $ 1,137     $ 270     $ 1,401     $ 2,808     $ 1,915,325     $ 1,918,133     $ 3,988  
                                                         
December 31, 2021                                                        
Commercial real estate   $ 139     $     $ 436     $ 575     $ 979,394     $ 979,969     $ 1,224  
Residential real estate:                                                        
Residential     787       41       507       1,335       550,997       552,332       3,214  
Home equity     57       5       63       125       99,634       99,759       94  
Commercial and industrial     58       10       22       90       201,250       201,340       410  
Consumer     5             11       16       4,234       4,250       22  
Total loans   $ 1,046     $ 56     $ 1,039     $ 2,141     $ 1,835,509     $ 1,837,650     $ 4,964  

 

Impaired Loans.

 

The following is a summary of impaired loans by class:

 

                      Three Months Ended  
    At March 31, 2022     March 31, 2022  
    Recorded Investment     Unpaid Principal Balance     Related Allowance     Average Recorded Investment     Interest Income Recognized  
    (In thousands)  
Impaired Loans (1)                                        
Commercial real estate   $ 13,762     $ 14,907     $     $ 14,078     $ 53  
Residential real estate:                                        
Residential real estate     4,590       5,422             4,735       16  
Home equity     130       153             121       1  
Commercial and industrial     983       3,748             1,026       15  
Consumer                       11        
Total impaired loans   $ 19,465     $ 24,230     $     $ 19,971     $ 85  
                                         

 17

 

 

 

                      Three Months Ended  
    At December 31, 2021     March 31, 2021  
    Recorded Investment     Unpaid Principal Balance     Related Allowance     Average Recorded Investment     Interest Income Recognized  
    (In thousands)  
Impaired Loans (1)                                        
Commercial real estate   $ 14,392     $ 15,563     $     $ 17,403     $ 108  
Residential rea estate:                                        
Residential real estate     4,881       5,381             6,357       104  
Home equity     112       136             143       4  
Commercial and industrial     1,069       3,850             4,827       62  
Consumer     22       37             26        
Total impaired loans   $ 20,476     $ 24,967     $     $ 28,756     $ 278  
(1) Includes loans acquired with deteriorated credit quality and performing troubled debt restructurings.

 

With the exception of loans acquired with deteriorated credit quality, the majority of impaired loans are included within the nonaccrual balances; however, not every loan on nonaccrual status has been designated as impaired. Impaired loans include loans that have been modified in a troubled debt restructuring (“TDR”). Impaired loans are individually evaluated and exclude large groups of smaller-balance homogeneous loans, such as residential mortgage loans and consumer loans, which are collectively evaluated for impairment, and loans that are measured at fair value, unless the loan is amended in a TDR.

 

All payments received on impaired loans in nonaccrual status are applied to principal. There was no interest income recognized on nonaccrual impaired loans during the three months ended March 31, 2022 and March 31, 2021. The Company's obligation to fulfill the additional funding commitments on impaired loans is generally contingent on the borrower's compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company's discretion. At March 31, 2022 and 2021, we had not committed to lend any additional funds for loans that are classified as impaired. Payments received on impaired loans in accrual status are recorded in accordance with the contractual terms of the loan. Interest income recognized on impaired loans during the three months ended March 31, 2022 and 2021 pertained to performing TDRs and purchased impaired loans.

 

Troubled Debt Restructurings.

 

Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan as a result of financial difficulties of the borrower, the Bank grants the borrower a concession on the terms that would not otherwise be considered. Typically, such concessions may consist of a reduction in interest rate to a below market rate, taking into account the credit quality of the note, extension of additional credit based on receipt of adequate collateral, or a deferment or reduction of payments (principal or interest) which materially alters the Bank's position or significantly extends the note's maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan's origination. All loans that are modified are reviewed by the Company to identify if a TDR has occurred. All TDR loans are classified as impaired.

 

When we modify loans in a TDR, we measure impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a specific allowance or a charge-off to the allowance. Nonperforming TDRs are included in nonperforming loans.

