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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, 2020

 

Commission File No.: 001-16767

 

Western New England Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Massachusetts   73-1627673
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

141 Elm Street, Westfield, Massachusetts 01085

(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:

 

(Title of each class)

(Trading Symbol)

(Name of each exchange on which registered)

Common Stock, $0.01 par value per share WNEB The NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐   Accelerated Filer ☒   Non-accelerated filer ☐   Smaller reporting company   Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2020, was $148,480,694. This amount was based on the closing price as of June 30, 2020 on the NASDAQ Global Select Market (“NASDAQ”) for a share of the registrant’s common stock, which was $5.79 on June 30, 2020.

 

As of March 5, 2021, the registrant had 25,103,656 shares of common stock, $0.01 per value, issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Portions of the Proxy Statement for the 2021 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

 

 

 

 

 

 

WESTERN NEW ENGLAND BANCORP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2020

 

TABLE OF CONTENTS

 
     
ITEM PART I PAGE
     
1 Business 4
1A Risk Factors 35
1B Unresolved Staff Comments 46
2 Properties 46
3 Legal Proceedings 49
4 Mine Safety Disclosures 49
     
  PART II  
     
5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 50
6 Selected Financial Data 52
7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 52
7A Quantitative and Qualitative Disclosures About Market Risk 70
8 Financial Statements and Supplementary Data 70
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 71
9A Controls and Procedures 71
9B Other Information 74
  PART III  
     
10 Directors, Executive Officers and Corporate Governance 74
11 Executive Compensation 74
12 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters 74
13 Certain Relationships and Related Transactions and Director Independence 74
14 Principal Accounting Fees and Services 74
     
  PART IV  
     
15 Exhibits and Financial Statement Schedules   74
16 Form 10-K Summary 76
     

 

 

 

FORWARD-LOOKING STATEMENTS

 

We may, from time to time, make written or oral “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements contained in our filings with the Securities and Exchange Commission (the “SEC”), our reports to shareholders and in other communications by us. This Annual Report on Form 10-K contains “forward-looking statements” with respect to the Company’s financial condition, liquidity, results of operations, future performance, business, measures being taken in response to the coronavirus disease 2019 (“COVID-19”) pandemic and the impact of COVID-19 on the Company’s business. Forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

 

the duration and scope of the COVID-19 pandemic and the local, national and global impact of COVID-19;
actions governments, businesses and individuals take in response to the COVID-19 pandemic;
the pace of recovery when the COVID-19 pandemic subsides;
changes in the interest rate environment that reduce margins;
the effect on our operations of governmental legislation and regulation, including changes in accounting regulation or standards, the nature and timing of the adoption and effectiveness of new requirements under the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), Basel guidelines, capital requirements and other applicable laws and regulations;
the highly competitive industry and market area in which we operate;
general economic conditions, either nationally or regionally, resulting in, among other things, a deterioration in credit quality;
changes in business conditions and inflation;
changes in credit market conditions;
the inability to realize expected cost savings or achieve other anticipated benefits in connection with business combinations and other acquisitions;
changes in the securities markets which affect investment management revenues;
increases in Federal Deposit Insurance Corporation deposit insurance premiums and assessments;
changes in technology used in the banking business;
the soundness of other financial services institutions which may adversely affect our credit risk;
certain of our intangible assets may become impaired in the future;
our controls and procedures may fail or be circumvented;
new lines of business or new products and services, which may subject us to additional risks;
changes in key management personnel which may adversely impact our operations;
severe weather, natural disasters, acts of war or terrorism and other external events which could significantly impact our business; and
other factors detailed from time to time in our SEC filings.

 

Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except to the extent required by law.

 

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, 2020, WNEB had consolidated total assets of $2.4 billion, total net loans of $1.9 billion, total deposits of $2.0 billion and total shareholders’ equity of $226.6 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, 2020, the Bank had 25 branches and 25 free-standing automated teller machines (“ATMs”), and an additional 23 seasonal or temporary ATMs, serving Hampden County and Hampshire County in western Massachusetts and northern Connecticut. The Bank also provides a variety of banking services including automated teller machines, 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: The Company conducts its principal business activities through its wholly owned subsidiary Westfield Bank.

 

WFD Securities, Inc. (“WFD”). WFD is a Massachusetts chartered security corporation, for the primary purpose of holding qualified securities.

 

Westfield Bank has three wholly owned subsidiaries that are included in the Company’s consolidated financial statements:

 

Elm Street Securities Corporation (“Elm”). Elm is a Massachusetts-chartered security corporation, formed for the primary purpose of holding qualified securities.

 

WB Real Estate Holdings, LLC. (“WB”). WB is a Massachusetts-chartered limited liability company formed for the primary purpose of holding other real estate owned (“OREO”).

