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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 June 30, 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 July 29, 2022 the registrant had 22,307,876 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 – June 30, 2022 and December 31, 2021 1
     
  Consolidated Statements of Net Income – Three and Six Months Ended June 30, 2022 and 2021 2
     
  Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2022 and 2021 3
     
  Consolidated Statements of Changes in Shareholders’ Equity – Three and Six Months Ended June 30, 2022 and 2021 4
     
  Consolidated Statements of Cash Flows – Six Months Ended June 30, 2022 and 2021 6
     
  Notes to Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 47
     
Item 4. Controls and Procedures 47
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 48
     
Item 1A. Risk Factors 48
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 48
     
Item 3. Defaults upon Senior Securities 48
     
Item 4. Mine Safety Disclosures 48
     
Item 5. Other Information 49
     
Item 6. Exhibits 49

 

 

 

 

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 share data)

 

   June 30,   December 31, 
   2022   2021 
ASSETS          
Cash and due from banks  $19,531   $15,233 
Federal funds sold   1,508    4,901 
Interest-bearing deposits and other short-term investments   26,474    83,322 
Cash and cash equivalents   47,513    103,456 
           
Available-for-sale securities, at fair value   160,925    194,352 
Held-to-maturity securities, at amortized cost (Fair value of $204,791 and $219,748 at June 30, 2022 and December 31, 2021, respectively)   233,803    222,272 
Marketable equity securities, at fair value   11,453    11,896 
Federal Home Loan Bank of Boston stock and other restricted stock, at cost   1,882    2,594 
Loans, net of allowance for loan losses of $19,560 at June 30, 2022 and $19,787 at December 31, 2021   1,956,140    1,844,929 
Premises and equipment, net   25,349    26,162 
Accrued interest receivable   7,869    7,775 
Bank-owned life insurance   73,801    72,895 
Deferred tax asset, net   17,038    12,092 
Goodwill   12,487    12,487 
Core deposit intangible   2,375    2,563 
Other assets   26,722    24,952 
TOTAL ASSETS  $2,577,357   $2,538,425 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
LIABILITIES:          
Deposits:          
Non-interest-bearing  $647,571   $641,284 
Interest-bearing   1,654,401    1,615,614 
Total deposits   2,301,972    2,256,898 
           
Shot-term borrowings   4,790    — 
Long-term debt   1,360    2,653 
Subordinated debt   19,653    19,633 
Other liabilities   34,252    35,553 
 TOTAL LIABILITIES   2,362,027    2,314,737 
           
SHAREHOLDERS’ EQUITY:          
Preferred stock - $0.01 par value, 5,000,000 shares authorized, none outstanding at June 30, 2022 and December 31, 2021   —    — 
Common stock - $0.01 par value, 75,000,000 shares authorized, 22,465,991 shares issued and outstanding at June 30, 2022; 22,656,515 shares issued and outstanding at December 31, 2021   225    227 
Additional paid-in capital   131,104    132,821 
Unearned compensation – Employee Stock Ownership Plan   (3,173)   (3,441)
Unearned compensation - Equity Incentive Plan   (1,651)   (981)
Retained earnings   115,561    107,376 
Accumulated other comprehensive loss   (26,736)   (12,314)
TOTAL SHAREHOLDERS’ EQUITY   215,330    223,688 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $2,577,357   $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   Six Months 
   Ended June 30,   Ended June 30, 
   2022   2021   2022   2021 
Interest and dividend income:                    
Residential and commercial real estate loans  $16,103   $14,457   $31,446   $28,966 
Commercial and industrial loans   2,334    3,801    4,878    8,344 
Consumer loans   63    63    123    131 
Debt securities, taxable   2,029    1,250    3,952    2,074 
Debt securities, tax-exempt   3    3    6    6 
Marketable equity securities   36    24    60    51 
Other investments   30    28    55    63 
Short-term investments   48    26    69    50 
Total interest and dividend income   20,646    19,652    40,589    39,685 
                     
Interest expense:                    
Deposits   990    1,466    1,982    3,200 
Long-term debt   —    185    —    458 
Subordinated debt   254    197    507    197 
Short-term borrowings   10    —    10    — 
Total interest expense   1,254    1,848    2,499    3,855 
Net interest and dividend income   19,392    17,804    38,090    35,830 
                     
Provision (credit) for loan losses   300    (1,200)   (125)   (1,125)
Net interest and dividend income after provision (credit) for loan losses   19,092    19,004    38,215    36,955 
                     
Non-interest income:                    
Service charges and fees   2,346    2,075    4,520    3,958 
Income from bank-owned life insurance   458    500    906    941 
Loss on available-for-sale securities, net   —    (12)   (4)   (74)
Net unrealized (loss) gain on marketable equity securities   (225)   6    (501)   (83)
Gain on sale of mortgages   —    242    2    469 
Gain on non-marketable equity investments   141    —    141    546 
Loss on interest rate swap terminations   —    (402)   —    (402)
Other income   21    —    25    58 
Total non-interest income   2,741    2,409    5,089    5,413 
                     
Non-interest expense:                    
Salaries and employees benefits   8,236    8,054    16,475    15,736 
Occupancy   1,177    1,099    2,540    2,388 
Furniture and equipment   539    513    1,082    1,003 
Data processing   731    758    1,454    1,479 
Professional fees   719    589    1,296    1,133 
FDIC insurance assessment   234    225    520    523 
Advertising   412    347    811    685 
Loss on prepayment of borrowings   —    45    —    45 
Other expenses   2,385    2,044    4,711    4,009 
Total non-interest expense   14,433    13,674    28,889    27,001 
Income before income taxes   7,400    7,739    14,415    15,367 
Income tax provision   1,865    2,087    3,561    3,924 
Net income   $5,535   $5,652   $10,854   $11,443 
                     
Earnings per common share:                    
Basic earnings per share  $0.25   $0.24   $0.49   $0.47 
Weighted average basic shares outstanding   21,991,383    23,722,903    22,045,052    24,102,416 
Diluted earnings per share  $0.25   $0.24   $0.49   $0.47 
Weighted average diluted shares outstanding   22,025,687    23,773,562    22,098,620    24,156,450 
Dividends per share  $0.06   $0.05   $0.12   $0.10 

 

 See accompanying notes to unaudited consolidated financial statements.

 

2

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED

(Dollars in thousands)

 

                 
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2022   2021   2022   2021 
                 
Net income  $5,535   $5,652   $10,854   $11,443 
                     
Other comprehensive income (loss):                    
Unrealized gains (losses) on available-for-sale securities:                    
Unrealized holding (losses) gains   (8,220)   707    (19,688)   (3,762)
Reclassification adjustment for net losses realized in income (1)   —    12    4    74 
Unrealized (losses) gains    (8,220)   719    (19,684)   (3,688)
Tax effect   2,100    (165)   5,034    916 
Net-of-tax amount   (6,120)   554    (14,650)   (2,772)
                     
Cash flow hedges:                    

Reclassification adjustment for loss realized in income for interest rate swap termination(2)

   —    402    —    402 
Reclassification adjustment for termination fee realized in interest expense (3)   —    142    —    282 
Unrealized gains on cash flow hedges   —    544    —    684 
Tax effect   —    (153)   —    (192)
Net-of-tax amount   —    391    —    492 
                     
Defined benefit pension plan:                    
Amortization of defined benefit plan actuarial loss   159    233    317    467 
Tax effect   (44)   (65)   (89)   (131)
Net-of-tax amount   115    168    228    336 
                     
Other comprehensive (loss) income   (6,005)   1,113    (14,422)   (1,944)
                     
Comprehensive (loss) income  $(470)  $6,765   $(3,568)  $9,499 

 

(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 $3,000 for the three months ended June 30, 2021.   The tax effects applicable to net realized gains and losses were $1,000 and $16,000 for the six months ended June 30, 2022 and 2021, respectively.
(2)Loss realized in income on interest rate swap termination is recognized as a component of non-interest income.  Income tax effects associated with the reclassification adjustments was $113,000 for the three months ended June 30, 2021.
(3)Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on long-term debt.  Income tax effects associated with the reclassification adjustments were $40,000 for the three months ended June 30, 2021 and $79,000 for the six months ended June 30, 2021.

 

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 AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Dollars in thousands, except share data)

 

                                 
   Common Stock                               
   Shares   Par  Value   Additional Paid-in Capital   Unearned Compensation- ESOP   Unearned Compensation- Equity Incentive Plan   Retained Earnings   Accumulated Other Comprehensive Loss   Total 
                                         
BALANCE AT DECEMBER 31, 2021   22,656,515   $227   $132,821   $(3,441)  $(981)  $107,376   $(12,314)  $223,688 
Comprehensive income (loss)   —    —    —    —    —    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 
Comprehensive income (loss)   —    —    —    —    —    5,535    (6,005)   (470)
Common stock held by ESOP committed to be released (78,526 shares)   —    —    38    134    —    —    —    172 
Share-based compensation - equity incentive plan   —    —    —    —    292    —    —    292 
Common stock repurchased   (293,173)   (2)   (2,508)   —    —    —    —    (2,510)
Issuance of common stock in connection with stock option exercises   16,975    —    115    —    —    —    —    115 
Cash dividends declared and paid on common stock ($0.06 per share)   —    —    —    —    —    (1,332)   —    (1,332)
BALANCE AT JUNE 30, 2022   22,465,991   $225   $131,104   $(3,173)  $(1,651)  $115,561   $(26,736)  $215,330 

 

See accompanying notes to unaudited consolidated financial statements.

 

4

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Dollars in thousands, except share data)

 

                                 
   Common Stock                               
   Shares   Par  Value   Additional Paid-in Capital   Unearned Compensation- ESOP   Unearned Compensation- Equity Incentive Plan   Retained Earnings   Accumulated Other 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 (19,086 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 
Comprehensive income   —    —    —    —    —    5,652    1,113    6,765 
Common stock held by ESOP committed to be released (81,893 shares)   —    —    27    139    —    —    —    166 
Share-based compensation - equity incentive plan   —    —    —    —    380    —    —    380 
Common stock repurchased   (635,921)   (6)   (5,295)   —    —    —    —    (5,301)
Issuance of common stock in connection with equity incentive plan   122,362    1    1,020    —    (1,021)   —    —    — 
Cash dividends declared and paid on common stock ($0.05 per share)   —    —    —    —    —    (1,195)   —    (1,195)
BALANCE AT JUNE 30, 2021   24,070,399   $241   $144,602   $(3,719)  $(1,600)  $97,370   $(13,223)  $223,671 

 

See accompanying notes to unaudited consolidated financial statements.

