UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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.
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit such files).
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.
| Large 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
At May 1, 2023 the registrant had shares of common stock, $0.01 par value, issued and outstanding.
TABLE OF CONTENTS
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 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 the COVID-19 impact 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:
| ● | unpredictable changes in general economic conditions, financial markets, fiscal, monetary and regulatory policies, including actual or potential stress in the banking industry; |
| ● | the duration and scope of the continuing COVID-19 pandemic, including the emergence of new COVID-19 variants and the response thereto; |
| ● | changes in economic conditions which could materially impact credit quality trends and the ability to generate loans and gather deposits; |
| ● | inflation and governmental responses to inflation, including increasing interest rates 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, Basel guidelines, capital requirements and other applicable laws and regulations; |
| ● | significant changes in accounting, tax or regulatory practices or requirements; |
| ● | new legal obligations or liabilities or unfavorable resolutions of litigation; |
| ● | disruptive technologies in payment systems and other services traditionally provided by banks; |
| ● | the highly competitive industry and market area in which we operate; |
| ● | uncertainty about the discontinued use of LIBOR and the transition to an alternative rate; |
| ● | changes in business conditions and inflation; |
| ● | operational risks or risk management failures by us or critical third parties, including without limitation with respect to data processing, information systems, cybersecurity, technological changes, vendor issues, business interruption, and fraud risks; |
| ● | failure or circumvention of our internal controls or procedures; |
| ● | changes in the securities markets which affect investment management revenues; |
| ● | increases in Federal Deposit Insurance Corporation deposit insurance premiums and assessments; |
| ● | 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; |
| ● | 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 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.
i
PART I – FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS.
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(Dollars in thousands, except per share data)
March 31, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Federal funds sold | ||||||||
| Interest-bearing deposits and other short-term investments | ||||||||
| Cash and cash equivalents | ||||||||
| Available-for-sale securities, at fair value | ||||||||
| Held-to-maturity securities, at amortized cost (Fair value of $ | ||||||||
| Marketable equity securities, at fair value | ||||||||
| Federal Home Loan Bank of Boston stock and other restricted stock, at cost | ||||||||
| Loans, net of allowance for credit losses of $ | ||||||||
| Premises and equipment, net | ||||||||
| Accrued interest receivable | ||||||||
| Bank-owned life insurance | ||||||||
| Deferred tax asset, net | ||||||||
| Goodwill | ||||||||
| Core deposit intangible | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| LIABILITIES: | ||||||||
| Deposits: | ||||||||
| Non-interest-bearing | $ | $ | ||||||
| Interest-bearing | ||||||||
| Total deposits | ||||||||
| Short-term borrowings | ||||||||
| Long-term debt | ||||||||
| Subordinated debt | ||||||||
| Other liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| SHAREHOLDERS’ EQUITY: | ||||||||
| Preferred stock - $ par value, shares authorized, outstanding at March 31, 2023 and December 31, 2022 | ||||||||
| Common stock - $ par value, shares authorized, shares issued and outstanding at March 31, 2023; shares issued and outstanding at December 31, 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Unearned compensation – Employee Stock Ownership Plan | ( | ) | ( | ) | ||||
| Unearned compensation - Equity Incentive Plan | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
See accompanying notes to unaudited consolidated financial statements.
