Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Management of Market
Risk,” for a discussion of quantitative and qualitative disclosures about market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our
consolidated financial statements and the accompanying notes may be found on pages F-1 through F-52 of this report.
70
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation
of Disclosure Controls and Procedures
Management,
including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer has evaluated the
effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end
of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Executive Vice President and
Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required
to be disclosed in the reports we file and submit under the Exchange Act (i) is recorded, processed, summarized and reported as
and when required and (ii) accumulated and communicated to our management including the Chief Executive Officer and Executive
Vice President and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.
Management’s
Annual Report on Internal Control over Financial Reporting
The
management of Western New England Bancorp, Inc. and Subsidiaries (collectively, the “Company”), including our President
and Chief Executive Officer and Executive Vice President and Chief Financial Officer, is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our management assessed
the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based
on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2020.
There
have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred
during our last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, our internal control
over financial reporting.
71
Report
of Independent Registered Public Accounting Firm
on
Internal Control over Financial Reporting
To
the Shareholders and Board of Directors
of
Western New England Bancorp, Inc.
Opinion
on Internal Control over Financial Reporting
We
have audited Western New England Bancorp, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of
December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the Consolidated Financial Statements of the Company and our report dated March 11, 2021 expressed an unqualified opinion.
Basis
for Opinion
The
Company’s management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.
Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
72
Definition
and Limitations of Internal Control over Financial Reporting
A
company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/
Wolf & Company, P.C.
Boston,
Massachusetts
March
11, 2021
73
ITEM 9B. OTHER INFORMATION.
None.
PART
III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The
following information included in the Proxy Statement is incorporated herein by reference: “Information About Our Board
of Directors,” “Information About Our Executive Officers Who Are Not Directors,” and “Corporate
Governance.”
ITEM 11. EXECUTIVE COMPENSATION.
The
following information included in the Proxy Statement is incorporated herein by reference: “Compensation Committee
Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Compensation
Committee Report,” “Executive Compensation” and “Director Compensation.”
The
following information included in the Proxy Statement is incorporated herein by reference: “Security Ownership of Certain
Beneficial Owners and Management” and “Securities Authorized For Issuance Under Equity Compensation Plans.”
The
following information included in the Proxy Statement is incorporated herein by reference: “Transactions with Related Persons”
and “Board of Directors Independence.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The
following information included in the Proxy Statement is incorporated herein by reference: “Independent Registered Public
Accounting Firm Fees and Services.”
PART
IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements
Reference
is made to our consolidated financial statements and accompanying notes included in Item 8 of Part II hereof.
(a)(2) Financial Statement Schedules
Consolidated
financial statement schedules have been omitted because the required information is not present, or not present in amounts sufficient
to require submission of the schedules, or because the required information is provided in the consolidated financial statements
or notes thereto.
74
(a)(3) Exhibits
EXHIBIT
INDEX
75
21.1† Subsidiaries of Western New England Bancorp, Inc.
23.1† Consent of Wolf & Company, P.C.
† Filed herewith.
* Management contract or compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY.
None.
76
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 11, 2021.
WESTERN NEW ENGLAND BANCORP, INC.
By: /s/ James C. Hagan
James C. Hagan
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ Guida R. Sajdak
Guida R. Sajdak
POWER
OF ATTORNEY
Each
person whose individual signature appears below hereby authorizes and appoints James C. Hagan and Guida R. Sajdak, and each of
them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful
attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person,
individually and in each capacity stated below, and to file any and all amendments to this report on Form 10-K, and to file
the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act
and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes
may lawfully do or cause to be done by virtue thereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the
following persons on behalf of the registrant and in the capacities indicated on March 11, 2021.
Name Title
James C. Hagan
Guida R. Sajdak
/s/ Lisa G. McMahon Chairperson of the Board
Lisa G. McMahon
/s/ Laura Benoit Director
Laura Benoit
/s/ Donna J. Damon Director
Donna J. Damon
/s/ Gary G. Fitzgerald Director
Gary G. Fitzgerald
/s/ William D. Masse Director
William D. Masse
/s/ Gregg F. Orlen Director
Gregg F. Orlen
/s/ Paul C. Picknelly Director
Paul C. Picknelly
Name Title
/s/ Steven G. Richter Director
Steven G. Richter
/s/ Philip R. Smith Director
Philip R. Smith
Report
of Independent Registered Public Accounting Firm
To
the Shareholders and Board of Directors of
Western
New England Bancorp, Inc.
