Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2021
Commission
File No.: 001-16767
Western
New England Bancorp, Inc.
(Exact
name of registrant as specified in its charter)
141
Elm Street, Westfield, Massachusetts01085
(Address
of principal executive offices, including zip code)
(413)568-1911
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share WNEB The NASDAQ Global Select Market
Securities
registered pursuant to Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
☐ No ☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☒ Emerging
growth company ☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The
aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2021, was $196,173,752. This
amount was based on the closing price as of June 30, 2021 on the NASDAQ Global Select Market (“NASDAQ”) for a share
of the registrant’s common stock, which was $8.15 on June 30, 2021.
As
of March 3, 2022, the registrant had 22,664,878shares of common stock, $0.01 per value, issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the Proxy Statement for the 2022 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
WESTERN
NEW ENGLAND BANCORP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2021
TABLE
OF CONTENTS
ITEM PART I PAGE
1 Business 4
1A Risk Factors 35
1B Unresolved Staff Comments 46
3 Legal Proceedings 49
4 Mine Safety Disclosures 49
PART II
7A Quantitative and Qualitative Disclosures About Market Risk 67
8 Financial Statements and Supplementary Data 67
9A Controls and Procedures 68
9B Other Information 71
9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 71
PART III
10 Directors, Executive Officers and Corporate Governance 71
11 Executive Compensation 71
13 Certain Relationships and Related Transactions and Director Independence 71
14 Principal Accounting Fees and Services 71
PART IV
15 Exhibits and Financial Statement Schedules 71
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 Annual Report on Form 10-K contains “forward-looking
statements” with respect to the Company’s financial condition, liquidity, results
of operations, future performance, business, measures being taken in response to the coronavirus disease 2019 (“COVID-19")
pandemic and the impact of COVID-19 on the Company’s business. Forward-looking statements may be identified by the
use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,”
“estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to,
estimates with respect to our financial condition, results of operations and business that are subject to various factors which
could cause actual results to differ materially from these estimates. These factors include, but are not limited to:
• the pace of recovery when the COVID-19 pandemic subsides;
• changes in the interest rate environment that reduce margins;
• the highly competitive industry and market area in which we operate;
• changes in business conditions and inflation;
• changes in credit market conditions;
• changes in the securities markets which affect investment management revenues;
• changes in technology used in the banking business;
• certain of our intangible assets may become impaired in the future;
• our controls and procedures may fail or be circumvented;
• changes in key management personnel which may adversely impact our operations;
• other factors detailed from time to time in our SEC filings.
Although
we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially
from the results discussed in these forward-looking statements. You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We do not undertake any obligation to republish revised forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except to the extent
required by law.
Unless
the context indicates otherwise, all references in this prospectus to “Western New England Bancorp,” “WNEB,”
“we,” “us,” “our company,” and “our” refer to Western New England Bancorp, Inc.
and its subsidiaries (including Westfield Bank, CSB Colts, Inc., Elm Street Securities Corporation, WFD Securities, Inc. and WB
Real Estate Holdings, LLC).
3
PART
I
ITEM 1. BUSINESS
General.
Western
New England Bancorp, Inc. (“WNEB” or “Company”) (f/k/a “Westfield Financial, Inc.”) headquartered
in Westfield, Massachusetts, is a Massachusetts-chartered stock holding company and is registered as a savings and loan holding
company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). In
2001, the Company reorganized from a Massachusetts-chartered savings bank holding company to a Massachusetts-chartered stock corporation
with the second step conversion being completed in 2007. WNEB is the parent company and owns all of the capital stock of Westfield
Bank (“Westfield” or “Bank”). The Company is also subject to the jurisdiction of the SEC and is subject
to the disclosure and other regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act
of 1934, as amended, as administered by the SEC. Western New England Bancorp is traded on the NASDAQ under the ticker symbol “WNEB”
and is subject to the NASDAQ stock market rules. At December 31, 2021, WNEB had consolidated total assets of $2.5 billion, total
net loans of $1.8 billion, total deposits of $2.3 billion and total shareholders’ equity of $223.7 million.