 

There were no loan modifications classified as TDRs during the three months ended March 31, 2022 and 2021. During the three months ended March 31, 2022 and 2021, no TDRs defaulted (defined as 30 days or more past due) within 12 months of restructuring. There were no charge-offs on TDRs during the three months ended March 31, 2022 or 2021.

 

 18

 

 

Loans Acquired with Deteriorated Credit Quality.

 

The following is a summary of loans acquired with deteriorated credit quality in the Chicopee acquisition.

 

      Contractual Required Payments Receivable     Cash Expected To Be Collected     Non- Accretable Discount     Accretable Yield     Loans Receivable  
      (In thousands)  
Balance at December 31, 2021     $ 12,134     $ 9,430     $ 2,704     $ 2,499     $ 6,931  
Collections       (669 )     (639 )     (30 )     (50 )     (589 )
Dispositions       (58 )     (58 )           (58 )      
Balance at March 31, 2022     $ 11,407     $ 8,733     $ 2,674     $ 2,391     $ 6,342  

 

Credit Quality Information.

 

The Company utilizes an eight-grade internal loan rating system for commercial real estate and commercial and industrial loans. Performing residential real estate, home equity and consumer loans are grouped with “Pass” rated loans. Nonperforming residential real estate, home equity and consumer loans are monitored individually for impairment and risk rated as “substandard.”

 

Loans rated 1 – 4: Loans rated 1-4 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent acceptable risk.

 

Loans rated 5: Loans rated 5 are considered “Special Mention” and may exhibit potential credit weaknesses or downward trends and are being monitored by management. Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification.

 

Loans rated 6: Loans rated 6 are considered “Substandard.” A loan is classified as substandard if the borrower exhibits a well-defined weakness and may be inadequately protected by the current net worth and cash flow capacity to pay the current debt.

 

Loans rated 7: Loans rated 7 are considered “Doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation of the loan highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.

 

Loans rated 8: Loans rated 8 are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be affected in the future.

 

On an annual basis, or more often if needed, we formally review the ratings on all commercial real estate and commercial and industrial loans. In addition, management utilizes delinquency reports, the criticized loan report and other loan reports to monitor credit quality. In addition, at least on an annual basis, the Company contracts with an external loan review company to review the internal credit ratings assigned to loans in the commercial loan portfolio on a pre-determined schedule, based on the type, size, rating, and overall risk of the loan. During the course of its review, the third party examines a sample of loans, including new loans, existing relationships over certain dollar amounts and classified assets.

 

 19

 

 

The following table presents our loans by risk rating for the periods indicated:

 

    Commercial Real Estate     Residential 1-4 Family     Home Equity     Commercial and Industrial     Consumer     Total  
    (In thousands)  
March 31, 2022                                    
Pass (Rated 1 – 4)   $ 973,892     $ 560,425     $ 99,891     $ 199,763     $ 4,232     $ 1,838,203  
Special Mention (Rated 5)     47,729                   7,464             55,193  
Substandard (Rated 6)     17,866       3,914       274       8,715       20       30,789  
Total   $ 1,039,487     $ 564,339     $ 100,165     $ 215,942     $ 4,252     $ 1,924,185  
                                                 
December 31, 2021                                                
Pass (Rated 1 – 4)   $ 913,063     $ 547,980     $ 99,503     $ 215,605     $ 4,228     $ 1,780,379  
Special Mention (Rated 5)     48,765                   2,777             51,542  
Substandard (Rated 6)     18,141       4,352       256       8,287       22       31,058  
Total   $ 979,969     $ 552,332     $ 99,759     $ 226,669     $ 4,250     $ 1,862,979  

 

 

6.       GOODWILL AND OTHER INTANGIBLES

 

Goodwill.

 

At March 31, 2022 and December 31, 2021, the Company’s goodwill was related to the acquisition of Chicopee in October 2016. There was no goodwill impairment recorded during the three months ended March 31, 2022 or the year ended December 31, 2021. Annually, or more frequently if events or changes in circumstances warrant such evaluation, the Company evaluates its goodwill for impairment.

