UNITED
STATES
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, 2023
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. ☒
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the
registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate
by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b).
☐
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, 2023, was $128,961,234. This
amount was based on the closing price as of June 30, 2023 on the NASDAQ Global Select Market (“NASDAQ”) for a share
of the registrant’s common stock, which was $5.84 on June 30, 2023.
As
of March 6, 2024, the registrant had 21,581,759shares of common stock, $0.01 par value, issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the Proxy Statement for the 2024 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
ITEM PART I PAGE
1 Business 4
1A Risk Factors 36
1B Unresolved Staff Comments 49
1C Cybersecurity 49
3 Legal Proceedings 54
4 Mine Safety Disclosures 54
PART II
7A Quantitative and Qualitative Disclosures About Market Risk 73
8 Financial Statements and Supplementary Data 73
9A Controls and Procedures 73
9B Other Information 77
9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 77
PART III
10 Directors, Executive Officers and Corporate Governance 77
11 Executive Compensation 77
13 Certain Relationships and Related Transactions and Director Independence 77
14 Principal Accounting Fees and Services 77
PART IV
15 Exhibits and Financial Statement Schedules 77
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, and 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:
● new legal obligations or liabilities or unfavorable resolutions of litigation;
● the highly competitive industry and market area in which we operate;
● changes in business conditions and inflation;
● failure or circumvention of our internal controls or procedures;
● changes in the securities markets which affect investment management revenues;
● certain of our intangible assets may become impaired in the future;
● changes in key management personnel which may adversely impact our operations;
● other risk factors detailed from time to time in our SEC filings.
Investors
should consider these risks, uncertainties, and other factors in addition to the factors under the heading “Risk Factors”
included in this filing and our other filings with the SEC.
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, 2023, WNEB had consolidated total assets of $2.6 billion, total
net loans of $2.0 billion, total deposits of $2.1 billion and total shareholders’ equity of $237.4 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, 2023, the Bank had twenty-five branches and ten freestanding automated teller machines (“ATMs”). The Bank also
conducts business through an additional fourteen freestanding and thirty-three 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 twenty-five 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 ten freestanding
ATM locations in Holyoke, Southwick, Springfield, West Springfield and Westfield, Massachusetts. The Bank also conducts business
through an additional fourteen freestanding and thirty-three 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, Center for Human Development, Holyoke
Medical Center, MassMutual Financial Group, Mercy Medical Center/Trinity Health of New England, Mestek, Inc., MGM Springfield,
Verizon and Westover Air Reserve Base in Massachusetts, and Aetna, Inc., Air National Guard, Collins Aerospace, Connecticut Children’s
Medical Center, Hartford Financial Services Group, Hartford Hospital, Institute of Living, Kaman Aerospace Corporation, Lego Systems
Inc., Talcott Resolution Life Insurance Company and Travelers Indemnity 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
Company faces significant competition to attract and retain customers within existing and neighboring geographic markets. The
Company competes actively with local, regional, and national financial institutions, as well as 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, 2023, 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 third largest market share out of the seventeen banks and thrifts with offices in Hampden County.
Human
Capital.
Diversity,
Equity and Inclusion
We
understand that our human capital is one of our most valuable assets and a key to our success. We are committed to fostering,
cultivating and preserving a culture of diversity, equity and inclusion. We are dedicated to providing a workplace for our employees
that is inclusive, supportive, and free of any form of discrimination or harassment; rewarding and recognizing our employees based
on their individual results and performance as well as that of their department and the Company overall; and recognizing and respecting
all of the characteristics and differences that make each of our employees unique.
At
December 31, 2023, our employees were representative of our commitment to recruit, develop, and retain diverse individuals, wherein
approximately 64% of our employees were women and 24% of our employees were 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.
We
embrace and value our inclusive culture of belonging that celebrates unique perspectives and experiences. We leverage our strong
and inclusive culture to provide quality service to our customers, the communities in which we operate and each other. In 2023,
we established the Westfield Bank Culture and Diversity Committee (the “Diversity Committee”), which is comprised
of a cross-section of employees representing diverse backgrounds. The Diversity Committee is committed to creating opportunities
for our employees to connect with each other, learn from one another and celebrate employee commonalities and differences.
Talent
Management
We
have been successful in attracting, developing and retaining qualified and competent staff. The Company believes that it has had
and continues to have strong 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, strong work ethic, loyalty, inclusion and a professional and positive
attitude.
As
of December 31, 2023, the Bank employed 348 total employees, with 294 employed full-time and 54 employed part-time. Employee retention
helps the Company operate efficiently and effectively. As of December 31, 2023, our average employee tenure was 7.9 years.