 

5

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)

 

         
   Six Months Ended June 30, 
   2022   2021 
OPERATING ACTIVITIES:          
Net income  $10,854   $11,443 
Adjustments to reconcile net income to net cash provided by operating activities:          
Credit for loan losses   (125)   (1,125)
Depreciation and amortization of premises and equipment   1,163    1,168 
(Accretion) amortization of purchase accounting adjustments, net   (84)   89 
Amortization of core deposit intangible   188    187 
Net amortization of premiums and discounts on securities and mortgage loans   827    1,170 
Amortization of subordinated debt issuance costs   20    8 
Share-based compensation expense   593    611 
ESOP expense   351    313 
Gain on sale of portfolio mortgages   —    (227)
Principal balance of loans originated for sale   (277)   (9,991)
Principal balance of loans sold   277    9,991 
Net change in unrealized loss on marketable equity securities   501    83 
Net loss on available-for-sale securities   4    74 
Income from bank-owned life insurance   (906)   (941)
Net change in:          
Accrued interest receivable   (94)   410 
Other assets   (4,846)   (5,473)
Other liabilities   (344)   5,748 
Net cash provided by operating activities   8,102    13,538 
           
INVESTING ACTIVITIES:          
Purchases of held-to-maturity securities   (21,808)   (108,694)
Proceeds from calls, maturities, and principal collections of held-to-maturity securities   10,021    845 
Purchases of available-for-sale securities   (3,000)   (65,291)
Proceeds from redemptions and sales of available-for-sale securities   20    129 
Proceeds from calls, maturities, and principal collections of available-for-sale securities   16,107    31,083 
Loan originations and principal payments, net   (111,020)   42,431 
Redemption of Federal Home Loan Bank of Boston stock   712    1,124 
Proceeds from sale of portfolio mortgages   —    7,801 
Purchases of premises and equipment   (370)   (1,114)
Proceeds from payout on bank-owned life insurance   2,435    — 
Net cash used in investing activities   (106,903)   (91,686)
           
FINANCING ACTIVITIES:          
Net increase in deposits   45,091    142,535 
Net change in short-term borrowings   4,790    — 
Repayment of long-term debt   (1,289)   (52,852)
Proceeds from subordinated debt issuance   —    20,000 
Payment of subordinated debt issuance costs   —    (394)
Cash dividends paid   (2,669)   (2,427)
Common stock repurchased   (3,690)   (10,777)
    Issuance of common stock in connection with stock option exercise   625    113 
Net cash provided by financing activities   42,858    96,198 
           
NET CHANGE IN CASH AND CASH EQUIVALENTS:   (55,943)   18,050 
Beginning of period   103,456    87,444 
End of period  $47,513   $105,494 
           
Supplemental cash flow information:          
Net change in cash due to broker  $—   $301 
Interest paid   2,521    3,912 
Taxes paid   4,955    4,211 

 

See the accompanying notes to unaudited consolidated financial statements.

 

6

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

JUNE 30, 2022

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations and Basis of Presentation. Western New England Bancorp, Inc. (“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 County and Hampshire County in western Massachusetts and Hartford County and Tolland County 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, Inc., 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 June 30, 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 and six months ended June 30, 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.

 

 

 

7

 

 

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.

 

Earnings per share for the three and six months ended June 30, 2022 and 2021 have been computed based on the following:

 

                 
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2022   2021   2022   2021 
   (In thousands, except per share data) 
                 
Net income applicable to common stock  $5,535   $5,652   $10,854   $11,443 
                     
Average number of common shares issued   22,576    24,345    22,640    24,729 
Less: Average unallocated ESOP Shares   (425)   (506)   (435)   (516)
Less: Average unvested performance-based equity incentive plan shares   (160)   (116)   (160)   (110)
                     
Average number of common shares outstanding used to calculate basic earnings per common share   21,991    23,723    22,045    24,103 
                     
Effect of dilutive performance-based equity incentive plan   17    10    29    19 
Effect of dilutive stock options   17    40    24    35 
                     
Average number of common shares outstanding used to calculate diluted earnings per common share   22,025    23,773    22,098    24,157 
                     
Basic earnings per share  $0.25   $0.24   $0.49   $0.47 
Diluted earnings per share  $0.25   $0.24   $0.49   $0.47 

 

 

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).

 

8

 

 

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

 

   June 30, 2022   December 31, 2021 
   (In thousands) 
         
Net unrealized losses on available-for-sale securities  $(24,369)  $(4,685)
Tax effect   6,194    1,160 
Net-of-tax amount   (18,175)   (3,525)
           
Unrecognized actuarial loss on the defined benefit plan   (11,908)   (12,225)
Tax effect   3,347    3,436 
Net-of-tax amount   (8,561)   (8,789)
           
Accumulated other comprehensive loss  $(26,736)  $(12,314)

 

 

 

4.SECURITIES

 

Available-for-sale and held-to-maturity investment securities at June 30, 2022 and December 31, 2021 are summarized as follows:

 

   June 30, 2022 
   Amortized Cost   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		   Fair Value 
   (In thousands) 
Available-for-sale securities:                    
Debt securities:                    
Government-sponsored enterprise obligations  $14,908   $—   $(2,512)  $12,396 
State and municipal bonds   405    —    —    405 
Corporate bonds   6,019    24    (109)   5,934 
Total debt securities   21,332    24    (2,621)   18,735 
                     
Mortgage-backed securities:                    
Government-sponsored mortgage-backed securities   156,160    —    (20,606)   135,554 
U.S. government guaranteed mortgage-backed securities   7,803    —    (1,167)   6,636 
Total mortgage-backed securities   163,963    —    (21,773)   142,190 
                     
Total available-for-sale   185,295    24    (24,394)   160,925 
                     
Held-to-maturity securities:                    
Debt securities:                    
U.S. Treasury securities   9,983    —    (602)   9,381 
Total debt securities   9,983    —    (602)   9,381 
                     
Mortgage-backed securities:                    
Government-sponsored mortgage-backed securities   223,820    —    (28,410)   195,410 
Total mortgage-backed securities   223,820    —    (28,410)   195,410 
                     
Total held-to-maturity   233,803    —    (29,012)   204,791 
                     
Total  $419,098   $24   $(53,406)  $365,716 

 

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 June 30, 2022, U.S. Treasury securities with a fair value of $4.6 million, government-sponsored enterprise obligations with a fair value of $8.3 million and mortgage-backed securities with a fair value of $50.2 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 June 30, 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  $3,424   $3,316   $—   $— 
Due after five years through ten years   9,908    8,390    9,983    9,381 
Due after ten years   8,000    7,029    —    — 
Total debt securities  $21,332   $18,735   $9,983   $9,381 

 

10

 

 

   Available-for-Sale   Held-to-Maturity 
   Amortized Cost   Fair Value   Amortized Cost   Fair Value 
   (In thousands) 
Mortgage-backed securities:                    
Due after one year through five years  $623   $604   $—   $— 
Due after five years through ten years   1,194    1,115    —    — 
Due after ten years   162,146    140,471    223,820    195,410 
Total mortgage-backed securities   163,963    142,190    223,820    195,410 
Total securities  $185,295   $160,925   $233,803   $204,791 

 

Gross realized gains and losses on sales of available-for-sale securities for the three and six months ended June 30, 2022 and 2021 are as follows:

 

                 
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2022   2021   2022   2021 
   (In thousands) 
                 
Gross gains realized  $—   $—   $—   $— 
Gross losses realized   —    (12)   (4)   (74)
Net (loss) gain realized  $—   $(12)  $(4)  $(74)

 

Proceeds from the redemption of available-for-sale securities totaled $20,000 and $129,000 for the six months ended June 30, 2022 and 2021, respectively.

 

Information pertaining to securities with gross unrealized losses at June 30, 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:

 

   June 30, 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   42   $70,556   $9,339    11.7%   29   $64,998   $11,267    14.8%
U.S. government guaranteed mortgage-backed securities   2    1,054    84    7.4    7    5,581    1,083    16.3 
Government-sponsored enterprise obligations   —    —    —    —    3    12,395    2,512    16.9 
Corporate Bonds   1    2,910    109    3.6    —    —    —      
Total available-for-sale   45    74,520    9,532         39    82,974    14,862      
                                         
Held-to-maturity:                                        
U.S. Treasury securities   2    9,381    602    6.0%   —    —    —    —%
Government-sponsored mortgage-backed securities   34    183,882    26,411    12.6    2    11,528    1,999    14.8 
Total held-to-maturity   36    193,263    27,013         2    11,528    1,999      
                                         
Total   81   $267,783   $36,545         41   $94,502   $16,861      

 

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 six months ended June 30, 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 June 30, 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 June 30, 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 as of the dates indicated were as follows:

 

   June 30,   December 31, 
   2022   2021 
   (In thousands) 
Commercial real estate  $1,074,907   $979,969 
Residential real estate:          
Residential one-to-four family   572,700    552,332 
Home equity   103,623    99,759 
Total residential real estate   676,323    652,091 
           
Commercial and industrial:          
Paycheck Protection Program (“PPP”) loans   2,631    25,329 
Commercial and industrial   215,224    201,340 
Total commercial and industrial   217,855    226,669 
           
Consumer   4,457    4,250 
Total gross loans   1,973,542    1,862,979 
Unamortized PPP loan fees   (133)   (781)
Unearned premiums and deferred loan fees and costs, net   2,291    2,518 
Total loans, net   1,975,700    1,864,716 
Allowance for loan losses   (19,560)   (19,787)
Net loans  $1,956,140   $1,844,929 

 

12

 

 

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 June 30, 2022 and December 31, 2021, the Company was servicing commercial loans participated out to various other institutions totaling $80.5 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 June 30, 2022, include weighted average prepayment speed for the portfolio using the Public Securities Association Standard Prepayment Model (113 PSA), weighted average internal rate of return (9.01%), weighted average servicing fee (0.25%), and average cost to service loans ($84.02 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 six months ended June 30, 2022 and 2021, the Company sold $277,000 and $17.6 million in residential real estate mortgages with servicing retained and recorded gains on the sale of mortgages of $2,000 and $469,000, respectively, within non-interest income.

 

At June 30, 2022 and December 31, 2021, the Company was servicing residential mortgage loans owned by investors totaling $82.5 million and $88.2 million, respectively. Servicing fee income of $105,000 and $52,000 was recorded for the six months ended June 30, 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

June 30, 2022

  

Six Months Ended

June 30, 2022

 
   (In thousands) 
         
Balance at the beginning of period:  $659   $693 
Capitalized mortgage servicing rights   —    2 
Amortization   (36)   (72)
Balance at the end of period  $623   $623 
Fair value at the end of period  $796   $796 

 

13

 

 

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 six months ended June 30, 2022.

 

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. This portfolio segment consists of first mortgages, home equity loans, and home equity lines secured by one-to-four family residential properties. First mortgages may be underwritten to a maximum loan-to-value of 97% for owner-occupied homes, 90% for second homes and 85% for investment properties. Mortgages with loan-to-values greater than 80% require private mortgage insurance. We do not grant subprime loans. Home equity loans and lines are secured by first or second mortgages on one-to-four family owner-occupied properties. Equity loans & lines are underwritten to a maximum combined loan-to-value of 85% of the appraised value of the property. Underwriting approval is dependent on review of the borrower’s ability to repay and credit history in accordance with Westfield Bank’s policy. The overall health of the economy, including unemployment rates and housing pricing, will have an effect on the credit quality in this segment.

Commercial real estate. Loans in this segment include commercial real estate, multi-family dwellings, owner-occupied commercial real estate and income producing investment properties, as well as commercial construction loans for commercial development projects 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.