 

4

 

 

CSB Colts, Inc. (“CSB Colts”). CSB Colts is a Massachusetts-chartered security corporation, formed for the primary purpose of holding qualified securities. CSB Colts was acquired on October 21, 2016, in conjunction with the acquisition of Chicopee.

 

Market Area.

 

Westfield Bank’s headquarters are located at 141 Elm Street in Westfield, Massachusetts. The Bank’s primary lending and deposit market areas include all of Hampden County and Hampshire County in western Massachusetts and Hartford and Tolland Counties in northern Connecticut. The Bank operates 25 banking offices in Agawam, Chicopee, Feeding Hills, East Longmeadow, Holyoke, Huntington, Ludlow, South Hadley, Southwick, Springfield, Ware, West Springfield and Westfield, Massachusetts and Bloomfield, Enfield, Granby and West Hartford, Connecticut. We operate full-service ATMs at our branch locations and we also have 25 free-standing ATM locations in Chicopee, Holyoke, Ludlow, Southwick, Springfield, West Springfield and Westfield, Massachusetts and 23 traveling/seasonal ATMs. 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 market areas located in western Massachusetts and in northern Connecticut. Our middle market and commercial real estate lending team is located in Springfield, the Pioneer Valley’s primary urban market. Westfield, Massachusetts, is located near the intersection of U.S. Interstates 90 (the Massachusetts Turnpike) and 91. 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.

 

A diversified mix of industry groups also operate within Hampden and Hampshire County, including manufacturing, health care, higher education, wholesale and retail trade and service. The economy of our primary market area has benefited from the presence of large employers such as Baystate Medical Center, Big Y World Class Supermarkets, University of Massachusetts, MassMutual Financial Group, Berkshire Medical Center, Mercy Medical Center, MGM Springfield, Peter Pan Bus Lines, Westover Air Reserve Base, Westfield-Barnes Regional Airport, Smith and Wesson, Inc. and Yankee Candle Company. Other employment and economic activity is provided by financial institutions, nine other colleges and universities, eight other 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 called the Big E, the largest fair in the northeast, the Basketball Hall of Fame, Six Flags New England and MGM.

 

Competition.

 

The Company faces significant competition to attract and retain customers within existing and neighboring geographic markets. This competition stems from national and larger regional banks, numerous local savings banks, commercial banks, cooperative banks and credit unions which have a large presence in the region. Competition for loans, deposits and cash management services, and investment advisory assets also comes from other businesses that provide financial services, including consumer finance companies, mortgage brokers and lenders, private lenders, insurance companies, securities brokerage firms, institutional mutual funds, registered investment advisors, non-bank electronic payment and funding channels, internet-based banks and other financial intermediaries.

 

We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered the barriers to market entry, allowed banks and other lenders to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal laws permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry.

 

At June 30, 2020, which is the most recent date for which data is available from the FDIC, we held approximately 13.1% of the deposits in Hampden County, which was the third largest market share out of the 16 banks and thrifts with offices in Hampden County.

 

5

 

 

Human Capital Management

 

We remain focused on being a good corporate citizen and creating a culture where we prioritize providing an exceptional customer experience and empowering our employees. The Company believes that it has had and continues to have good employee relations. Our human capital management strategy ensures we leverage the talent needed, not just for today, but also for our future. Our employees are the foundation of our success and are responsible for upholding our guiding principles, of integrity, trust, empathy, collaboration, work ethic, courage, inclusion and positive attitude.

 

As of December 31, 2020, the Bank employed 358 total employees, with 298 employed full-time and 60 employed part-time. Employee retention helps the Company operate efficiently and effectively. Management promotes its core values through prioritizing concern for employees’ well-being, supporting employees’ career goals, offering competitive wages, and providing valuable fringe benefits. In addition, Bank employees may become stockholders of the Company through participation in its Employee Stock Ownership Plan (ESOP) and its 401(k) retirement plan, which offers a Company stock investment option.

 

The Company actively encourages and supports the growth and development of its employees. Management generally seeks to fill positions by promotion and transfer from within the organization, whenever practical. Career development is advanced through ongoing mentoring and development programs, as well as internally developed training programs, customized corporate training engagements and educational reimbursement programs. Reimbursement is available to employees enrolled in pre-approved degree or certification programs at accredited institutions that teach skills or knowledge relevant to the financial services industry. Each year, we attract rising juniors and seniors from colleges and universities across our footprint. They work directly with business areas where they have the opportunity to be assigned a position upon graduation.

 

Inclusion and Diversity

 

The Company strives to create an intentionally inclusive, diverse and thriving workplace where each person feels valued, respected and understood.  The Company aims to maintain a workplace that presents a respectful, productive environment for everyone and enables individuals to achieve their full potential. At December 31, 2020, our employees were representative of our commitment to recruit, develop, and retain diverse individuals, wherein approximately 68% of our employees were women and 20% of our employees are either ethnic minorities, veterans, or persons with disabilities. We remain focused on bolstering our workforce through inclusive hiring and retention practices, which we feel reflects and better serves our communities.