There
are many factors that contribute to the success of the Company. We actively encourage and support the growth and development of
our employees. Whenever practical, Management generally seeks to fill positions by promotion and transfer opportunities from within
the organization. Career development is advanced through ongoing mentoring and professional development programs, as well as internally
and externally developed training programs.
In
2021, a customized Corporate Leadership Development Program was established for the Company to enhance the core capabilities of
our top talent in leadership, including through the development of management skills to prepare them for future roles in the Company.
During 2023, twenty-seven employees were nominated to participate in the program and successfully completed the program. In addition,
the Company offers educational reimbursement programs 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 an internship
within the Company and have the potential to be hired upon graduation.
6
Employee
Compensation and Benefits
Management
promotes its core values through prioritizing concern for employees’ well-being, supporting employees’ career goals,
offering competitive wages, and providing valuable fringe benefits. The Company maintains a comprehensive employee benefit program
providing, among other benefits, group medical, dental and vision insurance, health savings accounts and flexible spending accounts,
life insurance and disability insurance, a 401(k) Safe Harbor Plan with a competitive company match, an employee stock ownership
plan (“ESOP”), short-term and long-term incentive compensation programs, tuition reimbursement, paid time off, including
vacation days and paid holidays, and wellness and employee assistance programs.
Workplace
Health and Safety
The
safety, health and wellness of our employees is considered a top priority. 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.
We communicate to our employees on a monthly basis through email and the Company’s intranet, sharing articles and best practices
on mental, emotional and physical well-being, health savings account and flexible spending account use, resources to find cheaper
prescriptions and other related topics. Our employees also have access to a platform that gives them access to interactive activities
for wellness classes, stress management, mindfulness, healthy eating and health plan literacy.
In
2023, we established the Westfield Bank Wellness Committee (the “Wellness Committee”), which is comprised of a cross-section
of employees from the Bank. The Wellness Committee is committed to promoting a culture of physical, mental and emotional well-being
for our employees by providing activities, services and support that will foster living healthy and happy lifestyles. The Wellness
Committee looks to inspire and empower our employees to make their health a top priority through encouraging and providing employees
healthy lifestyle choices and options.
Lending
Activities.
General.
The Bank has loan policies which are approved by its Board of Directors on an annual basis. The loan policies govern the conditions
under which loans may be made, addresses the lending authority of loan officers, documentation requirements, appraisal policy,
charge-off policies and desired portfolio mix. The Bank’s lending limit to any one borrower is subject to regulation by
the OCC. The Bank continually monitors its loan portfolio to review compliance with new and existing regulations.
The
Bank offers a variety of loan products to its customers, including residential and commercial real estate mortgage loans, commercial
loans, and installment loans. The Bank primarily extends loans to customers located within the Company’s footprint. Interest
income on loans represented 90.2% of the total interest income of the Company in 2023 compared with 89.9% in 2022. The Bank’s
loan portfolio totaled $2.0 billion, or 79.1% of total assets, at December 31, 2023, compared to $2.0 billion, or 78.0% of total
assets, at December 31, 2022.
The
Company’s primary lending focus is to generate high quality commercial loan 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.
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.
7
The
Company employs a seasoned commercial lending staff, with commercial lenders to support the Company’s loan growth strategy.
The Company contracts with an external third-party loan review company to review the internal credit ratings assigned to loan
relationships 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 loans. 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 Bank’s loan policies.
At
December 31, 2023, our general regulatory limit on loans to one borrower was $40.7 million. Our largest lending exposure was a
$24.9 million commercial lending relationship, of which $9.9 million was outstanding at December 31, 2023. This relationship is
primarily secured by business assets and commercial real estate located in Agawam, Massachusetts. At December 31, 2023, this relationship
was performing in accordance with its original terms.
Commercial
Real Estate Loans and Commercial and Industrial Loans.
At
December 31, 2023, commercial real estate loans totaled $1.1 billion, or 53.3% of total loans, compared to $1.1 billion, or 53.8%
of total loans, at December 31, 2022.
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, 2023 and December 31, 2022, there was $111.0 million and $91.7 million, respectively, in
commercial construction loans included within commercial real estate loans. At December 31, 2023, the largest concentration of
commercial loans to an industry was to hotels, which comprised approximately 2.3% of total loans and 16.4% of total risk-based
capital as of December 31, 2023.
At
December 31, 2023, our total commercial and industrial loan portfolio totaled $217.4 million, or 10.7% of our total loans. At
December 31, 2022, our total commercial and industrial loan portfolio totaled $219.8 million, or 11.0% of our total loans. Commercial
and industrial loans include 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 term loans generally having fixed initial periods. Commercial and industrial loans have average repayment periods
of one to seven years.