1
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME – UNAUDITED
(Dollars in thousands, except per share data)
Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Interest and dividend income: | ||||||||
| Residential and commercial real estate loans | $ | $ | ||||||
| Commercial and industrial loans | ||||||||
| Consumer loans | ||||||||
| Debt securities, taxable | ||||||||
| Debt securities, tax-exempt | ||||||||
| Marketable equity securities | ||||||||
| Other investments | ||||||||
| Short-term investments | ||||||||
| Total interest and dividend income | ||||||||
| Interest expense: | ||||||||
| Deposits | ||||||||
| Short-term borrowings | ||||||||
| Long-term debt | ||||||||
| Subordinated debt | ||||||||
| Total interest expense | ||||||||
| Net interest and dividend income | ||||||||
| Reversal of credit losses | ( | ) | ( | ) | ||||
| Net interest and dividend income after reversal of credit losses | ||||||||
| Non-interest income: | ||||||||
| Service charges and fees | ||||||||
| Income from bank-owned life insurance | ||||||||
| Loss on available-for-sale securities, net | ( | ) | ||||||
| Net unrealized loss on marketable equity securities | ( | ) | ||||||
| Gain on sale of mortgages | ||||||||
| Gain on non-marketable equity investments | ||||||||
| Other income | ||||||||
| Total non-interest income | ||||||||
| Non-interest expense: | ||||||||
| Salaries and employees benefits | ||||||||
| Occupancy | ||||||||
| Furniture and equipment | ||||||||
| Data processing | ||||||||
| Professional fees | ||||||||
| FDIC insurance assessment | ||||||||
| Advertising | ||||||||
| Other expenses | ||||||||
| Total non-interest expense | ||||||||
| Income before income taxes | ||||||||
| Income tax provision | ||||||||
| Net income | $ | $ | ||||||
| Earnings per common share: | ||||||||
| Basic earnings per share | $ | $ | ||||||
| Weighted average shares outstanding | ||||||||
| Diluted earnings per share | $ | $ | ||||||
| Weighted average diluted shares outstanding | ||||||||
| Dividends per share | $ | $ | ||||||
See accompanying notes to unaudited consolidated financial statements.
2
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) – UNAUDITED
(Dollars in thousands)
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net income | $ | $ | ||||||
| Other comprehensive income (loss): | ||||||||
| Unrealized gain (loss) on available-for-sale securities: | ||||||||
| Unrealized holding gain (loss) | ( | ) | ||||||
| Reclassification adjustment for net loss realized in income (1) | ||||||||
| Unrealized gain (loss) | ( | ) | ||||||
| Tax effect | ( | ) | ||||||
| Net-of-tax amount | ( | ) | ||||||
| Defined benefit pension plan: | ||||||||
| Amortization of defined benefit plans actuarial loss | ||||||||
| Tax effect | ( | ) | ||||||
| Net-of-tax amount | ||||||||
| Other comprehensive income (loss) | ( | ) | ||||||
| Comprehensive income (loss) | $ | $ | ( | ) | ||||
| (1) |
See accompanying notes to unaudited consolidated financial statements.
3
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED
THREE MONTHS ENDED MARCH 31, 2023 AND 2022
(Dollars in thousands, except per share data)
| Common Stock | ||||||||||||||||||||||||||||||||
| Shares | Par Value | Additional Paid-in Capital | Unearned Compensation- ESOP | Unearned Compensation- Equity Incentive Plan | Retained Earnings | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
| Comprehensive income | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Common stock held by ESOP committed to be released ( shares) | — | |||||||||||||||||||||||||||||||
| Share-based compensation - equity incentive plan | — | |||||||||||||||||||||||||||||||
| Forfeited equity incentive plan shares ( shares) | — | ( | ) | |||||||||||||||||||||||||||||
| Forfeited equity incentive plan shares reissued ( shares) | — | ( | ) | |||||||||||||||||||||||||||||
| Common stock repurchased | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Issuance of common stock in connection with stock option exercises | ||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with equity incentive plan | ( | ) | ||||||||||||||||||||||||||||||
| Cash dividends declared and paid on common stock ($ per share) | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
| BALANCE AT DECEMBER 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
| Cumulative effect accounting adjustment(1) | — | |||||||||||||||||||||||||||||||
| Comprehensive income | — | |||||||||||||||||||||||||||||||
| Common stock held by ESOP committed to be released ( shares) | — | |||||||||||||||||||||||||||||||
| Share-based compensation - equity incentive plan | — | |||||||||||||||||||||||||||||||
| Forfeited equity incentive plan shares reissued in connection with 2020 LTI performance share grant ( shares) | — | ( | ) | |||||||||||||||||||||||||||||
| Common stock repurchased | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Issuance of common stock in connection with equity incentive plan | ( | ) | ||||||||||||||||||||||||||||||
| Forfeited equity incentive plan shares reissued in connection with 2023 LTI grant ( shares) | — | ( | ) | |||||||||||||||||||||||||||||
| Cash dividends declared and paid on common stock ($ per share) | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
| (1) |
See accompanying notes to unaudited consolidated financial statements.