Westfield
Bank, headquartered in Westfield, Massachusetts, is a federally-chartered savings bank organized in 1853 and is regulated by the
Office of the Comptroller of the Currency (“OCC”). The Bank is a full-service, community oriented financial institution
offering a full range of commercial and retail products and services as well as wealth management financial products. As of December
31, 2021, the Bank had twenty-five branches and seventeen freestanding automated teller machines (“ATMs”), and an
additional five seasonal or temporary ATMs. The Bank also conducts business through an additional six freestanding and thirty
seasonal or temporary ATMs that are owned and serviced by a third party, whereby the Bank pays a rental fee and shares in the
surcharge revenue. All branch and ATM locations serve Hampden County and Hampshire County in western Massachusetts and Hartford
County and Tolland County in northern Connecticut. The Bank also provides a variety of banking services including telephone and
online banking, remote deposit capture, cash management services, overdraft facilities, night deposit services, and safe deposit
facilities. As a member of the Federal Deposit Insurance Corporation (“FDIC”), the Bank’s deposits are insured
up to the maximum FDIC insurance coverage limits. The Bank is also a member of the Federal Home Loan Bank of Boston (“FHLB”).
On
October 21, 2016, the Company acquired Chicopee Bancorp, Inc. (“Chicopee”), the holding company for Chicopee Savings
Bank and in conjunction with the acquisition, the name of the Company was changed to Western New England Bancorp, Inc. The transaction
qualified as a tax-free reorganization for federal income tax purposes.
Subsidiary
Activities.
Western
New England Bancorp, Inc. has two subsidiaries that are included in the Company’s consolidated financial statements:
Westfield
Bank has three wholly owned subsidiaries that are included in the Company’s consolidated financial statements:
4
Market
Area.
Westfield
Bank’s headquarters are located at 141 Elm Street in Westfield, Massachusetts. The Bank’s primary lending and deposit
market areas include all of Hampden County and Hampshire County in western Massachusetts and Hartford and Tolland Counties in
northern Connecticut. The Bank operates 25 banking offices in Agawam, Chicopee, Feeding Hills, East Longmeadow, Holyoke, Huntington,
Ludlow, South Hadley, Southwick, Springfield, Ware, West Springfield and Westfield, Massachusetts and Bloomfield, Enfield, Granby
and West Hartford, Connecticut. We operate full-service ATMs at our branch locations and have 17 freestanding ATM locations in
Chicopee, Holyoke, Ludlow, Southwick, Springfield, West Springfield and Westfield, Massachusetts and 5 traveling/seasonal ATMs.
The Bank also conducts business through an additional six freestanding and thirty seasonal or temporary ATMs that are owned and
serviced by a third party, whereby the Bank pays a rental fee and shares in the surcharge revenue. In addition, we provide online
banking services, including online deposit account opening and residential mortgage and consumer loan applications through our
website at www.westfieldbank.com.
The
markets served by our branches are primarily suburban markets located in western Massachusetts and in northern Connecticut. Westfield,
Massachusetts, is located near the intersection of U.S. Interstates 90 (the Massachusetts Turnpike) and 91. Our middle market
and commercial real estate lending team is located in Springfield, the Pioneer Valley’s primary urban market. The Pioneer
Valley of western Massachusetts encompasses the sixth largest metropolitan area in New England. The Springfield Metropolitan area
covers a relatively diverse area ranging from densely populated urban areas, such as Springfield, to outlying rural areas. Our
Financial Services Center in West Hartford serves as our Connecticut hub, housing employees across all commercial and retail lines
of business. Our markets fall within New England’s Knowledge Corridor, an interstate partnership of regional economic development,
planning, business, tourism and educational institutions that work together to advance the region’s economic progress.
A
diversified mix of industry groups are concentrated in western Massachusetts and northern Connecticut, including manufacturing,
health care, higher education, wholesale and retail trade and service. The economies of our primary markets have benefited from
the presence of large employers such as Baystate Medical Center, Big Y World Class Markets, MassMutual Financial Group, Mercy
Medical Center/Trinity Health of New England, MGM Springfield and Westover Air Reserve Base in Massachusetts, and Air National
Guard, Collins Aerospace, Kaman Aerospace Corporation, Lego Systems Inc., Stanadyne LLC and Talcott Resolution Life Insurance
Company in Connecticut. Other employment and economic activity is provided by financial institutions, colleges and universities,
hospitals, and a variety of wholesale and retail trade business. Our Hampden County market also enjoys a strong tourism business
with attractions such as the Eastern States Exposition, which operates The Big E, the largest fair in the northeast, the Basketball
Hall of Fame, MGM Springfield and Six Flags New England.