8
As
a Preferred Lender with the Small Business Administration (“SBA”), the Company offered Paycheck Protection Program
(“PPP”) loans through the March 27, 2020 $2.2 trillion fiscal stimulus bill known as the Coronavirus Aid, Relief and
Economic Security Act (the “CARES Act”) launched by the U.S. Department of Treasury (“Treasury”) and the
SBA. An eligible business was able to apply for a PPP loan up to the lesser of: (1) 2.5 times its average monthly “payroll
costs,” or (2) $10.0 million. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity, subsequently
extended to a five-year loan term maturity for loans granted on or after June 5, 2020 and (c) principal and interest payments
deferred from six months to ten months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible
borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced
by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60%
of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.
PPP loans totaled $756,000 and $2.3 million, at December 31, 2023 and 2022, and were included in total commercial and industrial
loans.
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 $129.9 million at December 31, 2023 and $132.6 million at December
31, 2022. The Company was servicing commercial loans originated by the Company and participated out to various other institutions
totaling $65.0 million and $70.5 million at December 31, 2023 and December 31, 2022, respectively.
Residential
Real Estate Loans.
At
December 31, 2023 and December 31, 2022, the residential real estate loan portfolio totaled $612.3 million, or 30.3% of total
loans, and $589.5 million, or 29.6%, of total loans, respectively. The Company originates and funds residential real estate loans,
including first mortgages, home equity loans, and home equity lines, secured by one-to-four family residential properties primarily
located in western Massachusetts and northern Connecticut.
These
residential properties may serve as the borrower’s primary residence, or as vacation homes or investment properties. First
mortgages may be underwritten in amounts up to 97% of the lesser of the appraised value or purchase price of the property for
owner-occupied homes, 90% for second homes and 85% for investment properties. Private mortgage insurance is required on all loans
with a loan-to-value ratio greater than 80%. We do not grant subprime loans. 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. Home equity loans and lines are secured by first or second mortgages on one-to-four
family owner-occupied properties. Equity loans and lines are underwritten by a maximum combined loan-to-value of 85% of the appraised
value of the property. Underwriting approval is dependent on review of the borrower’s ability to repay and credit history
in accordance with the Bank’s loan policies. The overall health of the economy, including unemployment rates and housing
pricing, will have an effect on the credit quality in this segment.
9
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 servicer with Fannie
Mae and an approved seller and servicer with Freddie Mac and the FHLB. In order to reduce interest rate risk, during the twelve
months ended December 31, 2022, the Company sold $277,000 of fixed rate, low coupon residential real estate loans to the secondary
market. The Company did not sell residential real estate loans during the twelve months ended December 31, 2023. At December 31,
2023 and December 31, 2022, the Company serviced $72.7 million and $79.3 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, 2023.
Home
Equity Loans.
At
December 31, 2023 and December 31, 2022, home equity loans totaled $109.8 million, or 5.4% of total loans, and $105.6 million,
or 5.3% 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.
Consumer
Loans.
At
December 31, 2023 and December 31, 2022, consumer loans totaled $5.5 million, or 0.3%, of total loans and $5.0 million, or 0.3%,
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.
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
Amount Total Amount Total
(Dollars in thousands)
Real estate loans:
Commercial and industrial loans:
Unamortized premiums and net
10
Loan
Maturity and Repricing.
The
following table shows the repricing dates or contractual maturity dates of our loans as of December 31, 2023. 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:
11
The
following table presents, as of December 31, 2023, the dollar amount of all loans contractually due or scheduled to reprice after
December 31, 2024, and whether such loans have fixed interest rates or adjustable interest rates.
Fixed Adjustable Total
(In thousands)
Real estate loans:
Other loans:
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 loan policies require 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 third-party 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
Bank’s loan policies contain an internal rating system which evaluates the overall risk of a problem loan. 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.
Criticized
and Classified Loans.
The
Company’s internal credit risk grades are based on the definitions currently utilized by the banking regulatory agencies.
The grades assigned and definitions are as follows, and loans graded excellent, above average, good (risk ratings 1-4) are treated
as “pass” for grading purposes. 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 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. In addition, the Company closely
monitors classified loans, defined as substandard, doubtful, and loss 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. Loans identified as containing a loss are partially charged-off or fully charged-off.