 

14

 

 

Commercial and industrial loans. Loans in this segment include commercial business loans and are generally secured by assignments of corporate assets and personal guarantees of the business owners. 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 and six months ended June 30, 2022 and 2021 is as follows:

 

   Commercial
Real Estate		   Residential
Real Estate		   Commercial
and Industrial		   Consumer   Unallocated   Total 
   (In thousands) 
     
Balance at March 31, 2021  $13,315   $4,113   $3,562   $223   $14   $21,227 
Provision (credit)   (1,083)   29    (149)   2    1    (1,200)
Charge-offs   (103)   (41)   (25)   (22)   —    (191)
Recoveries   —    1    22    11    —    34 
Balance at June 30, 2021  $12,129   $4,102   $3,410   $214   $15   $19,870 
                               
Balance at March 31, 2022  $12,294   $4,068   $2,726   $199   $21   $19,308 
Provision (credit)   189    106    (31)   40    (4)   300 
Charge-offs   —    (11)   (16)   (40)   —    (67)
Recoveries   —    1    7    11    —    19 
Balance at June 30, 2022  $12,483   $4,164   $2,686   $210   $17   $19,560 
                               
Balance at December 31, 2020  $13,020   $4,240   $3,630   $241   $26   $21,157 
Provision (credit)   (788)   (106)   (209)   (11)   (11)   (1,125)
Charge-offs   (103)   (41)   (34)   (46)   —    (224)
Recoveries   —    9    23    30    —    62 
Balance at June 30, 2021  $12,129   $4,102   $3,410   $214   $15   $19,870 
                               
Balance at December 31, 2021  $12,970   $3,964   $2,643   $197   $13   $19,787 
Provision (credit)   (450)   197    57    67    4    (125)
Charge-offs   (37)   (28)   (22)   (85)   —    (172)
Recoveries   —    31    8    31    —    70 
Balance at June 30, 2022  $12,483   $4,164   $2,686   $210   $17   $19,560 

 

15

 

 

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

 

   Commercial
Real Estate		   Residential
Real Estate		   Commercial
and
Industrial		   Consumer   Unallocated   Total 
   (In thousands) 
June 30, 2022                        
Amount of allowance for impaired loans  $ —   $ —   $ —   $ —   $ —   $ — 
Amount of allowance for non-impaired loans   12,483    4,164    2,686    210    17    19,560 
Total allowance for loan losses  $12,483   $4,164   $2,686   $210   $17   $19,560 
                               
Impaired loans  $9,416   $3,117   $523   $—   $—   $13,056 
Non-impaired loans   1,061,476    671,487    214,344    4,457    —    1,951,764 
Impaired loans acquired with deteriorated credit quality   4,015    1,719    357    —    —    6,091 
Total loans  $1,074,907   $676,323   $215,224   $4,457   $—   $1,970,911 
                               
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) 
June 30, 2022                            
Commercial real estate  $346   $—   $436   $782   $1,074,125   $1,074,907   $650 
Residential real estate:                                   
Residential   516    82    540    1,138    571,562    572,700    2,913 
Home equity   88    —    151    239    103,384    103,623    187 
Commercial and industrial   25    2    22    49    215,175    215,224    355 
Consumer   4    —    —    4    4,453    4,457    — 
Total loans  $979   $84   $1,149   $2,212   $1,968,699   $1,970,911   $4,105 
                                    
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 for the dates and periods indicated:

 

           Three Months Ended   Six Months Ended 
   At June 30, 2022   June 30, 2022   June 30, 2022 
   Recorded
Investment		   Unpaid
Principal
Balance		   Average
Recorded
Investment		   Interest
Income
Recognized		   Average
Recorded Investment		   Interest
Income
Recognized		 
   (In thousands) 
Impaired Loans(1):                              
Commercial real estate  $13,431   $14,579   $13,597   $85   $13,837   $138 
Residential one-to-four family   4,633    5,479    4,612    14    4,673    30 
Home equity   203    221    166    —    143    1 
Commercial and industrial   880    3,236    931    18    979    33 
Consumer   —    —    —    —    5    — 
Total impaired loans  $19,147   $23,515   $19,306   $117   $19,637   $202 

 

17

 

 

           Three Months Ended   Six Months Ended 
   At December 31, 2021   June 30, 2021   June 30, 2021 
   Recorded
Investment		   Unpaid
Principal
Balance		   Average
Recorded
Investment		   Interest
Income
Recognized		   Average
Recorded
Investment		   Interest
Income
Recognized		 
   (In thousands) 
Impaired Loans(1):                              
Commercial real estate  $14,392   $15,563   $16,186   $197   $16,795   $305 
Residential real estate:                              
Residential real estate   4,881    5,381    5,947    63    6,152    167 
Home equity   112    136    136    —    139    4 
Commercial and industrial   1,069    3,850    3,036    28    3,932    90 
Consumer   22    37    24    —    25    — 
 Total impaired loans  $20,476   $24,967   $25,329   $288   $27,043   $566 

 

(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 and six months ended June 30, 2022 and June 30, 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 June 30, 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 and six months ended June 30, 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.

 

18

 

 

There were no loan modifications classified as TDRs during the three and six months ended June 30, 2022 and 2021. During the six months ended June 30, 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 six months ended June 30, 2022 or 2021.

 

Loans Acquired with Deteriorated Credit Quality.

 

The following is a summary of loans acquired in the Chicopee Bancorp, Inc. (“Chicopee”) acquisition with evidence of credit deterioration as of June 30, 2022.

 

    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    (1,063)   (950)   (113)   (110)   (840)
Dispositions    (63)   (61)   (2)   (61)   — 
Balance at June 30, 2022   $11,008   $8,419   $2,589   $2,328   $6,091 

 

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) 
June 30, 2022                        
Pass (Rated 1 – 4)  $1,023,912   $568,915   $103,308   $204,076   $4,438   $1,904,649 
Special Mention (Rated 5)   33,505    —    —    6,837    —    40,342 
Substandard (Rated 6)   17,490    3,785    215    6,942    19    28,551 
Total  $1,074,907   $572,700   $103,623   $217,855   $4,457   $1,973,542 
                               
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 June 30, 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 and six months ended June 30, 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 Intangibles.

 

In connection with the acquisition of Chicopee, the Bank recorded a core deposit intangible of $4.5 million which is amortized over twelve years using the straight-line method. Amortization expense was $94,000 and $188,000 for the three and six months ended June 30, 2022, respectively. At June 30, 2022, future amortization of the core deposit intangible totaled $375,000 for each of the next five years and $500,000 thereafter.

 

 

 

7.SHARE-BASED COMPENSATION

 

Stock Options.

 

A summary of stock option activity for the three months ended June 30, 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    (97,856)   6.38    0.47    238 
Outstanding at June 30, 2022    80,025   $6.80    0.56   $51 
                      
Exercisable at June 30, 2022    80,025   $6.80    0.56   $51 

 

20

 

 

Cash received for options exercised during the six months ended June 30, 2022 and 2021 was $625,000 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 were not issued because vesting requirements were 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 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-based shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period 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.

 

21

 

 

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-based shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period 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-based shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period 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 June 30, 2022, there were 440,487 remaining shares available to grant under the 2021 RSA Plan.

 

22

 

 

A summary of the status of restricted stock awards at June 30, 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 June 30, 2022    291,161   $8.86 
            

 

    Shares   Weighted Average Grant Date Fair Value 
Balance at December 31, 2020    178,766   $9.63 
Shares granted    142,189    8.32 
Shares forfeited    (19,154)   11.05 
Shares vested    (27,727)   9.81 
Balance at June 30, 2021    274,074   $8.83 

 

We recorded total expense for restricted stock awards of $593,000 and $377,000 for the six months ended June 30, 2022 and 2021, respectively.

 

 8.  SHORT-TERM BORROWINGS AND LONG-TERM DEBT

 

We utilize short-term borrowings and long-term debt as additional sources of funds to finance our lending and investing activities and to provide liquidity for daily operations. Total borrowing capacity includes borrowing arrangements at the FHLB, the Federal Reserve Bank (“FRB”), and borrowing arrangements with correspondent banks.

 

Short-term borrowings can consist of FHLB advances with an original maturity of less than one year, overnight Ideal Way line of credit advances and other borrowings held as collateral for customer swap arrangements. Other borrowings totaled $4.8 million at June 30, 2022. There were no other borrowings outstanding at December 31, 2021. In addition, there were no short-term borrowings issued by the FHLB at June 30, 2022 and at December 31, 2021.

 

FHLB advances 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 June 30, 2022, the Bank had $473.2 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 June 30, 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 June 30, 2022 and December 31, 2021, there were no advances outstanding under this line.

 

The Company has an available line of credit of $5.0 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 June 30, 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 June 30, 2022 and December 31, 2021, there were no advances outstanding under these lines.

 

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Long-term debt consists of FHLB advances with an original maturity of one year or more. At June 30, 2022, we had $1.4 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 $347,000 as of June 30, 2022, which are being amortized into interest expense over the life of the Notes. Amortization of issuance costs into interest expense was $20,000 and $8,000 for the six months ended June 30, 2022 and 2021, respectively.

 

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 pension plan the amount required to meet the minimum funding standards under Section 412 of the Internal Revenue Code of 1986, as amended. Additional contributions will be made as deemed appropriate by management in conjunction with the pension plan’s actuaries. We contributed $2.1 million into the plan for the six months ended June 30, 2022. There were no contributions made to the Plan during the six months ended June 30, 2021. We have not yet determined how much we expect to contribute to the Plan in 2022. The Plan assets are invested in various pooled separate investment accounts offered by Principal Life Insurance Company, a division of Principal Financial Group, who is the custodian of the Plan. The 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 indicated:

 

                             
  

Three Months Ended  

June 30, 

  

Six Months Ended, 

June 30, 

 
   2022   2021   2022   2021 
   (In thousands) 
Service cost  $334   $454   $668   $908 
Interest cost   312    294    625    587 
Expected return on assets   (427)   (439)   (854)   (878)
Amortization of actuarial loss   159    233    317    467 
 Net periodic pension cost  $378   $542   $756   $1,084 

 

 

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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 June 30, 2022 and December 31, 2021:

 

June 30, 2022  Notional   Weighted Average   Weighted Average Rate   Estimated Fair 
   Amount   Maturity   Receive   Pay   Value 
   (In thousands)   (In years)           (In thousands) 
Non-hedging derivatives:                         
Loan-level swaps – dealer counterparties  $15,847    10.6    3.68%   3.76%  $1,270 
Loan-level swaps – borrower counterparties   15,847    10.6    3.76%   3.68%   (1,270)
Forward starting loan-level swaps – dealer counterparties   22,390    10.0              3,346 
Forward starting loan-level swaps - borrower counterparties   22,390    10.0              (3,346)
 Total  $76,474                  $0 

 

December 31, 2021  Notional   Weighted Average   Weighted Average Rate   Estimated 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 the Company’s net risk exposure resulting from such transactions. The third-party financial institution exchanges the customer’s fixed-rate loan payments for floating-rate loan payments. As the interest-rate swap agreements associated with this program do not meet hedge accounting requirements, changes in the fair value are recognized directly in earnings.

 

25

 

 

Fair Values of Derivative Instruments on the Balance Sheet.

 

The table below presents the fair value of our derivative financial instruments designated as hedging and non-hedging instruments as well as our classification on the balance sheet as of June 30, 2022 and December 31, 2021.

 

 June 30, 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 customers counterparties     $0      $4,616 
Interest rate swap – with dealer counterparties      4,616       0 
Total derivatives not designated as hedging instruments  Other Assets  $4,616   Other Liabilities  $4,616 

 

 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 customers 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 no gains or losses recognized in accumulated other comprehensive income during the three and six months ended June 30, 2022 and 2021.

 

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

 

   Amount of Loss Reclassified from OCI into Expense (Effective Portion) 
   Three Months Ended June 30,   Six Months Ended June 30, 
   2022   2021   2022   2021 
   (In thousands) 
                     
Interest rate swaps  $—   $142   $—   $282 

 

During the six months ended June 30, 2021, the Company terminated an interest rate swap designated as a cash flow hedge prior to its respective maturity date and recognized a loss. The net loss reclassified into earnings totaled $402,000 for the six months ended June 30, 2021, representing the unamortized portion of a $3.4 million loss associated with the previous termination of a $32.5 million interest rate swap. This loss was immediately recognized into earnings as the forecasted transaction will not occur. As of June 30, 2022, the Company no longer has any outstanding cash flow hedges. During the next 12 months, we estimate that there will be no reclassification of loss related to derivatives to increase interest expense. 

 

26

 

 

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 June 30, 2022, we had minimum collateral posting thresholds with certain of our derivative counterparties. As of June 30, 2022, we were not required to post collateral under these agreements because we did not have any derivatives in a liability position with those counterparties.

 

12. FAIR VALUE OF ASSETS AND LIABILITIES

 

Determination of Fair Value.

 

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

 

Fair Value Hierarchy.

 

We group our assets and liabilities that are measured at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value.

 

Level 1: Valuation is based on quoted prices in active markets for identical assets. Level 1 assets generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets.