4
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Reversal of credit losses | ( | ) | ( | ) | ||||
| Depreciation and amortization of premises and equipment | ||||||||
| Amortization (accretion) of purchase accounting adjustments, net | ( | ) | ||||||
| Amortization of core deposit intangible | ||||||||
| Net amortization of premiums and discounts on securities and mortgage loans | ||||||||
| Net amortization of deferred costs on mortgage loans | ||||||||
| Net amortization of premiums on subordinated debt | ||||||||
| Share-based compensation expense | ||||||||
| ESOP expense | ||||||||
| Principal balance of loans originated for sale | ( | ) | ||||||
| Principal balance of loans sold | ||||||||
| Net loss on available-for-sale securities | ||||||||
| Net change in unrealized loss on marketable equity securities | ||||||||
| Income from bank-owned life insurance | ( | ) | ( | ) | ||||
| Net change in: | ||||||||
| Accrued interest receivable | ||||||||
| Other assets | ( | ) | ( | ) | ||||
| Other liabilities | ( | ) | ||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of held-to-maturity securities | ( | ) | ||||||
| Proceeds from calls, maturities and principal collections of held-to-maturity securities | ||||||||
| Proceeds from sales and redemption of available-for-sale securities | ||||||||
| Proceeds from calls, maturities, and principal collections of available-for-sale securities | ||||||||
| Loan originations and principal payments, net | ( | ) | ( | ) | ||||
| Purchase of Federal Home Loan Bank of Boston stock | ( | ) | ||||||
| Purchases of premises and equipment | ( | ) | ||||||
| Proceeds from payout on bank-owned life insurance | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Net (decrease) increase in deposits | ( | ) | ||||||
| Net change in short-term borrowings | ||||||||
| Repayment of long-term debt | ( | ) | ||||||
| Proceeds from issuance of long-term debt | ||||||||
| Cash dividends paid on common stock | ( | ) | ( | ) | ||||
| Common stock repurchased | ( | ) | ( | ) | ||||
| Issuance of common stock in connection with stock option exercises | ||||||||
| Net cash provided by financing activities | ||||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS: | ( | ) | ( | ) | ||||
| Beginning of period | ||||||||
| End of period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | $ | ||||||
| Taxes paid | ||||||||
| Net change in cash due to broker for common stock repurchased | ||||||||
See the accompanying notes to unaudited consolidated financial statements.
5
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2023
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation. Western New England Bancorp, Inc. (“Western New England Bancorp,” “WNEB,” “Company,” “we,” or “us”) is a Massachusetts-chartered stock holding company for Westfield Bank, a federally-chartered savings bank (“Bank”).
The
Bank operates
Wholly-owned Subsidiaries. Elm Street Securities Corporation, WFD Securities, Inc. and CSB Colts, Inc., are Massachusetts chartered securities corporations, formed for the primary purpose of holding qualified securities. WB Real Estate Holdings, LLC, is a Massachusetts-chartered limited liability company that holds real property acquired as security for debts previously contracted by the Bank.
Principles of Consolidation. The consolidated financial statements include the accounts of Western New England Bancorp, the Bank, CSB Colts, Inc., Elm Street Securities Corporation, WB Real Estate Holdings, LLC and WFD Securities, Inc. All material intercompany balances and transactions have been eliminated in consolidation.
Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses for each. Actual results could differ from those estimates. An estimate that is particularly susceptible to significant change in the near-term relates to the determination of the allowance for credit losses.
Basis of Presentation. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial condition as of March 31, 2023, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results of operations for the year ending December 31, 2023. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission.
On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13 Financial Instruments - Credit Losses (Topic326): Measurement of Credit Losses on Financial Instruments, which requires the recognition of the allowance for credit losses be estimated using the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases (See Notes 4 and 5 to our unaudited consolidated financial statements for further information).
These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2022, included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”).
Reclassifications. Amounts in the prior period financial statements are reclassified when necessary to conform to the current year presentation.