12
The
“criticized” risk rating (5) and the “classified” risk ratings (6-8) are detailed below:
5
– Special Mention- Loans rated 5 are considered “Special Mention” and may exhibit potential credit
weaknesses or downward trends and are being monitored by management. Loans in this category are currently protected based on collateral
and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration
of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s
financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification.
6
– Substandard- Loans rated 6 are considered “Substandard.” A loan is classified as substandard if
the borrower exhibits a well-defined weakness and may be inadequately protected by the current net worth and cash flow capacity
to pay the current debt.
7
– Doubtful- Loans rated 7 are considered “Doubtful.” Loans classified as doubtful have all the weaknesses
inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation of the
loan highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors
that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more
exact status may be determined.
8
– Loss- Loans rated 8 are considered uncollectible. The loss classification does not mean that the asset has absolutely
no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery
and collection time may be affected in the future.
The
grades are determined through the use of qualitative and quantitative matrices that consider various characteristics of the loan
such as payment performance, quality of management, principals’/guarantors’ character, balance sheet strength, collateral
quality, cash flow coverage, position within the industry, loan structure and documentation.
At
December 31, 2023, the Company’s criticized loans totaled $39.5 million, or 1.9% of total loans, compared to $64.0 million,
or 3.2% of total loans, at December 31, 2022. The Company’s classified loans totaled $33.7 million, or 1.7% of total loans,
at December 31, 2023 and $42.3 million, or 2.1%, of total loans, at December 31, 2022. Classified loans that were performing but
possessed potential weaknesses and, as a result, could ultimately become nonperforming loans totaled $27.7 million, or 1.4% of
total loans, at December 31, 2023 and $36.6 million, or 1.8% of total loans, at December 31, 2022. The remaining balance of classified
loans were nonaccrual loans totaling $6.0 million, or 0.3% of total loans, at December 31, 2023 and $5.7 million, or 0.3% of total
loans, at December 31, 2022.
Total
impaired loans totaled $29.7 million, or 1.5% of total loans, at December 31, 2023, while individually analyzed and impaired loans
totaled $18.4 million, or 0.9% of total loans, at December 31, 2022. Total accruing impaired loans totaled $23.3 million at December
31, 2023, while individually analyzed and impaired loans totaled $12.7 million at December 31, 2022. Nonaccrual impaired loans
totaled $6.4 million as of December 31, 2023, while individually analyzed and impaired nonaccrual loans totaled $5.7 million as
of December 31, 2022.
In
management’s opinion, all impaired loan balances at December 31, 2023 and 2022, were supported by expected future cash flows
or, for those collateral dependent loans, the net realizable value of the underlying collateral. At December 31, 2023, commercial
and industrial impaired loans with a recorded investment of $517,000 carried a related reserve amount of $179,000. No impaired
loans required a specific reserve at December 31, 2022. Management closely monitors these relationships for collateral or credit
deterioration.
Total
nonaccrual loans totaled $6.4 million, or 0.32% of total loans, at December 31, 2023, and $5.7 million, or 0.29% of total loans,
at December 31, 2022. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional
interest income of $373,000, $257,000 and $262,000 for the years ended December 31, 2023, 2022 and 2021, respectively.
Other
Real Estate Owned (“OREO”)
Assets
acquired through, or in lieu of, loan foreclosures are held for sale and are initially recorded at fair value less cost to sell
at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Costs relating to development
and improvement of property are capitalized, whereas costs relating to the holding of property are expensed. At December 31, 2023
and 2022, the Company carried no other real estate owned (“OREO”) balances.
13
The
following table presents, for the years indicated, an analysis of the allowance for credit losses and other related data.
Years Ended December 31,
(Dollars in thousands)
Allowance for credit losses to total loans outstanding 1.00 % 1.00 %
Nonaccrual loans to total loans outstanding 0.32 % 0.29 %
Allowance for credit losses to nonaccrual loans 315.64 % 350.04 %
Net recoveries during the period $ (23 ) $ (30 )
Net charge-offs during the period $ 755 $ 337
Net charge-offs during the period $ 1,213 $ 69
Net (recoveries) charge-offs during the period $ (3 ) $ 26
Consumer charge-offs to daily average loans outstanding 1.66 % 3.37 %
Net charge-offs during the period $ 97 $ 154
Average amount outstanding $ 5,840 $ 4,568
Total Loan Charge-offs to Daily Average Loans Outstanding 0.10 % 0.03 %
Net charge-offs during the period $ 2,039 $ 556
14
During
the year ended December 31, 2023, the Company recorded net charge-offs of $1.2 million on the commercial and industrial loan portfolio.
The charge-offs during the year ended December 31, 2023 were related to one commercial relationship acquired on October 21, 2016