 

Level 2: Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3: Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. Level 3 assets include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

Methods and assumptions for valuing our financial instruments measured at fair value on a recurring basis are set forth below. Estimated fair values are calculated based on the value without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications or estimated transaction cost.

 

27

 

 

Securities Available-for-Sale.

 

The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. These securities include marketable equity securities. All other securities are measured at fair value in Level 2 and are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. These securities include government-sponsored enterprise obligations, state and municipal obligations, corporate bonds, residential mortgage-backed securities guaranteed and sponsored by the U.S. government or an agency thereof. Fair value measurements are obtained from a third-party pricing service and are not adjusted by management.

 

Interest Rate Swaps.

 

The valuation of our interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. We have determined that the majority of the inputs used to value our interest rate derivatives fall within Level 2 of the fair value hierarchy.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis.

 

Assets and liabilities measured at fair value on a recurring basis are summarized below for the dates indicated:

 

                               
   June 30, 2022 
   Level 1   Level 2   Level 3   Total 
Assets:  (In thousands) 
Securities available-for-sale  $—   $160,925   $—   $160,925 
Marketable equity securities   11,453    —    —    11,453 
Interest rate swaps   —    4,616    —    4,616 
Total assets  $11,453   $165,541   $—   $176,994 
                     
Liabilities:                    
Interest rate swaps  $—   $4,616   $—   $4,616 

 

                               
   December 31, 2021 
   Level 1   Level 2   Level 3   Total 
Assets:  (In thousands) 
Securities available-for-sale  $—   $194,352   $—   $194,352 
Marketable equity securities   11,896    —    —    11,896 
Interest rate swaps   —    1,692    —    1,692 
Total assets  $11,896   $196,044   $—   $207,940 
                     
Liabilities:                    
Interest rate swaps  $—   $1,692   $—   $1,692 

 

Assets Measured at Fair Value on a Non-recurring Basis.

 

We may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. There were no assets measured at fair value on a non-recurring basis at June 30, 2022 or 2021.

 

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Summary of Fair Values of Financial Instruments.

 

The estimated fair values of our financial instruments are as follows for the dates indicated:

 

                                       
   June 30, 2022 
   Carrying Value   Fair Value 
       Level 1   Level 2   Level 3   Total 
   (In thousands) 
Assets:                    
Cash and cash equivalents  $47,513   $47,513   $—   $—   $47,513 
Securities held-to-maturity   233,803    9,381    195,410    —    204,791 
Securities available-for-sale   160,925    —    160,925    —    160,925 
Marketable equity securities   11,453    11,453    —    —    11,453 
Federal Home Loan Bank of Boston and other restricted stock   1,882    —    —    1,882    1,882 
Loans - net   1,956,140    —    —    1,911,600    1,911,600 
Accrued interest receivable   7,869    —    —    7,869    7,869 
Mortgage servicing rights   623    —    796    —    796 
Derivative asset   4,616    —    4,616    —    4,616 
                          
Liabilities:                         
Deposits   2,301,972    —    —    2,296,204    2,296,204 
Short-term borrowings   4,790    —    4,790    —    4,790 
Long-term debt   1,360    —    1,294    —    1,294 
Subordinated debt   19,653    —    20,009    —    20,009 
Accrued interest payable   167    —    —    167    167 
Derivative liabilities   4,616    —    4,616    —    4,616 

 

                                       
   December 31, 2021 
   Carrying Value   Fair Value 
       Level 1   Level 2   Level 3   Total 
   (In thousands) 
Assets:                    
Cash and cash equivalents  $103,456   $103,456   $—   $—   $103,456 
Securities held-to-maturity   222,272    9,973    209,775    —    219,748 
Securities available-for-sale   194,352    —    194,352    —    194,352 
Marketable equity securities   11,896    11,896    —    —    11,896 
Federal Home Loan Bank of Boston and other restricted stock   2,594    —    —    2,594    2,594 
Loans - net   1,844,929    —    —    1,838,045    1,838,045 
Accrued interest receivable   7,775    —    —    7,775    7,775 
Mortgage servicing rights   693    —    739    —    739 
Derivative asset   1,692    —    1,692    —    1,692 
                          
Liabilities:                         
Deposits   2,256,898    —    —    2,256,834    2,256,834 
Long-term debt   2,653    —    2,620    —    2,620 
Subordinated debt   19,633         20,479    —    20,479 
Accrued interest payable   191    —    —    191    191 
Derivative liabilities   1,692    —    1,692    —    1,692 

 

 

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13. RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. This ASU, as amended, is effective for the Company in fiscal years beginning after December 15, 2022. The Company is in the process of implementing the standard.  We have put together a project team that has begun to identify appropriate loan segments along with related historical losses for each segment and potential models that would be most appropriate for each individual segment.  We have not quantified the effects of any models, but do expect the standard to significantly change the approach to calculating our allowance for loan losses.

 

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Overview.

 

We strive to remain a leader in meeting the financial service needs of our local community, and to provide quality service to the individuals and businesses in the market areas that we have served since 1853. Historically, we have been a community-oriented provider of traditional banking products and services to business organizations and individuals, including products such as residential and commercial loans, consumer loans and a variety of deposit products. We meet the needs of our local community through a community-based and service-oriented approach to banking.

 

We have adopted a growth-oriented strategy that has focused on increasing commercial lending. Our strategy also calls for increasing deposit relationships and broadening our product lines and services. We believe that this business strategy is best for our long-term success and viability, and complements our existing commitment to high-quality customer service.

 

In connection with our overall growth strategy, we seek to:

 

●Grow the Company’s commercial loan portfolio and related commercial deposits by targeting businesses in our primary market area of Hampden County and Hampshire County in western Massachusetts and Hartford and Tolland Counties in northern Connecticut to increase the net interest margin and loan income;

 

●Supplement the commercial portfolio by growing the residential real estate portfolio to diversify the loan portfolio and deepen customer relationships;

 

●Focus on expanding our retail banking deposit franchise and increase the number of households served within our designated market area;

 

●Invest in people, systems and technology to grow revenue, improve efficiency and enhance the overall customer experience;

 

●Grow revenues, increase tangible book value per share, continue to pay competitive dividends to shareholders and utilize the Company’s stock repurchase plan to leverage our capital and enhance franchise value; and

 

●Consider growth through acquisitions. We may pursue expansion opportunities in existing or adjacent strategic locations with companies that add complementary products to our existing business and at terms that add value to our existing shareholders.

 

You should read the following financial results for the three and six months ended June 30, 2022 in the context of this strategy.

 

●Net income was $5.5 million, or $0.25 per diluted share, for the three months ended June 30, 2022, compared to $5.7 million, or $0.24 per diluted share, for the same period in 2021. For the six months ended June 30, 2022, net income was $10.9 million, or $0.49 per diluted share, as compared to net income of $11.4 million, or $0.47 per diluted share, for the same period in 2021.

 

●The provision for loan losses was $300,000 for the three months ended June 30, 2022, compared to a credit of $1.2 million for the same period in 2021. The provision for loan losses was a credit of $125,000 for the six months ended June 30, 2022, compared to a credit of $1.1 million for the same period in 2021. During the three and six months ended June 30, 2021, the Company reduced its qualitative factors related to the impact of the COVID-19 pandemic and other economic trends used in the Company’s allowance.

 

●Net interest income increased $1.6 million, or 8.9%, to $19.4 million, for the three months ended June 30, 2022, from $17.8 million for the three months ended June 30, 2021. The net interest margin was 3.24% for the three months ended June 30, 2022, compared to 3.06% for the three months ended June 30, 2021. The net interest margin, on a tax-equivalent basis, was 3.26% for the three months ended June 30, 2022, compared to 3.08% for the three months ended June 30, 2021. During the six months ended June 30, 2022, net interest income increased $2.3 million, or 6.3%, to $38.1 million, compared to $35.8 million for the six months ended June 30, 2021. The net interest margin for the six months ended June 30, 2022 was 3.21%, compared to 3.15% during the six months ended June 30, 2021. The net interest margin, on a tax-equivalent basis, was 3.23% for the six months ended June 30, 2022, compared to 3.17% for the six months ended June 30, 2021.

 

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CRITICAL ACCOUNTING POLICIES.

 

Our consolidated financial statements are prepared in accordance with U.S. GAAP and practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ from those estimates.

 

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. There have been no material changes to our critical accounting policies during the six months ended June 30, 2022. For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the accompanying unaudited consolidated financial statements and Note 1 of the consolidated financial statements included in our 2021 Annual Report.

 

RECENT DEVELOPMENTS: CORONAVIRUS PANDEMIC RESPONSE AND ACTIONS.

 

The Company continues to monitor COVID-19’s impact on its business and customers, however, the extent to which COVID-19 will continue to impact its results and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures.

 

Our business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions. The COVID-19 global public health crisis and the resulting “stay-at-home” orders resulted in widespread volatility, severe disruptions in the U.S. economy at large, and for small businesses in particular, deterioration in household, business, economic and market conditions.

 

Paycheck Protection Program.

 

As a Preferred Lender with the Small Business Administration (“SBA”), the Company was in a position to react quickly to the PPP component of the March 27, 2020 $2.2 trillion fiscal stimulus bill known as the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) launched by the U.S. Department of the Treasury and the SBA. An eligible business was able to apply for a PPP loan up to the lesser of: (1) 2.5 times its average monthly “payroll costs,” or (2) $10.0 million. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity, subsequently extended to a five-year loan term maturity for loans granted on or after June 5, 2020 and (c) principal and interest payments deferred from six months to ten months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. As of June 30, 2022, the Company received funding approval from the SBA for 2,146 applications totaling $302.2 million. As of June 30, 2022, the Company processed 2,128 PPP loan forgiveness applications totaling $299.6 million. Total PPP loans decreased $22.7 million, or 89.6%, from $25.3 million at December 31, 2021 to $2.6 million at June 30, 2022.

 

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During the three months ended June 30, 2022, the Company recognized $129,000 in PPP loan origination fee income and PPP interest income (“PPP income”), compared to $1.6 million during the three months ended June 30, 2021. As of June 30, 2022, the Company had $133,000 in remaining deferred PPP loan processing fees.

 

The table below breaks out the PPP income recognized for the periods indicated:

 

   For the Three Months Ended 
                     
   June 30, 2022   March 31, 2022   December 31, 2021   September 30, 2021   June 30, 2021 
   ($ in thousands) 
     
PPP origination fee income  $122   $526   $868   $1,556   $1,240 
PPP interest income   7    36    105    201    387 
Total PPP Income  $129   $562   $973   $1,757   $1,627 

 

Loan Modifications/Troubled Debt Restructurings.

 

The banking regulatory agencies, through an Interagency Statement dated April 7, 2020, have encouraged financial institutions to work “prudently” with borrowers who request loan modifications or deferrals as a result of the economic impacts of COVID-19. Pursuant to Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. Financial institutions can then suspend the requirements under U.S. GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a TDR, and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting under U.S. GAAP. The Company has adopted this policy election to address COVID-19 loan modification requests that have been received from the earlier of either January 1, 2022 or the 60th day after the end of the COVID-19 national emergency.

 

The Company implemented a modification deferral program under the CARES Act, which allowed residential, commercial and consumer borrowers who were adversely affected by the COVID-19 pandemic, to defer loan payments for a set period of time. As of June 30, 2022, the Company had one remaining commercial real estate loan, with an outstanding principal balance of $9.0 million, and one residential loan with an outstanding principal balance of $123,000, under CARES Act modification. The commercial real estate borrower was granted a principal deferral, while the residential borrower was granted full payment deferral under the Company’s modification deferral program.

 

Allowance for Loan Losses.