Competition.
The
Bank faces significant competition to attract and retain customers within existing and neighboring geographic markets. This competition
stems from national and larger regional banks, numerous local savings banks, commercial banks, cooperative banks and credit unions
which have a large presence in the region. Competition for loans, deposits and cash management services, and investment advisory
assets also comes from other businesses that provide financial services, including consumer finance companies, mortgage brokers
and lenders, private lenders, insurance companies, securities brokerage firms, institutional mutual funds, registered investment
advisors, non-bank electronic payment and funding channels, internet-based banks and other financial intermediaries.
We
expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing
trend of consolidation in the financial services industry. Technological advances, for example, have lowered the barriers to market
entry, allowed banks and other lenders to expand their geographic reach by providing services over the internet and made it possible
for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal
laws permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the
financial services industry.
5
At
June 30, 2021, which is the most recent date for which data is available from the FDIC, we held approximately 14.0% of the deposits
in Hampden County, which was the second largest market share out of the 16 banks and thrifts with offices in Hampden County.
Human
Capital
Talent
Management
We
remain focused on being a good corporate citizen and creating a culture where we prioritize providing an exceptional customer
experience and empowering our employees. The Company believes that it has had and continues to have good employee relations. Our
talent management strategy ensures we leverage the talent needed, not just for today, but also for our future. Our employees are
the foundation of our success and are responsible for upholding our guiding principles of integrity, trust, empathy, collaboration,
work ethic, courage, inclusion and positive attitude.
As
of December 31, 2021, the Bank employed 355 total employees, with 298 employed full-time and 57 employed part-time. Employee retention
helps the Company operate efficiently and effectively. Management promotes its core values through prioritizing concern for employees’
well-being, supporting employees’ career goals, offering competitive wages, and providing valuable fringe benefits. In addition,
Bank employees may become stockholders of the Company through participation in its Employee Stock Ownership Plan (“ESOP”) and its
401(k) retirement plan, which offers a Company stock investment option.
The
Company actively encourages and supports the growth and development of its employees. Management generally seeks to fill positions
by promotion and transfer from within the organization, whenever practical. Career development is advanced through ongoing mentoring
and development programs, as well as internally developed training programs, customized corporate training engagements and educational
reimbursement programs. Reimbursement is available to employees enrolled in pre-approved degree or certification programs at accredited
institutions that teach skills or knowledge relevant to the financial services industry. Each year, we also attract rising juniors
and seniors from colleges and universities across our footprint who have the opportunity to be assigned a position with the Company
upon graduation.
Inclusion
and Diversity
The
Company strives to create an intentionally inclusive, diverse and thriving workplace where each person feels valued, respected
and understood as well as a respectful, productive environment where everyone is encouraged to achieve their full potential. At
December 31, 2021, our employees were representative of our commitment to recruit, develop, and retain diverse individuals, wherein approximately
65% of our employees were women and 21% of our employees are either ethnic minorities, veterans or persons with disabilities.
We remain focused on bolstering our workforce through inclusive hiring and retention practices, which we feel reflects and better
serves our communities.
Health
and Safety/Well-Being
The safety, health and wellness of our employees is considered a top priority.
The COVID-19 pandemic has presented a unique challenge with regard to maintaining employee safety while continuing successful operations.
All employees have returned to working in person; however, when they experience signs or symptoms of a possible COVID-19 illness, they
have been asked not to come to work and test for COVID-19 as necessary. We follow the Center for Disease Control (“CDC”) guidance
as to when employees may return to in-person work. On an ongoing basis, the Company promotes the health and wellness of its employees
and strives to keep the employee portion of health care premiums competitive with local competition.
Lending
Activities.
General.