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying Consolidated Balance Sheets of Western New England Bancorp, Inc. and subsidiaries (the “Company”)
as of December 31, 2020 and 2019, the related Consolidated Statements of Net Income, Comprehensive Income, Changes in Shareholders’
Equity and Cash Flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred
to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in
the United States of America.
We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
and our report dated March 11, 2021 expressed an unqualified opinion.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements.
Our
audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
F-1
Critical
Audit Matter
The
critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the Company’s Audit Committee and that: (1) relates to accounts or disclosures
that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication
of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not,
by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts
or disclosures to which it relates.
Critical
Audit Matter Description
As
described in Notes 1 and 3 to the financial statements, the Company has recorded an allowance for loan losses in the amount of
$21.2 million as of December 31, 2020, representing management’s estimate of the probable losses inherent in the loan portfolio
as of that date. The allowance is established as losses are estimated to have occurred through a provision for loan
losses charged to earnings.
The
determination of the allowance for loan losses requires significant judgment by management including the identification of, and
estimated reserves on, problem loans and the determination of qualitative adjustments to historical loss experience.
How
the Critical Audit Matter was addressed in the Audit
Our
principal audit procedures to evaluate management’s estimates of the allowance for loan losses included tests of the following:
We
have served as the Company’s auditor since 2004.
/s/
Wolf & Company, P.C.
Boston,
Massachusetts
March
11, 2021
F-2
WESTERN NEW ENGLAND BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
December 31, December 31,
ASSETS
Interest-bearing deposits and other short-term investments 67,058 6,466
Marketable equity securities, at fair value 11,968 6,737
Federal Home Loan Bank stock and other restricted stock, at cost 5,160 14,477
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Short-term borrowings — 35,000
Securities pending settlement 160 —
COMMITMENTS AND CONTINGENCIES (see Note 16)
SHAREHOLDERS’ EQUITY:
Unearned compensation - ESOP (3,997 ) (4,574 )
Unearned compensation - Equity Incentive Plan (1,240 ) (1,124 )
Accumulated other comprehensive loss (11,279 ) (8,968 )
See accompanying notes to consolidated financial statements.
F-3
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(Dollars in thousands, except per share data)
Years Ended December 31,
Interest and dividend income:
Debt securities, tax-exempt 56 72 85
Interest expense:
Non-interest income (loss):
Gain on bank-owned life insurance death benefit — — 715
Gain (loss) on available-for-sale securities, net 1,965 (97 ) (281 )
Gain on sale of OREO — — 48
Unrealized gains (losses) on marketable equity securities, net 109 165 (142 )
Loss on interest rate swap termination (2,353 ) — —
Non-interest expense:
Loss on prepayment of borrowings 987 — —
Earnings per common share:
Diluted earnings per share $ 0.45 $ 0.51 $ 0.57
See accompanying notes to consolidated financial statements.
F-4
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Years Ended December 31,
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities:
Cash flow hedges:
Change in fair value of derivatives used for cash flow hedges 1,099 (900 ) 442
Defined benefit pension plan:
(Losses) gains arising during the period (8,037 ) (4,349 ) 1,328
Amortization of defined benefit plans actuarial loss(4) 421 137 177
See accompanying notes to consolidated financial statements.
F-5
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(Dollars
in thousands, except share data)
Common Stock Unearned Accumulated
Share-based compensation - equity incentive plan — — — — 845 — — 845
Share-based compensation - equity incentive plan — — (45 ) — 818 — — 773
Forfeited equity incentive plan shares (30,193 shares) — — (319 ) — 319 — — —
Share-based compensation - equity incentive plan — — — — 834 — — 834
See
accompanying notes to consolidated financial statements.