 

In determining the allowance for loan losses, the Company considers quantitative loss factors and a number of qualitative factors, such as underwriting policies, current economic conditions, delinquency statistics, the adequacy of the underlying collateral and the financial strength of the borrower. The ongoing COVID-19 pandemic could cause us to experience higher credit losses in our lending portfolio, reduce demand for our products and services and other negative impacts on our financial position, results of operations and prospects. As of June 30, 2022, the Company’s delinquency and nonperforming assets have not been materially impacted by the COVID-19 pandemic, and therefore, have not resulted in material credit losses within the lending portfolio.

 

The Company is continuing to monitor COVID-19’s impact on its business and its customers, however, the extent to which COVID-19 will further impact its results and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures.

 

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COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2022 AND DECEMBER 31, 2021

 

At June 30, 2022, total assets were $2.6 billion, an increase of $38.9 million, or 1.5%, from December 31, 2021. During the six months ended June 30, 2022, cash and cash equivalents decreased $55.9 million, or 54.1%, to $47.5 million, investment securities decreased $22.3 million, or 5.2%, to $406.2 million and total loans increased $111.0 million, or 6.0%, to $2.0 billion.

 

At June 30, 2022, the Company’s available-for-sale securities portfolio decreased $33.4 million, or 17.2%, from $194.4 million at December 31, 2021 to $160.9 million at June 30, 2022. The held-to-maturity securities portfolio, recorded at amortized cost, increased $11.5 million, or 5.2%, from $222.3 million at December 31, 2021 to $233.8 million at June 30, 2022. The marketable equity securities portfolio decreased $443,000, or 3.7%, from $11.9 million at December 31, 2021 to $11.5 million at June 30, 2022. The primary objective of the investment portfolio is to provide liquidity and maximize income while preserving the safety of principal.

 

At June 30, 2022, total loans were $2.0 billion, an increase of $111.0 million, or 6.0%, from December 31, 2021. Excluding PPP loans, total loans increased $133.7 million, or 7.3%, driven by an increase in commercial real estate loans of $94.9 million, or 9.7%, partially offset by a decrease in total commercial and industrial loans of $8.8 million, or 3.9%. Excluding a decrease in PPP loans of $22.7 million, or 89.6%, from December 31, 2021, commercial and industrial loans increased $13.9 million, or 6.9%, at June 30, 2022. Residential real estate loans, which include home equity loans, increased $24.2 million, or 3.7%. In accordance with the Company’s asset/liability management strategy, at June 30, 2022, the Company serviced $82.5 million in loans sold to the secondary market, compared to $88.2 million at December 31, 2021. Servicing rights will continue to be retained on all loans written and sold to the secondary market. All loans where the payments are 90 days or more in arrears as of the closing date of each month are placed on nonaccrual status. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $102,000 and $153,000 for the six months ended June 30, 2022 and 2021, respectively.

 

Management continues to remain attentive to any signs of deterioration in borrowers’ financial conditions and is proactive in taking the appropriate steps to mitigate risk. At June 30, 2022, nonperforming loans totaled $4.1 million, or 0.21% of total loans, compared to $5.0 million, or 0.27% of total loans, at December 31, 2021. At June 30, 2022, there were no loans 90 or more days past due and still accruing interest. Nonperforming assets to total assets was 0.16% at June 30, 2022, compared to 0.20% at December 31, 2021. The allowance for loan losses as a percentage of total loans was 0.99% at June 30, 2022, compared to 1.06% at December 31, 2021. At June 30, 2022, the allowance for loan losses as a percentage of nonperforming loans was 476.5%, compared to 398.6%, at December 31, 2021

 

At June 30, 2022, total deposits were $2.3 billion, an increase of $45.1 million, or 2.0%, from December 31, 2021, primarily due to an increase in core deposits of $96.7 million, or 5.2%. Core deposits, which the Company defines as all deposits except time deposits, increased from $1.9 billion, or 82.2% of total deposits, at December 31, 2021, to $2.0 billion, or 84.8% of total deposits, at June 30, 2022. Non-interest-bearing deposits increased $6.3 million, or 1.0%, to $647.6 million, interest-bearing checking accounts increased $8.3 million, or 5.7%, to $154.0 million, savings accounts increased $9.1 million, or 4.2%, to $226.7 million, and money market accounts increased $72.9 million, or 8.6%, to $923.2 million. Time deposits decreased $51.6 million, or 12.8%, from $402.0 million at December 31, 2021 to $350.4 million at June 30, 2022. The Company did not have any brokered deposits at June 30, 2022 or December 31, 2021.

 

At June 30, 2022, total borrowings increased $3.5 million, or 15.7%, from $22.3 million at December 31, 2021, to $25.8 million. Other borrowings increased $3.5 million, or 129.6%, to $6.2 million and subordinated debt outstanding totaled $19.7 million at June 30, 2022 and $19.6 million at December 31, 2021.

 

At June 30, 2022, shareholders’ equity was $215.3 million, or 8.4% of total assets, compared to $223.7 million, or 8.8% of total assets, at December 31, 2021. The decrease in shareholders’ equity reflects $3.7 million for the repurchase of the Company’s common stock, the payment of regular cash dividends of $2.7 million and an increase in accumulated other comprehensive loss of $14.4 million, partially offset by net income of $10.9 million. Total shares outstanding as of June 30, 2022 were 22,465,991.

 

The Company’s book value per share was $9.58 at June 30, 2022 compared to $9.87 at December 31, 2021, while tangible book value per share, a non-GAAP financial measure, decreased $0.29, or 3.1%, from $9.21 at December 31, 2021 to $8.92 at June 30, 2022. During the six months ended June 30, 2022, the change in AOCI reduced the tangible book value per share by $0.64 as of June 30, 2022, primarily due to the impact of higher interest rates on the fair value of available-for-sale securities.  Tangible book value is a non-GAAP measure. See “Explanation of Use of Non-GAAP Financial Measurements” for the related tangible book value calculation and a reconciliation of GAAP to non-GAAP financial measures.

 

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The Company’s regulatory capital ratios remain in compliance with regulatory “well capitalized” requirements and internal target minimal levels. At June 30, 2022, the Company’s Tier 1 leverage, common equity tier 1 capital, and total risk-based capital ratios were 8.9%, 11.7%, and 13.7%, respectively, and the Bank’s Tier 1 leverage, common equity tier 1 capital, and total risk-based capital ratios were 9.1%, 12.0%, and 13.0%, respectively, compared with regulatory “well capitalized” minimums of 5.00%, 6.5%, and 10.00%, respectively.

 

On April 27, 2021, the Board of Directors authorized a stock repurchase plan (the “2021 Plan”) under which the Company is authorized to repurchase up to 2.4 million shares of common stock, or 10% of its outstanding common stock. During the three months ended June 30, 2022, the Company repurchased 293,173 shares of common stock under the 2021 Plan. During the six months ended June 30, 2022, the Company repurchased 405,847 shares of common stock under the 2021 Plan. At June 30, 2022, there were 271,472 shares of common stock available for repurchase under the 2021 Plan. On July 26, 2022, the Board of Directors authorized a stock repurchase plan (the “2022 Plan”), pursuant to which the Company may repurchase up to 1.1 million shares of common stock, or approximately 5.0%, of the Company’s outstanding shares of common stock, upon the completion of the 2021 Plan.

 

The shares repurchased under the 2021 and 2022 Plans will be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, or otherwise, depending upon market conditions. There is no guarantee as to the exact number, or value, of shares that will be repurchased by the Company, and the Company may discontinue repurchases at any time that management determines additional repurchases are not warranted. The timing and amount of additional share repurchases under the 2021 Plan will depend on a number of factors, including the Company’s stock price performance, ongoing capital planning considerations, general market conditions, and applicable legal requirements.

 

Although the Company has historically paid quarterly dividends on its common stock and currently intends to continue to pay such dividends, the Company’s ability to pay such dividends depends on a number of factors, including restrictions under federal laws and regulations on the Company’s ability to pay dividends, and as a result, there can be no assurance that dividends will continue to be paid in the future.

 

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND JUNE 30, 2021

 

General.

 

The Company reported net income of $5.5 million, or $0.25 per diluted share, for the three months ended June 30, 2022, compared to net income of $5.7 million, or $0.24 per diluted share, for the three months ended June 30, 2021. Return on average assets and return on average equity was 0.87% and 10.22%, respectively, for the three months ended June 30, 2022, as compared to 0.92% and 10.16%, respectively, for the three months ended June 30, 2021.

 

Net Interest and Dividend Income.

 

The following tables set forth the information relating to our average balance and net interest income for the three months ended June 30, 2022 and 2021, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.

 

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   Three Months Ended June 30, 
   2022   2021 
   Average       Average Yield/   Average       Average Yield/ 
   Balance   Interest(8)   Cost(9)   Balance   Interest(8)   Cost(9) 
   (Dollars in thousands) 
ASSETS:                        
Interest-earning assets                              
Loans(1)(2)  $1,949,464   $18,624    3.83%  $1,911,323   $18,425    3.87%
Securities(2)   414,226    2,068    2.00    293,991    1,278    1.74 
Other investments - at cost   9,892    30    1.22    10,114    28    1.11 
Short-term investments(3)   24,944    48    0.77    114,883    26    0.09 
Total interest-earning assets   2,398,526    20,770    3.47    2,330,311    19,757    3.40 
Total non-interest-earning assets   153,939              147,545           
Total assets  $2,552,465             $2,477,856           
                               
LIABILITIES AND EQUITY:                              
Interest-bearing liabilities                              
Interest-bearing checking accounts  $137,984   $105    0.31%  $100,455   $92    0.37%
Savings accounts   224,487    48    0.09    206,302    47    0.09 
Money market accounts   910,801    549    0.24    766,378    650    0.34 
Time deposit accounts   365,383    288    0.32    487,712    677    0.56 
Total interest-bearing deposits   1,638,655    990    0.24    1,560,847    1,466    0.38 
Short-term borrowings and long-term debt   25,829    264    4.10    54,459    382    2.81 
Interest-bearing liabilities   1,664,484    1,254    0.30    1,615,306    1,848    0.46 
Non-interest-bearing deposits   635,678              603,270           
Other non-interest-bearing liabilities   35,076              36,043           
Total non-interest-bearing liabilities   670,754              639,313           
                               
Total liabilities   2,335,238              2,254,619           
Total equity   217,227              223,237           
Total liabilities and equity  $2,552,465             $2,477,856           
Less: Tax-equivalent adjustment(2)        (124)             (105)     
Net interest and dividend income       $19,392             $17,804      
Net interest rate spread(4)             3.15%             2.92%
Net interest rate spread, on a tax equivalent basis(5)             3.17%             2.94%
Net interest margin(6)             3.24%             3.06%
Net interest margin, on a tax equivalent basis(7)             3.26%             3.08%
Ratio of average interest-earning                              
assets to average interest-bearing liabilities             144.10%             144.26%

 

 

(1)Loans, including nonaccrual loans, are net of deferred loan origination costs and unadvanced funds.

(2)Loan and securities income are presented on a tax-equivalent basis using a tax rate of 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported on the consolidated statements of net income.

(3)Short-term investments include federal funds sold.

(4)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(5)Net interest rate spread, on a tax-equivalent basis, represents the difference between the tax-equivalent weighted average yield on interest-earning assets and the tax-equivalent weighted average cost of interest-bearing liabilities.

(6)Net interest margin represents net interest and dividend income as a percentage of average interest-earning assets.

(7)Net interest margin, on a tax-equivalent basis, represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets.

(8)Acquired loans, time deposits and borrowings are recorded at fair value at the time of acquisition. The fair value marks on the loans, time deposits and borrowings acquired accrete and amortize into net interest income over time. For the three months ended June 30, 2022 and June 30, 2021, the loan accretion income and interest expense reduction on time deposits and borrowings increased (decreased) net interest income $64,000, and $(33,000), respectively. Excluding these items, net interest margin, on a tax-equivalent basis, for the three months ended June 30, 2022 and June 30, 2021 was 3.25%, and 3.09%, respectively.