The Company’s loan portfolio totaled $1.9 billion, or 73.5% of total assets, at December 31, 2021, compared to $1.9
billion, or 81.5% of total assets, at December 31, 2020. The Company lends to individuals, business entities, non-profit organizations
and professional practices. The Company’s primary lending focus is on the development of high quality commercial relationships
achieved through active business development efforts, long-term relationships with established commercial developers, community
involvement, and focused marketing strategies. Loans made to businesses, non-profits, and professional practices may include commercial
mortgage loans, construction and land development loans, commercial and industrial loans, including lines of credit and letters
of credit. Loans made to individuals may include conventional residential mortgage loans, home equity loans and lines, residential
construction loans on owner-occupied primary and secondary residences, and secured and unsecured personal loans and lines of credit.
The Company manages its loan portfolio to avoid concentration by industry, relationship size, and source of repayment to lessen
its credit risk exposure.
6
Interest
rates on loans may be fixed or variable and variable rate loans may have fixed initial periods before periodic rate adjustments
begin. Individual rates offered are dependent on the associated degree of credit risk, term, underwriting and servicing costs,
loan amount, and the extent of other banking relationships maintained with the borrower, and may be subject to interest rate floors.
Rates are also subject to competitive pressures, the current interest rate environment, availability of funds, and government
regulations.
The
Company employs a seasoned commercial lending staff, with commercial lenders supporting the Company’s loan growth strategy.
The Company contracts with an external loan review company to review the internal credit ratings assigned to loans in the commercial
loan portfolio on a pre-determined schedule, based on the type, size, rating, and overall risk of the loan. During the course
of their review, the third party examines a sample of loans, including new loans, existing relationships over certain dollar amounts
and classified assets. The Company's internal residential origination and underwriting staff originate residential loans and are
responsible for compliance with residential lending regulations, consumer protection and internal policy guidelines. The Company's
internal compliance department monitors the residential loan origination activity for regulatory compliance.
The
Executive Committee of the Company’s Board of Directors (the “Board”) approves loan relationships exceeding
certain prescribed dollar limits as outlined in the Company’s lending policy.
At
December 31, 2021, our general regulatory limit on loans to one borrower was $36.6 million. Our largest lending exposure was a
$24.2 million commercial lending relationship, of which $19.2 million was outstanding at December 31, 2021. The relationship is
primarily secured by business assets and commercial real estate located in Agawam, Massachusetts. At December 31, 2021, this relationship
was performing in accordance with its original terms.
Commercial
Real Estate Loans and Commercial and Industrial Loans.
At
December 31, 2021, commercial real estate loans totaled $980.0 million, or 52.6% of total loans, compared to $833.9 million, or
43.3% of total loans, at December 31, 2020.
The
Company originates commercial real estate loans throughout its market area for the purpose of acquiring, developing, and refinancing
commercial real estate where the property is the primary collateral securing the loan. These loans are typically secured by a
variety of commercial and industrial property types, including one-to-four and multi-family apartment buildings, office, industrial,
or mixed-use facilities, or other commercial properties, and are generally guaranteed by the principals of the borrower. Commercial
real estate loans generally have repayment periods of approximately fifteen to thirty years. Variable interest rate loans in the
commercial real estate loan portfolio have a variety of adjustment terms and underlying interest rate indices, and are generally
fixed for an initial period before periodic rate adjustments begin.
Commercial
construction loans may include the development of residential housing and condominium projects, the development of commercial
and industrial use property, and loans for the purchase and improvement of raw land. These loans are secured in whole or in part
by underlying real estate collateral and are generally guaranteed by the principals of the borrowers. Construction lenders work
to cultivate long-term relationships with established developers. The Company limits the amount of financing provided to any single
developer for the construction of properties built on a speculative basis. Funds for construction projects are disbursed as pre-specified
stages of construction are completed. Regular site inspections are performed, prior to advancing additional funds, at each construction
phase, either by experienced construction lenders on staff or by independent outside inspection companies. Commercial construction
loans generally are variable rate loans and lines with interest rates that are periodically adjusted and generally have terms
of one to three years. At December 31, 2021 and December 31, 2020, there was $83.2 million and $103.3 million, respectively, in
commercial construction loans included within commercial real estate loans.