 

Health and Safety/Well-Being

 

The safety, health and wellness of our employees is considered a top priority. The COVID-19 pandemic has presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Through teamwork and the adaptability of our employees, we were able to transition, over a short period of time, the substantial majority of our non-customer-facing employees to effectively working from remote locations and ensuring a safely-distanced working environment for employees performing customer-facing activities at banking and operational centers. All employees have been asked not to come to work when they experience signs or symptoms of a possible COVID-19 illness and have been provided additional paid time off to cover compensation during such absences. On an ongoing basis, the Company promotes the health and wellness of its employees and striving to keep the employee portion of health care premiums competitive with local competition.

 

6

 

 

Lending Activities.

 

General. The Company’s loan portfolio totaled $1.9 billion, or 81.5% of total assets, at December 31, 2020, compared to $1.8 billion, or 81.4% of total assets, at December 31, 2019. The Company lends to individuals, business entities, non-profit organizations and professional practices. The Company’s primary lending focus is on the development of high quality commercial relationships achieved through active business development efforts, long-term relationships with established commercial developers, community involvement, and focused marketing strategies. Loans made to businesses, non-profits, and professional practices may include commercial mortgage loans, construction and land development loans, commercial and industrial loans, including lines of credit and letters of credit. Loans made to individuals may include conventional residential mortgage loans, home equity loans and lines, residential construction loans on owner-occupied primary and secondary residences, and secured and unsecured personal loans and lines of credit. The Company manages its loan portfolio to avoid concentration by industry, relationship size, and source of repayment to lessen its credit risk exposure.

 

Interest rates on loans may be fixed or variable and variable rate loans may have fixed initial periods before periodic rate adjustments begin. Individual rates offered are dependent on the associated degree of credit risk, term, underwriting and servicing costs, loan amount, and the extent of other banking relationships maintained with the borrower, and may be subject to interest rate floors. Rates are also subject to competitive pressures, the current interest rate environment, availability of funds, and government regulations.

 

The Company employs a seasoned commercial lending staff, with commercial lenders supporting the Company’s loan growth strategy. The Company contracts with an external loan review company to review the internal credit ratings assigned to loans in the commercial loan portfolio on a pre-determined schedule, based on the type, size, rating, and overall risk of the loan. During the course of their review, the third party examines a sample of loans, including new loans, existing relationships over certain dollar amounts and classified assets. The Company's internal residential origination and underwriting staff originate residential loans and are responsible for compliance with residential lending regulations, consumer protection and internal policy guidelines. The Company's internal compliance department monitors the residential loan origination activity for regulatory compliance.

 

The Executive Committee of the Company’s Board of Directors (the “Board”) approves loan relationships exceeding certain prescribed dollar limits as outlined in the Company’s lending policy.

 

At December 31, 2020, our general regulatory limit on loans to one borrower was $34.8 million. Our largest lending exposure was a $22.9 million commercial lending relationship, of which $16.9 million was outstanding at December 31, 2020. The relationship is primarily secured by commercial real estate located in Springfield, Massachusetts. At December 31, 2020, this relationship was performing in accordance with its original terms.

 

Commercial Real Estate Loans and Commercial and Industrial Loans.

 

At December 31, 2020, commercial real estate loans totaled $833.9 million, or 43.3% of total loans, compared to $816.9 million, or 46.1% of total loans, at December 31, 2019.

 

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 twenty 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. 

 

 7 

 

 

 

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 both December 31, 2020 and December 31, 2019, there was $103.3 million in commercial construction loans included within commercial real estate loans.

 

At December 31, 2020, our total commercial and industrial loan portfolio totaled $379.1 million, or 19.7% of our total loans, with commercial and industrial loans totaling $211.8 million, or 11.0% of total loans, and Paycheck Protection Program (“PPP”) loans totaling $167.3 million at December 31, 2020. This compares to commercial and industrial loans of $248.9 million, or 14.0% of total loans, at December 31, 2019. Commercial and industrial loans include seasonal revolving lines of credit, working capital loans, equipment financing and term loans. Commercial and industrial credits may be unsecured loans and lines to financially strong borrowers, loans secured in whole or in part by real estate unrelated to the principal purpose of the loan or secured by inventories, equipment, or receivables, and are generally guaranteed by the principals of the borrower. Variable rate loans and lines in this portfolio have interest rates that are periodically adjusted, with loans generally having fixed initial periods. Commercial and industrial loans have average repayment periods of one to seven years. Our commercial and industrial loan portfolio does not have any significant loan concentration by type of property or borrower.