(9)Annualized.

 

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Rate/Volume Analysis.

 

The following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest and dividend income and interest expense during the periods indicated. Information is provided in each category with respect to: (1) interest income changes attributable to changes in volume (changes in volume multiplied by prior rate); (2) interest income changes attributable to changes in rate (changes in rate multiplied by prior volume); and (3) the net change.

 

The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

 

   Three Months Ended June 30, 2022 compared to Three Months Ended
June 30, 2021		 
   Increase (Decrease) Due to     
   Volume   Rate   Net 
   (In thousands) 
Interest-earning assets    
Loans (1)  $369   $(170)  $199 
Securities (1)   523    267    790 
Other investments - at cost   (1)   3    2 
Short-term investments   (20)   42    22 
  Total interest-earning assets   871    142    1,013 
                
Interest-bearing liabilities               
Interest-bearing checking accounts   34    (21)   13 
Savings accounts   4    (3)   1 
Money market accounts   122    (223)   (101)
Time deposit accounts   (170)   (219)   (389)
Short-term borrowing and long-time debt   (201)   83    (118)
  Total interest-bearing liabilities   (211)   (383)   (594)
Change in net interest and dividend income (1)  $1,082   $525   $1,607 

 

 

(1)Securities, loan income and change in net interest and dividend income are presented on a tax-equivalent basis using a tax rate of 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest income.

 

Net interest income increased $1.6 million, or 8.9%, to $19.4 million, for the three months ended June 30, 2022, from $17.8 million for the three months ended June 30, 2021. The increase was due to an increase in interest and dividend income of $994,000, or 5.1%, and a decrease in interest expense of $594,000, or 32.2%. Interest expense on deposits decreased $476,000, or 32.5%, and interest expense on borrowings decreased $118,000, or 30.9%. For the three months ended June 30, 2022, net interest income included $129,000 in PPP income, compared to $1.6 million for the three months ended June 30, 2021. Excluding PPP income, net interest income increased $3.1 million, or 19.1%, primarily due to an increase in interest and dividend income of $2.5 million, or 13.8%.

 

The net interest margin was 3.24% for the three months ended June 30, 2022, compared to 3.06% for the three months ended June 30, 2021. The net interest margin, on a tax-equivalent basis, was 3.26% for the three months ended June 30, 2022, compared to 3.08% for the three months ended June 30, 2021. The increase in the net interest margin was due to an increase in average loans outstanding of $38.1 million, or 2.0%, from the three months ended June 30, 2021, compared to the three months ended June 30, 2022.

 

The average yield on interest-earning assets increased seven basis points from 3.40% for the three months ended June 30, 2021 to 3.47% for the three months ended June 30, 2022. During the three months ended June 30, 2022, the average cost of funds, including non-interest-bearing demand accounts and borrowings, decreased 11 basis points, from 0.33% for the three months ended June 30, 2021 to 0.22% for the three months ended June 30, 2022. The average cost of core deposits, which include non-interest-bearing demand accounts, decreased four basis points, from 0.19% for the three months ended June 30, 2021 to 0.15% for the three months ended June 30, 2022. The average cost of time deposits decreased 24 basis points from 0.56% for the three months ended June 30, 2021 to 0.32% for the three months ended June 30, 2022. The average cost of borrowings increased 129 basis points during the same period due to the full quarter impact of the $20.0 million in subordinated debt issued on April 19, 2021. For the three months ended June 30, 2022, average demand deposits, an interest-free source of funds, increased $32.4 million, or 5.4%, to $635.7 million, or 28.0% of total average deposits, from $603.3 million, or 27.9% of total average deposits for the three months ended June 30, 2021.

 

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During the three months ended June 30, 2022, average interest-earning assets increased $68.2 million, or 2.9%, to $2.4 billion compared to the three months ended June 30, 2021, primarily due to an increase in average securities of $120.0 million, or 39.5%, and an increase in average loans of $38.1 million, or 2.0%, partially offset by a decrease in short-term investments of $89.9 million, or 78.3%. Excluding average PPP loans, average interest-earning assets increased $220.7 million, or 10.2%, and average loans increased $190.7 million, or 10.9%, from the three months ended June 30, 2021 to the three months ended June 30, 2022.

 

Provision for Loan Losses.

 

The provision for loan losses is reviewed by management based upon our evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as new loan products, credit quality trends (including trends in nonperforming loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectability of the loan portfolio.

 

The amount of the provision for loan losses during the three months ended June 30, 2022 was based on the changes that occurred in the loan portfolio during that same period. The Company recorded a provision for loan losses of $300,000 for three months ended June 30, 2022, compared to a credit for loan losses of $1.2 million for the three months ended June 30, 2021. The increase in the provision for loan losses was due to strong organic loan growth during the second quarter of 2022. The Company recorded net charge-offs of $48,000 for the three months ended June 30, 2022, as compared to net charge-offs of $157,000 for the three months ended June 30, 2021. Management continues to assess the exposure of the Company’s loan portfolio to the COVID-19 pandemic related factors, economic trends and their potential effect on asset quality.

 

Although we believe that we have established and maintained the allowance for loan losses at adequate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment. If the COVID-19 pandemic has an adverse effect on the ability of our borrowers to satisfy their obligations to us, the demand for our loans or our other products and services, other aspects of our business operations, or on financial markets, real estate markets, or economic growth, this could, depending on the extent of the loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations could be materially and adversely affected.

 

Non-interest Income.

 

Non-interest income increased $332,000, or 13.8%, to $2.7 million for the three months ended June 30, 2022, from $2.4 million for the three months ended June 30, 2021. During the three months ended June 30, 2022, service charges and fees on deposits increased $271,000, or 13.1%, primarily due to the $177,000, or 19.1%, increase in ATM and debit card interchange income from increased card-based transaction usage across our checking account base. Other income from loan-level swap fees on commercial loans increased $21,000 from the three months ended June 30, 2021 to the three months ended June 30, 2022. Income from bank-owned life insurance decreased $42,000, or 8.4%, from the three months ended June 30, 2021 to the three months ended June 30, 2022. During the three months ended June 30, 2021, mortgage banking income from the sale of fixed rate residential real estate loans totaled $242,000. The Company did not sell any loans to the secondary market during the three months ended June 30, 2022. The Company reported a gain of $141,000 on non-marketable equity investments and reported an unrealized loss on marketable equity securities of $225,000, during the three months ended June 30, 2022, compared to unrealized gains on marketable equity securities of $6,000 during the three months ended June 30, 2021. The Company also reported realized losses on the sale of securities of $12,000 during the three months ended June 30, 2021. Gains and losses from the investment portfolio vary from quarter to quarter based on market conditions, as well as the related yield curve and valuation changes.

 

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During the three months ended June 30, 2021, the Company recognized a loss on interest rate swap termination of $402,000 representing the unamortized portion of a $3.4 million loss associated with the previous termination of a $32.5 million interest rate swap on March 16, 2016. The unamortized portion of the loss was previously reported in accumulated other comprehensive income and amortized through interest expense, however, as the previously hedged item was discontinued, the Company accelerated the remaining unamortized loss.

 

Non-interest Expense.

 

For the three months ended June 30, 2022, non-interest expense increased $759,000, or 5.6%, to $14.4 million from $13.7 million, for the three months ended June 30, 2021. The increase in non-interest expense was partially due to an increase in salaries and benefits of $263,000, or 3.3%, due to normal annual salary increases. Other non-interest expense increased $260,000, or 12.2%, professional fees increased $130,000, or 22.1%, occupancy expense increased $78,000, or 7.1%, advertising expense increased $65,000, or 18.7%, furniture and equipment expense increased $26,000, or 5.1%, and FDIC insurance expense increased $9,000, or 4.0%. During the same period, data processing expense decreased $27,000, or 3.6%. During the three months ended June 30, 2021, the Company prepaid $32.5 million of FHLB borrowings resulting in a loss of $45,000. For the three months ended June 30, 2022, the adjusted efficiency ratio, a non-GAAP financial measure, was 65.0%, compared to 66.1% for the three months ended June 30, 2021. The adjusted efficiency ratio is a non-GAAP measure. See “Explanation of Use of Non-GAAP Financial Measurements” for the related efficiency ratio calculation and a reconciliation of GAAP to non-GAAP financial measures.

 

Income Taxes.

 

Income tax expense for the three months ended June 30, 2022 was $1.9 million, representing an effective tax rate of 25.2%, compared to $2.1 million, representing an effective tax rate of 27.0%, for three months ended June 30, 2021.

 

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND JUNE 30, 2021

 

General.

 

For the six months ended June 30, 2022, the Company reported net income of $10.9 million, or $0.49 per diluted share, compared to $11.4 million, or $0.47 per diluted share, for the six months ended June 30, 2021. Return on average assets and return on average equity were 0.86% and 9.93% for the six months ended June 30, 2022, respectively, compared to 0.95% and 10.25% for the six months ended June 30, 2021, respectively.

 

Net Interest and Dividend Income.

 

The following tables set forth the information relating to our average balance and net interest income for the six months ended June 30, 2022 and 2021, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.

 

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   Six Months Ended June 30, 
   2022   2021 
   Average       Average Yield/   Average       Average Yield/ 
   Balance   Interest(8)   Cost(9)   Balance   Interest(8)   Cost(9) 
   (Dollars in thousands) 
ASSETS:                        
Interest-earning assets                              
Loans(1)(2)  $1,922,318   $36,691    3.85%  $1,917,366   $37,648    3.96%
Securities(2)   418,806    4,018    1.94    260,845    2,131    1.65 
Other investments - at cost   10,241    55    1.08    9,889    63    1.28 
Short-term investments(3)   40,899    69    0.34    104,999    50    0.10 
Total interest-earning assets   2,392,264    40,833    3.44    2,293,099    39,892    3.51 
Total non-interest-earning assets   148,815              146,709           
Total assets  $2,541,079             $2,439,808           
                               
LIABILITIES AND EQUITY:                              
Interest-bearing liabilities                              
Interest-bearing checking accounts  $135,104    200    0.30   $95,507    198    0.42 
Savings accounts   221,484    83    0.08    196,812    83    0.09 
Money market accounts   894,687    1,070    0.24    721,270    1,303    0.36 
Time deposit accounts   377,158    629    0.34    527,188    1,616    0.62 
Total interest-bearing deposits   1,628,433    1,982    0.25    1,540,777    3,200    0.42 
Short-term borrowings and long-term debt   24,164    517    4.31    53,569    655    2.47 
Interest-bearing liabilities   1,652,597    2,499    0.30    1,594,346    3,855    0.49 
Non-interest-bearing deposits   634,387              582,541           
Other non-interest-bearing liabilities   33,721              37,829           
Total non-interest-bearing liabilities   668,108              620,370           
                               
Total liabilities   2,320,705              2,214,716           
Total equity   220,374              225,092           
Total liabilities and equity  $2,541,079             $2,439,808           
Less: Tax-equivalent adjustment(2)        (244)             (207)     
Net interest and dividend income       $38,090             $35,830      
Net interest rate spread(4)             3.12%             3.00%
Net interest rate spread, on a tax equivalent basis(5)             3.14%             3.02%
Net interest margin(6)             3.21%             3.15%
Net interest margin, on a tax equivalent basis(7)             3.23%             3.17%
Ratio of average interest-earning                              
assets to average interest-bearing liabilities             144.76%             143.83%

 

 

(1)Loans, including nonaccrual loans, are net of deferred loan origination costs and unadvanced funds.

(2)Loan and securities income are presented on a tax-equivalent basis using a tax rate of 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported on the consolidated statements of net income.

(3)Short-term investments include federal funds sold.