7
At
December 31, 2021, our total commercial and industrial loan portfolio totaled $226.7 million, or 12.2% of our total loans, with
commercial and industrial loans totaling $201.3 million, or 10.8% of total loans, and Paycheck Protection Program (“PPP”)
loans totaling $25.3 million, or 1.4% of total loans. This compares to our total commercial and industrial loan portfolio of $379.1
million, or 19.7% of total loans, at December 31, 2020, with commercial and industrial loans totaling $211.8 million, or 11.0%
of total loans, and PPP loans totaling $167.3 million, or 8.7% of total loans. Commercial and industrial loans include seasonal
revolving lines of credit, working capital loans, equipment financing and term loans. Commercial and industrial credits may be
unsecured loans and lines to financially strong borrowers, loans secured in whole or in part by real estate unrelated to the principal
purpose of the loan or secured by inventories, equipment, or receivables, and are generally guaranteed by the principals of the
borrower. Variable rate loans and lines in this portfolio have interest rates that are periodically adjusted, with loans generally
having fixed initial periods. Commercial and industrial loans have average repayment periods of one to seven years. Our commercial
and industrial loan portfolio does not have any significant loan concentration by type of property or borrower.
The
largest concentration of commercial loans to an industry was to hotels and accommodation, which comprised approximately 6.8% of
the commercial loan portfolio as of December 31, 2021. At December 31, 2021, our largest commercial and industrial loan relationship
was $24.2 million to a hardware merchant wholesaler. The loan relationship is secured by business assets and real estate. At December
31, 2021, this relationship was performing according to its original terms.
As
a Preferred Lender with the Small Business Administration (“SBA”), the Company offered PPP loans through the March
27, 2020 $2.2 trillion fiscal stimulus bill known as the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”)
launched by the U.S. Department of Treasury (“Treasury”) and the SBA. An eligible business was able to apply for a
PPP loan up to the lesser of: (1) 2.5 times its average monthly “payroll costs,” or (2) $10.0 million. PPP loans have:
(a) an interest rate of 1.0%, (b) a two-year loan term to maturity, subsequently extended to a five-year loan term maturity for
loans granted on or after June 5, 2020 and (c) principal and interest payments deferred from six months to ten months from the
date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of
the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under
the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll
expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. PPP loans totaled $25.3 million, or
1.4% of total loans, at December 31, 2021.
Letters
of credit are conditional commitments issued by the Company to guarantee the financial obligation or performance of a customer
to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. If the letter of credit is drawn upon, a loan is created for the customer, generally a commercial
loan, with the same criteria associated with similar commercial loans.
The
Company participates with other banks in the financing of certain commercial projects. Participating loans with other institutions
provide banks the opportunity to retain customer relationships and reduce credit risk exposure among each participating bank,
while providing customers with larger credit facilities than the individual bank might be willing or able to offer independently.
In some cases, the Company may act as the lead lender, originating and servicing the loans, but participating out a portion of
the funding to other banks. In other cases, the Company may participate in loans originated by other institutions. In each case,
the participating bank funds a percentage of the loan commitment and takes on the related pro-rata risk. In each case in which
the Company participates in a loan, the rights and obligations of each participating bank are divided proportionately among the
participating banks in an amount equal to their share of ownership and with equal priority among all banks. The Company performs
an independent credit analysis of each commitment and a review of the participating institution prior to participation in the
loan, and an annual review of the borrower thereafter. Loans originated by other banks in which the Company is a participating
institution are carried in the loan portfolio at the Company’s pro-rata share of ownership. Loans originated by other banks
in which the Company is a participating institution amounted to $121.7 million at December 31, 2021 and $113.0 million at December
31, 2020. The Company was servicing commercial loans originated by the Company and participated out to various other institutions
totaling $63.2 million and $52.9 million at December 31, 2021 and December 31, 2020, respectively.
8
Residential
Real Estate Loans.
At
December 31, 2021 and December 31, 2020, the residential real estate loan portfolio totaled $552.3 million, or 29.6% of total
loans, and $604.7 million, or 31.4%, of total loans, respectively. The Company originates and funds residential real estate loans
secured by one-to-four family residential properties primarily located in western Massachusetts and northern Connecticut. The
Company processes and underwrites all of its originations internally through its Residential Loan Center located in Westfield,
MA.