F-6
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
OPERATING ACTIVITIES:
Depreciation and amortization of premises and equipment 2,145 2,079 2,055
Amortization of core deposit intangible 375 376 375
Net (gain) loss on sales of available-for-sale securities (1,965 ) 97 281
Net gain on sales of other real estate owned — — (48 )
Loss on prepayment of borrowings 987 — —
Income from bank-owned life insurance (1,809 ) (1,799 ) (1,825 )
Gain on bank-owned life insurance death benefit — — (715 )
Net change in:
INVESTING ACTIVITIES:
Securities, available-for-sale:
Proceeds from calls, maturities, and principal collections 84,774 35,386 25,060
Redemption of Federal Home Loan Bank of Boston stock, net 9,317 218 858
Proceeds from sale of other real estate owned — — 203
Purchases of premises and equipment (3,581 ) (1,285 ) (3,327 )
Proceeds from sale of premises and equipment 66 27 100
Proceeds from payout on bank-owned life insurance — — 2,050
FINANCING ACTIVITIES:
Issuance of common stock in connection with stock option exercises 43 106 114
NET CHANGE IN CASH AND CASH EQUIVALENTS: 62,703 (2,048 ) (343 )
Supplemental cash flow information:
Net change in due to broker for common stock repurchased $ 160 $ (221 ) $ (83 )
See the accompanying notes to consolidated financial statements.
F-7
WESTERN
NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations and Basis of Presentation. Western New England Bancorp, Inc. (“Western New England Bancorp,” “WNEB,”
“Company,” “we,” or “us”) is a Massachusetts-chartered stock holding company for Westfield
Bank, a federally-chartered savings bank (“Bank”).
The
Bank operates 25 banking offices in Hampden and Hampshire counties in western Massachusetts and Hartford and Tolland counties
in northern Connecticut, and its primary sources of revenue are interest income from loans as well as interest income from investment
securities. The Bank’s Huntington, Massachusetts branch opened on February 25, 2020 and its Bloomfield, Connecticut branch
opened on July 6, 2020. In addition, the Bank’s Financial Services Center in West Hartford, Connecticut, opened on July
21, 2020. The West Hartford Financial Services Center serves as the Company’s Connecticut hub, housing Commercial Lending,
Cash Management and a Mortgage Loan Officer. The Bank’s deposits are insured up to the maximum Federal Deposit Insurance
Corporation (“FDIC”) coverage limits.
Wholly-owned
Subsidiaries of the Bank. Elm Street Securities Corporation, WFD Securities, Inc. and CSB Colts, Inc., are Massachusetts chartered
securities corporations, formed for the primary purpose of holding qualified securities. WB Real Estate Holdings, LLC, is a Massachusetts-chartered
limited liability company that holds real property acquired as security for debts previously contracted by the Bank.
Principles
of Consolidation. The consolidated financial statements include the accounts of Western New England Bancorp, the Bank, CSB
Colts, Inc., Elm Street Securities Corporation, WB Real Estate Holdings, LLC and WFD Securities, Inc. All material intercompany
balances and transactions have been eliminated in consolidation.
Estimates.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of income and expenses for each. Actual results could differ from those estimates. Estimates that are
particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses,
accounting for non-performing loans and the realizability of deferred tax assets.
Reclassifications.
Amounts in the prior year financial statements are reclassified when necessary to conform to the current year presentation.
Significant
Group Concentrations of Credit Risk. Most of the Company’s lending activities are with customers located within the
New England region of the country. The Company does not have any significant concentrations to any one industry or customer.
Cash
and Cash Equivalents. We define cash on hand, cash due from banks, federal funds sold and interest-bearing deposits having
an original maturity of 90 days or less as cash and cash equivalents.
Securities
and Mortgage-Backed Securities. Debt securities, including mortgage-backed securities, which have been identified as assets
for which there is not a positive intent to hold to maturity are classified as available-for-sale and are carried at fair value
with unrealized gains and losses, net of income taxes, reported as a separate component of comprehensive income (loss). Marketable
equity securities are measured at fair value with changes in fair value reported on the Company’s consolidated statements
of net income as a component of non-interest income, regardless of whether such gains and losses are realized. We do not acquire
securities and mortgage-backed securities for purposes of engaging in trading activities.
F-8
Realized
gains and losses on sales of securities and mortgage-backed securities are computed using the specific identification method and
are included in non-interest income on the trade date. The amortization of premiums and accretion of discounts is determined by
using the level yield method to the maturity date.
Derivatives.
