Quarterly Report (10-q)

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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

☐

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.

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.

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.

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.

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.

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.

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.

2. EARNINGS PER SHARE

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

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


	Three Months Ended
	March 31,
	2022			2021
	(In thousands, except per share data)

Net income applicable to common stock	$	5,319		$	5,791

Average number of common shares issued		22,705			25,118
Less: Average unallocated ESOP Shares		(445	)		(527	)
Less: Average unvested equity incentive plan shares		(160	)		(105	)

Average number of common shares outstanding used to calculate basic earnings per common share		22,100			24,486
Effect of dilutive equity incentive plan		41			28
Effect of dilutive stock options		32			30
Average number of common shares outstanding used to calculate diluted earnings per common share		22,173			24,544

Basic earnings per share	$	0.24		$	0.24
Diluted earnings per share	$	0.24		$	0.24

3. COMPREHENSIVE INCOME (LOSS)

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

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

	March 31, 2022			December 31, 2021
	(In thousands)

Net unrealized losses on available-for-sale securities	$	(16,149	)	$	(4,685	)
Tax effect		4,094			1,160
Net-of-tax amount		(12,055	)		(3,525	)

Unrecognized actuarial loss on the defined benefit plan		(12,067	)		(12,225	)
Tax effect		3,391			3,436
Net-of-tax amount		(8,676	)		(8,789	)

Accumulated other comprehensive loss	$	(20,731	)	$	(12,314	)

4. INVESTMENT SECURITIES

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

	March 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available-for-sale securities:
Debt securities:
Government-sponsored enterprise obligations	$	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

	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

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

	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.

5. LOANS AND ALLOWANCE FOR LOAN LOSSES

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

	March 31,			December 31,
	2022			2021
	(In thousands)
Commercial real estate	$	1,039,487		$	979,969
Residential real estate:
Residential one-to-four family		564,339			552,332
Home equity		100,165			99,759
Total residential real estate		664,504			652,091

Commercial and industrial:
Paycheck Protection Program (“PPP”) loans		6,052			25,329
Commercial and industrial		209,890			201,340
Total commercial and industrial		215,942			226,669

Consumer		4,252			4,250
Total gross loans		1,924,185			1,862,979
Unamortized PPP loan fees		(255	)		(781	)
Unearned premiums and deferred loan fees and costs, net		2,355			2,518
Total loans, net		1,926,285			1,864,716
Allowance for loan losses		(19,308	)		(19,787	)
Net loans	$	1,906,977		$	1,844,929

Loans Serviced for Others.

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

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

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

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


	Three Months Ended March 31,
	2022			2021
	(In thousands)

Balance at the beginning of year:	$	693		$	153
Capitalized mortgage servicing rights		2			48
Amortization		(36	)		(15	)
Balance at the end of period	$	659		$	186
Fair value at the end of period	$	813		$	235

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

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

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

General component

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

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

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

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

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

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

Allocated component

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

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

Unallocated component

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

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

	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer			Unallocated			Total
	(In thousands)
Balance at December 31, 2020	$	13,020		$	4,240		$	3,630		$	241		$	26		$	21,157
Provision (credit)		295			(135	)		(60	)		(13	)		(12	)		75
Charge-offs		—			—			(9	)		(24	)		—			(33	)
Recoveries		—			8			1			19			—			28
Balance at March 31, 2021	$	13,315		$	4,113		$	3,562		$	223		$	14		$	21,227

Balance at December 31, 2021	$	12,970		$	3,964		$	2,643		$	197		$	13		$	19,787
Provision (credit)		(639	)		90			89			27			8			(425	)
Charge-offs		(37	)		(16	)		(7	)		(45	)		—			(105	)
Recoveries		—			30			1			20			—			51
Balance at March 31, 2022	$	12,294		$	4,068		$	2,726		$	199		$	21		$	19,308

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

	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer		Unallocated		Total
	(In thousands)
March 31, 2022
Amount of allowance for impaired loans	$	—	$	—	$	—	$	—	$	—	$	—
Amount of allowance for non-impaired loans		12,294		4,068		2,726		199		21		19,308
Total allowance for loan losses	$	12,294	$	4,068	$	2,726	$	199	$	21	$	19,308

Impaired loans	$	9,527	$	2,976	$	620	$	—	$	—	$	13,123
Non-impaired loans		1,025,725		659,784		208,907		4,252		—		1,898,668
Impaired loans acquired with deteriorated credit quality		4,235		1,744		363		—		—		6,342
Total loans	$	1,039,487	$	664,504	$	209,890	$	4,252	$	—	$	1,918,133

December 31, 2021
Amount of allowance for impaired loans	$	—	$	—	$	—	$	—	$	—	$	—
Amount of allowance for non-impaired loans		12,970		3,964		2,643		197		13		19,787
Total allowance for loan losses	$	12,970	$	3,964	$	2,643	$	197	$	13	$	19,787

Impaired loans	$	9,601	$	3,223	$	699	$	22	$	—	$	13,545
Non-impaired loans		965,577		647,098		200,271		4,228		—		1,817,174
Impaired loans acquired with deteriorated credit quality		4,791		1,770		370		—		—		6,931
Total loans	$	979,969	$	652,091	$	201,340	$	4,250	$	—	$	1,837,650

Past Due and Nonaccrual Loans.