 

Core Deposit Intangible.

 

In connection with the acquisition of Chicopee, the Bank recorded a core deposit intangible of $4.5 million which is amortized over twelve years using the straight-line method. Amortization expense was $94,000 for the three months ended March 31, 2022 and $93,000 for the three months ended March 31, 2021. At March 31, 2022, future amortization of the core deposit intangible totaled $375,000 for each of the next five years and $594,000 thereafter.

 

7. SHARE-BASED COMPENSATION

 

Stock Options.

 

A summary of stock option activity for the three months ended March 31, 2022 is presented below:

 

      Shares     Weighted Average Exercise Price    

Weighted
Average
Remaining Contractual
Term

(in years)

   

Aggregate
Intrinsic
Value

(in thousands)

 
                           
Outstanding at December 31, 2021       177,881     $ 6.57       0.81     $ 388  
Exercised       (80,881 )     6.29       0.43       211  
Outstanding at March 31, 2022       97,000     $ 6.80       0.81     $ 206  
                                   
Exercisable at March 31, 2022       97,000     $ 6.80       0.81     $ 206  

 

Cash received for options exercised during the three months ended March 31, 2022 and 2021 was $510,000 and $113,000, respectively.

 

 20

 

 

Restricted Stock Awards.

 

In May 2014, the Company’s shareholders approved the 2014 Omnibus Incentive Plan, a stock-based compensation plan (the “2014 RSA Plan”). Under the 2014 RSA Plan, up to 516,000 shares of the Company’s common stock were reserved for grants of stock awards, including stock options and restricted stock, which may be granted to any officer, key employee or non-employee director of WNEB. Any shares that are not issued because vesting requirements are not met were available for future issuance under the 2014 RSA Plan.

 

On an annual basis, the Compensation Committee (the “Committee”) approves long-term incentive awards out of the 2014 RSA Plan, whereby shares will be granted to eligible participants of the Company that are nominated by the Chief Executive Officer and approved by the Committee, with vesting over a three-year term for employees and a one-year term for directors. Annual employee grants provide for a periodic award that is both performance and time-based and is designed to recognize the executive’s responsibilities, reward performance and leadership and as a retention tool. The objective of the award is to align compensation for the named executive officers and directors over a multi-year period directly with the interests of our shareholders by motivating and rewarding creation and preservation of long-term financial strength, shareholder value and relative shareholder return.

 

In February 2019, 108,718 shares were granted. Of the 108,718 shares, 64,496 shares were time-based, with 20,262 vesting in one year and 44,234 vesting ratably over a three-year period. The remaining 44,222 shares granted are performance-based and are subject to the achievement of the 2019 long-term incentive performance metric. The primary performance metric for 2019 grants was return on equity. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period, but will be distributed at the end of the three-year period.

 

The threshold, target and stretch metrics under the 2019 grants are as follows:

 

                         
      Return on Equity Metrics  
Performance Period Ending       Threshold       Target       Stretch  
December 31, 2019       5.75 %     6.13 %     7.00 %
December 31, 2020       6.00 %     6.75 %     7.75 %
December 31, 2021       6.25 %     7.00 %     8.00 %

 

Eligible participants will be able to earn between 50% (“threshold” performance), 100% (“target” performance) and 150% (“maximum” performance). As of December 31, 2021, the three-year performance period for the 2019 grants ended. The 2019 long term incentive plan included a “catch-up” provision allowing unearned performance-based shares from the 2019 and 2020 performance periods to be earned at the end of the three-year period based on the final year performance. Of the original 44,222 performance-based shares granted in 2019, 40,003 shares were eligible for vesting based on achieving target. Because of the “catch-up” provision within the plan, 60,009 performance-based shares vested and were issued to eligible recipients in February 2022 based on achieving stretch for each performance period.