 

As a Preferred Lender with the Small Business Administration (“SBA”), the Company offered PPP loans through the March 27, 2020 $2.2 trillion fiscal stimulus bill known as the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) launched by the U.S. Department of Treasury (“Treasury”) and the SBA. An eligible business was able to apply for a PPP loan up to the lesser of: (1) 2.5 times its average monthly “payroll costs,” or (2) $10.0 million. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity, subsequently extended to a five-year loan term maturity for loans granted on or after June 5, 2020 and (c) principal and interest payments deferred from six months to ten months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. PPP loans totaled $167.3 million, or 8.7% of total loans, at December 31, 2020.

 

The largest concentration of commercial loans to an industry was to hotels and accommodation, which comprised approximately 5.5% of the commercial loan portfolio inclusive of commercial and industrial owner-occupied real estate loans as of December 31, 2020. At December 31, 2020, our largest commercial and industrial loan relationship was $22.9 million to a college. The loan relationship is secured by business assets and real estate. At December 31, 2020, this relationship was performing according to its original terms.

 

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 $113.0 million at December 31, 2020 and $138.7 million at December 31, 2019. The Company was servicing commercial loans originated by the Company and participated out to various other institutions totaling $52.9 million and $24.2 million at December 31, 2020 and December 31, 2019, respectively.

 

8

 

 

Residential Real Estate Loans.

 

At December 31, 2020 and December 31, 2019, the residential real estate loan portfolio totaled $604.7 million, or 31.4% of total loans, and $597.7 million, or 33.7%, of total loans, respectively. In 2020 and 2019, the Company did not purchase any residential real estate loans.

 

The Company originates and funds residential real estate loans secured by one-to-four family residential properties primarily located in western Massachusetts and northern Connecticut. The Company processes and underwrites all of its originations internally through its Residential Loan Center located in Westfield, MA.

 

These residential properties may serve as the borrower’s primary residence, or as vacation homes or investment properties. Loans are originated in amounts up to 97% of the lesser of the appraised value or purchase price of the property. Private mortgage insurance is required on all loans with a loan-to-value ratios greater than 80%. In addition, financing is provided for the construction of owner-occupied primary and secondary residences. Residential mortgage loans may have terms of up to 30 years at either fixed or adjustable rates of interest. Fixed and adjustable rate residential mortgage loans are generally originated using secondary market underwriting and documentation standards.

 

Depending on the current interest rate environment, management may elect to sell those fixed and adjustable rate residential mortgage loans which are eligible for sale in the secondary market, or hold some or all of this residential loan production for the Company’s portfolio. The Company may retain or sell the servicing when selling the loans. The Company is an approved seller and servicer with Fannie Mae, Freddie Mac and the FHLB. In order to reduce interest rate risk, at December 31, 2020 and December 31, 2019, the Company serviced $38.1 million and $48.2 million, respectively, in residential loans sold to the secondary market. The servicing rights will continue to be retained on all loans sold over the life of the loan. The largest owner-occupied residential real estate loan was $1.7 million and was performing according to its original terms as of December 31, 2020.

 

Home Equity Loans.

 

At December 31, 2020 and December 31, 2019, home equity loans totaled $103.9 million, or 5.4% of total loans, and $102.5 million, or 5.8% of total loans, respectively. The Company originates home equity revolving loans and lines of credit for one-to-four family residential properties with maximum original loan-to-value ratios generally up to 85%. Home equity lines generally have interest rates that adjust monthly based on changes in the Wall Street Journal Prime Rate, although minimum rates may be applicable. Some home equity line rates may be fixed for a period of time and then adjusted monthly thereafter. The payment schedule for home equity lines require interest only payments for the first ten years of the lines. Generally at the end of ten years, the line may be frozen to future advances, and principal plus interest payments are collected over a fifteen-year amortization schedule or, for eligible borrowers meeting certain requirements, the line availability may be extended for an additional interest only period.

 

Consumer Loans.

 

At December 31, 2020, consumer loans totaled $5.2 million, or 0.2%, of total loans and $5.7 million, or 0.4%, of total loans, at December 31, 2019. Consumer loans are generally originated at higher interest rates than residential and commercial real estate loans, but they also generally tend to have a higher credit risk than residential real estate loans because they are usually unsecured or secured by rapidly depreciable assets. Management, however, believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities. We offer a variety of consumer loans to retail customers in the communities we serve. Examples of our consumer loans include automobile loans, spa and pool loans, collateral loans and personal lines of credit tied to deposit accounts to provide overdraft protection.

 

9

 

 

The following table presents the composition of our loan portfolio in dollar amounts and in percentages of the total portfolio at the dates indicated.

