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-59 of this report.
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, 2024 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, 2024.
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.
80
Report
of Independent Registered Public Accounting Firm
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, 2024, 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, 2024, 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 10, 2025 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 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.
81
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
10, 2025
82
ITEM 9B. OTHER INFORMATION.
During
the quarter ended December 31, 2024, no director or officer of the Company adopted or terminated any Rule 10b5-1 trading arrangements
or non-Rule 10b5-1 trading arrangements.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not
applicable.
PART
III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The
Company has an insider trading policy and procedures governing the purchase, sale and/or other dispositions of the Company’s
securities that applies to all directors, officers, employees and certain other persons. It is also the Company’s policy
to take appropriate steps to comply with applicable federal and state securities laws and regulations, as well as applicable stock
exchange listing standards, when the Company engages in transactions in the Company’s securities. The Company believes that
its insider trading policy and procedures are reasonably designed to promote compliance with insider trading laws, rules and regulations,
and listing standards applicable to the Company. A copy of the Company’s insider trading policy is filed as Exhibit 19.1
to this Report. The remaining information required by this item will be included in the Proxy Statement under “Corporate
Governance” and is incorporated herein by reference.
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.” Our independent registered public accounting firm is Wolf & Company, P.C., Boston,
Massachusetts, Auditor ID: 392.
83
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.
84
(a)(3) Exhibits
EXHIBIT
INDEX
85
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.
86
ITEM 16. FORM 10-K SUMMARY.
None.
87
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 10, 2025.
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 10, 2025.
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, 2024 and 2023, 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, 2023, and the related notes to the consolidated financial statements (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, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2024, 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, 2024, 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 10, 2025 expressed an unqualified opinion on
the effectiveness of the Company’s internal controls over financial reporting.
Change in Accounting Principle
As discussed in the financial statements, the Company
changed its method of accounting for measurement and recognition of credit losses as of January 1, 2023 upon the adoption of Accounting
Standards Codification Topic 326, Financial Instruments - Credit Losses (“ASC 326”).
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 audits 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.
Critical Audit Matters
The critical audit matters communicated below are
matters 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) relate to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters 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 matters below, providing
separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for
Credit Losses – Loans Evaluated on a Pooled Basis
Critical Audit
Matter Description
As described in Notes 1 and 3 to the financial statements,
the Company has recorded an allowance for credit losses (ACL) for its loan portfolio in the amount of $19.5 million as of December 31,
2024, representing management’s estimate of credit losses over the remaining expected life of the Company’s loan portfolio
as of that date. Management determined the amounts, and corresponding reversal for credit loss expense for the year, pursuant to the application
of Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses.
The Company’s methodology to determine its
allowance for credit losses incorporates quantitative and qualitative assessments of its historical losses, current loan portfolio and
economic conditions, the application of forecasted economic conditions, and related modeling. Management incorporates the use of third-party
software to arrive at an expected life-of-loan loss amount based on discounted cash flow estimates at the loan level for material loan
segments. The amount and timing of cash flows is determined using assumptions for probability of default and loss given default (PD/LGD);
expected term; and forecasted economic factors. The results of these calculations are then qualitatively adjusted by management based
on pool-specific attributes. We determined that performing procedures relating to these components of the Company’s methodology
is a critical audit matter.
The principal considerations for our determination
are (i) the application of significant judgment and estimation on the part of management, which in turn led to a high degree of auditor
judgment and subjectivity in performing procedures and evaluating audit evidence obtained, and (ii) significant audit effort was necessary
in evaluating management’s methodology, significant assumptions and calculations.
How the Critical Audit Matter was addressed in
the Audit
Following are some of the primary procedures we
performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls
related to the Company’s measurement of the collectively evaluated ACL, including controls over the:
· Segmentation of loans into pools with similar risk characteristics
· Validation of the third-party model and recalculation of model results
· Role of peer loss data and the appropriate peer group
· Completeness and accuracy of loan data
· Development of qualitative adjustments to model results
Addressing the above matters involved performing
procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.
These procedures included, among others, reviewing the Company’s procedures to validate the model, testing assumptions used in the
calculation of discounted cash flows, testing management’s process for determining the qualitative reserve component, and testing
the completeness and accuracy of data used in the model.