 

In February 2020, 120,053 shares were granted. Of the 120,053 shares, 69,898 shares were time-based, with 19,760 vesting in one year and 50,138 vesting ratably over a three-year period. The remaining 50,155 shares granted are performance-based and are subject to the achievement of the 2020 long-term incentive performance metrics, with 50% of the performance-based shares vesting for each performance metric. The primary performance metrics for the 2020 grants are return on equity and earnings per share. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period for return on equity metrics and for a three-year cumulative performance period for earnings per share, but will be distributed at the end of the three-year period as earned.

 

 21

 

 

The threshold, target and stretch metrics under the 2020 grants are as follows:

 

                         
      Return on Equity Metrics  
Performance Period Ending       Threshold       Target       Stretch  
                           
December 31, 2020       5.00 %     5.48 %     6.00 %
December 31, 2021       5.62 %     6.24 %     6.86 %
December 31, 2022       6.29 %     6.99 %     7.69 %

 

                         
      Earnings Per Share Metrics  
Performance Period Ending     Threshold     Target     Stretch  
                     
Three-year Cumulative Diluted Earnings Per Share     $ 1.50     $ 1.65     $ 1.80  

 

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

 

The fair market value of shares awarded is based on the market price at the grant date, recorded as unearned compensation and amortized over the applicable vesting period. Performance-based metrics are monitored on a quarterly basis in order to compare actual results to the performance metric, with any necessary adjustments being recognized through share-based compensation expense and unearned compensation.

 

In February 2021, 19,827 shares were granted to our directors, with a one-year vesting period. At December 31, 2021, there were no remaining shares available to grant under the 2014 RSA Plan.

 

In May 2021, the Company’s shareholders approved the 2021 Omnibus Incentive Plan, a stock-based compensation plan (the “2021 RSA Plan”). Under the 2021 RSA Plan, up to 700,000 shares of the Company’s common stock were reserved for grants of stock awards, including stock options and restricted stock, which may be granted to any officer, key employee or non-employee director of the Company. Any shares that are not issued because vesting requirements are not met will be available for future issuance under the 2021 RSA Plan.

 

In May 2021, 122,362 shares were granted. Of the 122,362 shares, 61,181 shares were time-based, vesting ratably over a three-year period. The remaining 61,181 shares granted are performance-based and are subject to the achievement of the 2021 long-term incentive performance metrics, with 50% of the performance-based shares vesting for each performance metric. The primary performance metrics for the 2021 grants are return on equity and earnings per share. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period for return on equity metrics and for a three-year cumulative performance period for earnings per share, but will be distributed at the end of the three-year period as earned.

 

The threshold, target and stretch metrics under the 2021 grants are as follows:

 

                         
      Return on Equity Metrics  
Performance Period Ending     Threshold     Target     Stretch  
                     
December 31, 2021       5.63 %     6.25 %     7.50 %
December 31, 2022       5.85 %     6.50 %     7.80 %
December 31, 2023       6.08 %     6.75 %     8.10 %

 

                         
      Earnings Per Share Metrics  
Performance Period Ending     Threshold     Target     Stretch  
                     
Three-year Cumulative Diluted Earnings Per Share     $ 1.58     $ 1.97     $ 2.36  
                           

 

 22

 

 

In March 2022, 137,151 shares were granted. Of the 137,151 shares, 77,463 shares were time-based, with 17,775 vesting in one year and 59,688 vesting ratably over a three-year period. The remaining 59,688 shares granted are performance-based and are subject to the achievement of the 2022 long-term incentive performance metrics, with 50% of the performance-based shares vesting for each performance metric. The primary performance metrics for the 2022 grants are return on equity and earnings per share. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period for return on equity metrics and for a three-year cumulative performance period for earnings per share, but will be distributed at the end of the three-year period as earned.