 

   At December 31, 
   2020  2019  2018  2017  2016 
      Percent of     Percent of     Percent of     Percent of     Percent of 
   Amount  Total  Amount  Total  Amount  Total  Amount  Total  Amount  Total 
   (Dollars in thousands) 
Real estate loans:                                         
Commercial  $833,949   43.3% $816,886   46.1% $768,881   45.4% $732,616   45.1% $720,741   46.2%
Residential   604,719   31.4   597,727   33.7   577,641   34.1   557,752   34.3   522,083   33.4 
Home equity   103,905   5.4   102,517   5.8   97,238   5.8   92,599   5.7   92,083   5.9 
Total real estate loans   1,542,573   80.1   1,517,130   85.6   1,443,760   85.3   1,382,967   85.1   1,334,907   85.5 
                                          
Commercial and industrial  loans:                                         
Commercial and industrial   211,823   11.0   248,893   14.0   243,493   14.4   238,502   14.7   222,286   14.2 
PPP loans   167,258   8.7                         
Total commercial and industrial   379,081   19.7   248,893   14.0   243,493   14.4   238,502   14.7   222,286   14.2 
                                          
Consumer   5,192   0.2   5,747   0.4   5,203   0.3   4,478   0.3   4,424   0.3 
                                          
Total loans   1,926,846   100.0%  1,771,770   100.0%  1,692,456   100.0%  1,625,947   100.0%  1,561,617   100.0%
                                          
Unamortized PPP loan fees   (3,050)                                
Premiums and deferred loan fees and costs, net   3,587       4,264       4,401       4,734       4,867     
Allowance for loan losses   (21,157)      (14,102)      (12,053)      (10,831)      (10,068)    
Total loans, net  $1,906,226      $1,761,932      $1,684,804      $1,619,850      $1,556,416     

10

 

Loan Maturity and Repricing.

 

The following table shows the repricing dates or contractual maturity dates of our loans as of December 31, 2020. 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.

 

   At December 31, 2020 
   Commercial
Real Estate
   Residential   Home Equity   Commercial
and
Industrial
   Consumer   Unallocated   Totals 
  (In thousands)
Amount due:                                   
Within one year  $185,958   $33,017   $63,255   $86,169   $218   $   $368,617 
                                    
After one year:                                   
One to three years   160,885    32,744    752    144,567    1,273        340,221 
Three to five years   177,338    29,663    2,441    85,186    2,642        297,270 
Five to ten years   287,863    40,552    10,346    53,707    297        392,765 
Ten to twenty years   17,245    77,136    27,015    207    185        121,788 
Over twenty years   4,660    391,607    96    9,245    577        406,185 
Total due after one year   647,991    571,702    40,650    292,912    4,974        1,558,229 
                                    
Total amount due:   833,949    604,719    103,905    379,081    5,192        1,926,846 
                                    
Unamortized PPP loan fees               (3,050)           (3,050)
Net deferred loan origination fees and costs and premiums   (417)   2,633    695    644    32        3,587 
Allowance for loan losses   (13,020)   (3,618)   (622)   (3,630)   (241)   (26)   (21,157)
                                    
Loans, net  $820,512   $603,734   $103,978   $373,045   $4,983   $(26)  $1,906,226 

 

The following table presents, as of December 31, 2020, the dollar amount of all loans contractually due or scheduled to reprice after December 31, 2021, and whether such loans have fixed interest rates or adjustable interest rates.

 

   Due After December 31, 2021 
   Fixed   Adjustable   Total 
   (In thousands) 
Real estate loans:               
Residential  $491,496   $80,206   $571,702 
Home equity   40,650        40,650 
Commercial real estate   197,550    450,441    647,991 
Total real estate loans   729,696    530,647    1,260,343 
                
Other loans:               
Commercial and industrial   282,591    10,321    292,912 
Consumer   4,974        4,974 
Total other loans   287,565    10,321    297,886 
                
Total loans  $1,017,261   $540,968   $1,558,229 

11

 

 

The following table presents our loan originations, purchases and principal payments for the years indicated:

 

   For the Years Ended December 31, 
   2020   2019   2018 
Loans:  (In thousands) 
Balance outstanding at beginning of year  $1,771,770   $1,692,456   $1,625,947 
                
Originations:               
Real estate loans:               
Residential   157,190    88,541    85,216 
Home equity   31,546    40,768    40,551 
Commercial   154,740    150,113    130,744 
Total mortgage originations   343,476    279,422    256,511 
                
Commercial and industrial loans   308,788    90,389    98,635 
Consumer loans   2,308    2,898    2,509 
Total originations   654,572    372,709    357,655 
                
Less:               
Principal repayments, unadvanced funds and other, net   498,776    292,769    290,468 
Loan charge-offs, net   720    626    678 
Total deductions   499,496    293,395    291,146 
Ending balance  $1,926,846   $1,771,770   $1,692,456 

 

Asset Quality.

 

Maintaining a high level of asset quality continues to be one of the Company’s key objectives. Credit Administration reports directly to the Chief Credit Officer and is responsible for the completion of independent credit analyses for all loans above a specific threshold.