These
residential properties may serve as the borrower’s primary residence, or as vacation homes or investment properties. Loans
are originated in amounts up to 97% of the lesser of the appraised value or purchase price of the property. Private mortgage insurance
is required on all loans with a loan-to-value ratios greater than 80%. In addition, financing is provided for the construction
of owner-occupied primary and secondary residences. Residential mortgage loans may have terms of up to 30 years at either fixed
or adjustable rates of interest. Fixed and adjustable rate residential mortgage loans are generally originated using secondary
market underwriting and documentation standards.
Depending
on the current interest rate environment, management may elect to sell those fixed and adjustable rate residential mortgage loans
which are eligible for sale in the secondary market, or hold some or all of this residential loan production for the Company’s
portfolio. The Company may retain or sell the servicing when selling the loans. The Company is an approved seller and servicer
with Fannie Mae, Freddie Mac and the FHLB. In order to reduce interest rate risk, during the twelve months ended December 31,
2021, the Company sold $59.7 million of fixed rate, low coupon residential real estate loans to the secondary market. There were
no loans sold during 2020. At December 31, 2021 and December 31, 2020, the Company serviced $88.2 million and $38.1 million, respectively,
in residential loans sold to the secondary market. The servicing rights will likely continue to be retained on all loans sold
over the life of the loan. The largest owner-occupied residential real estate loan was $2.0 million and was performing according
to its original terms as of December 31, 2021.
Home
Equity Loans.
At
December 31, 2021 and December 31, 2020, home equity loans totaled $99.8 million, or 5.4% of total loans, and $103.9 million,
or 5.4% of total loans, respectively. The Company originates home equity revolving loans and lines of credit for one-to-four family
residential properties with maximum original loan-to-value ratios generally up to 85%. Home equity lines generally have interest
rates that adjust monthly based on changes in the Wall Street Journal Prime Rate, although minimum rates may be applicable. Some
home equity line rates may be fixed for a period of time and then adjusted monthly thereafter. The payment schedule for home equity
lines require interest only payments for the first ten years of the lines. Generally at the end of ten years, the line may be
frozen to future advances, and principal plus interest payments are collected over a fifteen-year amortization schedule or, for
eligible borrowers meeting certain requirements, the line availability may be extended for an additional interest only period.
Consumer
Loans.
At
December 31, 2021 and December 31, 2020, consumer loans totaled $4.3 million, or 0.2%, of total loans and $5.2 million, or 0.2%,
of total loans, respectively. Consumer loans are generally originated at higher interest rates than residential and commercial
real estate loans, but they also generally tend to have a higher credit risk than residential real estate loans because they are
usually unsecured or secured by rapidly depreciable assets. Management, however, believes that offering consumer loan products
helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and
providing cross-marketing opportunities. We offer a variety of consumer loans to retail customers in the communities we serve.
Examples of our consumer loans include automobile loans, spa and pool loans, collateral loans and personal lines of credit tied
to deposit accounts to provide overdraft protection.
9
The
following table presents the composition of our loan portfolio in dollar amounts and in percentages of the total portfolio at
the dates indicated.
At December 31,
Percent of Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total Amount Total
(Dollars in thousands)
Real estate loans:
Commercial and industrial loans:
Unamortized PPP loan fees (781 ) (3,050 ) — — —
10
Loan
Maturity and Repricing.
The
following table shows the repricing dates or contractual maturity dates of our loans as of December 31, 2021. The table does not
reflect prepayments or scheduled principal amortization. Demand loans, loans having no stated maturity, and overdrafts are shown
as due in within one year.
(In thousands)
Amount due:
After one year:
Unamortized PPP loan fees — — — (781 ) — — (781 )
The following table presents, as of December 31, 2021, the dollar amount of all loans contractually due or scheduled to reprice after December 31, 2022, and whether such loans have fixed interest rates or adjustable interest rates.
Fixed Adjustable Total
(In thousands)
Real estate loans:
Other loans:
11
The
following table presents our loan originations, purchases and principal payments for the years indicated:
For the Years Ended December 31,
(In thousands)
Loans:
Originations:
Real estate loans:
Less:
Sales of residential one-to-four family loans to secondary market 59,704 — —
Asset
Quality.
Maintaining
a high level of asset quality continues to be one of the Company’s key objectives. Credit Administration reports directly
to the Chief Credit Officer and is responsible for the completion of independent credit analyses for all loans above a specific
threshold.