We have served as the Company's auditor since
2004.
Boston, Massachusetts
March 10, 2025
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 38,362 5,065
Marketable equity securities, at fair value 397 196
Less: Allowance for credit losses (19,529 ) (20,267 )
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Borrowings:
Securities pending settlement 8,622 —
SHAREHOLDERS’ EQUITY:
Unearned compensation – Employee Stock Ownership Plan (“ESOP”) (1,906 ) (2,394 )
Unearned compensation - Equity Incentive Plan (1,190 ) (1,111 )
Accumulated other comprehensive loss (23,274 ) (21,744 )
See accompanying notes
to consolidated financial statements.
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:
Investment securities, tax-exempt 3 7 11
Total interest and dividend income from investment securities 8,649 8,370 8,296
Total interest income from cash and cash equivalents 2,285 1,579 368
Interest expense:
(Reversal of) provision for credit losses (665 ) 872 700
Non-interest income:
Bank-owned life insurance death benefit — 778 —
Loss on disposal of premises and equipment (6 ) (3 ) —
Loss on available-for-sale securities, net — — (4 )
Gain on sale of mortgages 235 — 2
Net unrealized gain (loss) on marketable equity securities 13 (1 ) (717 )
Gain on non-marketable equity investments 1,287 590 422
(Loss) gain on defined benefit plan termination — (1,143 ) 2,807
Non-interest expense:
Earnings per common share:
Diluted earnings per share $ 0.56 $ 0.70 $ 1.18
See
accompanying notes to consolidated financial statements.
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Years Ended December 31,
Other comprehensive income (loss):
Securities available-for-sale:
Reclassification adjustment for amounts realized in income (1) — — 4
Defined benefit pension plan:
Gains arising during the period — 358 13,000
Reclassification adjustment for amounts realized in income (2) — 1,143 (2,807 )
Amortization of defined benefit plan actuarial loss (3) — — 531
See accompanying
notes to consolidated financial statements.
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands, except share data)
Common Stock Unearned Accumulated
Forfeited equity incentive plan shares (24,440 shares) — — (213 ) — 213 — — —
Share-based compensation – equity incentive plan — — (2 ) — 1,076 — — 1,074
Cumulative effect accounting adjustment(1) — — — — — 9 — 9
Comprehensive income — — — — — — 3,298 3,298
Forfeited equity incentive plan shares (4,219 shares) — — (40 ) — 40 — — —
Share-based compensation - equity incentive plan — — — — 1,417 — — 1,417
Comprehensive loss — — — — — — (1,530 ) (1,530 )
Forfeited equity incentive plan shares (2,384 shares) — — (20 ) — 20 — — —
Share-based compensation - equity incentive plan — — — — 1,469 — — 1,469
See accompanying notes to consolidated financial statements.
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES:
(Reversal of) provision for credit losses (665 ) 872 700
Depreciation and amortization of premises and equipment 2,230 2,219 2,312
Net (accretion) amortization of purchase accounting adjustments (39 ) 95 (135 )
Amortization of core deposit intangible 375 375 375
Net amortization of deferred costs on mortgage loans 490 497 681
Net amortization of premiums on subordinated debt 39 39 40
Gain on sale of portfolio mortgages (235 ) — —
Principal balance of loans originated for sale — — (277 )
Principal balance of loans sold — — 277
Net change in unrealized (gain) loss on marketable equity securities (13 ) 1 717
Net loss on sales of available-for-sale securities — — 4
Loss on disposal of premises and equipment 6 3 —
Gain on bank-owned life insurance death benefit — (778 ) —
Income from bank-owned life insurance (1,911 ) (1,820 ) (1,725 )
Net change in:
Accrued interest receivable 60 (388 ) (365 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities held-to-maturity (1,100 ) (7,701 ) (28,030 )
Purchases of securities available-for-sale (32,945 ) (196 ) (5,000 )
Proceeds from redemption and sales of marketable equity securities — 6,237 5,131
Purchase of Federal Home Loan Bank of Boston stock (2,111 ) (355 ) (758 )
Proceeds from sale of portfolio mortgages 20,333 — —
Purchases of premises and equipment (1,196 ) (2,902 ) (1,143 )
Proceeds from sale of premises and equipment 74 18 —
Proceeds from payout on bank-owned life insurance — 2,079 2,435
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock in connection with stock option exercises — — 1,171
Net cash provided by (used in) financing activities 72,034 (2,569 ) 1,990
Supplemental cash flow information:
Available-for-sale securities purchases pending settlement $ 8,459 $ — $ —
Net change in due to broker for common stock repurchased 163 — —
See the accompanying notes to consolidated financial statements.