 

The Company’s policy requires that management continuously monitor the status of the loan portfolio and report to the Board of Directors on a monthly basis. These reports include information on concentration levels, delinquent loans, non-accrual loans, criticized loans and foreclosed real estate, as well as our actions and plans to cure the non-accrual status of the loans and to dispose of the foreclosed property.

 

The Company contracts with an external loan review company to review the internal risk ratings assigned to loans in the commercial loan portfolio on a pre-determined schedule, based on the type, size, rating, and overall risk of the loan. During the course of their review, the third party examines a sample of loans, including new loans, existing relationships over certain dollar amounts and classified assets. The findings are reported to the Chief Credit Officer and the full report is then presented to the Audit Committee.

 

Potential Problem Loans.

 

The Company performs an internal analysis of the loan portfolio in order to identify and quantify loans with higher than normal risk. Loans having a higher risk profile are assigned a risk rating corresponding to the level of weakness identified in the loan.

 

All loans risk rated “Special Mention (5)”, “Substandard (6)”, “Doubtful (7)” and “Loss (8)” are listed on the Company’s criticized report and are reviewed by management not less than on a quarterly basis to assess the level of risk and to ensure that appropriate actions are being taken to minimize potential loss exposure. Loans identified as containing a loss are partially charged-off or fully charged-off. In addition, the Company closely monitors the classified loans for signs of deterioration to mitigate the growth in nonaccrual loans, including performing additional due diligence, updating valuations and requiring additional financial reporting from the borrower. At December 31, 2020, criticized loans, inclusive of “adversely classified loans”, totaled $147.1 million, or 7.6% of total loans, compared to $83.3 million, or 4.7% of total loans, at December 31, 2019.

 

12

 

 

The Company’s adversely classified loans (defined as “Substandard (6)”, “Doubtful (7)” or “Loss (8)”) totaled $55.0 million, or 2.9% of total loans, at December 31, 2020 and $57.3 million, or 3.2%, of total loans, at December 31, 2019. Adversely classified loans that were performing but possessed potential weaknesses and, as a result, could ultimately become non-performing loans totaled $47.2 million, or 2.4% of total loans, at December 31, 2020 and $47.5 million, or 2.7% of total loans, at December 31, 2019. The remaining balance of adversely classified loans were non-accrual loans totaling $7.8 million, or 0.40% of total loans, at December 31, 2020 and $9.9 million, or 0.56% of total loans, at December 31, 2019.

 

Total impaired loans totaled $29.1 million, or 1.5% of total loans, at December 31, 2020 and $19.5 million, or 1.1% of total loans, at December 31, 2019. Total accruing impaired loans totaled $21.3 million and $9.6 million at December 31, 2020 and December 31, 2019, respectively, while non-accrual impaired loans totaled $7.8 million and $9.9 million as of December 31, 2020 and December 31, 2019, respectively.

 

In management’s opinion, all impaired loan balances at December 31, 2020 and 2019, were supported by expected future cash flows or, for those collateral dependent loans, the net realizable value of the underlying collateral. Based on management’s assessment at December 31, 2020 and December 31, 2019, no impaired loans required a specific reserve. Management closely monitors these relationships for collateral or credit deterioration.

 

At December 31, 2020, 2019, 2018, non-accrual loans totaled $7.8 million, or 0.41% of total loans, $9.9 million, or 0.56% of total loans, and $13.5 million, and 0.79% of total loans, respectively. If all non-accrual loans had been performing in accordance with their terms, we would have earned additional interest income of $275,000, $651,000 and $900,000 for the years ended December 31, 2020, 2019 and 2018, respectively.

 

At December 31, 2020, 2019 and 2018, the Company carried no OREO balances.

 

13

 

 

The following table presents information regarding non-performing commercial real estate loans, commercial and industrial term loans, residential real estate loans, consumer loans, and foreclosed real estate as of the dates indicated. All loans where the payment is 90 days or more in arrears as of the closing date of each month are placed on non-accrual status unless the loan is well secured and in the process of collection.

 

   At December 31, 
   2020   2019   2018   2017   2016 
   (Dollars in thousands) 
Non-accrual real estate loans:                         
Residential  $5,353   $4,548   $5,856   $5,961   $5,744 
Home equity   124    445    391    696    120 
Commercial real estate   1,632    3,843    4,701    2,959    4,452 
Total non-accrual real estate loans   7,109    8,836    10,948    9,616    10,316 
Other loans:                         
Commercial and industrial   705    1,003    2,476    3,019    3,714 
Consumer   27    42    60    120    27 
Total non-accrual other loans   732    1,045    2,536    3,139    3,741 
Total non-performing loans   7,841    9,881    13,484    12,755    14,057 
Foreclosed real estate, net               155    298 
Total non-performing assets (1)  $7,841   $9,881   $13,484   $12,910   $14,355 
Non-performing loans to total loans   0.41%   0.56%   0.79%   0.78%   0.90%
Non-performing assets to total assets   0.33    0.45    0.64    0.63    0.69 

 

 

(1) Troubled debt restructurings on accrual status not included above totaled $9.8 million, $1.5 million, $2.4 million, $1.8 million and $2.1 million at December 31, 2020, 2019, 2018, 2017 and 2016, respectively.