(4)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(5)Net interest rate spread, on a tax-equivalent basis, represents the difference between the tax-equivalent weighted average yield on interest-earning assets and the tax-equivalent weighted average cost of interest-bearing liabilities.

(6)Net interest margin represents net interest and dividend income as a percentage of average interest-earning assets.

(7)Net interest margin, on a tax-equivalent basis, represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets.

(8)Acquired loans, time deposits and borrowings are recorded at fair value at the time of acquisition. The fair value marks on the loans, time deposits and borrowings acquired accrete and amortize into net interest income over time. For the six months ended June 30, 2022 and June 30, 2021, the loan accretion income and interest expense reduction on time deposits and borrowings increased (decreased) net interest income $103,000 and $(78,000), respectively. Excluding these items, net interest margin, on a tax-equivalent basis, for the six months ended June 30, 2022 and June 30, 2021 was 3.22% and 3.18%, respectively.

(9)Annualized.

 

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Rate/Volume Analysis.

 

The following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest and dividend income and interest expense during the periods indicated. Information is provided in each category with respect to: (1) interest income changes attributable to changes in volume (changes in volume multiplied by prior rate); (2) interest income changes attributable to changes in rate (changes in rate multiplied by prior volume); and (3) the net change.

 

The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

 

  

Six Months Ended June 30, 2022 compared to

Six Months Ended June 30, 2021

 
   Increase (Decrease) Due to     
   Volume   Rate   Net 
   (In thousands) 
Interest-earning assets    
Loans (1)  $97   $(1,055)  $(958)
Securities (1)   1,290    598    1,888 
Other investments - at cost   2    (10)   (8)
Short-term investments   (31)   50    19 
Total interest-earning assets   1,358    (417)   941 
                
Interest-bearing liabilities               
Interest-bearing checking accounts   82    (80)   2 
Savings accounts   10    (10)   — 
Money market accounts   313    (546)   (233)
Time deposit accounts   (460)   (527)   (987)
Short-term borrowing and long-term debt   (360)   222    (138)
Total interest-bearing liabilities   (415)   (941)   (1,356)
Change in net interest and dividend income  $1,773   $524   $2,297 

 

 
(1)Securities, loan income and change in net interest and dividend income are presented on a tax-equivalent basis using a tax rate of 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest income.

 

During the six months ended June 30, 2022, net interest income increased $2.3 million, or 6.3%, to $38.1 million, compared to $35.8 million for the six months ended June 30, 2021. The increase in net interest income was due to a decrease in interest expense of $1.4 million, or 35.2%, and an increase in interest and dividend income of $904,000, or 2.3%. The decrease in interest expense was due to a decrease in interest expense on deposits of $1.2 million, or 38.1%, and a decrease of $138,000, or 21.1%, in interest expense on borrowings. For the six months ended June 30, 2022, interest and dividend income included $691,000 in PPP income, compared to $4.0 million during the six months ended June 30, 2021. Excluding PPP income, net interest income increased $5.6 million, or 17.6%, for the same period.

 

The net interest margin for the six months ended June 30, 2022 was 3.21%, compared to 3.15% during the six months ended June 30, 2021. The net interest margin, on a tax-equivalent basis, was 3.23% for the six months ended June 30, 2022, compared to 3.17% for the six months ended June 30, 2021. Excluding the PPP income, the net interest margin increased from 3.01% for the six months ended June 30, 2021 to 3.16% for the six months ended June 30, 2022.

 

The average yield on interest-earning assets decreased seven basis points from 3.51% for the six months ended June 30, 2021 to 3.44% for the six months ended June 30, 2022. During the six months ended June 30, 2022, the average cost of funds, including non-interest-bearing demand accounts and borrowings, decreased 14 basis points from 0.36% for the six months ended June 30, 2021 to 0.22% for the six months ended June 30, 2022. For the six months ended June 30, 2022, the average cost of core deposits, including non-interest-bearing demand deposits, decreased six basis points from 0.20% for the six months ended June 30, 2021 to 0.14% for the six months ended June 30, 2022. The average cost of time deposits decreased 28 basis points from 0.62% for the six months ended June 30, 2021 to 0.34% during the same period in 2022. The average cost of borrowings, which include FHLB advances and subordinated debt, increased 184 basis points from 2.47% for the six months ended June 30, 2021 to 4.31% for the six months ended June 30, 2022. For the six months ended June 30, 2022, average demand deposits, an interest-free source of funds, increased $51.8 million, or 8.9%, from $582.5 million, or 27.4% of total average deposits, for the six months ended June 30, 2021, to $634.4 million, or 28.0% of total average deposits.

 

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During the six months ended June 30, 2022, average interest-earning assets increased $99.2 million, or 4.3%, to $2.4 billion. The increase in average interest-earning assets was due to an increase in average loans of $5.0 million, or 0.3%, as well as an increase in average securities of $158.3 million, or 58.5%. Both were partially offset by a decrease of $64.1 million, or 61.1%, in short-term investments. Excluding average PPP loans, average interest-earning assets increased $251.2 million, or 11.8%, and average loans increased $157.0 million, or 8.9%.

 

Provision for Loan Losses.

 

For the six months ended June 30, 2022, the credit for loan losses decreased $1.0 million, or 88.9%, from $1.1 million for the six months ended June 30, 2021 to $125,000 for the six months ended June 30, 2022. During the six months ended June 30, 2021, the Company adjusted its qualitative factors related to the impact of the COVID-19 pandemic and other economic trends used in the Company’s allowance calculation, which resulted in a credit for loan losses of $1.1 million. The Company recorded net charge-offs of $102,000 for the six months ended June 30, 2022, as compared to net charge-offs of $162,000 for the six months ended June 30, 2021.

 

Although we believe that we have established and maintained the allowance for loan losses at adequate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment. If the COVID-19 pandemic has an adverse effect on the ability of our borrowers to satisfy their obligations to us, the demand for our loans or our other products and services, other aspects of our business operations, or on financial markets, real estate markets, or economic growth, this could, depending on the extent of the loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations could be materially and adversely affected.

 

Non-interest Income.

 

For the six months ended June 30, 2022, non-interest income was $5.1 million, compared to $5.4 million for the six months ended June 30, 2021. During the same period, service charges and fees increased $562,000, or 14.2%. Other income from loan-level swap fees on commercial loans decreased $37,000, or 63.8%, and income from bank-owned life insurance decreased $35,000, or 3.7%. Mortgage banking income was $469,000 for the six months ended June 30, 2021 due to the sale of fixed rate residential real estate loans to the secondary market. The Company sold $17.6 million of low coupon residential real estate loans to the secondary market during the six months ended June 30, 2021, compared to $277,000 during the six months ended June 30, 2022.

 

During the six months ended June 30, 2022, the Company reported unrealized losses on marketable equity securities of $501,000, compared to unrealized losses of $83,000 during the six months ended June 30, 2021. During the six months ended June 30, 2022, the Company also reported realized losses on the sale of securities of $4,000, compared to realized losses of $74,000 on the sale of securities during the six months ended June 30, 2021. The Company reported a gain of $141,000 on non-marketable equity investments during the six months ended June 30, 2022, compared to $546,000 during the six months ended June 30, 2021. Gains and losses from the investment portfolio vary from quarter to quarter based on market conditions, as well as the related yield curve and valuation changes.

 

During the six months ended June 30, 2021, the Company recognized a loss on interest rate swap termination of $402,000 representing the unamortized portion of a $3.4 million loss associated with the previous termination of a $32.5 million interest rate swap on March 16, 2016. The unamortized portion of the loss was previously reported in accumulated other comprehensive income and amortized through interest expense, however, as the previously hedged item was discontinued, the Company accelerated the remaining unamortized loss.

 

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Non-interest Expense.

 

For the six months ended June 30, 2022, non-interest expense increased $1.9 million, or 7.0%, to $28.9 million, compared to $27.0 million for the six months ended June 30, 2021. The increase in non-interest expense was primarily due to an increase in salaries and employee benefits of $739,000, or 4.7%, due to normal annual salary increases as well as higher compensation incentive costs to support overall franchise growth. The increase in salary related expenses was also partially due to a decrease of $279,000 in deferred direct origination costs associated with Round 3 of PPP loans. The origination costs were recorded against salary expense during the six months ended June 30, 2021.

 

Other non-interest expense increased $702,000, or 17.5%, professional fees increased $163,000, or 14.4%, occupancy expense increased $152,000, or 6.4%, advertising expense increased $126,000, or 18.4%, furniture and equipment expense increased $79,000, or 7.9%, data processing expenses decreased $25,000, or 1.7%, and FDIC insurance expense decreased $3,000, or 0.6%. During the six months ended June 30, 2021, the Company prepaid $32.5 million of FHLB borrowings resulting in a loss of $45,000. For the six months ended June 30, 2022, the adjusted efficiency ratio, a non-GAAP financial measure, was 66.4%, compared to 65.3% for the six months ended June 30, 2021. The adjusted efficiency ratio is a non-GAAP measure. See “Explanation of Use of Non-GAAP Financial Measurements” for the related efficiency ratio calculation and a reconciliation of GAAP to non-GAAP financial measures.

 

Income Taxes.

 

Income tax expense for the six months ended June 30, 2022 was $3.6 million, representing an effective tax rate of 24.7%, compared to $3.9 million, representing an effective tax rate of 25.5%, for six months ended June 30, 2021.

 

Explanation of Use of Non-GAAP Financial Measurements.

 

We believe that it is common practice in the banking industry to present interest income and related yield information on tax-exempt loans and securities on a tax-equivalent basis, as well as presenting tangible book value per share and adjusted efficiency ratio, and that such information is useful to investors because it facilitates comparisons among financial institutions. However, the adjustment of interest income and yields on tax-exempt loans and securities to a tax-equivalent amount, as well as the presentation of tangible book value per share and adjusted efficiency ratio, may be considered to include financial information that is not in compliance with GAAP. A reconciliation from GAAP to non-GAAP is provided below.

 

   Three Months Ended   Six Months Ended 
   June 30, 2022   June 30, 2021   June 30, 2022   June 30, 2021 
   (In thousands) 
                 
Loans (no tax adjustment)  $18,500   $18,321   $36,447   $37,441 
Tax-equivalent adjustment (1)   124    104    244    207 
Loans (tax-equivalent basis)  $18,624   $18,425   $36,691   $37,648 
                     
Securities (no tax adjustment)  $2,068   $1,277   $4,018   $2,131 
Tax-equivalent adjustment (1)   —    1    —    — 
Securities (tax-equivalent basis)  $2,068   $1,278   $4,018   $2,131 
                     
Net interest income (no tax adjustment)  $19,392   $17,804   $38,090   $35,830 
Tax-equivalent adjustment (1)   124    105    244    207 
Net interest income (tax-equivalent basis)  $19,516   $17,909   $38,334   $36,037 

 

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   Three Months Ended   Six Months Ended 
   June 30, 2022   June 30, 2021   June 30, 2022   June 30, 2021 
   (In thousands) 
                 
Loans (no tax adjustment)   3.81%   3.84%   3.82%   3.94%
Loans (tax-equivalent basis)   3.83%   3.87%   3.85%   3.96%
Securities (no tax adjustment)   2.00%   1.74%   1.94%   1.65%
Securities (tax-equivalent basis)   2.00%   1.74%   1.94%   1.65%
                     
Interest rate spread (no tax adjustment)   3.15%   2.92%   3.12%   3.00%
Net interest margin (no tax adjustment)   3.24%   3.06%   3.21%   3.15%
Net interest margin (tax-equivalent)   3.26%   3.08%   3.23%   3.17%
                     