WESTERN
NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2024, 2023 AND 2022
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations and Basis of Presentation. Western New England Bancorp, Inc. (“Western New England Bancorp,” “WNEB,”
“Company,” “we,” or “us”) is a Massachusetts-chartered stock holding company for Westfield
Bank, a federally-chartered savings bank (“Bank”).
The
Bank operates 25 banking offices in Hampden 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. 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 (“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 credit losses.
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. Investment debt securities, including mortgage-backed securities, which management has the
positive intent and ability to hold until maturity are classified as held to maturity and are carried at amortized cost. Investment
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 investment securities and
mortgage-backed securities for purposes of engaging in trading activities.
Realized
gains and losses on sales of investment 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 are
determined by using the level yield method to the maturity date, except that premiums are amortized to the earliest call date
or maturity.
Allowance
for Credit Losses – Securities Available-for-Sale
The
Company measures expected credit losses on debt securities available-for-sale based upon the gain or loss position of the security.
For debt securities available-for-sale in an unrealized loss position which the Company does not intend to sell, and it is not
more likely than not that the Company will be required to sell the security before recovery of the Company’s amortized cost,
the Company evaluates qualitative criteria to determine any expected loss. This includes among other items the financial health
of, and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security.
The Company also evaluates quantitative criteria including determining whether there has been an adverse change in expected future
cash flows of the security. Securities available-for-sale which are guaranteed by government agencies do not currently have an
allowance for credit loss as the Company determined these securities are either backed by the full faith and credit of the U.S.
government and/or there is an unconditional commitment to make interest payments and to return the principal investment in full
to investors when a debt security reaches maturity. 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. The Company will evaluate this position no less than annually, however, certain items which
may cause the Company to change this methodology include legislative changes that remove a government-sponsored enterprise’s
ability to draw funds from the U.S. government, or legislative changes to housing policy that reduce or eliminate the U.S. government’s
implicit guarantee on such securities. If the Company does not expect to recover the entire amortized cost basis of the security,
an allowance for credit losses would be recorded, with a related charge to earnings. If the Company intends to sell the security
or it is more likely than not that the Company will be required to sell the debt security before recovery of its amortized cost
basis, the Company recognizes the entire difference between the amortized cost basis of the security and its fair value in earnings.
Any impairment that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.
Allowance
for Credit Losses – Securities Held-to-Maturity
The
Company measures expected credit losses on debt securities held-to-maturity on a collective basis by security type and risk rating
where available. The reserve for each pool is calculated based on a Probability of Default/Loss Given Default basis taking into
consideration the expected life of each security. Held-to-maturity securities which are issued by the United States Treasury or
are guaranteed by government agencies do not currently have an allowance for credit loss as the Company determined these securities
are either backed by the full faith and credit of the U.S. government and/or there is an unconditional commitment to make interest
payments and to return the principal investment in full to investors when a debt security reaches maturity. 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;
FHLMC, FNMA, FFCB, or 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. The Company will evaluate this position no less than annually, however, certain items
which may cause the Company to change this methodology include legislative changes that remove a government-sponsored enterprise’s
ability to draw funds from the U.S. government, or legislative changes to housing policy that reduce or eliminate the U.S. government’s
implicit guarantee on such securities. Any expected credit losses on securities held-to-maturity would be presented as an allowance
for credit loss.
Non-marketable
Equity Securities. Investments in equity securities without readily determinable fair values are measured at cost, less any
impairment, with re-measurement to fair value when there are observable price changes. Impairment is evaluated on such securities
based on a qualitative assessment that considers various potential impairment indicators. Upon determining that an impairment
exists, a loss is recognized for the amount by which the carrying value exceeds the fair value of the investment.
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.