6
Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. If rights to dividends on unvested awards are non-forfeitable, these unvested awards are considered outstanding in the computation of basic earnings per share. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by us relate to stock options and certain performance-based restricted stock awards and are determined using the treasury stock method. Unallocated Employee Stock Ownership Plan (“ESOP”) shares are not deemed outstanding for earnings per share calculations. There were no anti-dilutive shares outstanding during the three months ended March 31, 2023 and 2022.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| (In thousands, except per share data) | ||||||||
| Net income applicable to common stock | $ | $ | ||||||
| Average number of common shares issued | ||||||||
| Less: Average unallocated ESOP Shares | ( | ) | ( | ) | ||||
| Less: Average unvested equity incentive plan shares | ( | ) | ( | ) | ||||
| Average number of common shares outstanding used to calculate basic earnings per common share | ||||||||
| Effect of dilutive equity incentive plan | ||||||||
| Effect of dilutive stock options | ||||||||
| Average number of common shares outstanding used to calculate diluted earnings per common share | ||||||||
| Basic earnings per share | $ | $ | ||||||
| Diluted earnings per share | $ | $ | ||||||
3. COMPREHENSIVE INCOME (LOSS)
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income (loss).
The components of accumulated other comprehensive loss included in shareholders’ equity are as follows:
| March 31, 2023 | December 31, 2022 | |||||||
| (In thousands) | ||||||||
| Net unrealized losses on available-for-sale securities | $ | ( | ) | $ | ( | ) | ||
| Tax effect | ||||||||
| Net-of-tax amount | ( | ) | ( | ) | ||||
| Unrecognized actuarial loss on the defined benefit plan | ( | ) | ( | ) | ||||
| Tax effect | ||||||||
| Net-of-tax amount | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | $ | ( | ) | $ | ( | ) | ||
7
4. INVESTMENT SECURITIES
Available-for-sale and held-to-maturity investment securities at March 31, 2023 and December 31, 2022 are summarized as follows:
| March 31, 2023 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||
| Debt securities: | ||||||||||||||||
| Government-sponsored enterprise obligations | $ | $ | $ | ( | ) | $ | ||||||||||
| State and municipal bonds | ||||||||||||||||
| Corporate bonds | ( | ) | ||||||||||||||
| Total debt securities | ( | ) | ||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Government-sponsored mortgage-backed securities | ( | ) | ||||||||||||||
| U.S. government guaranteed mortgage-backed securities | ( | ) | ||||||||||||||
| Total mortgage-backed securities | ( | ) | ||||||||||||||
| Total available-for-sale | ( | ) | ||||||||||||||
| Held-to-maturity securities: | ||||||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. Treasury securities | ( | ) | ||||||||||||||
| Total debt securities | ( | ) | ||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Government-sponsored mortgage-backed securities | ( | ) | ||||||||||||||
| Total mortgage-backed securities | ( | ) | ||||||||||||||
| Total held-to-maturity | ( | ) | ||||||||||||||
Total | $ | $ | $ | ( | ) | $ | ||||||||||
8
| December 31, 2022 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||
| Debt securities: | ||||||||||||||||
| Government-sponsored enterprise obligations | $ | $ | $ | ( | ) | $ | ||||||||||
| State and municipal bonds | ||||||||||||||||
| Corporate bonds | ( | ) | ||||||||||||||
| Total debt securities | ( | ) | ||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Government-sponsored mortgage-backed securities | ( | ) | ||||||||||||||
| U.S. government guaranteed mortgage-backed securities | ( | ) | ||||||||||||||
| Total mortgage-backed securities | ( | ) | ||||||||||||||
| Total available-for-sale | ( | ) | ||||||||||||||
| Held-to-maturity securities: | ||||||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. Treasury securities | ( | ) | ||||||||||||||
| Total debt securities | ( | ) | ||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Government-sponsored mortgage-backed securities | ( | ) | ||||||||||||||
| Total mortgage-backed securities | ( | ) | ||||||||||||||
| Total held-to-maturity | ( | ) | ||||||||||||||
Total | $ | $ | $ | ( | ) | $ | ||||||||||
The following table presents the unrealized losses recognized on marketable equity securities for the periods indicated:
Three Months Ended March 31 | ||||||||
| 2023 | 2022 | |||||||
| (In thousands) | ||||||||
| Net losses recognized during the period on marketable equity securities | $ | $ | ( | ) | ||||
| Net losses recognized during the period on equity securities sold during the period | ||||||||
| Unrealized losses recognized during the period on marketable equity securities still held at end of period | $ | $ | ( | ) | ||||
At
March 31, 2023, U.S. Treasury securities with a fair value of $
9
The amortized cost and fair value of available-for-sale and held-to-maturity securities at March 31, 2023, by final maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations.