                     
Net interest income (no tax adjustment)  $19,392   $17,804   $38,090   $35,830 
Less:                    
Purchase accounting adjustments   64    (33)   103    (78)
Prepayment penalties and fees   26    117    48    152 
PPP fee income   129    1,627    691    4,038 
Adjusted net interest income (non-GAAP)  $19,173   $16,093   $37,248   $31,718 
                     
Average interest-earning assets  $2,398,526   $2,330,311   $2,392,264   $2,293,099 
Average interest-earnings asset, excluding average PPP loans  $2,395,463   $2,174,716   $2,383,226   $2,132,050 
                     
Adjusted net interest margin, excluding purchase accounting adjustments, PPP fee income, prepayment penalties and average PPP loans (non-GAAP)   3.21%   2.97%   3.16%   2.99%
                     
Book Value per Share (GAAP)  $9.58   $9.29   $9.58   $9.29 
Non-GAAP adjustments:                    
Goodwill   (0.55)   (0.52)   (0.55)   (0.52)
                     
Core deposit intangible   (0.11)   (0.11)   (0.11)   (0.11)
Tangible Book Value per Share (non-GAAP)  $8.92   $8.66   $8.92   $8.66 
                     
Income Before Income Taxes (GAAP)  $7,400   $7,739   $14,415   $15,367 
                     
Provision (credit) for loan losses   300    (1,200)   (125)   (1,125)
Income Before Taxes and Provision (non-GAAP)  $7,700   $6,539   $14,290   $14,242 
                     
                     
Non-interest Expense (GAAP)  $14,433   $13,674   $28,889   $27,001 
Non-GAAP adjustments:                    
Loss on prepayment of borrowings   —    (45)   —    (45)
Non-interest Expense for Efficiency Ratio (non-GAAP)  $14,433   $13,629   $28,889   $26,956 

 

44

 

 

   Three Months Ended   Six Months Ended 
   June 30, 2022   June 30, 2021   June 30, 2022   June 30, 2021 
   (In thousands) 
                 
Net Interest Income (GAAP)  $19,392   $17,804   $38,090   $35,830 
                     
Non-interest Income (GAAP)  $2,741   $2,409   $5,089   $5,413 
Non-GAAP adjustments:                    
Loss on securities, net   —    12    4    74 
Unrealized loss (gain) on marketable equity securities   225    (6)   501    83 
Loss on interest rate swap termination   —    402    —    402 
Gain on non-marketable equity investments   (141)   —    (141)   (546)
Non-interest Income for Adjusted Efficiency Ratio
(non-GAAP)		  $2,825   $2,817   $5,453   $5,426 
Total Revenue for Adjusted Efficiency Ratio (non-GAAP)  $22,217   $20,621   $43,543   $41,256 
                     
Efficiency Ratio (GAAP)   65.21%   67.65%   66.91%   65.47%
                     
Adjusted Efficiency Ratio (Non-interest Expense (GAAP)/Total Revenue for Adjusted Efficiency Ratio (non-GAAP))   64.96%   66.09%   66.35%   65.34%

 
(1)The tax equivalent adjustment is based upon a 21% tax rate.

 

Liquidity and Capital Resources.

 

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, deposit withdrawals and operating expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investment securities and funds provided by our operations. We also can borrow funds from the FHLB based on eligible collateral of loans and securities. Our material cash commitments include funding loan originations, fulfilling contractual obligations with third-party service providers, maintaining operating leases for certain of our Bank properties and satisfying repayment of our long-term debt obligations.

 

Primary Sources of Liquidity

 

At June 30, 2022 and December 31, 2021, outstanding borrowings from the FHLB were $1.4 million and $2.7 million, respectively. At June 30, 2022, we had $473.2 million in available borrowing capacity with the FHLB. We have the ability to increase our borrowing capacity with the FHLB by pledging investment securities or additional loans.

 

In addition, we have available lines of credit of $15.0 million and $50.0 million with other correspondent banks. Interest rates on these lines are determined and reset on a daily basis by each respective bank. At June 30, 2022 and December 31, 2021, we did not have an outstanding balance under either of these lines of credit. In addition, we may enter into reverse repurchase agreements with approved broker-dealers. Reverse repurchase agreements are agreements that allow us to borrow money using our securities as collateral.

 

We also have outstanding at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. We are also obligated under agreements with the FHLB to repay borrowed funds and are obligated under leases for certain of our branches and equipment.

 

Maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of securities and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds.

 

45

 

 

The Company’s primary activities are the origination of commercial real estate loans, commercial and industrial loans and residential real estate loans, as well as and the purchase of mortgage-backed and other investment securities. During the six months ended June 30, 2022 and 2021, we originated $207.2 million and $236.5 million in loans, respectively. We purchased securities totaling $24.8 million for the six months ended June 30, 2022 and $174.0 million for the six months ended June 30, 2021. At June 30, 2022, the Company had approximately $179.2 million in loan commitments and letters of credit to borrowers and approximately $323.3 million in available home equity and other unadvanced lines of credit.

 

Deposit in flows and out flows are affected by the level of interest rates, the products and interest rates offered by competitors and by other factors. At June 30, 2022, time deposit accounts scheduled to mature within one year totaled $296.0 million. Based on the Company’s deposit retention experience and current pricing strategy, we anticipate that a significant portion of these time deposits will remain on deposit. We monitor our liquidity position frequently and anticipate that it will have sufficient funds to meet our current funding commitments for the next 12 months and beyond.

 

Material Cash Commitments

 

The Company entered into a long-term contractual obligation with a vendor for use of its core provider and ancillary services beginning in 2016. Total remaining contractual obligations outstanding with this vendor as of June 30, 2022 were estimated to be $12.0 million, with $4.5 million expected to be paid within one year and the remaining $7.5 million to be paid within the next five years. Further, the Company has operating leases for certain of its banking offices and ATMs. Our leases have remaining lease terms of less than one year to seventeen years, some of which include options to extend the leases for additional five-year terms up to fifteen years. Lease liabilities totaled $9.7 million as of June 30, 2022. Principal payments expected to be made on our lease liabilities during the twelve months ended June 30, 2023 are $1.3 million. The remaining lease liability payments totaled $8.4 million and are expected to be made after June 30, 2023.

 

In addition, the Company completed an offering of $20 million in aggregate principal amount of its Notes to certain qualified institutional buyers in a private placement transaction on April 20, 2021. For more information on the Notes, refer to the information contained in Note 9 “Subordinated Debt” of the unaudited consolidated financial statements included above.

 

We do not anticipate any material capital expenditures during the rest of 2022, except in pursuance of the Company’s strategic initiatives. The Company does not have any balloon or other payments due on any long-term obligations or any off-balance sheet items other than the commitments and unused lines of credit noted above.

 

At June 30, 2022, we exceeded each of the applicable regulatory capital requirements. As of June 30, 2022, the most recent notification from the Office of Comptroller of the Currency categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized,” the Bank must maintain minimum total risk-based, Tier 1 risk-based, Common Equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes would change our category.

 

46

 

 

   Actual   Minimum For Capital Adequacy Purpose   Minimum To Be Well Capitalized 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
   (Dollars in thousands) 
June 30, 2022                        
Total Capital (to Risk Weighted Assets):                              
Consolidated  $267,084    13.69%  $156,026    8.00%    N/A      N/A  
Bank   252,707    12.98    155,750    8.00   $194,687    10.00%
Tier 1 Capital (to Risk Weighted Assets):                              
Consolidated   227,871    11.68    117,019    6.00     N/A      N/A  
Bank   233,147    11.98    116,812    6.00    155,750    8.00 
Common Equity Tier 1 Capital (to Risk Weighted Assets)                              
Consolidated   227,871    11.68    87,764    4.50     N/A      N/A  
Bank   233,147    11.98    87,609    4.50    126,547    6.50 
Tier 1 Leverage Ratio (to Adjusted Average Assets):                              
Consolidated   227,871    8.91    102,350    4.00     N/A      N/A  
Bank   233,147    9.13    102,182    4.00    127,728    5.00 
December 31, 2021                              
Total Capital (to Risk Weighted Assets):                              
Consolidated  $261,093    14.27%  $146,347    8.00%    N/A      N/A  
Bank   243,788    13.35    146,135    8.00   $182,669    10.00 
Tier 1 Capital (to Risk Weighted Assets):                              
Consolidated   221,673    12.12    109,761    6.00     N/A      N/A  
Bank   224,001    12.26    109,601    6.00    146,135    8.00 
Common Equity Tier 1 Capital (to Risk Weighted Assets):                              
Consolidated   221,673    12.12    82,320    4.50     N/A      N/A  
Bank   224,001    12.26    82,201    4.50    118,735    6.50 
Tier 1 Leverage Ratio (to Adjusted Average Assets):                              
Consolidated   221,673    8.75    101,320    4.00     N/A      N/A  
Bank   224,001    8.86    101,101    4.00    126,377    5.00 

 

We also have outstanding, at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows.

 

OFF-BALANCE SHEET ARRANGEMENTS.

 

The Company does not have any off-balance sheet arrangements, other than noted above under Material Cash Commitments, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes in our assessment of our sensitivity to market risk since our presentation in our 2021 Annual Report. Please refer to Item 7A of the 2021 Annual Report for additional information.

 

ITEM 4: CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures.

 

Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered by this report. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

 

47

 

 

Changes in Internal Control Over Financial Reporting.

 

There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS.

 

We are subject to claims and legal actions in the ordinary course of business. We believe that all such claims and actions currently pending against us, if any, are either adequately covered by insurance or would not have a material adverse effect on us if decided in a manner unfavorable to us.

 

ITEM 1A.RISK FACTORS.

 

For a summary of risk factors relevant to our operations, see Part 1, Item 1A, “Risk Factors” in our 2021 Annual Report. There are no material changes in the risk factors relevant to our operations since December 31, 2021.

 

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

The following table sets forth information with respect to purchases made by us of our common stock during the three months ended June 30, 2022.

 

Period   Total Number
of Shares
Purchased		   Average
Price Paid
per Share
($)		   Total Number
of Shares
Purchased as
Part of Publicly
Announced
Programs		   Maximum
Number of
Shares that May
Yet Be
Purchased
Under the 2021
Plan (1)		 
April 1 - 30, 2022    110,052    8.85    110,052    454,593 
May 1 - 31, 2022    121,340    8.40    121,340    333,253 
June 1 - 30, 2022    61,781    8.38    61,781    271,472 
Total    293,173    8.56    293,173    271,472 

 

(1)On April 27, 2021, the Board of Directors authorized the 2021 Plan under which the Company may purchase up to 2,400,000 shares of its common stock, or 10%, of its outstanding common stock.

 

There were no sales by us of unregistered securities during the three months ended June 30, 2022.

 

ITEM 3.DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4.MINE SAFETY DISCLOSURE.

 

Not applicable.

 

48

 

 

ITEM 5.OTHER INFORMATION.

 

None.

 

ITEM 6.EXHIBITS.

 

Exhibit  

Number

  

Exhibit Description

3.2   Restated Articles of Organization of Western New England Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of the Form 8-K filed with the SEC on October 26, 2016).
     
3.3   Amended and Restated Bylaws of Western New England Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of the Form 8-K filed with the SEC on February 2, 2017).
     
4.1   Form of Stock Certificate of Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 4.1 of the Registration Statement No. 333-137024 on Form S-1 filed with the Securities and Exchange Commission on August 31, 2006).
     
31.1*   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101**   Financial statements from the quarterly report on Form 10-Q of Western New England Bancorp, Inc. for the quarter ended June 30, 2022, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Net Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.
     
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

 

*Filed herewith.

 

**Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

49

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 5, 2022.

 

  Western New England Bancorp, Inc.
   
  By: /s/ James C. Hagan
    James C. Hagan
    President and Chief Executive Officer
   
  By: /s/ Guida R. Sajdak
    Guida R. Sajdak
    Executive Vice President and Chief Financial Officer

 

 

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