 

The threshold, target and stretch metrics under the 2022 grants are as follows:

 

                         
      Return on Equity Metrics  
Performance Period Ending     Threshold     Target     Stretch  
                     
December 31, 2022       7.79 %     8.20 %     8.61 %
December 31, 2023       7.93 %     8.35 %     8.77 %
December 31, 2024       8.03 %     8.45 %     8.87 %

 

                         
      Earnings Per Share Metrics  
Performance Period Ending     Threshold     Target     Stretch  
                     
Three-year Cumulative Diluted Earnings Per Share     $ 2.35     $ 2.61     $ 2.85  
                           

 

At March 31, 2022, there were 440,487 remaining shares available to grant under the 2021 RSA Plan.

 

A summary of the status of restricted stock awards at March 31, 2022 and 2021 is presented below:

 

      Shares     Weighted Average Grant Date Fair Value  
Balance at December 31, 2021       213,381     $ 8.91  
Shares granted       144,440       9.14  
Shares forfeited       (6,651 )     8.66  
Shares vested       (60,009 )     9.77  
Balance at March 31, 2022       291,161     $ 8.85  

 

      Shares     Weighted Average Grant Date Fair Value  
Balance at December 31, 2020       178,766     $ 9.63  
Shares granted       19,827       8.17  
Shares forfeited       (19,154 )     11.05  
Shares vested       (27,727 )     9.81  
Balance at March 31, 2021       151,712     $ 9.23  

 

We recorded total expense for restricted stock awards of $301,000 and $231,000 for the three months ended March 31, 2022 and 2021, respectively.

 

8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

 

Total borrowing capacity includes borrowing arrangements at the FHLB, the Federal Reserve Bank (“FRB”), and borrowing arrangements with correspondent banks.

 

The Company is a member of the FHLB and uses borrowings as an additional source of funding to finance the Company’s lending and investing activities and to provide liquidity for daily operations. FHLB advances also provide more pricing and option alternatives for particular asset/liability needs. The FHLB provides a central credit facility primarily for member institutions. As an FHLB member, the Company is required to own capital stock of the FHLB, calculated periodically based primarily on its level of borrowings from the FHLB. FHLB borrowings are secured by certain securities from the Company’s investment portfolio not otherwise pledged as well as certain residential real estate and commercial real estate loans. Advances are made under several different credit programs with different lending standards, interest rates and range of maturities. This relationship is an integral component of the Company’s asset-liability management program. At March 31, 2022, the Bank had $464.1 million in additional borrowing capacity from the FHLB.

 

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The Company also has an available overnight Ideal Way line of credit with the FHLB of $9.5 million as of March 31, 2022. Interest on this line of credit is payable at a rate determined and reset by the FHLB on a daily basis. The outstanding principal is due daily but the portion not repaid will be automatically renewed. As of March 31, 2022 and December 31, 2021, there were no advances outstanding under this line.

 

The Company has an available line of credit of $5.7 million with the FRB Discount Window at an interest rate determined and reset on a daily basis. Borrowings from the FRB Discount Window are secured by certain securities from the Company’s investment portfolio not otherwise pledged. As of March 31, 2022 and December 31, 2021, there were no advances outstanding under this line.

 

The Company also has pre-established, non-collateralized overnight borrowing arrangements with large national and regional correspondent banks to provide additional overnight and short-term borrowing capacity for the Company. The Company has a $15.0 million line of credit with a correspondent bank and a $50.0 million line of credit with another correspondent bank, both at an interest rate determined and reset on a daily basis. As of March 31, 2022 and December 31, 2021, there were no advances outstanding under these lines.

 

Long-term debt consists of FHLB advances with an original maturity of one year or more. At March 31, 2022, we had $1.7 million in long-term debt with the FHLB, compared to $2.7 million in long-term debt with the FHLB at December 31, 2021.

 

9. SUBORDINATED DEBT

 

On April 20, 2021, the Company completed an offering of $20 million in aggregate principal amount of its 4.875% fixed-to-floating rate subordinated notes (the “Notes”) to certain qualified institutional buyers in a private placement transaction.