| Available-for-Sale | Held-to-Maturity | |||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Debt securities: | ||||||||||||||||
| Due in one year or less | $ | $ | $ | $ | ||||||||||||
| Due after one year through five years | ||||||||||||||||
| Due after five years through ten years | ||||||||||||||||
| Due after ten years | ||||||||||||||||
| Total debt securities | ||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Due after one year through five years | ||||||||||||||||
| Due after five years through ten years | ||||||||||||||||
| Due after ten years | ||||||||||||||||
| Total mortgage-backed securities | 152,722 | |||||||||||||||
| Total securities | $ | $ | $ | $ | ||||||||||||
Gross realized gains and losses on sales of available-for-sale securities for the three months ended March 31, 2023 and 2022 are as follows:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| (In thousands) | ||||||||
| Gross gains realized | $ | $ | ||||||
| Gross losses realized | ( | ) | ||||||
| Net loss realized | $ | $ | ( | ) | ||||
Proceeds
from the redemption of available-for-sale securities totaled $
On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities.
10
Allowance for Credit Losses – Available-for-Sale Securities
The
Company measures expected credit losses on available-for-sale debt securities based upon the gain or loss position of the security.
For available-for-sale debt securities in an unrealized loss position which the Company does not intend to sell, and it is not
more likely than not that the Company will be required to sell the security before recovery of the Company’s amortized cost,
the Company evaluates qualitative criteria to determine any expected loss. This includes among other items the financial health
of, and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security.
The Company also evaluates quantitative criteria including determining whether there has been an adverse change in expected future
cash flows of the security. Available-for-sale securities which are guaranteed by government agencies do not currently have an
allowance for credit loss as the Company determined these securities are either backed by the full faith and credit of the U.S.
government and/or there is an unconditional commitment to make interest payments and to return the principal investment in full
to investors when a debt security reaches maturity. In assessing the Company’s investments in government-sponsored and U.S. government
guaranteed mortgage-backed securities and government-sponsored enterprise obligations, the contractual cash flows of these investments
are guaranteed by the respective government-sponsored enterprise; Federal Home Loan Mortgage Corporation (“FHLMC”),
Federal National Mortgage Association (“FNMA”), Federal Farm Credit Bank (“FFCB”), or Federal Home Loan
Bank (“FHLB”). Accordingly, it is expected that the securities would not be settled at a price less than the par value
of the Company’s investments. The Company will evaluate this position no less than annually, however, certain items which may
cause the Company to change this methodology include legislative changes that remove a government-sponsored enterprise’s
ability to draw funds from the U.S. government, or legislative changes to housing policy that reduce or eliminate the U.S. government’s
implicit guarantee on such securities. Accrued interest receivable on available-for-sale securities guaranteed by government agencies
totaled $
Allowance for Credit Losses – Held-to-Maturity Securities
The
Company measures expected credit losses on held-to-maturity debt securities on a collective basis by security type and risk rating
where available. The reserve for each pool is calculated based on a Probability of Default/Loss Given Default basis taking into
consideration the expected life of each security. Held-to-maturity securities which are issued by the United States Treasury or
are guaranteed by government agencies do not currently have an allowance for credit loss as the Company determined these securities
are either backed by the full faith and credit of the U.S. government and/or there is an unconditional commitment to make interest
payments and to return the principal investment in full to investors when a debt security reaches maturity. In assessing the Company’s
investments in government-sponsored and U.S. government guaranteed mortgage-backed securities and government-sponsored enterprise
obligations, the contractual cash flows of these investments are guaranteed by the respective government-sponsored enterprise;
FHLMC, FNMA, FFCB, or FHLB. Accordingly, it is expected that the securities would not be settled at a price less than the par