The
Company’s interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty
in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying
notional amount. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well
as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.
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 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, 2024, 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 credit 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.
Allowance
for Credit Losses. The allowance for credit losses is an estimate of expected losses inherent within the Company’s existing
loans held for investment portfolio. The allowance for credit losses for loans held for investment, as reported in our consolidated
balance sheet, is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts,
net of recoveries.
The
loan loss estimation process involves procedures to appropriately consider the unique characteristics of loan portfolio segments,
which consist of commercial real estate loans, residential real estate loans, commercial and industrial loans, and consumer loans.
These segments are further disaggregated into loan classes, the level at which credit risk is monitored. For each of these pools,
the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment
speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds,
curtailment rates, and time to recovery are based on historical internal data. The quantitative component of the ACL on loans
is model-based and utilizes a forward-looking macroeconomic forecast. For commercial real estate loans, residential real estate
loans, and commercial and industrial loans, the Company uses a discounted cash flow method, incorporating probability of default
and loss given default forecasted based on statistically derived economic variable loss drivers, to estimate expected credit losses.
This process includes estimates which involve modeling loss projections attributable to existing loan balances, and considering
historical experience, current conditions, and future expectations for pools of loans over a reasonable and supportable forecast
period. The historical information either experienced by the Company or by a selection of peer banks, when appropriate, is derived
from a combination of recessionary and non-recessionary performance periods for which data is available. The expected loss estimates
for the consumer loan segment are based on historical loss rates using the weighted average remaining maturity (“WARM”)
method.
Commercial
real estate loans. Loans in this segment include owner occupied and non-owner occupied commercial real estate, multi-family
dwellings, and income producing investment properties, as well as commercial construction loans for commercial development projects
throughout New England. Typically, commercial real estate loans are secured by office buildings, apartment buildings, industrial
properties, warehouses, retail facilities, hotels, assisted living facilities, and educational facilities. Collateral values are
established by independent third-party appraisals and evaluations. Primary repayment sources for commercial real estate loans
include operating income and cash flow generated by the real estate, sale of the real estate and, funds from any liquidation of
the collateral. Under its lending guidelines, the Company generally requires a corporate or personal guarantee from individuals
that hold material ownership in the borrowing entity. 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.
Residential
real estate loans. This portfolio segment consists of first mortgages secured by one-to-four family residential properties
and home equity loans and home equity lines secured by first or second mortgage on one-to-four family owner occupied 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 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 principal and interest on a monthly basis,
credit history, financial resources and the value of the collateral. Residential real estate loans are originated either for sale
to investors or retained in the Company’s loan portfolio. Decisions about whether to sell or retain residential real estate
loans are made based on the interest rate, pricing for loans in the secondary market, and the Company’s liquidity and capital
needs. The overall health of the economy, including unemployment rates and housing pricing, will have an effect on the credit
quality in this segment.
Commercial
and industrial loans. The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve
business results and cash flows consistent with those projected at loan origination. Collateral frequently consists of a first
lien position on business assets including, but not limited to, accounts receivable, inventory, and equipment. The primary repayment
source is operating cash flow, followed by liquidation of assets. Under its lending guidelines, the Company generally requires
a corporate or personal guarantee from individuals that hold material ownership in the borrowing entity. 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 both secured and unsecured and repayment is dependent on the credit quality of the individual
borrower.
Allowance
for Credit Losses Methodology
In
estimating the component of the allowance for credit losses for loans that share similar risk characteristics with other loans,
such loans are segregated into loan classes. Loans are designated into loan classes based on loans pooled by product types and
similar risk characteristics or areas of risk concentration. In determining the allowance for credit losses, we derive an estimated
credit loss assumption from a model that categorizes loan pools based on loan type and purpose.
The
discounted cash flow (“DCF”) model calculates an expected loss percentage for each loan class by considering the probability
of default, using life-of-loan analysis periods for the commercial and industrial, commercial real estate, residential real estate
loan segments, and the historical severity of loss, based on the aggregate net lifetime losses incurred per loan class. The expected
loss estimates for the consumer loan segment are based on historical loss rates using the remaining life method. The default and
severity factors used to calculate the allowance for credit losses for loans that share similar risk characteristics with other