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

	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days or More Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Nonaccrual Loans
	(In thousands)
March 31, 2022
Commercial real estate	$	301	$	—	$	436	$	737	$	1,038,750	$	1,039,487	$	660
Residential real estate:
Residential		561		270		853		1,684		562,655		564,339		2,846
Home equity		230		—		88		318		99,847		100,165		112
Commercial and industrial		42		—		24		66		209,824		209,890		370
Consumer		3		—		—		3		4,249		4,252		—
Total loans	$	1,137	$	270	$	1,401	$	2,808	$	1,915,325	$	1,918,133	$	3,988

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

Impaired Loans.

The following is a summary of impaired loans by class:

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

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

⁽¹⁾

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

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

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

Troubled Debt Restructurings.

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

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

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

Loans Acquired with Deteriorated Credit Quality.

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

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

Credit Quality Information.

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

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

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

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

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

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

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

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

	Commercial Real Estate		Residential 1-4 Family		Home Equity		Commercial and Industrial		Consumer		Total
	(In thousands)
March 31, 2022
Pass (Rated 1 – 4)	$	973,892	$	560,425	$	99,891	$	199,763	$	4,232	$	1,838,203
Special Mention (Rated 5)		47,729		—		—		7,464		—		55,193
Substandard (Rated 6)		17,866		3,914		274		8,715		20		30,789
Total	$	1,039,487	$	564,339	$	100,165	$	215,942	$	4,252	$	1,924,185


December 31, 2021
Pass (Rated 1 – 4)	$	913,063	$	547,980	$	99,503	$	215,605	$	4,228	$	1,780,379
Special Mention (Rated 5)		48,765		—		—		2,777		—		51,542
Substandard (Rated 6)		18,141		4,352		256		8,287		22		31,058
Total	$	979,969	$	552,332	$	99,759	$	226,669	$	4,250	$	1,862,979

6. GOODWILL AND OTHER INTANGIBLES

Goodwill.

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

Core Deposit Intangible.

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

7. SHARE-BASED COMPENSATION

Stock Options.

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

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)

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

Exercisable at March 31, 2022		97,000		$	6.80		0.81	$	206

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

Restricted Stock Awards.

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

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

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

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


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

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

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

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


	Return on Equity Metrics
Performance Period Ending		Threshold		Target		Stretch

December 31, 2020		5.00	%	5.48	%	6.00	%
December 31, 2021		5.62	%	6.24	%	6.86	%
December 31, 2022		6.29	%	6.99	%	7.69	%


	Earnings Per Share Metrics
Performance Period Ending	Threshold		Target		Stretch

Three-year Cumulative Diluted Earnings Per Share	$	1.50	$	1.65	$	1.80

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

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

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

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

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

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


	Return on Equity Metrics
Performance Period Ending	Threshold			Target			Stretch

December 31, 2021		5.63	%		6.25	%		7.50	%
December 31, 2022		5.85	%		6.50	%		7.80	%
December 31, 2023		6.08	%		6.75	%		8.10	%


	Earnings Per Share Metrics
Performance Period Ending	Threshold		Target		Stretch

Three-year Cumulative Diluted Earnings Per Share	$	1.58	$	1.97	$	2.36

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

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


	Return on Equity Metrics
Performance Period Ending	Threshold			Target			Stretch

December 31, 2022		7.79	%		8.20	%		8.61	%
December 31, 2023		7.93	%		8.35	%		8.77	%
December 31, 2024		8.03	%		8.45	%		8.87	%


	Earnings Per Share Metrics
Performance Period Ending	Threshold		Target		Stretch

Three-year Cumulative Diluted Earnings Per Share	$	2.35	$	2.61	$	2.85

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

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

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

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

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

8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

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

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

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

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

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

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

9. SUBORDINATED DEBT

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

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

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

10. PENSION BENEFITS

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

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


	Three Months Ended March 31,
	2022			2021
	(In thousands)
Service cost	$	334		$	454
Interest cost		313			295
Expected return on assets		(427	)		(439	)
Amortization of actuarial loss		158			234
Net periodic pension cost	$	378		$	544

11. DERIVATIVES AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives.

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

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

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

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

Cash Flow Hedges of Interest Rate Risk.

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

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

Non-hedging Derivatives.

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

Fair Values of Derivative Instruments on the Balance Sheet.

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

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

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

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

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

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

	Amount of Loss Reclassified from OCI into Expense (Effective Portion)
	Three Months Ended March 31,

	2022		2021

Interest rate swaps	$	0	$	140

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

Credit-risk-related Contingent Features

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

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

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

12. FAIR VALUE OF ASSETS AND LIABILITIES

Determination of Fair Value.

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

WNEB

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