 

Unless earlier redeemed, the Notes mature on May 1, 2031. The Notes will bear interest from the initial issue date to, but excluding, May 1, 2026, or the earlier redemption date, at a fixed rate of 4.875% per annum, payable quarterly in arrears on May 1, August 1, November 1 and February 1 of each year, beginning August 1, 2021, and from and including May 1, 2026, but excluding the maturity date or earlier redemption date, equal to the benchmark rate, which is the 90-day average secured overnight financing rate, plus 412 basis points, determined on the determination date of the applicable interest period, payable quarterly in arrears on May 1, August 1, November 1 and February 1 of each year. The Company may also redeem the Notes, in whole or in part, on or after May 1, 2026, and at any time upon the occurrence of certain events, subject in each case to the approval of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Notes were designed to qualify as Tier 2 capital under the Federal Reserve’s capital adequacy regulations.

 

The Notes are presented net of issuance costs of $357,000 as of March 31, 2022, which is being amortized into interest expense over the life of the Notes. Amortization of issuance costs into interest expense was $10,000 for the three months ended March 31, 2022.

 

10. PENSION BENEFITS

 

We provide a defined benefit pension plan for eligible employees (the “Plan”). Employees must work a minimum of 1,000 hours per year to be eligible for the Plan. Eligible employees become vested in the Plan after five years of service. We plan to contribute to the Plan the amount required to meet the minimum funding standards under Section 412 of the Internal Revenue Code of 1986, as amended. Additional contributions will be made as deemed appropriate by management in conjunction with the Plan’s actuaries. We have not yet determined how much we expect to contribute to the Plan in 2022. No contributions have been made to the Plan for the three months ended March 31, 2022. The Plan’s assets are invested in various pooled separate investment accounts offered by Principal Life Insurance Company, a division of Principal Financial Group, who is the custodian of the Plan. The Plan is administered by an officer of Westfield Bank. On September 30, 2016, we effected a soft freeze on the Plan and therefore no new participants will be included in the Plan after such effective date.

 

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

 

                 
   

Three Months Ended

March 31,

 
    2022     2021  
    (In thousands)  
Service cost   $ 334     $ 454  
Interest cost     313       295  
Expected return on assets     (427 )     (439 )
Amortization of actuarial loss     158       234  
Net periodic pension cost   $ 378     $ 544  

 

  

11. DERIVATIVES AND HEDGING ACTIVITIES

 

Risk Management Objective of Using Derivatives.

 

The Company is exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of our assets and liabilities and the use of derivative financial instruments. Specifically, we entered into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally related to certain variable rate loan assets and variable rate borrowings.

 

The following table presents information about interest rate swaps at March 31, 2022 and December 31, 2021:

 

March 31, 2022   Notional     Weighted Average     Weighted Average Rate     Fair  
    Amount     Maturity     Receive     Pay     Value  
    (In thousands)     (In years)                 (In thousands)  
Non-hedging derivatives:                                        
Loan-level swaps – dealer counterparties   $ 15,951       10.9       2.13 %     3.76 %   $ 449  
Loan-level swaps – borrower counterparties     15,951       10.9       3.76 %     2.13 %     (449 )
Forward starting loan-level swaps - dealer counterparties     22,390       10.3                       2,363  
Forward starting loan-level swaps - borrower counterparties     22,390       10.3                       (2,363 )
Total   $ 76,682                             $ 0  

 

December 31, 2021   Notional     Weighted Average     Weighted Average Rate     Fair  
    Amount     Maturity     Receive     Pay     Value  
    (In thousands)     (In years)                 (In thousands)  
Non-hedging derivatives:                                        
Loan-level swaps – dealer counterparties   $ 16,023       11.1       1.99 %     3.76 %   $ (662 )
Loan-level swaps – borrower counterparties     16,023       11.1       3.76 %     1.99 %     662  
Forward starting loan-level swaps - dealer counterparties     22,390       10.5                       1,030  
Forward starting loan-level swaps - borrower counterparties     22,390       10.5                       (1,030 )
Total   $ 76,826                             $ 0  

 

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Cash Flow Hedges of Interest Rate Risk.