We enter into interest rate swap agreements as part of our interest-rate risk management strategy for certain assets and liabilities
and not for speculative purposes. Based on our intended use for interest rate swaps, these are hedging instruments subject to
hedge accounting provisions. Cash flow hedges are recorded at fair value in other assets or other liabilities within our balance
sheets. Changes in the fair value of these cash flow hedges are initially recorded in accumulated other comprehensive income (loss)
and subsequently reclassified into earnings when the forecasted transaction affects earnings.
Other-than-Temporary
Impairment of Securities. On a quarterly basis, we review securities available-for-sale with a decline in fair value below
the amortized cost of the investment to determine whether the decline in fair value is temporary or other-than-temporary (“OTTI”).
In estimating OTTI losses for securities available-for-sale, impairment is required to be recognized if (1) we intend to sell
the security; (2) it is “more likely than not” that we will be required to sell the security before recovery of its
amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire
amortized cost basis. For all impaired debt securities that we intend to sell, or more likely than not will be required to sell,
the full amount of the other-than-temporary impairment is recognized through earnings. For all other impaired debt securities,
credit-related other-than-temporary impairment is recognized through earnings, while non-credit related other-than-temporary impairment
is recognized in other comprehensive income/loss, net of applicable taxes.
Fair
Value Hierarchy. We group our assets and liabilities measured at fair value in three levels, based on the markets in which
the assets and liabilities 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 and 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 and 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 and liabilities. 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.
Federal
Home Loan Bank of Boston Stock. The Bank, as a member of the Federal Home Loan Bank (“FHLB”) system, is required
to maintain an investment in capital stock of the FHLB of Boston. Based on the redemption provisions of the FHLB, the stock has
no quoted market value and is carried at cost. At its discretion, the FHLB may declare dividends on the stock. Management reviews
for impairment based on the ultimate recoverability of the cost basis in the FHLB stock. As of December 31, 2020, no impairment
has been recognized.
Loans
Held for Sale. Loans originated and intended for sale in the secondary market are carried at the lower of amortized cost or
fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to non-interest income. Gains or losses on sales of mortgage
loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold
on the trade date and reported within non-interest income on the accompanying consolidated statements of net income.
Loans
Receivable. Loans are recorded at the principal amount outstanding, adjusted for charge-offs, the allowance for loan losses,
unearned premiums, discounts 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
collectible. 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 current period interest income. Subsequent cash receipts are applied to the outstanding
principal balance or to interest income if, in the judgment of management, collection of the principal balance is not in question.
Loans are returned to accrual status when they become current as to both principal and interest and when subsequent performance
reduces the concern as to the collectability of principal and interest. Loan fees, discounts and premiums on purchased loans,
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.
F-9
Allowance
for Loan Losses. 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 non-performing 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. Beginning in March 2020, the Bank added a new qualitative factor category to the allowance calculation
– “Economic Impact of COVID-19”. The allocation of additional reserves for the COVID-19 qualitative factor during
the year was based upon continued analysis of the loan portfolio that included identifying borrowers sensitive to the shutdown
(i.e. accommodation and food service, recreation, construction, manufacturing, and wholesale & retail trade) as well as a
general allocation for the negative economic outlook given the record number of unemployment benefits claims during the period.
In addition, on an ongoing basis, the Company has continually evaluated the loan portfolio acquired on October 24, 2016 from Chicopee
Bancorp, Inc. (“Chicopee”). The acquired portfolio was initially recorded at fair value without a related allowance
for loan losses. Subsequent to acquisition, there have been no indications that there has been any subsequent deterioration to
the acquired portfolio. Due to the ongoing impacts and extended nature of the pandemic, during the year ended December 31, 2020,
the Company determined that it was prudent to provide an allowance for loan losses related to the acquired portfolio. Excluding
the COVID-19 qualitative factor category and the allowance for the acquired loan portfolio, there were no additional changes in
our policies or methodology pertaining to the general component of the allowance for loan losses during the periods presented
for disclosure.
The
qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant
to each loan portfolio segment are as follows:
Commercial
real estate loans. Loans in this segment are primarily income-producing investment properties and owner-occupied commercial
properties throughout New England. The underlying cash flows generated by the properties or operations can be adversely impacted
by a downturn in the economy due to increased vacancy rates or diminished cash flows, which in turn, would have an effect on the
credit quality in this segment. Management obtains financial information annually and continually monitors the cash flows of these
loans.