value of the Company’s investments. The Company will evaluate this position no less than annually, however, certain items which
may cause the Company to change this methodology include legislative changes that remove a government-sponsored enterprise’s
ability to draw funds from the U.S. government, or legislative changes to housing policy that reduce or eliminate the U.S. government’s
implicit guarantee on such securities. Any expected credit losses on held-to-maturity securities would be presented as an allowance
for credit loss. Accrued interest receivable on held-to-maturity securities totaled $
At March 31, 2023 and December 31, 2022, management attributed the unrealized losses to increases in current market yields compared to the yields at the time the investments were purchased by the Company and not due to credit quality. There was no credit loss during the three months ended March 31, 2023 or the year ended December 31, 2022. At March 31, 2023 and December 31, 2022, there was one available-for-sale corporate bond that was below investment grade. The Company reviewed the financial strength of this bond and has concluded that the amortized cost remains supported by the expected future cash flows of the security.
11
Information pertaining to securities with gross unrealized losses as of March 31, 2023 for which the Company did not recognize a provision for credit losses under CECL, and as of December 31, 2022, for which the Company did not deem to be impaired under its prior methodology, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
| March 31, 2023 | ||||||||||||||||||||||||||||||||
| Less Than Twelve Months | Over Twelve Months | |||||||||||||||||||||||||||||||
| Number of Securities | Fair Value | Gross Unrealized Loss | Depreciation from Amortized Cost Basis (%) | Number of Securities | Fair Value | Gross Unrealized Loss | Depreciation from Amortized Cost Basis (%) | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Available-for-sale: | ||||||||||||||||||||||||||||||||
| Government-sponsored mortgage-backed securities | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||
| U.S. government guaranteed mortgage-backed securities | ||||||||||||||||||||||||||||||||
| Government-sponsored enterprise obligations | ||||||||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||||||||
| Total available-for-sale | ||||||||||||||||||||||||||||||||
| Held-to-maturity: | ||||||||||||||||||||||||||||||||
| U.S. Treasury securities | % | % | ||||||||||||||||||||||||||||||
| Government-sponsored mortgage-backed securities | ||||||||||||||||||||||||||||||||
| Total held-to-maturity | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||
| Less Than Twelve Months | Over Twelve Months | |||||||||||||||||||||||||||||||
| Number of Securities | Fair Value | Gross Unrealized Loss | Depreciation from Amortized Cost Basis (%) | Number of Securities | Fair Value | Gross Unrealized Loss | Depreciation from Amortized Cost Basis (%) | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Available-for-sale: | ||||||||||||||||||||||||||||||||
| Government-sponsored mortgage-backed securities | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||
| U.S. government guaranteed mortgage-backed securities | ||||||||||||||||||||||||||||||||
| Government-sponsored enterprise obligations | ||||||||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||||||||
| Total available-for-sale | ||||||||||||||||||||||||||||||||
| Held-to-maturity: | ||||||||||||||||||||||||||||||||
| U.S. Treasury securities | % | % | ||||||||||||||||||||||||||||||
| Government-sponsored mortgage-backed securities | ||||||||||||||||||||||||||||||||
| Total held-to-maturity | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||
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5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Major classifications of loans at the periods indicated were as follows:
March 31, 2023 | December 31, 2022 | |||||||
| (In thousands) | ||||||||
| Commercial real estate | $ | $ | ||||||
Residential real estate: | ||||||||
| Residential one-to-four family | ||||||||
| Home equity | ||||||||
| Total residential real estate | ||||||||
| Commercial and industrial: | ||||||||
| Paycheck Protection Program (“PPP”) loans | ||||||||
| Commercial and industrial | ||||||||
| Total commercial and industrial | ||||||||
| Consumer | ||||||||
| Total gross loans | ||||||||
| Unamortized PPP loan fees | ( | ) | ( | ) | ||||
| Unearned premiums and deferred loan fees and costs, net | ||||||||
| Total loans, net | ||||||||
| Allowance for credit losses(1) | ( | ) | ( | ) | ||||
| Net loans | $ | $ | ||||||
| (1) |
Loans Serviced for Others.