The
Company’s policy requires that management continuously monitor the status of the loan portfolio and report to the Board
of Directors on a monthly basis. These reports include information on concentration levels, delinquent loans, nonaccrual loans,
criticized loans and foreclosed real estate, as well as our actions and plans to cure the nonaccrual status of the loans and to
dispose of the foreclosed property.
The
Company contracts with an external loan review company to review the internal risk ratings assigned to loans in the commercial
loan portfolio on a pre-determined schedule, based on the type, size, rating, and overall risk of the loan. During the course
of their review, the third party examines a sample of loans, including new loans, existing relationships over certain dollar amounts
and classified assets. The findings are reported to the Chief Credit Officer and the full report is then presented to the Audit
Committee.
Potential
Problem Loans.
The
Company performs an internal analysis of the loan portfolio in order to identify and quantify loans with higher than normal risk.
Loans having a higher risk profile are assigned a risk rating corresponding to the level of weakness identified in the loan.
All
loans risk rated “Special Mention (5)”, “Substandard (6)”, “Doubtful (7)” and “Loss
(8)” are listed on the Company’s criticized report and are reviewed by management not less than on a quarterly basis
to assess the level of risk and to ensure that appropriate actions are being taken to minimize potential loss exposure. Loans
identified as containing a loss are partially charged-off or fully charged-off. In addition, the Company closely monitors the
classified loans for signs of deterioration to mitigate the growth in nonaccrual loans, including performing additional due diligence,
updating valuations and requiring additional financial reporting from the borrower. At December 31, 2021, criticized loans, inclusive
of “adversely classified loans”, totaled $82.6 million, or 4.4% of total loans, compared to $147.1 million, or 7.6%
of total loans, at December 31, 2020.
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The
Company’s adversely classified loans (defined as "Substandard (6)", "Doubtful (7)" or "Loss (8)")
totaled $31.1 million, or 1.7% of total loans, at December 31, 2021 and $55.0 million, or 2.9%, of total loans, at December 31,
2020. Adversely classified loans that were performing but possessed potential weaknesses and, as a result, could ultimately become
nonperforming loans totaled $26.4 million, or 1.4% of total loans, at December 31, 2021 and $47.2 million, or 2.4% of total loans,
at December 31, 2020. The remaining balance of adversely classified loans were nonaccrual loans totaling $4.7 million, or 0.3%
of total loans, at December 31, 2021 and $7.8 million, or 0.4% of total loans, at December 31, 2020.
Total
impaired loans totaled $20.5 million, or 1.1% of total loans, at December 31, 2021 and $29.1 million, or 1.5% of total loans,
at December 31, 2020. Total accruing impaired loans totaled $15.5 million and $21.3 million at December 31, 2021 and December
31, 2020, respectively, while nonaccrual impaired loans totaled $5.0 million and $7.8 million as of December 31, 2021 and December
31, 2020, respectively.
In
management’s opinion, all impaired loan balances at December 31, 2021 and 2020, were supported by expected future cash flows
or, for those collateral dependent loans, the net realizable value of the underlying collateral. Based on management’s assessment
at December 31, 2021 and December 31, 2020, no impaired loans required a specific reserve. Management closely monitors these relationships
for collateral or credit deterioration.
At
December 31, 2021, 2020, 2019, nonaccrual loans totaled $5.0 million, or 0.27% of total loans, $7.8 million, or 0.41% of total
loans, and $9.9 million, and 0.56% of total loans, respectively. If all nonaccrual loans had been performing in accordance with
their terms, we would have earned additional interest income of $262,000, $275,000 and $651,000 for the years ended December 31,
2021, 2020 and 2019, respectively.
At
December 31, 2021, 2020 and 2019, the Company carried no OREO balances.
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The
following table presents information regarding nonperforming commercial real estate loans, commercial and industrial term loans,
residential real estate loans, consumer loans, and foreclosed real estate as of the dates indicated. All loans where the payment
is 90 days or more in arrears as of the closing date of each month are placed on nonaccrual status unless the loan is well secured
and in the process of collection.
At December 31,
(Dollars in thousands)
Nonaccrual real estate loans:
Other loans:
Foreclosed real estate, net — — — — 155
(1)
Troubled debt restructurings on accrual status not included above totaled $4.1 million, $9.8 million, $1.5 million, $2.4
million and $1.8 million at December 31, 2021, 2020, 2019, 2018 and 2017, respectively.