F-10
Residential
real estate loans. Loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent
on the credit quality of the individual borrower. We require private mortgage insurance for all loans originated with a loan-to-value
ratio greater than 80% and we do not grant subprime loans. The overall health of the economy, including unemployment rates and
housing prices, will have an effect on the credit quality in this segment. Home equity loans are secured by first or second mortgages
on one-to-four family owner occupied properties.
Commercial
and industrial loans. Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment
is expected from the cash flows of the business. A weakened economy, decreased consumer spending, changes in technology and government
spending are examples of what will have an effect on the credit quality in this segment.
In
addition, as a Preferred Lender with the Small Business Administration (“SBA”), the Company offered Paycheck Protection
Program (“PPP”) loans through the March 27, 2020 $2.2 trillion fiscal stimulus bill known as the Coronavirus Aid,
Relief and Economic Security Act (the “CARES Act”) launched by the U.S. Department of Treasury (“Treasury”)
and the SBA. An eligible business was able to apply for a PPP loan up to the lesser of: (1) 2.5 times its average monthly “payroll
costs,” or (2) $10.0 million. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity, subsequently
extended to a five-year loan term maturity for loans granted on or after June 5, 2020 and (c) principal and interest payments
deferred from six months to ten months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible
borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced
by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60%
of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.
Consumer
loans. Loans in this segment are both secured and 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 non-performing or subject to a troubled debt restructuring agreement.
A
loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the
scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered
by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally
are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal
and interest owed. The extent to which COVID-19 impacts our borrower’s ability to repay and therefore the classification
of a loan as impaired is highly uncertain and cannot be predicted with confidence as it is highly dependent upon the scope, severity
and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic
effects of the pandemic and containment measures.
We
may periodically agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower
experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). All TDRs
are classified as impaired.
While
we use our best judgment and information available, the ultimate appropriateness of the allowance is dependent upon a variety
of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates and the
view of the regulatory authorities toward loan classifications.
F-11
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 reflects the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating allocated and general reserves in the portfolio.
Loans
Acquired with Deteriorated Credit Quality. Loans acquired in a transfer, including business combinations, where there is evidence
of credit deterioration since origination and it is probable at the date of acquisition the Company will not collect all contractually
required principal and interest payments, are accounted for under accounting guidance for purchased credit-impaired loans. This
guidance provides that the excess of the cash flows initially expected to be collected over the fair value of the loans at the
acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the loans,
provided that the timing and amount of future cash flows is reasonably estimated. The difference between the contractually required
payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. Subsequent
to acquisition, probable decreases in expected cash flows are recognized through a provision for loan losses, resulting in an
increase to the allowance for loan losses. If the Company has probable and significant increases in cash flows expected to be
collected, the Company will first reverse any previously established allowance for loan losses and then increase interest income
as a prospective yield adjustment.
Bank-owned
Life Insurance. Bank-owned life insurance policies are reflected on the consolidated balance sheets at cash surrender value.
Changes in the net cash surrender value of the policies, as well as insurance proceeds received in excess of carrying value, are
reflected in non-interest income on the consolidated statements of net income and are not subject to income taxes.
Transfers
and Servicing of Financial Assets. Transfers of financial assets are accounted for as sales, when control over the assets
has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from
us, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge
or exchange the transferred assets, and (3) we do not maintain effective control over the transferred assets through an agreement
to repurchase them before their maturity.
Premises
and Equipment. Land is carried at cost. Buildings, furniture and equipment are stated at cost, less accumulated depreciation
and amortization, computed on the straight-line method over the estimated useful lives of the assets, or the expected lease term,
if shorter. Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured.
The estimated useful lives of the assets are as follows:
Schedule
of estimated useful lives of assets
Years
Buildings 39
Leasehold Improvements 5-20
Furniture and Equipment 3-7
The
cost of maintenance and repairs is charged to expense when incurred. Major expenditures for betterments are capitalized and depreciated.
Other
Real Estate Owned. Other real estate owned (“OREO”) represents property acquired through foreclosure or deeded