 

14

 

 

Allowance for Loan Losses.

 

The allowance for loan losses is an estimate of probable credit risk inherent in the loan portfolio as of the specified balance sheet dates. On a quarterly basis, management prepares an estimate of the allowance necessary to cover estimated probable credit losses. The Company maintains the allowance at a level that it deems adequate to absorb all reasonably anticipated probable losses from specifically known and other credit risks associated with the portfolio.

 

The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio based on ongoing quarterly assessments of the estimated losses. Our methodology for assessing the appropriateness of the allowance consists of a review of the components, which includes a general allowance for non-impaired loans.

 

The specific valuation allowance incorporates the results of measuring impairment for specifically identified non-homogenous problem loans and, as applicable, troubled debt restructurings (“TDRs”). A loan is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the loan’s contractual terms. Impairment is measured on a loan-by-loan basis for commercial real estate and commercial and industrial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Once an impairment has been determined, the Company recognizes the charge-off.

 

The general allowance is calculated by applying loss factors to outstanding loans by loan type, excluding loans determined to be impaired. As part of this analysis, each quarter we prepare an allowance for loan losses worksheet which categorizes the loan portfolio by risk characteristics such as loan type and loan grade. The general allowance is inherently subjective as it requires material estimates that may be susceptible to significant change. There are a number of factors that are considered when evaluating the appropriate level of the allowance. These factors include current economic and business conditions that affect our key lending areas, collateral values, loan volumes and concentrations, credit quality trends such as non-performing loans, delinquency and loan losses, and specific industry concentrations within the portfolio segments that may impact the collectability of the loan portfolio. During the year ended December 31, 2020, the Company significantly increased the general allowance as a result of the COVID-19 pandemic. For information on our methodology for assessing the appropriateness of the allowance for loan losses please see Footnote 1 – “Summary of Significant Accounting Policies” of our notes to consolidated financial statements.

 

The allowance for loan losses is established through a provision for loan losses, which is a direct charge to earnings. Loan losses are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged-off are credited to the allowance for loan losses.

 

In making its assessment on the adequacy of the allowance for loan losses, management considers several quantitative and qualitative factors that could have an effect on the credit quality of the portfolio. Management closely monitors the credit quality of individual delinquent and non-performing relationships, the levels of impaired and adversely classified loans, net charge-offs, the growth and composition of the loan portfolio, expansion in geographic market area, and any material changes in underwriting criteria, and the strength of the local and national economy, among other factors.

 

The level of delinquent and non-performing assets is largely a function of economic conditions and the overall banking environment and the individual business circumstances of borrowers. Despite prudent loan underwriting, adverse changes within the Company’s market area, or deterioration in local, regional or national economic conditions, could negatively impact management’s estimate of probable credit losses.

 

Management continues to closely monitor the necessary allowance levels, including specific reserves. The allowance for loan losses to total loans ratio was 1.10% at December 31, 2020 compared to 0.79% at December 31, 2019. The allowance for loan losses to total loans ratio, excluding PPP loans, was 1.20% at December 31, 2020.

 

Based on the foregoing, as well as management’s judgment as to the existing credit risks inherent in the loan portfolio, management believes that the Company’s allowance for loan losses is adequate to absorb probable losses from specifically known and other probable credit risks associated with the portfolio as of December 31, 2020.

 

15

 

 

The following table presents the activity in our allowance for loan losses and other ratios at or for the dates indicated.

 

   At or for Years Ended December 31, 
   2020   2019   2018   2017   2016 
   (Dollars in thousands) 
Balance at beginning of year  $14,102   $12,053   $10,831   $10,068   $8,840 
                          
Charge-offs:                         
Residential   (124)   (283)   (608)   (124)   (115)
Commercial real estate   (107)   (669)   (35)   (292)   (170)
Home equity   (53)   (37)   (37)   (24)   (42)
Commercial and industrial   (543)   (514)   (299)   (289)    
Consumer   (136)   (197)   (171)   (319)   (159)
        Total charge-offs   (963)   (1,700)   (1,150)   (1,048)   (486)
                          
Recoveries:                         
Residential   65    65    25    122    9 
Commercial real estate   58    873    369    142    1,065 
Home equity   24    1    2    42     
Commercial and industrial   51    74    20    81    25 
Consumer   45    61    56    64    40 
         Total recoveries   243    1,074    472    451    1,139 
                          
Net (charge-offs) recoveries   (720)   (626)   (678)   (597)   653 
                          
Provision for loan losses   7,775    2,675    1,900    1,360    575 
                          
Balance at end of year  $21,157   $14,102   $12,053   $10,831   $10,068 
                          
Total loans receivable (1)  $1,926,846   $1,771,770   $1,692,456   $1,625,947   $1,561,617 
                          
Average loans outstanding  $1,922,607   $1,721,884   $1,666,266   $1,597,599   $1,013,611 
                         
Allowance for loan losses as a percent of total loans receivable   1.10%   0.79%   0.71%   0.67%   0.64%
                         
Allowance for loan losses as a percent of total loans receivable, excluding PPP loans   1.20%   %   %   %   %
                         
Net loans charged-off as a percent of average loans outstanding   0.04    0.04    0.04    0.04    (0.06)

 

 

(1) Does not include premiums, deferred costs and fees, or the allowance for loan losses.                                        

 

16

 

 

A summary of the components of the allowance for loan losses is as follows:

 

   December 31, 2020   December 31, 2019   December 31, 2018 
   Specific   General   Total   Specific   General   Total   Specific   General   Total 
   (In thousands) 
Commercial real estate  $   $13,020   $13,020   $   $6,807   $6,807   $   $5,260   $5,260 
Residential real estate:                                             
Residential       3,618    3,618        3,346    3,346        3,044    3,044 
Home equity       622    622        574    574        512    512 
Commercial and industrial       3,630    3,630        3,183    3,183        3,114    3,114 
Consumer       241    241        203    203        135    135 
Unallocated       26    26        (11)   (11)       (12)   (12)
Total  $   $21,157   $21,157   $   $14,102   $14,102   $   $12,053   $12,053 
                           
   December 31, 2017   December 31, 2016   
   Specific   General   Total   Specific   General   Total   
   (In thousands)   
Commercial real estate  $   $4,712   $4,712   $   $4,083   $4,083   
Residential real estate:                                
Residential       2,839    2,839        2,433    2,433   
Home equity       472    472        429    429   
Commercial and industrial       2,733    2,733        3,085    3,085   
Consumer       71    71        38    38   
Unallocated       4    4               
Total  $   $10,831   $10,831   $   $10,068   $10,068   

 

For the years ended December 31, 2020 and December 31, 2019, the Company recorded a provision of $7.8 million and $2.7 million, respectively, to the allowance for loan losses based on our evaluation of the items discussed above. We believe that the allowance for loan losses adequately reflects the level of incurred losses in the current loan portfolio as of December 31, 2020.

 

17

 

Allocation of Allowance for Loan Losses.

 

The following tables set forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans, excluding PPP loans.

 

   December 31, 2020   December 31, 2019   December 31, 2018 
Loan Category  Amount of
Allowance for
Loan Losses
   Loan
Balances by
Category
   Percent of
Loans in
Each
Category to
Total Loans
   Amount of
Allowance for
Loan Losses
   Loan
Balances by
Category
   Percent of
Loans in
Each
Category to
Total Loans
   Amount of
Allowance for
Loan
Losses
   Loan
Balances by
Category
   Percent of
Loans in
Each
Category to
Total Loans
 
   (In thousands) 
Commercial real estate  $13,020   $833,949    47.4%  $6,807   $816,886    46.1%  $5,260   $768,881    45.4%
Real estate mortgage:                                             
Residential   3,618    604,719    34.4    3,346    597,727    33.7    3,044    577,641    34.1 
Home equity   622    103,905    5.9    574    102,517    5.8    512    97,238    5.8 
Commercial and industrial loans   3,630    211,823    12.0    3,183    248,893    14.0    3,114    243,493    14.4 
Consumer loans   241    5,192    0.3    203    5,747    0.4    135    5,203    0.3 
Unallocated   26            (11)           (12)        
Total allowances for loan losses  $21,157   $1,759,588    100.0%  $14,102   $1,771,770    100.0%  $12,053   $1,692,456    100.0%
                                
   December 31, 2017   December 31, 2016   
   Amount of
Allowance for
Loan Losses
   Loan
Balances by
Category
   Percent of
Loans in
Each
Category to
Total Loans
   Amount of
Allowance for
Loan Losses
   Loan
Balances by
Category
   Percent of
Loans in
Each
Category to
Total Loans
  
   (In thousands)  
Commercial real estate  $4,712   $732,616    45.1%  $4,083   $720,741    46.2% 
Real estate mortgage:                               
Residential   2,839    557,752    34.3    2,433    522,083    33.4  
Home equity   472    92,599    5.7    429    92,083    5.9  
Commercial and industrial loans   2,733    238,502    14.7    3,085    222,286    14.2  
Consumer loans   71    4,478    0..3    38    4,424    0.3  
Unallocated   4