 

The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish these objectives, we entered into interest rate swaps as part of our interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for our making fixed payments.

 

For derivatives designated as cash flow hedges, the changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings. We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of six years (excluding forecasted payment of variable interest on existing financial instruments).

 

Non-hedging Derivatives.

 

Derivatives not designated as hedges are not speculative, but rather result from a service the Company provides to certain customers. The Company executes loan level derivative products such as interest-rate swap agreements with commercial banking customers to aid them in managing their interest-rate risk by converting floating-rate loan payments to fixed-rate loan payments. The Company concurrently enters into offsetting swaps with a third party financial institution, effectively minimizing its net risk exposure resulting from such transactions. The third-party financial institution exchanges the customer's fixed-rate loan payments for floating-rate loan payments. As the interest-rate swap agreements associated with this program do not meet hedge accounting requirements, changes in the fair value are recognized directly in earnings.

 

Fair Values of Derivative Instruments on the Balance Sheet.

 

The table below presents the fair value of our derivative financial instruments not designated as hedging instruments as well as our classification on the balance sheet as of March 31, 2022 and December 31, 2021.

 

 March 31, 2022   Asset Derivatives   Liability Derivatives
    Balance Sheet Location   Fair Value   Balance Sheet Location   Fair Value  
    (In thousands)
Derivatives not designated as hedging instruments:                  
Interest rate swap – with borrower counterparties       $ 0       $ 2,812  
Interest rate swap – with dealer counterparties         2,812         0  
Total derivatives not designated as hedging instruments   Other Assets   $ 2,812   Other Liabilities   $ 2,812  

  

 December 31, 2021   Asset Derivatives   Liability Derivatives
    Balance Sheet Location   Fair Value   Balance Sheet Location   Fair Value  
    (In thousands)
Derivatives not designated as hedging instruments:                  
Interest rate swap – with borrower counterparties       $ 662       $ 1,030  
Interest rate swap – with dealer counterparties         1,030         662  
Total derivatives not designated as hedging instruments   Other Assets   $ 1,692   Other Liabilities   $ 1,692  

 

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

 

There were gains or losses recognized in accumulated other comprehensive income during the three months ended March 31, 2021 or 2020.

 

Amounts reported in accumulated other comprehensive loss related to cash flow hedge derivatives are reclassified to interest expense as interest payments are made on our designated rate sensitive liabilities. The table below presents the amount reclassified from accumulated other comprehensive loss into net income for interest rate swaps and termination fees:

 

    Amount of Loss Reclassified from OCI into Expense (Effective Portion)  
    Three Months Ended March 31,  
             
    2022     2021  
                 
Interest rate swaps   $ 0     $ 140  

 

As of December 31, 2021, the Company no longer has any outstanding cash flow hedges.

 

Credit-risk-related Contingent Features

 

By using derivative financial instruments, we expose ourselves to credit risk. Credit risk is the risk of failure by the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative is negative, we owe the counterparty and, therefore, it does not possess credit risk. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that we believe to be creditworthy and by limiting the amount of exposure to each counterparty.

 

We have agreements with our derivative counterparties that contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. We also have agreements with certain of our derivative counterparties that contain a provision where if we fail to maintain our status as well capitalized, then the counterparty could terminate the derivative positions and we would be required to settle our obligations under the agreements. Certain of our agreements with our derivative counterparties contain provisions where if a formal administrative action by a federal or state regulatory agency occurs that materially changes our creditworthiness in an adverse manner, we may be required to fully collateralize our obligations under the derivative instrument.

 

At March 31, 2022, we had minimum collateral posting thresholds with certain of our derivative counterparties. As of March 31, 2022, we were not required to post collateral under these agreements because we did not have any derivatives in a liability position with those counterparties.

 

12. FAIR VALUE OF ASSETS AND LIABILITIES

 

Determination of Fair Value.

 

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for our various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

 

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