The
Company has transferred a portion of its originated commercial loans to participating lenders. The amounts transferred have been
accounted for as sales and are therefore not included in our accompanying consolidated balance sheets. We continue to service
the loans on behalf of the participating lenders. We share with participating lenders, on a pro-rata basis, any gains or losses
that may result from a borrower’s lack of compliance with contractual terms of the loan. At March 31, 2023 and December
31, 2022, the Company was servicing commercial loans participated out to various other institutions totaling $
Residential
real estate mortgages are originated by the Company both for its portfolio and for sale into the secondary market. The Company
may sell its loans to institutional investors such as the FHLMC. Under loan sale and servicing agreements with the investor, the
Company generally continues to service the residential real estate mortgages. The Company pays the investor an agreed upon rate
on the loan, which is less than the interest rate received from the borrower. The Company retains the difference as a fee for
servicing the residential real estate mortgages. The Company capitalizes mortgage servicing rights at their fair value upon sale
of the related loans, amortizes the asset over the estimated life of the serviced loan, and periodically assesses the asset for
impairment. The significant assumptions used by a third party to estimate the fair value of capitalized servicing rights at March
31, 2023, include weighted average prepayment speed for the portfolio using the Public Securities Association Standard Prepayment
Model (
13
At
March 31, 2023 and December 31, 2022, the Company was servicing residential mortgage loans owned by investors totaling $
A summary of the activity in the balances of mortgage servicing rights follows:
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| (In thousands) | ||||||||
| Balance at the beginning of year: | $ | $ | ||||||
| Capitalized mortgage servicing rights | ||||||||
| Amortization | ( | ) | ( | ) | ||||
| Balance at the end of period | $ | $ | ||||||
| Fair value at the end of period | $ | $ | ||||||
Loans are recorded at the principal amount outstanding, adjusted for charge-offs, unearned premiums and deferred loan fees and costs. Interest on loans is calculated using the effective yield method on daily balances of the principal amount outstanding and is credited to income on the accrual basis to the extent it is deemed collectable. Our general policy is to discontinue the accrual of interest when principal or interest payments are delinquent 90 days or more based on the contractual terms of the loan, or earlier if there are concerns regarding the collectability of the loan. Any unpaid amounts previously accrued on these loans are reversed from income. Subsequent cash receipts are applied to the outstanding principal balance or to interest income if, in the judgment of management, collection of the principal balance is not in question. Loans are returned to accrual status when they become current as to both principal and interest and perform in accordance with contractual terms for a period of at least six months, reducing the concern as to the collectability of principal and interest. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income over the estimated average lives of the related loans.
Effect of New Financial Accounting Standards.
On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic326): Measurement of Credit Losses on Financial Instruments, which requires the recognition of the allowance for credit losses be estimated using the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities that are determined to have impairment related to credit losses.
The
Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance
sheet credit exposures. Results for reporting periods beginning January 1, 2023 are presented under ASC 326 while prior period
amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net increase to retained
earnings of $
14
The following table illustrates the impact of ASC 326:
Pre-ASC 326 Adoption December 31, 2022 | As Reported Under ASC 326 January 1, 2023 | Impact of ASC 326 Adoption | ||||||||||
| (In thousands) | ||||||||||||
| Assets | ||||||||||||
| Loans(1) | $ | $ | $ | |||||||||
| Allowance for credit losses on loans(2) | ( | ) | ( | ) | ( | ) | ||||||
| Deferred tax asset | ( | ) | ||||||||||
| Liabilities | ||||||||||||
| Allowance for credit losses on off-balance sheet exposures | $ | $ | ( | ) | $ | ( | ) | |||||
| Shareholders’ Equity | ||||||||||||
| Retained earnings, net of tax | $ | ( | ) | $ | ( | |||||||