Allowance
for Loan Losses.
The
allowance for loan losses is an estimate of probable credit risk inherent in the loan portfolio as of the specified balance sheet
dates. On a quarterly basis, management prepares an estimate of the allowance necessary to cover estimated probable credit losses.
The Company maintains the allowance at a level that it deems adequate to absorb all reasonably anticipated probable losses from
specifically known and other credit risks associated with the portfolio. The Company has deferred the adoption of the Current
Expected Credit Loss allowance methodology, as permitted by its classification as a Smaller Reporting Company by the Securities
and Exchange Commission.
The
Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio based on ongoing quarterly assessments
of the estimated losses. Our methodology for assessing the appropriateness of the allowance consists of a review of the components,
which includes a general allowance for non-impaired loans.
The
specific valuation allowance incorporates the results of measuring impairment for specifically identified non-homogenous problem
loans and, as applicable, troubled debt restructurings (“TDRs”). A loan is recognized as impaired when it is probable
that principal and/or interest are not collectible in accordance with the loan’s contractual terms. Impairment is measured
on a loan-by-loan basis for commercial real estate and commercial and industrial loans by either the present value of expected
future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral
dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than
the carrying value of that loan. Once an impairment has been determined, the Company recognizes the charge-off.
14
The
general allowance is calculated by applying loss factors to outstanding loans by loan type, excluding loans determined to be impaired.
As part of this analysis, each quarter we prepare an allowance for loan losses worksheet which categorizes the loan portfolio
by risk characteristics such as loan type and loan grade. The general allowance is inherently subjective as it requires material
estimates that may be susceptible to significant change. There are a number of factors that are considered when evaluating the
appropriate level of the allowance. These factors include current economic and business conditions that affect our key lending
areas, collateral values, loan volumes and concentrations, credit quality trends such as nonperforming loans, delinquency and
loan losses, and specific industry concentrations within the portfolio segments that may impact the collectability of the loan
portfolio. During the year ended December 31, 2020, the Company significantly increased the general allowance as a result of the
COVID-19 pandemic. For information on our methodology for assessing the appropriateness of the allowance for loan losses please
see Footnote 1 – “Summary of Significant Accounting Policies” of our notes to consolidated financial
statements.
The
allowance for loan losses is established through a provision for loan losses, which is a direct charge to earnings. Loan losses
are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries
on loans previously charged-off are credited to the allowance for loan losses.
In
making its assessment on the adequacy of the allowance for loan losses, management considers several quantitative and qualitative
factors that could have an effect on the credit quality of the portfolio. Management closely monitors the credit quality of individual
delinquent and nonperforming relationships, the levels of impaired and adversely classified loans, net charge-offs, the growth
and composition of the loan portfolio, expansion in geographic market area, and any material changes in underwriting criteria,
and the strength of the local and national economy, among other factors.
The
level of delinquent and nonperforming assets is largely a function of economic conditions and the overall banking environment
and the individual business circumstances of borrowers. Despite prudent loan underwriting, adverse changes within the Company’s
market area, or deterioration in local, regional or national economic conditions, could negatively impact management's estimate
of probable credit losses.
Management
continues to closely monitor the necessary allowance levels, including specific reserves. The allowance for loan losses to total
loans ratio was 1.06% at December 31, 2021 compared to 1.10% at December 31, 2020. The allowance for loan losses to total loans
ratio, excluding PPP loans, was 1.08% and 1.20%, at December 31, 2021 and 2020, respectively.
Based
on the foregoing, as well as management's judgment as to the existing credit risks inherent in the loan portfolio, management
believes that the Company's allowance for loan losses is adequate to absorb probable losses from specifically known and other
probable credit risks associated with the portfolio as of December 31, 2021.
15
The
following table presents the activity in our allowance for loan losses and other ratios at or for the dates indicated.
At or for Years Ended December 31,
(Dollars in thousands)
Charge-offs:
Recoveries:
16
A
summary of the components of the allowance for loan losses is as follows:
Specific General Total Specific General Total Specific General Total
(In thousands)
Residential real estate:
Specific General Total Specific General Total
(In thousands)
Residential real estate: