Western New England Bancorp, Inc 10-Q for FY2020 Q2
Western New England Bancorp, Inc. (WNEB)
About this 10-Q
Western New England Bancorp, Inc filed this 10-Q on August 7, 2020, covering the quarter ended June 30, 2020 (FY2020 Q2).
Headline figures
Quarter ended June 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $2.02M
- down 37.9% from net income of $3.26M a year earlier
- Diluted EPS
- $0.08
- down 33.3% from $0.12 a year earlier
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 August 3, 2020 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, 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 Quarterly Report on Form 10-Q 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.
i
PART I – FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS.
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(Dollars in thousands, except share data)
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Federal funds sold | ||||||||
| Interest-bearing deposits and other short-term investments | ||||||||
| Cash and cash equivalents | ||||||||
| Securities available-for-sale, at fair value | ||||||||
| Marketable equity securities, at fair value | ||||||||
| Federal Home Loan Bank stock and other restricted stock, at cost | ||||||||
| Loans, net of allowance for loan 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 | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| SHAREHOLDERS' EQUITY: | ||||||||
| Preferred stock - $ par value, shares authorized, none outstanding at June 30, 2020 and December 31, 2019 | ||||||||
| Common stock - $ par value, shares authorized, shares issued and outstanding at June 30, 2020; shares issued and outstanding at December 31, 2019 | ||||||||
| Additional paid-in capital | ||||||||
| Unearned compensation - ESOP | ( | ) | ( | ) | ||||
| 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 | Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| 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 | ||||||||||||||||
| Long-term debt | ||||||||||||||||
| Short-term borrowings | ||||||||||||||||
| Total interest expense | ||||||||||||||||
| Net interest and dividend income | ||||||||||||||||
| Provision for loan losses | ||||||||||||||||
| Net interest and dividend income after provision for loan losses | ||||||||||||||||
| Non-interest income: | ||||||||||||||||
| Service charges and fees | ||||||||||||||||
| Income from bank-owned life insurance | ||||||||||||||||
| Gain (loss) on available-for-sale securities, net | ( | ) | ( | ) | ||||||||||||
| Unrealized gain on marketable equity securities, net | ||||||||||||||||
| 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 | ||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
2
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED
(Dollars in thousands)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Unrealized gains on available-for-sale securities: | ||||||||||||||||
| Unrealized holding gains | ||||||||||||||||
| Reclassification adjustment for net (gains) losses realized in income (1) | ( | ) | ( | ) | ||||||||||||
| Unrealized gains | ||||||||||||||||
| Tax effect | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net-of-tax amount | ||||||||||||||||
| Cash flow hedges: | ||||||||||||||||
| Change in fair value of derivatives used for cash flow hedges | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Reclassification adjustment for loss realized in interest expense (2) | ||||||||||||||||
| Reclassification adjustment for termination fee realized in interest expense (3) | ||||||||||||||||
| Unrealized gains (losses) on cash flow hedges | ( | ) | ( | ) | ( | ) | ||||||||||
| Tax effect | ( | ) | ||||||||||||||
| Net-of-tax amount | ( | ) | ( | ) | ( | ) | ||||||||||
| Defined benefit pension plan: | ||||||||||||||||
| Amortization of defined benefit plan actuarial loss(4) | ||||||||||||||||
| Tax effect | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net-of-tax amount | ||||||||||||||||
| Other comprehensive income | ||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
(1) | |||||||
(2) | |||||||
(3) | |||||||
(4) | |||||||
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 AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018 |
| (Dollars in thousands, except share data) |
| Common Stock | Unearned | Accumulated | ||||||||||||||||||||||||||||||
| Additional | Unearned | Compensation | Other | |||||||||||||||||||||||||||||
| Par | Paid-in | Compensation | - Equity | Retained | Comprehensive | |||||||||||||||||||||||||||
| Shares | Value | Capital | - ESOP | Incentive Plan | Earnings | Loss | Total | |||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
| Comprehensive income | — | |||||||||||||||||||||||||||||||
| Common stock held by ESOP committed to be released ( shares) | — | |||||||||||||||||||||||||||||||
| Share-based compensation - equity incentive plan | — | |||||||||||||||||||||||||||||||
| Forfeited equity incentive plan shares reissued ( shares) | — | ( | ) | |||||||||||||||||||||||||||||
| Common stock repurchased | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Issuance of common stock in connection with equity incentive plan | ( | ) | ||||||||||||||||||||||||||||||
| Cash dividends declared and paid on common stock ($ per share) | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
| Comprehensive income | — | |||||||||||||||||||||||||||||||
| Common stock held by ESOP committed to be released ( shares) | — | ( | ) | |||||||||||||||||||||||||||||
| Share-based compensation - equity incentive plan | — | |||||||||||||||||||||||||||||||
| Cash dividends declared and paid on common stock ($ per share) | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
| BALANCE AT JUNE 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
4
| WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED |
| THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019 |
| (Dollars in thousands, except share data) |
| Common Stock | Unearned | Accumulated | ||||||||||||||||||||||||||||||
| Additional | Unearned | Compensation | Other | |||||||||||||||||||||||||||||
| Par | Paid-in | Compensation | - Equity | Retained | Comprehensive | |||||||||||||||||||||||||||
| Shares | Value | Capital | - ESOP | Incentive Plan | Earnings | Loss | Total | |||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
| Comprehensive income | — | |||||||||||||||||||||||||||||||
| Cumulative-effect adjustment due to change in accounting principle (ASU 2017-08) | ( | ) | ||||||||||||||||||||||||||||||
| Common stock held by ESOP committed to be released ( shares) | — | |||||||||||||||||||||||||||||||
| Share-based compensation - equity incentive plan | — | ( | ) | |||||||||||||||||||||||||||||
| 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, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
| Comprehensive income | — | |||||||||||||||||||||||||||||||
| Common stock held by ESOP committed to be released ( shares) | — | |||||||||||||||||||||||||||||||
| Share-based compensation - equity incentive plan | — | |||||||||||||||||||||||||||||||
| Common stock repurchased | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Cash dividends declared and paid on common stock ($ per share) | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
| BALANCE AT JUNE 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
| See accompanying notes to unaudited consolidated financial statements. |
5
WESTERN
NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)
| Six Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Provision for loan losses | ||||||||
| Depreciation and amortization of premises and equipment | ||||||||
| (Accretion) amortization of purchase accounting adjustments, net | ( | ) | ||||||
| Amortization of core deposit intangible | ||||||||
| Net amortization of premiums and discounts on securities and mortgage loans | ||||||||
| Share-based compensation expense | ||||||||
| ESOP expense | ||||||||
| Net change in unrealized gains on marketable equity securities | ( | ) | ( | ) | ||||
| Net (gain) loss on available-for-sale securities | ( | ) | ||||||
| Income from bank-owned life insurance | ( | ) | ( | ) | ||||
| Net change in: | ||||||||
| Accrued interest receivable | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Other liabilities | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
INVESTING ACTIVITIES: | ||||||||
| Securities, available for sale: | ||||||||
| Purchases | ( | ) | ( | ) | ||||
| Proceeds from redemptions and sales | ||||||||
| Proceeds from calls, maturities, and principal collections | ||||||||
| Loan originations and principal payments, net | ( | ) | ( | ) | ||||
| Redemption of Federal Home Loan Bank of Boston stock | ||||||||
| Purchases of premises and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of premises and equipment | ||||||||
| Net cash (used in) provided by investing activities | ( | ) | ||||||
FINANCING ACTIVITIES: | ||||||||
| Net increase in deposits | ||||||||
| Net change in short-term borrowings | ( | ) | ||||||
| Repayment of long-term debt | ( | ) | ( | ) | ||||
| Proceeds from long-term debt | ||||||||
| Cash dividends paid | ( | ) | ( | ) | ||||
| Common stock repurchased | ( | ) | ( | ) | ||||
| Issuance of common stock in connection with stock option exercises | ||||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS: | ( | ) | ||||||
| Beginning of period | ||||||||
| End of period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Net change in cash due to broker for common stock repurchased | $ | $ | ( | ) | ||||
| Interest paid | ||||||||
| Taxes paid | ||||||||
See the accompanying notes to unaudited consolidated financial statements.
6
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2020
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’s deposits are insured up
to the maximum Federal Deposit Insurance Corporation (“FDIC”) coverage limits. The Bank operates
Wholly-owned Subsidiaries of the Bank. 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. Estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the realizability of deferred tax assets.
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 June 30, 2020, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results of operations for the year ending December 31, 2020. 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.
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, 2019, included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”).
Reclassifications. Amounts in the prior period financial statements are reclassified when necessary to conform to the current year presentation.
7
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 ESOP shares are not deemed outstanding for earnings per share calculations.
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (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 | $ | $ | $ | $ | ||||||||||||
| Anti-dilutive shares (1) | — | — | ||||||||||||||
| (1) |
8
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:
June 30, 2020 | December 31, 2019 | |||||||
| (In thousands) | ||||||||
| Net unrealized gains (losses) on securities available-for-sale | $ | $ | ( | ) | ||||
| Tax effect | ( | ) | ||||||
| Net-of-tax amount | ( | ) | ||||||
| Fair value of derivatives used for cash flow hedges | ( | ) | ( | ) | ||||
| Termination fee on cancelled cash flow hedges | ( | ) | ( | ) | ||||
| Total derivatives | ( | ) | ( | ) | ||||
| Tax effect | ||||||||
| Net-of-tax amount | ( | ) | ( | ) | ||||
| Unrecognized actuarial loss on the defined benefit plan | ( | ) | ( | ) | ||||
| Tax effect | ||||||||
| Net-of-tax amount | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | $ | ( | ) | $ | ( | ) | ||
The following table presents changes in accumulated other comprehensive loss for the periods ended June 30, 2020 and 2019 by component:
| Securities | Derivatives | Defined Benefit Plan | Accumulated Other Comprehensive Loss | |||||||||||||
| (In thousands) | ||||||||||||||||
| Balance at December 31, 2018 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Cumulative-effect adjustment due to change in accounting principle (ASU 2017-08) | — | — | ||||||||||||||
| Current-period other comprehensive (loss) income | ( | ) | ||||||||||||||
| Balance at June 30, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Balance at December 31, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Current-period other comprehensive (loss) income | ( | ) | ||||||||||||||
| Balance at June 30, 2020 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
9
4. SECURITIES
Available-for-sale securities are summarized as follows:
| June 30, 2020 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||
| Debt securities: | ||||||||||||||||
| 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 | $ | $ | $ | ( | ) | $ | ||||||||||
| December 31, 2019 | ||||||||||||||||
| 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 | $ | $ | $ | ( | ) | $ | ||||||||||
At June 30, 2020, mortgage-backed securities
with a fair value $
In 2019, the Company adopted Financial
Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2017-08, Receivables –
Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which
amends the guidance on the amortization period of premiums on certain purchased callable debt securities from maturity to the earliest
call date. The cumulative-effect adjustment resulting from the adoption of this ASU was to decrease retained earnings and reduce
accumulated other comprehensive loss as of January 1, 2019 by $
10
The amortized cost and fair value of available-for-sale debt securities at June 30, 2020, by final maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations. Also, because mortgage-backed securities require periodic principal paydowns, they are not included in the maturity categories in the following maturity summary.
| June 30, 2020 | ||||||||
| Amortized Cost | Fair Value | |||||||
| (In thousands) | ||||||||
| Available-for-sale securities: | ||||||||
| Debt securities: | ||||||||
| Due after one year through five years | $ | $ | ||||||
| Due after five years through ten years | ||||||||
| Due after ten years | ||||||||
| Total debt securities | ||||||||
| Mortgage-backed securities | ||||||||
| Total available-for-sale securities | $ | $ | ||||||
Gross realized gains and losses on sales of available-for-sale securities for the three and six months ended June 30, 2020 and 2019 are as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Gross gains realized | $ | $ | $ | $ | ||||||||||||
| Gross losses realized | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss realized | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
Proceeds from the sale and redemption of
available-for-sale securities amounted to $
Information pertaining to securities with gross unrealized losses at June 30, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:
| June 30, 2020 | ||||||||||||||||
| Less Than 12 Months | Over 12 Months | |||||||||||||||
| Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Available-for-sale: | ||||||||||||||||
| Corporate bonds | $ | $ | $ | — | $ | — | ||||||||||
| Government sponsored mortgage backed securities | ||||||||||||||||
| U.S. government guaranteed mortgage-backed securities | ||||||||||||||||
| Total available-for-sale | $ | $ | $ | $ | ||||||||||||
11
| December 31, 2019 | ||||||||||||||||
| Less Than 12 Months | Over 12 Months | |||||||||||||||
| Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Available-for-sale: | ||||||||||||||||
| Government-sponsored mortgage-backed securities | $ | $ | $ | $ | ||||||||||||
| U.S. government guaranteed mortgage-backed securities | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Government-sponsored enterprise obligations | ||||||||||||||||
| Total available-for-sale | $ | $ | $ | $ | ||||||||||||
During the six months ended June 30, 2020 and year ended December 31, 2019, the Company did not record any fair value impairment charges on its investments. Management regularly reviews the portfolio for securities with unrealized losses. At June 30, 2020, management did not consider any debt securities to have other-than-temporary impairment (“OTTI”) and attributes 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.
The process for assessing investments for OTTI may vary depending on the type of security. In assessing the Company's investments in government-sponsored mortgage-backed securities and 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. Management's assessment of other debt securities within the portfolio includes reviews of market pricing, ongoing credit quality evaluations, assessment of the investments' materiality, and duration of the investments' unrealized loss position.
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans at the periods indicated were as follows:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| (In thousands) | ||||||||
| Commercial real estate | $ | $ | ||||||
| Residential real estate: | ||||||||
| Residential 1-4 family | ||||||||
| Home equity | ||||||||
| Commercial and industrial | ||||||||
| Paycheck protection program (“PPP”) loans | — | |||||||
| Commercial and industrial | ||||||||
| Consumer | ||||||||
| Total gross loans | ||||||||
| Unamortized PPP loan fees | ( | ) | — | |||||
| Unearned premiums and deferred loan fees and costs, net | ||||||||
| Allowance for loan losses | ( | ) | ( | ) | ||||
| Net loans | $ | $ | ||||||
There were no purchases of loans during the six months ended June 30, 2020 and year ended December 31, 2019.
12
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 June 30, 2020 and December 31, 2019, the Company was servicing commercial loans participated
out to various other institutions totaling $
Residential real estate mortgages are originated
by the Bank both for its portfolio and for sale into the secondary market. The Bank may sell its loans to institutional investors
such as the FHLMC. Under loan sale and servicing agreements with the investor, the Bank generally continues to service the residential
real estate mortgages. The Bank pays the investor an agreed upon rate on the loan, which is less than the interest rate received
from the borrower. The Bank retains the difference as a fee for servicing the residential real estate mortgages. The Bank 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 June 30, 2020, include weighted average prepayment speed for the portfolio using
the Public Securities Association Standard Prepayment Model (
At June 30, 2020 and December 31, 2019,
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 | Six
Months Ended | |||||||
| (In thousands) | ||||||||
| Balance at the beginning of period: | $ | $ | ||||||
| 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 the loan is considered impaired. 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.
13
The allowance for loan losses is established through provisions for loan losses charged to expense. Loans are charged-off against the allowance when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated, and unallocated components, as further described below.
General component
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate (includes one-to-four family and home equity), commercial real estate, commercial and industrial, and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: trends in delinquencies and nonperforming loans; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; and national and local economic trends and industry conditions. The recent COVID-19 pandemic has put significant pressure on the local business community and increased unemployment. On March 23, 2020, the Governor of Massachusetts issued an emergency order requiring all businesses and organizations that do not provide COVID-19 essential services to close their physical workplaces and facilities to workers, customers and the public from March 24, 2020 until April 7, 2020, which was subsequently extended to May 18, 2020. Because of the mandated shutdowns, near the end of March 2020, a record number of individuals filed for unemployment benefits. Sectors that have been materially impacted include, but are not limited to: hospitality, retail, restaurant and food service, and fuel services. Beginning in March 2020, the Bank added a new qualitative factor category to the allowance calculation – “Economic Impact of COVID-19”. The allocation of additional reserves for the COVID-19 qualitative factor at June 30, 2020 was based upon an analysis of the loan portfolio that included identifying borrowers sensitive to the shutdown (i.e. accommodation and food service, recreation, construction, manufacturing, and wholesale & retail trade) as well as a general allocation for the negative economic outlook given the record number of unemployment benefits claims during the period. Excluding the COVID-19 qualitative factor category, there were no additional changes in our policies or methodology pertaining to the general component of the allowance for loan losses during the periods presented for disclosure.
The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:
Residential real estate. We require
private mortgage insurance for all loans originated with a loan-to-value ratio greater than
Commercial real estate. Loans in this segment are primarily income-producing investment properties and owner-occupied commercial properties throughout New England. The underlying cash flows generated by the properties or operations can be adversely impacted by a downturn in the economy due to increased vacancy rates or diminished cash flows, which in turn, would have an effect on the credit quality in this segment. Management obtains financial information annually and continually monitors the cash flows of these loans.
Commercial and industrial loans. Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.
Consumer loans. Loans in this segment are secured or unsecured and repayment is dependent on the credit quality of the individual borrower.
14
Allocated component
The allocated component relates to loans that are classified as impaired. Impaired loans are identified by analysis of loan performance, internal credit ratings and watch list loans that management believes are subject to a higher risk of loss. 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. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The extent to which COVID-19 impacts our borrower’s ability to repay and therefore the classification of a loan as impaired is highly uncertain and cannot be predicted with confidence as it is highly dependent upon the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures.
Unallocated component
An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance, if any, reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.
15
An analysis of changes in the allowance for loan losses by segment for the six months ended June 30, 2020 and 2019 is as follows:
| Commercial Real Estate | Residential Real Estate | Commercial and Industrial | Consumer | Unallocated | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||
| Balance at March 31, 2019 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Provision (credit) | ( | ) | ( | ) | ||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | — | ( | ) | |||||||||||||
| Recoveries | — | |||||||||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Provision (credit) | ( | ) | ( | ) | ||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | — | ( | ) | |||||||||||||
| Recoveries | — | — | ||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Six Months Ended | ||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Provision (credit) | ( | ) | ||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | — | ( | ) | |||||||||||||
| Recoveries | — | |||||||||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Provision (credit) | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | — | ( | ) | |||||||||||||
| Recoveries | — | — | ||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
16
The following table presents information pertaining to the allowance for loan losses by segment for the dates indicated:
| Commercial Real Estate | Residential Real Estate | Commercial and Industrial | Consumer | Unallocated | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| June 30, 2020 | ||||||||||||||||||||||||
| Amount of allowance for impaired loans | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
| Amount of allowance for non-impaired loans | ||||||||||||||||||||||||
| Total allowance for loan losses | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Impaired loans | $ | $ | $ | $ | $ | — | $ | |||||||||||||||||
| Non-impaired loans | — | |||||||||||||||||||||||
| Impaired loans acquired with deteriorated credit quality | — | — | ||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | — | $ | |||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||
| Amount of allowance for impaired loans | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
| Amount of allowance for non-impaired loans | ( | ) | ||||||||||||||||||||||
| Total allowance for loan losses | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Impaired loans | $ | $ | $ | $ | $ | — | $ | |||||||||||||||||
| Non-impaired loans | — | |||||||||||||||||||||||
| Impaired loans acquired with deteriorated credit quality | — | — | ||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | — | $ | |||||||||||||||||
17
Past Due and Non-accrual Loans.
The following tables present an age analysis of past due loans, excluding PPP loans, as of the dates indicated:
| 30 – 59 Days Past Due | 60 – 89 Days Past Due | 90 Days or More Past Due | Total Past
Due | Total Current
| Total Loans | Non-Accrual Loans | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
| June 30, 2020 | ||||||||||||||||||||||||||||
| Commercial real estate | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||
| Consumer | — | |||||||||||||||||||||||||||
Total loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||
| Commercial real estate | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||
| Consumer | — | |||||||||||||||||||||||||||
Total loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Impaired Loans.
The following is a summary of impaired loans by class:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| At June 30, 2020 | June 30, 2020 | June 30, 2020 | ||||||||||||||||||||||
| Recorded Investment | Unpaid Principal Balance | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Impaired Loans(1): | ||||||||||||||||||||||||
| Commercial real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||
| Home equity | — | |||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||
| Consumer | — | — | ||||||||||||||||||||||
| Total impaired loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
18
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| At December 31, 2019 | June 30, 2019 | June 30, 2019 | ||||||||||||||||||||||
| Recorded Investment | Unpaid Principal Balance | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Impaired Loans(1): | ||||||||||||||||||||||||
| Commercial real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||
| Home equity | — | — | ||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||
| Consumer | — | — | ||||||||||||||||||||||
| Total impaired loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (1) |
The majority of impaired loans are included within the non-accrual balances; however, not every loan on non-accrual status has been designated as impaired. Impaired loans include loans that have been modified in a troubled debt restructuring (“TDR”). Impaired loans are individually evaluated and exclude large groups of smaller-balance homogeneous loans, such as residential mortgage loans and consumer loans, which are collectively evaluated for impairment, and loans that are measured at fair value, unless the loan is amended in a TDR.
All payments received on impaired loans
in non-accrual status are applied to principal. There was no interest income recognized on non-accrual impaired loans during the
three and six months ended June 30, 2020 and 2019. The Company's obligation to fulfill the additional funding commitments on impaired
loans is generally contingent on the borrower's compliance with the terms of the credit agreement. If the borrower is not in compliance,
additional funding commitments may or may not be made at the Company's discretion. As of June 30, 2020, we loaned an additional
$
Troubled Debt Restructurings.
Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan as a result of financial difficulties of the borrower, the Bank grants the borrower a concession on the terms, that would not otherwise be considered. Typically, such concessions may consist of a reduction in interest rate to a below market rate, taking into account the credit quality of the note, extension of additional credit based on receipt of adequate collateral, or a deferment or reduction of payments (principal or interest) which materially alters the Bank's position or significantly extends the note's maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan's origination. All loans that are modified are reviewed by the Company to identify if a TDR has occurred. All TDR loans are classified as impaired.
When we modify loans in a TDR, we measure impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a specific allowance or a charge-off to the allowance. Non-performing TDRs are included in non-performing loans.
19
Loans modifications classified as TDRs during the three and six months ended June 30, 2020 and 2019 are included in the table below.
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| June 30, 2020 | June 30, 2020 | |||||||||||||||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | |||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||
| Troubled Debt Restructurings | ||||||||||||||||||||||||
| Commercial Real Estate | $ | $ | $ | $ | ||||||||||||||||||||
| Commercial and Industrial | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| June 30, 2019 | June 30, 2019 | |||||||||||||||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | |||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||
| Troubled Debt Restructurings | ||||||||||||||||||||||||
| Commercial Real Estate | $ | $ | $ | $ | ||||||||||||||||||||
| Commercial and Industrial | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||
During the three and six months ended June 30, 2020 and 2019,
20
Loans Acquired with Deteriorated Credit Quality.
The following is a summary of loans acquired in the Chicopee Bancorp, Inc. (“Chicopee”) acquisition with evidence of credit deterioration as of June 30, 2020 and 2019.
| Contractual Required Payments Receivable | Cash Expected To Be Collected | Non- Accretable Discount | Accretable Yield | Loans Receivable | |||||||||||||||||
| (In thousands) | |||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | $ | ||||||||||||||||
| Collections | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
| Dispositions | ( | ) | ( | ) | — | ( | ) | — | |||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | $ | ||||||||||||||||
| Contractual Required Payments Receivable | Cash Expected To Be Collected | Non- Accretable Discount | Accretable Yield | Loans Receivable | |||||||||||||||||
| (In thousands) | |||||||||||||||||||||
| Balance at December 31, 2018 | $ | $ | $ | $ | $ | ||||||||||||||||
| Collections | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
| Dispositions | ( | ) | ( | ) | — | ( | ) | — | |||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | $ | $ | ||||||||||||||||
Credit Quality Information.
The Company utilizes an eight-grade internal loan rating system for commercial real estate and commercial and industrial loans. Performing residential real estate, home equity and consumer loans are grouped with “Pass” rated loans. Non-performing residential real estate, home equity and consumer loans are monitored individually for impairment and risk rated as “substandard.”
Loans rated 1 – 4: Loans rated 1-4 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent acceptable risk.
Loans rated 5: Loans rated 5 are considered “Special Mention” and may exhibit potential credit weaknesses or downward trends and are being monitored by management. Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification.
Loans rated 6: Loans rated 6 are considered “Substandard.” A loan is classified as substandard if the borrower exhibits a well-defined weakness and may be inadequately protected by the current net worth and cash flow capacity to pay the current debt.
Loans rated 7: Loans rated 7 are considered “Doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation of the loan highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.
Loans rated 8: Loans rated 8 are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be affected in the future.
21
On an annual basis, or more often if needed, we formally review the ratings on all commercial real estate and commercial and industrial loans. In addition, management utilizes delinquency reports, the criticized report and other loan reports to monitor credit quality. In addition, at least on an annual basis, 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 its review, the third party examines a sample of loans, including new loans, existing relationships over certain dollar amounts and classified assets.
The following table presents our loans by risk rating for the periods indicated:
| Commercial Real Estate | Residential 1-4 Family | Home Equity | Commercial and Industrial | Consumer | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| June 30, 2020 | ||||||||||||||||||||||||
| Pass (Rated 1 – 4) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Special Mention (Rated 5) | — | — | — | |||||||||||||||||||||
| Substandard (Rated 6) | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||
| Pass (Rated 1 – 4) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Special Mention (Rated 5) | — | — | — | |||||||||||||||||||||
| Substandard (Rated 6) | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
6. GOODWILL AND OTHER INTANGIBLES
Goodwill.
At June 30, 2019 and December 31, 2018,
the Company’s goodwill was related to the acquisition of Chicopee in October 2016. There was
Core Deposit Intangibles.
In connection with the acquisition of
Chicopee, the Bank recorded a core deposit intangible of $
Stock Options.
A summary of stock option activity for the six months ended June 30, 2020 is presented below:
| Shares | Weighted Average Exercise Price | Weighted (in years) | Aggregate (in thousands) | ||||||||||||||
| Outstanding at December 31, 2019 | $ | $ | |||||||||||||||
| Exercised | — | — | — | — | |||||||||||||
| Outstanding at June 30, 2020 | $ | $ | — | ||||||||||||||
| Exercisable at June 30, 2020 | $ | $ | — | ||||||||||||||
22
Cash received for options exercised during the six months ended June 30, 2019 was $. There were no options exercised during the six months ended June 30, 2020.
Restricted Stock Awards.
In May 2014, the Company’s shareholders approved a stock-based compensation plan (the “RSA Plan”). Under the RSA Plan, up to shares of the Company’s common stock were reserved for grants of stock awards, including stock options and restricted stock, which may be granted to any officer, key employee or non-employee director of WNEB. Any shares that are not issued because vesting requirements are not met, will be available for future issuance under the RSA Plan.
In January 2015, there were shares granted under the RSA Plan. These shares vest ratably over . The fair market value of shares awarded are based on the market price at the grant date and recorded as unearned compensation. The shares are amortized over the applicable vesting period, with the final tranche of shares vesting in January of 2020.
On an annual basis, the Compensation Committee (the “Committee”) approves long-term incentive awards out of the RSA Plan, whereby shares will be granted to eligible participants of the Company that are nominated by the Chief Executive Officer and approved by the Committee, with vesting over a term for employees and a term for directors. Annual employee grants provide for a periodic award that is both performance and time-based and is designed to recognize the executive’s responsibilities, reward performance and leadership and as a retention tool. The objective of the award is to align compensation for the named executive officers and directors over a multi-year period directly with the interests of our shareholders by motivating and rewarding creation and preservation of long-term financial strength, shareholder value and relative shareholder return.
In May 2017, there were shares granted. Of the 89,042 shares, shares are time-based, with vesting in and vesting ratably over a period. The remaining shares granted were performance-based and are subject to the achievement of the 2017 performance metric. Vesting is realized after a three-year period. The primary performance metric for 2017 grants was return on equity. Performance-based shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period, but will be distributed at the end of the period. Eligible participants will be able to earn between % (“threshold” performance), % (“target” performance) and % (“maximum” performance).
As a result of the Tax Cuts and Jobs Act of 2017, the return on equity performance metrics were adjusted to incorporate the impact and benefits of the corporate tax rate reductions thereunder.
The original and adjusted threshold, target and maximum metrics for 2019 under the 2017 grant are as follows:
| Return on Equity Metrics | |||||||||||||||||||||||
| Performance Period Ending | Original Threshold | Adjusted Threshold | Original Target | Adjusted Target | Original Maximum | Adjusted Maximum | |||||||||||||||||
| December 31, 2019 | % | % | % | % | % | % | |||||||||||||||||
As of December 31, 2019, the three-year performance period for the 2017 grants ended. Performance-based shares were earned based on the Company achieving the annual 2017 performance metrics adjusted threshold, target or maximum metrics at the end of each year of the three-year performance period. Of the original 33,883 performance-based shares granted in 2017, performance-based shares vested and were issued to eligible recipients, while shares were forfeited in February of 2020. Shares forfeited become available for reissuance under future grants.
In January 2018, there were shares granted. Of the shares, shares were time-based, with vesting in and vesting ratably over a period. The remaining shares granted are performance-based and are subject to the achievement of the 2018 performance metric. The primary performance metric for 2018 grants was return on equity. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period, but will be distributed at the end of the period.
23
The threshold, target and stretch metrics under the 2018 grant are as follows:
| Return on Equity Metrics | |||||||||||||
| Performance Period Ending | Threshold | Target | Stretch | ||||||||||
| December 31, 2019 | % | % | % | ||||||||||
| December 31, 2020 | % | % | % | ||||||||||
Eligible participants will be able to earn between % (“threshold” performance), % (“target” performance) and % (“maximum” performance).
In February 2019, there were shares granted. Of the shares, shares were time-based, with vesting in and vesting ratably over a period. The remaining shares granted are performance-based and are subject to the achievement of the 2019 long-term incentive performance metric. The primary performance metric for 2019 grants was return on equity. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period, but will be distributed at the end of the period.
The threshold, target and stretch metrics under the 2019 grants are as follows:
| Return on Equity Metrics | |||||||||||||
| Performance Period Ending | Threshold | Target | Stretch | ||||||||||
| December 31, 2019 | % | % | % | ||||||||||
| December 31, 2020 | % | % | % | ||||||||||
| December 31, 2021 | % | % | % | ||||||||||
Eligible participants will be able to earn between % (“threshold” performance), % (“target” performance) and % (“maximum” performance).
In February 2020, there were shares granted. Of the shares, shares were time-based, with vesting in and vesting ratably over a three-year period. The remaining shares granted are performance-based and are subject to the achievement of the 2020 long-term incentive performance metrics, with 50% of the performance-shares vesting for each performance metric. The primary performance metrics for the 2020 grants were return on equity and earnings per share. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period for return on equity metrics and for a cumulative performance period for earnings per share, but will be distributed at the end of the period as earned. The threshold, target and stretch metrics under the 2020 grants are as follows:
| Return on Equity Metrics | |||||||||||||
| Performance Period Ending | Threshold | Target | Stretch | ||||||||||
| December 31, 2020 | % | % | % | ||||||||||
| December 31, 2021 | % | % | % | ||||||||||
| December 31, 2022 | % | % | % | ||||||||||
| Earnings Per Share Metrics | ||||||||||||
| Performance Period Ending | Threshold | Target | Stretch | |||||||||
| Three-year Cumulative Diluted Earnings Per Share | $ | $ | $ | |||||||||
24
Eligible participants will be able to earn between % (“threshold” performance), % (“target” performance) and % (“maximum” performance).
The fair market value of shares awarded is based on the market price at the grant date, recorded as unearned compensation and amortized over the applicable vesting period. Performance-based metrics are monitored on a quarterly basis in order to compare actual results to the performance metric, with any necessary adjustments being recognized through share-based compensation expense and unearned compensation.
At June 30, 2020, there were an additional shares available for future grants under the RSA Plan.
A summary of the status of restricted stock awards at June 30, 2020 and 2019 is presented below:
| Shares | Weighted Average Grant Date Fair Value | ||||||||
| Balance at December 31, 2019 | $ | ||||||||
| Shares granted | |||||||||
| Shares forfeited | ( | ) | |||||||
| Shares vested | ( | ) | |||||||
| Shares reissued | |||||||||
| Balance at June 30, 2020 | $ | ||||||||
| Shares | Weighted Average Grant Date Fair Value | ||||||||
| Balance at December 31, 2018 | $ | ||||||||
| Shares granted | |||||||||
| Shares vested | ( | ) | |||||||
| Balance at June 30, 2019 | $ | ||||||||
We recorded total expense for restricted stock awards of $ and $ for the six months ended June 30, 2020 and 2019, respectively.
8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
As a member of the FHLB, the Bank has the potential capacity to borrow an amount up to the value of its discounted qualified collateral. Borrowings from the FHLB are secured by certain securities from the Company’s investment portfolio not otherwise pledged as well as certain residential real estate and commercial real estate loans. Borrowings from the Federal Reserve Bank (“FRB”) Discount Window are secured by certain securities from the Company’s investment portfolio not otherwise pledged.
FHLB advances with an original maturity
of less than one year totaled $
In addition, at June 30, 2020 and December
31, 2019, the Company had an available Ideal Way line of credit with the FHLB for up to $
The Bank also had a line of credit in the
amount up to $
25
At June 30, 2020, we had $
9. PENSION BENEFITS
We provide a defined benefit pension plan
for eligible employees (the “Plan”). Employees must work a minimum of
The following table provides information regarding net pension benefit costs for the periods shown:
| Three Months Ended | Six Months Ended, | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||
| Interest cost | ||||||||||||||||
| Expected return on assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization of actuarial loss | ||||||||||||||||
| Net periodic pension cost | $ | $ | $ | $ | ||||||||||||
10. DERIVATIVES AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives.
The Company is exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of our assets and liabilities and the use of derivative financial instruments. Specifically, we entered into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally related to certain variable rate loan assets and variable rate borrowings.
The following table presents information about interest rate swaps at June 30, 2020 and December 31, 2019:
| June 30, 2020 | Notional | Weighted Average | Weighted Average Rate | Estimated Fair | ||||||||||||||||
| Amount | Maturity | Receive | Pay | Value | ||||||||||||||||
| (In thousands) | (In years) | (In thousands) | ||||||||||||||||||
| Cash flow hedges: | ||||||||||||||||||||
| Interest rate swaps on FHLB borrowings | $ | % | % | $ | ( | ) | ||||||||||||||
| Non-hedging derivatives: | ||||||||||||||||||||
| Loan-level swaps – dealer | % | % | ( | ) | ||||||||||||||||
| Loan-level swaps – borrower | % | % | ||||||||||||||||||
| Total | $ | $ | ( | ) | ||||||||||||||||
26
| December 31, 2019 | Notional | Weighted Average | Weighted Average Rate | Estimated Fair | ||||||||||||||||
| Amount | Maturity | Receive | Pay | Value | ||||||||||||||||
| (In thousands) | (In years) | (In thousands) | ||||||||||||||||||
| Cash flow hedges: | ||||||||||||||||||||
| Interest rate swaps on FHLB borrowings | $ | % | % | $ | ( | ) | ||||||||||||||
| Non-hedging derivatives: | ||||||||||||||||||||
| Loan-level swaps – dealer | % | % | ( | ) | ||||||||||||||||
| Loan-level swaps – borrower | % | % | ||||||||||||||||||
| Total | $ | $ | ( | ) | ||||||||||||||||
At June 30, 2020, the Company had $
Cash Flow Hedges of Interest Rate Risk.
The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish these objectives, we entered into interest rate swaps as part of our interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for our making fixed payments.
For derivatives designated as cash flow hedges, the changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings. We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of six years (excluding forecasted payment of variable interest on existing financial instruments).
Non-hedging Derivatives.
Derivatives not designated as hedges are not speculative, but rather result from a service the Company provides to certain customers. The Company executes loan-level derivative products such as interest-rate swap agreements with commercial banking customers to aid them in managing their interest-rate risk by converting floating-rate loan payments to fixed-rate loan payments. The Company concurrently enters into offsetting swaps with a third-party financial institution, effectively minimizing the Company’s net risk exposure resulting from such transactions. The third-party financial institution exchanges the customer's fixed-rate loan payments for floating-rate loan payments. As the interest-rate swap agreements associated with this program do not meet hedge accounting requirements, changes in the fair value are recognized directly in earnings.
Fair Values of Derivative Instruments on the Balance Sheet.
The table below presents the fair value of our derivative financial instruments designated as hedging and non-hedging instruments as well as our classification on the balance sheet as of June 30, 2020 and December 31, 2019.
| June 30, 2020 | Asset Derivatives | Liability Derivatives | ||||||||||
| Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||
| (In thousands) | ||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||
| Interest rate swaps – cash flow hedge | Other Assets | $ | — | Other Liabilities | $ | |||||||
| Total derivatives designated as hedging instruments | $ | — | $ | |||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||
| Interest rate swap – with customers | Other Assets | $ | $ | — | ||||||||
| Interest rate swap – with counterparties | — | Other Liabilities | ||||||||||
| Total derivatives not designated as hedging instruments | $ | $ | ||||||||||
27
| December 31, 2019 | Asset Derivatives | Liability Derivatives | ||||||||||
| Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||
| (In thousands) | ||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||
| Interest rate swaps – cash flow hedge | Other Assets | $ | — | Other Liabilities | $ | |||||||
| Total derivatives designated as hedging instruments | $ | — | $ | |||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||
| Interest rate swap – with customers | Other Assets | $ | $ | — | ||||||||
| Interest rate swap – with counterparties | — | Other Liabilities | ||||||||||
| Total derivatives not designated as hedging instruments | $ | $ | ||||||||||
Effect of Derivative Instruments in the Consolidated Statements of Net Income and Changes in Shareholders’ Equity.
The table below presents the pre-tax net losses of our cash flow hedges for the periods indicated:
| Amount of Gain (Loss) Recognized in OCI on Derivative | ||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Interest rate swaps | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Amounts reported in accumulated other comprehensive loss related to these derivatives are reclassified to interest expense as interest payments are made on our designated rate sensitive liabilities. The table below presents the amount reclassified from accumulated other comprehensive loss into net income for interest rate swaps and termination fees:
| Amount of Loss Reclassified from OCI into Expense (Effective Portion) | ||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | ||||||||||||
During the next 12 months, we estimate
that $
Credit-risk-related Contingent Features.
By using derivative financial instruments, we expose ourselves to credit risk. Credit risk is the risk of failure by the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative is negative, we owe the counterparty and, therefore, it does not possess credit risk. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that we believe to be creditworthy and by limiting the amount of exposure to each counterparty.
We have agreements with our derivative counterparties that contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. We also have agreements with certain of our derivative counterparties that contain a provision where if we fail to maintain our status as well capitalized, then the counterparty could terminate the derivative positions and we would be required to settle our obligations under the agreements. Certain of our agreements with our derivative counterparties contain provisions where if a formal administrative action by a federal or state regulatory agency occurs that materially changes our creditworthiness in an adverse manner, we may be required to fully collateralize our obligations under the derivative instrument.
28
At June 30, 2020 and December 31, 2019,
we had a net liability position of $
11. FAIR VALUE OF ASSETS AND LIABILITIES
Determination of Fair Value.
We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for our various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
Fair Value Hierarchy.
We group our assets and liabilities that are measured at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value.
Level 1: Valuation is based on quoted prices in active markets for identical assets. Level 1 assets generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets.
Level 2: Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. Level 3 assets include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Methods and assumptions for valuing our financial instruments measured at fair value on a recurring basis are set forth below. Estimated fair values are calculated based on the value without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications or estimated transaction cost.
Securities Available-for-sale.
The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. These securities include marketable equity securities. All other securities are measured at fair value in Level 2 and are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. These securities include government-sponsored enterprise obligations, state and municipal obligations, residential mortgage-backed securities guaranteed and sponsored by the U.S. government or an agency thereof. Fair value measurements are obtained from a third-party pricing service and are not adjusted by management.
29
Interest Rate Swaps.
The valuation of our interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. We have determined that the majority of the inputs used to value our interest rate derivatives fall within Level 2 of the fair value hierarchy.
Assets and Liabilities Measured at Fair Value on a Recurring Basis.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| June 30, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | (In thousands) | |||||||||||||||
| Securities available-for-sale | $ | $ | $ | $ | ||||||||||||
| Marketable equity securities | ||||||||||||||||
| Interest rate swaps | ||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | ||||||||||||
| December 31, 2019 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | (In thousands) | |||||||||||||||
| Securities available-for-sale | $ | $ | $ | $ | ||||||||||||
| Marketable equity securities | ||||||||||||||||
| Interest rate swaps | ||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | ||||||||||||
Assets Measured at Fair Value on a Non-recurring Basis.
We may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related assets at June 30, 2020 and December 31, 2019. Total losses for the six months ended June 30, 2020 and the three and six months ended June 30, 2019, respectively, represent the change in carrying value as a result of fair value adjustments related to assets still held at the periods indicated.
| At | Three Months Ended | Six Months Ended | ||||||||||||||||||
| June 30, 2020 | June 30, 2020 | June 30, 2020 | ||||||||||||||||||
| Total | Total | |||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Losses | Losses | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Impaired Loans | $ | — | $ | — | $ | $ | — | $ | ||||||||||||
| At | Three Months Ended | Six Months Ended | ||||||||||||||||||
| December 31, 2019 | June 30, 2019 | June 30, 2019 | ||||||||||||||||||
| Total | Total | |||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Losses | Losses | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Impaired Loans | $ | — | $ | — | $ | $ | $ | |||||||||||||
30
The amount of impaired loans represents the carrying value, and net of the related write-down or valuation allowance of impaired loans for which adjustments are based on the estimated fair value of the underlying collateral. The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on real estate appraisals performed by independent licensed or certified appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Management will discount appraisals as deemed necessary based on the date of the appraisal and new information deemed relevant to the valuation. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. The resulting losses were recognized in earnings through the provision for loan losses. There were no liabilities measured at fair value on a non-recurring basis at June 30, 2020 and December 31, 2019.
Summary of Fair Values of Financial Instruments.
The estimated fair values of our financial instruments are as follows:
| June 30, 2020 | ||||||||||||||||||||
| Carrying Value | Fair Value | |||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Securities available-for-sale | ||||||||||||||||||||
| Marketable equity securities | ||||||||||||||||||||
| Federal Home Loan Bank of Boston and other restricted stock | ||||||||||||||||||||
| Loans - net | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Mortgage servicing rights | ||||||||||||||||||||
| Derivative assets | ||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Deposits | ||||||||||||||||||||
| Short-term borrowings | ||||||||||||||||||||
| Long-term debt | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| Derivative liabilities | ||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||
| Carrying Value | Fair Value | |||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Securities available-for-sale | ||||||||||||||||||||
| Marketable equity securities | ||||||||||||||||||||
| Federal Home Loan Bank of Boston and other restricted stock | ||||||||||||||||||||
| Loans - net | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Mortgage servicing rights | ||||||||||||||||||||
| Derivative assets | ||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Deposits | ||||||||||||||||||||
| Short-term borrowings | ||||||||||||||||||||
| Long-term debt | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| Derivative liabilities | ||||||||||||||||||||
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12. LEASES
The Company determines if an arrangement is a lease at inception. Effective in 2019, operating leases are included within other assets and other liabilities in our consolidated balance sheets. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has lease agreements with
lease and non-lease components, which are generally accounted for separately. We have not elected the practical expedient to
account for lease and non-lease components as one lease component. Additionally, the Company has elected the practical
expedient whereby expired leases, existing operating lease classifications and initial direct costs will not be reassessed at
inception. The Company has operating leases for certain of our banking offices and ATMs. Our leases have remaining lease
terms of less than
The components of lease expense were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||
| (In thousands) | ||||||||||||||||||
| Amortization of ROU assets | $ | $ | $ | $ | ||||||||||||||
| Interest on lease liabilities | ||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||||
Supplemental cash flow information related to leases was as follows:
| Six Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| (In thousands) | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| ROU assets obtained in exchange for lease obligations: | ||||||||
| Operating leases | ||||||||
Supplemental balance sheet information related to leases was as follows:
| June 30, 2020 | December 31, 2019 | |||||||
| (In thousands) | ||||||||
| Operating lease ROU assets | $ | $ | ||||||
| Operating lease liabilities | $ | $ | ||||||
The weighted average remaining lease term for our operating
leases was
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Maturities of the Company’s operating lease liabilities were as follows (in thousands):
| Years Ending December 31, | |||||
| 2020 | $ | ||||
| 2021 | |||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less imputed interest | ( | ) | |||
| Total | $ | ||||
13. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. This ASU, as amended, is effective for the Company in fiscal years after December 15, 2022. The Company is in the process of implementing the standard. We have put together a project team that has begun to identify appropriate loan segments along with related historical losses for each segment and potential models that would be most appropriate for each individual segment. We have not quantified the effects of any models, but do expect the standard to significantly change the approach to calculating our allowance for loan losses.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removes and modifies the previously required disclosures relating to fair value measurements. Specifically, the ASU removes the required disclosure of amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, the valuation process for Level 3 fair value measurements and the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of a reporting period. It also modifies the required roll forward of Level 3 fair value measurements to a disclosure of any transfers into and out of Level 3, increases disclosure for investments in entities that calculate net asset value, and clarifies the measurement of uncertainty disclosure. The ASU became effective for the Company on January 1, 2020, and as this standard relates to disclosures, its adoption did not have a material impact on our consolidated financial statements.
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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview.
We strive to remain a leader in meeting the financial service needs of our local community, and to provide quality service to the individuals and businesses in the market areas that we have served since 1853. Historically, we have been a community-oriented provider of traditional banking products and services to business organizations and individuals, including products such as residential and commercial loans, consumer loans and a variety of deposit products. We meet the needs of our local community through a community-based and service-oriented approach to banking.
We have adopted a growth-oriented strategy that has focused on increasing commercial lending. Our strategy also calls for increasing deposit relationships and broadening our product lines and services. We believe that this business strategy is best for our long-term success and viability, and complements our existing commitment to high-quality customer service.
In connection with our overall growth strategy, we seek to:
| • | Grow the Company’s commercial loan portfolio and related commercial deposits by targeting businesses in our primary market area of Hampden County and Hampshire County in western Massachusetts and Hartford and Tolland Counties in northern Connecticut to increase the net interest margin and loan income; |
| • | Supplement the commercial portfolio by growing the residential real estate portfolio to diversify the loan portfolio and deepen customer relationships; |
| • | Focus on expanding our retail banking deposit franchise and increase the number of households served within our designated market area; |
| • | Invest in people, systems and technology to grow revenue, improve efficiency and enhance the overall customer experience; |
| • | Grow revenues, increase tangible book value, continue to pay competitive dividends to shareholders and utilize the Company’s stock repurchase plan to leverage our capital and enhance franchise value; and |
| • | Consider growth through acquisitions. We may pursue expansion opportunities in existing or adjacent strategic locations with companies that add complementary products to our existing business and at terms that add value to our existing shareholders. |
You should read the following financial results for the three and six months ended June 30, 2020 in the context of this strategy.
| • | Net income was $2.0 million, or $0.08 diluted earnings per share, for the three months ended June 30, 2020, compared to $3.3 million, or $0.12 diluted earnings per share, for the same period in 2019. For the six months ended June 30, 2020, net income was $4.1 million, or $0.16 diluted earnings per share, as compared to net income of $6.7 million, or $0.25 diluted earnings per share, for the same period in 2019. Both periods in 2020 were impacted by a higher provision for loan losses resulting from the coronavirus (“COVID-19”) pandemic mandated shutdowns and economic disruption that caused elevated unemployment levels and deterioration in household, business, economic and market conditions. |
| • | The provision for loan losses was $2.5 million and $350,000 for the three months ended June 30, 2020 and 2019, respectively, and $4.6 million and $400,000 for the six months ended June 30, 2020 and 2019, respectively. |
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| • | Net interest income was $15.1 million and $14.2 million for the three months ended June 30, 2020 and 2019, respectively. The net interest margin was 2.74% for the three months ended June 30, 2020, compared to 2.89% for the same period in 2019. The net interest margin, on a tax-equivalent basis, was 2.76% for the three months ended June 30, 2020, compared to 2.92% for the same period in 2019. Net interest income was $29.6 million and $28.5 million for the six months ended June 30, 2020 and 2019, respectively. The net interest margin was 2.80% and 2.92% for the six months ended June 30, 2020 and 2019, respectively. The net interest margin, on a tax-equivalent basis, was 2.82% and 2.95% for the six months ended June 30, 2020 and 2019, respectively. |
CRITICAL ACCOUNTING POLICIES.
Our consolidated financial statements are prepared in accordance with U.S. GAAP and practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ from those estimates.
Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. There have been no material changes to our critical accounting policies during the six months ended June 30, 2020. For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the accompanying unaudited consolidated financial statements and Note 1 of the consolidated financial statements included in our 2019 Annual Report.
RECENT DEVELOPMENTS: CORONAVIRUS PANDEMIC RESPONSE AND ACTIONS.
Beginning in the first quarter of 2020, we responded to the ongoing COVID-19 pandemic while prioritizing the health and safety of our community. On March 23, 2020, the Governor of Massachusetts issued an emergency order requiring all businesses and organizations that do not provide COVID-19 “essential services” to close their physical workplaces and facilities to workers, customers and the public from March 24, 2020 until April 7, 2020, which was subsequently extended to May 18, 2020. Although Massachusetts began reopening non-essential businesses in June 2020, the order put significant pressure on the local business community.
As a consequence of the order, we closed our branches and started the transition to working remotely. Our drive-up windows and ATMs remained open while we continued to service our customers through scheduled appointments and online channels. On June 29, 2020, we re-opened our branch lobbies to customers under Massachusetts recommended social distancing, safety and sanitation guidelines, while still offering appointments and online channel transactions as a means of promoting social distancing where possible. As of July 8, 2020, Massachusetts is now in Phase 3 of the re-opening plan. The following industries are open with restrictions: construction, manufacturing, houses of worship, office spaces (limited), hair and nail salons, spas, pet grooming, car washes, retailers, including malls, hotels and motels (no events, functions or conferences), restaurants, golf courses, fitness and health centers, casinos, gaming floors, theaters and museums. The final phase, the “new normal,” will not be allowed to begin until an effective treatment or vaccine is developed.
Our business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions. The COVID-19 global public health crisis and the resulting “stay-at-home” orders resulted in widespread volatility, severe disruptions in the U.S. economy at large, and for small businesses in particular, deterioration in household, business, economic and market conditions.
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Loan Portfolio:
The following table provides some insight into the composition of the Bank's loan portfolio and loan modifications, excluding PPP loans:
| Commercial Real Estate | % of Total Loans | %
of Bank Risk-Based Capital | % of Balance Modified | |||||||||
| Apartment | 10 | % | 77 | % | 21 | % | ||||||
| Office | 7 | % | 58 | % | 13 | % | ||||||
| Retail/shopping | 7 | % | 51 | % | 46 | % | ||||||
| Industrial | 6 | % | 49 | % | 8 | % | ||||||
| Hotel | 3 | % | 24 | % | 61 | % | ||||||
| Other | 2 | % | 14 | % | 24 | % | ||||||
| Mixed-use | 2 | % | 17 | % | 44 | % | ||||||
| Residential non-owner | 2 | % | 19 | % | 21 | % | ||||||
| Auto sales | 2 | % | 16 | % | 44 | % | ||||||
| Adult care/Assisted living | 2 | % | 16 | % | 20 | % | ||||||
| College/school | 1 | % | 11 | % | 1 | % | ||||||
| Gas station/convenience store | 1 | % | 5 | % | 2 | % | ||||||
| Restaurant | 1 | % | 5 | % | 40 | % | ||||||
| Auto service | 1 | % | 5 | % | 12 | % | ||||||
| Total commercial real estate | 47 | % | 24 | % | ||||||||
| Commercial and Industrial Loans | % of Total Loans | %
of Bank Risk-Based Capital | % of Balance Modified | |||||||||
| Manufacturing | 3 | % | 24 | % | 5 | % | ||||||
| Wholesale trade | 2 | % | 19 | % | 2 | % | ||||||
| Specialty trade | 1 | % | 6 | % | 0 | % | ||||||
| Heavy and civil engineering construction | 1 | % | 6 | % | 2 | % | ||||||
| Educational services | 1 | % | 8 | % | 1 | % | ||||||
| Healthcare and social assistance | 1 | % | 5 | % | 32 | % | ||||||
| Transportation and warehouse | 1 | % | 5 | % | 62 | % | ||||||
| Auto sales | 0 | % | 3 | % | 23 | % | ||||||
| All other C&I (1) | 3 | % | 27 | % | 6 | % | ||||||
| Total commercial and industrial loans | 13 | % | 9 | % | ||||||||
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| Residential and Consumer Loans | % of Total Loans | %
of Bank Risk-Based Capital | % of Balance Modified | |||||||||
| Residential real estate | 34 | % | 269 | % | 6 | % | ||||||
| Home equity line of credit | 4 | % | 28 | % | 2 | % | ||||||
| Home equity loan | 2 | % | 18 | % | 4 | % | ||||||
| Consumer loans | 0 | % | 2 | % | 3 | % | ||||||
| Total residential and consumer loans | 40 | % | 6 | % | ||||||||
| Total Portfolio | % of Total Loans | %
of Bank Risk-Based Capital | % of Balance Modified | |||||||||
| Commercial real estate | 47 | % | 369 | % | 24 | % | ||||||
| Commercial and industrial | 13 | % | 102 | % | 9 | % | ||||||
| Residential real estate | 34 | % | 269 | % | 6 | % | ||||||
| Home equity loans | 6 | % | 46 | % | 3 | % | ||||||
| Consumer loans | 0 | % | 2 | % | 3 | % | ||||||
| Total | 15 | % | ||||||||||
| (1) | Other consists of multiple industries, which individually are less than 1% of the total loan portfolio. |
Although the Bank's loan portfolio contains impacted sectors, the concentration limits remain acceptable, with no sector, excluding residential, representing more than 100% of the Bank's total risk-based capital. The Company monitors lending exposure by industry classification to determine potential risk associated with industry concentrations, if any, that could lead to additional credit loss exposure. As stated above, as a result of the COVID-19 pandemic, the Company identified sectors that have been materially impacted including, but not limited to: hospitality, retail, and restaurants and food service. These sectors potentially carry a higher level of credit risk, as many of these borrowers have incurred a significant negative impact to their businesses resulting from the governmental stay-at-home orders as well as travel limitations.
Paycheck Protection Program.
As a Preferred Lender with the Small Business Administration (“SBA”), the Company was in a position to react quickly to the PPP component of 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 and the SBA. An eligible business was able to apply for a PPP loan up to the greater 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.
As of June 30, 2020, the Company received funding approval from the SBA for over 1,358 applications totaling approximately $221.9 million, with processing fees totaling approximately $7.1 million. On June 5, 2020, the Paycheck Protection Program Flexibility Act (“Flexibility Act”) was signed into law and extended the June 30, 2020 safe harbor date to December 31, 2020. If borrowers exercise the safe harbor option and return the PPP loan proceeds before December 31, 2020, we are required to return the processing fee to the SBA.
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Loan Modifications/Troubled Debt Restructurings.
The banking regulatory agencies, through an Interagency Statement dated April 7, 2020, have encouraged financial institutions to work “prudently” with borrowers who request loan modifications or deferrals as a result of the economic impacts of COVID-19. Pursuant to Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. Financial institutions can then suspend the requirements under U.S. GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a TDR, and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting under U.S. GAAP. The Company has adopted this policy election to address COVID-19 loan modification requests that have been received from the earlier of either December 31, 2020 or the 60th day after the end of the COVID-19 national emergency.
As a result of the COVID-19 pandemic, the Company granted deferred loan payments for impacted commercial, residential and consumer customers who have experienced financial hardship due to COVID-19. The loan payment deferrals can be up to 90 days, depending upon the financial needs of each customer. Further deferrals will be re-evaluated on a customer-by-customer basis upon the expiration of the existing deferral period. As of June 30, 2020, the deferred loan payment commitments totaled $261.0 million (525 loans), for which principal and interest payments were deferred. The deferred loan payment commitments represented 15% of the total loan portfolio, excluding PPP loans, as of June 30, 2020. Loan payment deferrals by loan type were as follows:
| Loan Segment | Outstanding
Balance at June 30, 2020 | Modification Balance | # of Loans Modified | Balance as a % of Total Loan Segment | Balances Returned to P&I and Made First Payment (2) | % Returned to P&I and Made First Payment | #
of Loans Returned to P&I(2) | |||||||||||||||||||||
| (In millions) | (In millions) | |||||||||||||||||||||||||||
| Commercial real estate | $ | 832.7 | $ | 200.0 | 131 | 24.0 | % | $ | 71.6 | 35.8 | % | 54 | ||||||||||||||||
| Commercial and industrial (1) | 231.1 | 19.1 | 162 | 8.3 | % | 9.7 | 50.8 | % | 117 | |||||||||||||||||||
| Residential real estate (3) | 710.6 | 41.7 | 219 | 5.9 | % | 19.2 | 46.1 | % | 107 | |||||||||||||||||||
| Consumer | 5.3 | 0.2 | 13 | 3.8 | % | 0.1 | 50.0 | % | 10 | |||||||||||||||||||
| Total | $ | 1,780.0 | $ | 261.0 | 525 | 14.7 | % | $ | 100.6 | 38.5 | % | 288 | ||||||||||||||||
| (1) | Excludes PPP loans and deferred fees |
| (2) | Data as of July 27, 2020 |
| (3) | Residential includes home equity loans and lines of credit |
As of July 28, 2020, of the $261.0 million of modifications granted (525 accounts), $100.6 million, or 38.5%, (288 accounts) made their first principal and interest payment after returning to regular payments.
Allowance for Loan Losses.
The COVID-19 pandemic materially impacted the Company’s determination of the allowance for loan losses for the six months ended June 30, 2020. In determining the allowance for loan losses, the Company considers quantitative loss factors and a number of qualitative factors, such as underwriting policies, current economic conditions, delinquency statistics, the adequacy of the underlying collateral and the financial strength of the borrower. Beginning at the end of March 2020, a record number of Americans filed for unemployment benefits. The global pandemic could cause the Company to experience higher credit losses in its lending portfolio, reduced demand for our products and services and other negative impacts on our financial position, results of operations and prospects.
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To appropriately reserve for the impact of the COVID-19 pandemic on the Company’s loan portfolio, the Bank added a new qualitative factor category to the allowance calculation - "Economic Impact of COVID-19" at March 31, 2020. The allocation of additional reserves for the six months ended June 30, 2020 was based upon an analysis of the Company’s loan portfolio that included identifying borrowers sensitive to the shutdown (i.e. accommodation and food service, recreation, construction, manufacturing, and wholesale & retail trade) as well as a general allocation for the negative economic outlook as described above. The Company’s provision for loan losses was $4.6 million for the six months ended June 30, 2020, and based upon these considerations, approximately $1.5 million of the provision at June 30, 2020 related to COVID-19 pandemic factors. This increase was based on management’s evaluation of certain qualitative factors included in the determination of the allowance, primarily a result of the abrupt slowdown in commercial economic activity resulting from actions announced by the State of Massachusetts to close all non-essential businesses in the state as well as the dramatic rise in the unemployment rate. Local unemployment rates were higher than national averages during the second quarter of 2020 due to the slower reopening plan for Massachusetts. In addition, loans demonstrating cash flow declines and borrowers sensitive to the prolonged shutdown were identified and contributed to an overall increase in reserves. The Company is continuing to monitor COVID-19’s impact on its business and its customers, however, the extent to which COVID-19 will impact its results and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures.
Asset Quality.
Based upon an analysis of the portfolio to identify potentially impacted industries from the COVID-19 pandemic, including the downgrade of several lending relationships, specifically within the hotel portfolio, we allocated a total provision for loan losses of $2.5 million for the quarter ended June 30, 2020. Of the total provision, $2.0 million was related to assets quality changes, while $550,000 was related to COVID-19 factors. As mentioned above, the Company has allocated $1.5 million in loan loss reserves during the six months ended June 30, 2020 related to COVID-19 pandemic factors. Our allowance as a percentage of total loans, excluding PPP loans and acquired loans that have been marked to fair value, was 1.09% at June 30, 2020 and March 31, 2020.
During the three months ended June 30, 2020, special mention loans increased $60.4 million to $96.3 million at June 30, 2020, from $35.9 million at March 31, 2020. During the three months ended June 30, 2020, we downgraded thirteen lending relationships from pass-rated to special mention. Nine of these relationships, totaling $46.0 million, are in the hotel industry, and the other relationships are in retail or manufacturing. The hotel industry has experienced disruption as a direct result of the negative economic impacts of the COVID-19 pandemic.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2020 AND DECEMBER 31, 2019
At June 30, 2020, total assets were $2.4 billion, an increase of $253.4 million, or 11.6%, from December 31, 2019. During the same period, total loans increased $223.5 million, or 12.6%, securities available-for-sale decreased $3.2 million, or 1.4%, and cash and cash equivalents increased $38.1 million, or 154.0%.
Total loans increased $223.5 million, or 12.6%, primarily due to a $204.1 million, or 82.0%, increase in commercial and industrial loans. Excluding PPP loans of $221.9 million, commercial and industrial loans decreased $17.8 million, or 7.2%, from December 31, 2019. Commercial real estate loans increased $15.8 million, or 1.9%, and residential real estate loans, which include home equity loans, increased $10.4 million, or 1.5%. The decrease in commercial and industrial loans, excluding PPP loans, of $17.8 million, or 7.2%, was due to pay downs on existing revolving lines of credit of approximately $35.6 million, or 36.2%, from March 31, 2020 to June 30, 2020, after increasing $13.0 million, or 15.2%, from December 31, 2019 to March 31, 2020.
All loans where the payments are 90 days or more in arrears as of the closing date of each month are placed on non-accrual status. If all non-accrual loans had been performing in accordance with their terms, we would have earned additional interest income of $311,000 and $651,000 for the six months ended June 30, 2020 and 2019, respectively.
At June 30, 2020, nonperforming loans totaled $10.4 million, or 0.59% of total loans excluding PPP loans, compared to $9.9 million, or 0.56% of total loans at December 31, 2019 and $14.9 million, or 0.87% of total loans at June 30, 2019. There were no loans 90 or more days past due and still accruing interest. Nonperforming assets to total assets, excluding PPP loans, was 0.47% and 0.45% at June 30, 2020 and December 31, 2019, respectively, and 0.70% at June 30, 2019. The allowance for loan losses as a percentage of total loans, excluding PPP loans, which do not require an allowance for loan losses, was 1.03% at June 30, 2020, compared to 0.79% at December 31, 2019. The allowance for loan losses as a percentage of total loans, excluding loans acquired in the Chicopee acquisition, which were recorded at fair value with no related allowance for loan losses, as well as PPP loans, was 1.26% at June 30, 2020 and 1.01% at December 31, 2019. At June 30, 2020, the allowance for loan losses as a percentage of nonperforming loans was 175.5%, compared to 142.7% at December 31, 2019. A summary of our non-accrual and past due loans by class are listed in Note 5 of the accompanying unaudited consolidated financial statements.
At June 30, 2020, total deposits were $1.9 billion, an increase of $270.0 million, or 16.1%, from December 31, 2019, primarily due to a $294.0 million, or 28.7%, increase in core deposits. Core deposits, which the Company defines as all deposits except time deposits, increased from $1.0 billion, or 61.1% of total deposits, at December 31, 2019, to $1.3 billion, or 67.7% of total deposits, at June 30, 2020. Non-interest-bearing deposits increased $143.3 million, or 36.4%, to $536.6 million, interest-bearing checking accounts increased $33.6 million, or 47.8%, to $103.7 million, savings accounts increased $26.9 million, or 21.3%, to $153.3 million, and money market accounts increased $90.2 million, or 20.7%, to $525.6 million. The increase in core deposits of $294.0 million, or 28.7%, can be attributed to the government stimulus for individuals, lower consumer spending over the last several months, and tax payment delays to July 15, 2020 as well as PPP loan funds that may not have been fully utilized at June 30, 2020.
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Time deposits decreased $23.9 million, or 3.7%, from $652.6 million at December 31, 2019 to $628.7 million at June 30, 2020. Brokered deposits, which are included within time deposits, were $21.7 million at June 30, 2020 and $21.5 million at December 31, 2019.
Federal Home Loan Bank (“FHLB”) advances decreased $43.8 million, or 18.2%, from $240.5 million at December 31, 2019, to $196.7 million at June 30, 2020. Advances under the Federal Reserve Bank’s PPPLF totaled $26.4 million at June 30, 2020, representing 11.9% of the PPP loan portfolio. The increase in low cost deposits in the second quarter provided funding for the PPP loan portfolio. The Company has access to the PPPLF in the next two years to fund the PPP loan portfolio, if necessary. Our short-term borrowings and long-term debt are discussed in Note 8 of the accompanying consolidated financial statements.
At June 30, 2020, shareholders’ equity was $229.5 million, or 9.4% of total assets, compared to $232.0 million, or 10.6% of total assets, at December 31, 2019. The decrease in shareholders’ equity reflects $8.1 million for the repurchase of the Company’s shares and the payment of regular cash dividends of $2.5 million, both partially offset by net income of $4.1 million and a decrease of $3.3 million in accumulated other comprehensive loss. Total shares outstanding as of June 30, 2019 were 25,644,334.
The Company’s book value per share increased by $0.21, or 2.4%, to $8.95 at June 30, 2020, from $8.74 at December 31, 2019. The Company’s tangible book value per share increased by $0.20, or 2.5%, to $8.34 at June 30, 2020 from $8.14 at December 31, 2019. The Bank’s regulatory capital ratios continued to exceed the levels required to be considered “well-capitalized” under federal banking regulations.
On January 29, 2019, the Board of Directors authorized a stock purchase plan (the “2019 Plan”) pursuant to which the Company may purchase up to 2,814,200 shares, or 10% of its outstanding common stock. During the six months ended June 30, 2020, the Company purchased 1,009,731 shares under the 2019 Plan. As of June 30, 2020, there were 117,135 shares available to purchase under the 2019 Plan. As previously disclosed, on March 24, 2020, the Board of Directors approved a suspension of the 2019 plan in response to the COVID-19 pandemic. This action is effective until further notice but the Company retains the ability to reinstate its buyback program as soon as circumstances warrant.
Although the Company has historically paid quarterly dividends on its common stock and currently intends to continue to pay such dividends, the Company’s ability to pay such dividends depends on a number of factors, including restrictions under federal laws and regulations on the Company’s ability to pay dividends, and as a result, there can be no assurance that dividends will continue to be paid in the future.
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COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND JUNE 30, 2019
General.
Net income was $2.0 million, or $0.08 diluted earnings per share, for the three months ended June 30, 2020, compared to $3.3 million, or $0.12 diluted earnings per share, for the same period in 2019. Net interest income was $15.1 million and $14.2 million for the three months ended June 30, 2020 and 2019, respectively.
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Net Interest and Dividend Income.
The following tables set forth the information relating to our average balance and net interest income for the three months ended June 30, 2020 and 2019, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.
| Three Months Ended June 30, | ||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||
| Average | Average Yield/ | Average | Average Yield/ | |||||||||||||||||||||
| Balance | Interest | Cost | Balance | Interest | Cost | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| ASSETS: | ||||||||||||||||||||||||
| Interest-earning assets | ||||||||||||||||||||||||
| Loans(1)(2) | $ | 1,959,790 | $ | 19,106 | 3.92 | % | $ | 1,688,553 | $ | 18,434 | 4.38 | % | ||||||||||||
| Securities(2) | 217,816 | 1,170 | 2.16 | 249,110 | 1,635 | 2.63 | ||||||||||||||||||
| Other investments - at cost | 15,728 | 157 | 4.01 | 15,131 | 210 | 5.57 | ||||||||||||||||||
| Short-term investments(3) | 20,637 | 9 | 0.18 | 15,134 | 73 | 1.93 | ||||||||||||||||||
| Total interest-earning assets | 2,213,971 | 20,442 | 3.71 | 1,967,928 | 20,352 | 4.15 | ||||||||||||||||||
| Total non-interest-earning assets | 141,310 | 137,749 | ||||||||||||||||||||||
| Total assets | $ | 2,355,281 | $ | 2,105,677 | ||||||||||||||||||||
| LIABILITIES AND EQUITY: | ||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||
| Interest-bearing checking accounts | $ | 83,345 | $ | 86 | 0.42 | % | $ | 70,619 | $ | 94 | 0.53 | % | ||||||||||||
| Savings accounts | 148,566 | 37 | 0.10 | 126,855 | 42 | 0.13 | ||||||||||||||||||
| Money market accounts | 496,245 | 720 | 0.58 | 396,555 | 601 | 0.61 | ||||||||||||||||||
| Time deposit accounts | 640,129 | 2,974 | 1.87 | 679,909 | 3,630 | 2.14 | ||||||||||||||||||
| Total interest-bearing deposits | 1,368,285 | 3,817 | 1.12 | 1,273,938 | 4,367 | 1.37 | ||||||||||||||||||
| Short-term borrowings and long-term debt | 221,057 | 1,421 | 2.59 | 218,419 | 1,647 | 3.02 | ||||||||||||||||||
| Interest-bearing liabilities | 1,589,342 | 5,238 | 1.33 | 1,492,357 | 6,014 | 1.62 | ||||||||||||||||||
| Non-interest-bearing deposits | 504,885 | 363,329 | ||||||||||||||||||||||
| Other non-interest-bearing liabilities | 31,214 | 23,210 | ||||||||||||||||||||||
| Total non-interest-bearing liabilities | 536,099 | 386,539 | ||||||||||||||||||||||
| Total liabilities | 2,125,441 | 1,878,896 | ||||||||||||||||||||||
| Total equity | 229,840 | 226,781 | ||||||||||||||||||||||
| Total liabilities and equity | $ | 2,355,281 | $ | 2,105,677 | ||||||||||||||||||||
| Less: Tax-equivalent adjustment(2) | (112 | ) | (137 | ) | ||||||||||||||||||||
| Net interest and dividend income | $ | 15,092 | $ | 14,201 | ||||||||||||||||||||
| Net interest rate spread | 2.37 | % | 2.50 | % | ||||||||||||||||||||
| Net interest rate spread, on a tax equivalent basis(4) | 2.38 | % | 2.53 | % | ||||||||||||||||||||
| Net interest margin | 2.74 | % | 2.89 | % | ||||||||||||||||||||
| Net interest margin, on a tax equivalent basis(5) | 2.76 | % | 2.92 | % | ||||||||||||||||||||
| Ratio of average interest-earning assets to average interest-bearing liabilities | 139.30 | % | 131.87 | % | ||||||||||||||||||||
| (1) | Loans, including non-accrual loans, are net of deferred loan origination costs, unadvanced funds and the allowance for loan losses. |
| (2) | Securities income, loan income and net interest income are presented on a tax-equivalent basis using a tax rate of 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported in the consolidated statements of net income. |
| (3) | Short-term investments include federal funds sold. |
| (4) | Net interest rate spread, on a tax-equivalent basis, represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. See “Explanation of Use of Non-GAAP Financial Measurements”. |
| (5) | Net interest margin, on a tax-equivalent basis, represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. See “Explanation of Use of Non-GAAP Financial Measurements”. |
42
Rate/Volume Analysis.
The following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest and dividend income and interest expense during the periods indicated. Information is provided in each category with respect to: (1) interest income changes attributable to changes in volume (changes in volume multiplied by prior rate); (2) interest income changes attributable to changes in rate (changes in rate multiplied by prior volume); and (3) the net change.
The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
| Three Months Ended June 30, 2020 compared to Three Months Ended June 30, 2019 | ||||||||||||
| Increase (Decrease) Due to | ||||||||||||
| Volume | Rate | Net | ||||||||||
| Interest-earning assets | (In thousands) | |||||||||||
| Loans (1) | $ | 2,953 | $ | (2,281 | ) | $ | 672 | |||||
| Securities (1) | (205 | ) | (260 | ) | (465 | ) | ||||||
| Other investments - at cost | 8 | (61 | ) | (53 | ) | |||||||
| Short-term investments | 26 | (90 | ) | (64 | ) | |||||||
| Total interest-earning assets | 2,782 | (2,692 | ) | 90 | ||||||||
| Interest-bearing liabilities | ||||||||||||
| Interest-bearing checking accounts | 17 | (25 | ) | (8 | ) | |||||||
| Savings accounts | 7 | (12 | ) | (5 | ) | |||||||
| Money market accounts | 151 | (32 | ) | 119 | ||||||||
| Time deposit accounts | (212 | ) | (444 | ) | (656 | ) | ||||||
| Short-term borrowing and long-time debt | 20 | (246 | ) | (226 | ) | |||||||
| Total interest-bearing liabilities | (17 | ) | (759 | ) | (776 | ) | ||||||
| Change in net interest and dividend income (1) | $ | 2,799 | $ | (1,933 | ) | $ | 866 | |||||
| (1) | Securities, loan income and change in net interest and dividend income are presented on a tax-equivalent basis using a tax rate of 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest income. |
Net interest income increased $891,000, or 6.3%, to $15.1 million, for the three months ended June 30, 2020, from $14.2 million for the three months ended June 30, 2019. The increase in net interest income was due to a $115,000, or 0.6%, increase in interest and dividend income and a decrease in interest expense of $776,000, or 12.9%. Interest expense on deposits decreased $550,000, or 12.6%, and interest expense on FHLB borrowings decreased $226,000, or 13.7%. Net interest income for the three months ended June 30, 2020 includes interest income and fee income of $1.3 million from the PPP loan portfolio. Excluding PPP income, interest and dividend income decreased $369,000, or 2.6%, from $14.2 million during the three months ended June 30, 2019, compared to $13.8 million during the three months ended June 30, 2020.
The net interest margin was 2.74% for the three months ended June 30, 2020, compared to 2.89% for the three months ended June 30, 2019. The net interest margin, on a tax-equivalent basis, was 2.76% for the three months ended June 30, 2020, compared to 2.92% for the three months ended June 30, 2019. The decrease in the net interest margin was due to the continuing trend of market interest rates falling to historically low levels.
The average yield on interest-earning assets decreased 44 basis points from 4.15% for the three months ended June 30, 2019 to 3.71% for the three months ended June 30, 2020. During the three months ended June 30, 2020, the average cost of funds, including non-interest bearing demand accounts, decreased 29 basis points from 1.30% for the three months ended June 30, 2019 to 1.01% for the three months ended June 30, 2020. The average cost of core deposits, which include non-interest bearing demand accounts, decreased four basis points from 0.31% for the three months ended June 30, 2019 to 0.27% for the three months ended June 30, 2020. The average cost of time deposits decreased 27 basis points from 2.14% for the three months ended June 30, 2019 to 1.87% for the three months ended June 30, 2020. The average cost of FHLB borrowings decreased 43 basis points during the same period. For the three months ended June 30, 2020, average demand deposits, an interest-free source of funds, increased $141.6 million, or 39.0%, to $504.9 million, or 27.0% of total average deposits, from $363.3 million, or 22.2% of total average deposits for the three months ended June 30, 2019.
43
During the three months ended June 30, 2020, average interest-earning assets increased $246.0 million, or 12.5%, to $2.2 billion compared to the three months ended June 30, 2019, primarily due to the increase in average loans of $271.2 million, or 16.1%. Excluding average PPP loans, average loans increased $118.2 million, or 7.0%, from the three months ended June 30, 2019 to the three months ended June 30, 2020.
Provision for Loan Losses.
The provision for loan losses is reviewed by management based upon our evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as new loan products, credit quality trends (including trends in nonperforming loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectability of the loan portfolio.
The amount of the provision for loan losses during the three months ended June 30, 2020 was based on the changes that occurred in the loan portfolio during that same period, which were discussed above. The provision for loan losses increased $2.1 million, or 600.0%, from $350,000 for the three months ended June 30, 2019 to $2.5 million for the three months ended June 30, 2020. The Company recorded net charge-offs of $34,000 for the three months ended June 30, 2020, as compared to net recoveries of $194,000 for the three months ended June 30, 2019. During the three months ended June 30, 2019, the Company recorded charge-offs of $629,000, primarily due to an existing substandard commercial loan relationship, offset by recoveries of $823,000. The recovery was primarily due to a previously charged-off loan from 2010. The increase in the provision for loan losses was primarily due to the impacts of the COVID-19 pandemic on multiple sectors.
Although we believe that we have established and maintained the allowance for loan losses at adequate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment. If the COVID-19 pandemic has an adverse effect on the ability of our borrowers to satisfy their obligations to us, the demand for our loans or our other products and services, other aspects of our business operations, or on financial markets, real estate markets, or economic growth, this could, depending on the extent of the loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations could be materially and adversely affected.
44
Non-interest Income.
Non-interest income decreased $430,000, or 17.1%, to $2.1 million for the three months ended June 30, 2020, from $2.5 million for the three months ended June 30, 2019. Service charges and fees decreased $291,000, or 15.7%, and other non-interest income decreased $206,000, due to a decrease in commercial loans swap fees. The decrease in service charges and fees was due to a $201,000, or 49.3%, decrease in non-sufficient funds (“NSF”) and overdraft fees. The decrease in NSF and overdraft fees was primarily due to an increase in checking account balances during the three months ended June 30, 2020. During the three months ended June 30, 2020, the Company reported unrealized gains on marketable equity securities of $35,000 and realized gains on the sale of securities of $13,000, compared to unrealized gains on marketable equity securities of $79,000 and realized losses on the sale of securities of $96,000 during the three months ended June 30, 2019.
Non-interest Expense.
For the three months ended June 30, 2020, non-interest expense increased $105,000, or 0.9%, to $12.2 million, or 2.09% of average assets, from $12.1 million, or 2.31% of average assets, for the three months ended June 30, 2019. The increase in non-interest expense was primarily due to an increase in salaries and benefits of $291,000, or 4.2%, an increase in occupancy expense of $74,000, or 7.4%, primarily due to the new branches in Connecticut. Federal Deposit Insurance Corporation (“FDIC”) insurance expense increased $52,000, or 22.0%, professional fees increased $30,000, or 4.9%, and data processing expenses increased $5,000, or 0.7%. These increases were partially offset by a decrease of $151,000, or 40.8%, in advertising expense, a decrease of $132,000, or 6.9%, in other non-interest expense and a decrease of $64,000, or 15.0%, in furniture and equipment expense. For the three months ended June 30, 2020, the efficiency ratio was 71.5%, compared to 72.5% for the three months ended June 30, 2019.
Income Taxes.
Income tax expense for the three months ended June 30, 2020 was $463,000, or an effective tax rate of 18.6%, compared to $971,000, or an effective tax rate of 23.0%, for three months ended June 30, 2019. The decrease in the Company’s effective tax rate was primarily due to the effect of lower projected pre-tax income for the fiscal year-end December 31, 2020.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND JUNE 30, 2019
General.
Net income was $4.1 million, or $0.16 diluted earnings per share, for the six months ended June 30, 2020, compared to $6.7 million, or $0.25 diluted earnings per share, for the same period in 2019. Net interest income was $29.6 million and $28.5 million for the six months ended June 30, 2020 and 2019, respectively.
45
Net Interest and Dividend Income.
The following tables set forth the information relating to our average balance and net interest income for the six months ended June 30, 2020 and 2019, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.
| Six Months Ended June 30, | ||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||
| Average | Average Yield/ | Average | Average Yield/ | |||||||||||||||||||||
| Balance | Interest | Cost | Balance | Interest | Cost | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| ASSETS: | ||||||||||||||||||||||||
| Interest-earning assets | ||||||||||||||||||||||||
| Loans(1)(2) | $ | 1,871,145 | $ | 37,981 | 4.08 | % | $ | 1,686,336 | $ | 36,613 | 4.38 | % | ||||||||||||
| Securities(2) | 221,875 | 2,575 | 2.33 | 254,116 | 3,330 | 2.64 | ||||||||||||||||||
| Other investments - at cost | 16,245 | 339 | 4.20 | 15,535 | 446 | 5.79 | ||||||||||||||||||
| Short-term investments(3) | 19,097 | 71 | 0.75 | 15,123 | 149 | 1.99 | ||||||||||||||||||
| Total interest-earning assets | 2,128,362 | 40,966 | 3.87 | 1,971,110 | 40,538 | 4.15 | ||||||||||||||||||
| Total non-interest-earning assets | 139,487 | 135,820 | ||||||||||||||||||||||
| Total assets | $ | 2,267,849 | $ | 2,106,930 | ||||||||||||||||||||
| LIABILITIES AND EQUITY: | ||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||
| Interest-bearing checking accounts | $ | 76,777 | 161 | 0.42 | $ | 71,770 | 175 | 0.49 | ||||||||||||||||
| Savings accounts | 140,217 | 71 | 0.10 | 124,743 | 75 | 0.12 | ||||||||||||||||||
| Money market accounts | 471,240 | 1,473 | 0.63 | 395,889 | 1,157 | 0.59 | ||||||||||||||||||
| Time deposit accounts | 645,776 | 6,348 | 1.98 | 676,898 | 6,929 | 2.06 | ||||||||||||||||||
| Total interest-bearing deposits | 1,334,010 | 8,053 | 1.21 | 1,269,300 | 8,336 | 1.32 | ||||||||||||||||||
| Short-term borrowings and long-term debt | 226,523 | 3,022 | 2.68 | 233,615 | 3,412 | 2.95 | ||||||||||||||||||
| Interest-bearing liabilities | 1,560,533 | 11,075 | 1.43 | 1,502,915 | 11,748 | 1.58 | ||||||||||||||||||
| Non-interest-bearing deposits | 446,738 | 353,854 | ||||||||||||||||||||||
| Other non-interest-bearing liabilities | 30,340 | 21,798 | ||||||||||||||||||||||
| Total non-interest-bearing liabilities | 477,078 | 375,652 | ||||||||||||||||||||||
| Total liabilities | 2,037,611 | 1,878,567 | ||||||||||||||||||||||
| Total equity | 230,238 | 228,363 | ||||||||||||||||||||||
| Total liabilities and equity | $ | 2,267,849 | $ | 2,106,930 | ||||||||||||||||||||
| Less: Tax-equivalent adjustment(2) | (246 | ) | (263 | ) | ||||||||||||||||||||
| Net interest and dividend income | $ | 29,645 | $ | 28,527 | ||||||||||||||||||||
| Net interest rate spread | 2.42 | % | 2.54 | % | ||||||||||||||||||||
| Net interest rate spread, on a tax equivalent basis(4) | 2.44 | % | 2.57 | % | ||||||||||||||||||||
| Net interest margin | 2.80 | % | 2.92 | % | ||||||||||||||||||||
| Net interest margin, on a tax equivalent basis(5) | 2.82 | % | 2.95 | % | ||||||||||||||||||||
| Ratio of average interest-earning assets to average interest-bearing liabilities | 136.39 | % | 131.15 | % | ||||||||||||||||||||
| (1) | Loans, including non-accrual loans, are net of deferred loan origination costs, unadvanced funds and the allowance for loan losses. |
| (2) | Securities income, loan income and net interest income are presented on a tax-equivalent basis using a tax rate of 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported in the consolidated statements of net income. |
| (3) | Short-term investments include federal funds sold. |
| (4) | Net interest rate spread, on a tax-equivalent basis, represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. See “Explanation of Use of Non-GAAP Financial Measurements”. |
| (5) | Net interest margin, on a tax-equivalent basis, represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. See “Explanation of Use of Non-GAAP Financial Measurements”. |
46
Rate/Volume Analysis.
The following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest and dividend income and interest expense during the periods indicated. Information is provided in each category with respect to: (1) interest income changes attributable to changes in volume (changes in volume multiplied by prior rate); (2) interest income changes attributable to changes in rate (changes in rate multiplied by prior volume); and (3) the net change.
The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Six Months Ended June 30, 2020 compared to Six Months Ended June 30, 2019 | ||||||||||||
| Increase (Decrease) Due to | ||||||||||||
| Volume | Rate | Net | ||||||||||
| Interest-earning assets | (In thousands) | |||||||||||
| Loans (1) | $ | 4,024 | $ | (2,656 | ) | $ | 1,368 | |||||
| Securities (1) | (424 | ) | (331 | ) | (755 | ) | ||||||
| Other investments - at cost | 20 | (127 | ) | (107 | ) | |||||||
| Short-term investments | 39 | (117 | ) | (78 | ) | |||||||
| Total interest-earning assets | 3,659 | (3,231 | ) | 428 | ||||||||
| Interest-bearing liabilities | ||||||||||||
| Interest-bearing checking accounts | 12 | (26 | ) | (14 | ) | |||||||
| Savings accounts | 9 | (13 | ) | (4 | ) | |||||||
| Money market accounts | 221 | 95 | 316 | |||||||||
| Time deposit accounts | (319 | ) | (262 | ) | (581 | ) | ||||||
| Short-term borrowing and long-term debt | (104 | ) | (286 | ) | (390 | ) | ||||||
| Total interest-bearing liabilities | (181 | ) | (492 | ) | (673 | ) | ||||||
| Change in net interest and dividend income | $ | 3,840 | $ | (2,739 | ) | $ | 1,101 | |||||
| (1) | Securities, loan income and change in net interest and dividend income are presented on a tax-equivalent basis using a tax rate of 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest income. |
During the six months ended June 30, 2020, net interest income increased $1.1 million, or 3.9%, to $29.6 million, compared to $28.5 million for the six months ended June 30, 2019. The increase in net interest income was due to an increase of $445,000, or 1.1%, in interest and dividend income and a decrease in interest expense of $673,000, or 5.7%. For the six months ended June 30, 2020, interest and dividend income included $1.3 million in interest and fee income from PPP loans. Excluding the income from PPP loans, net interest income decreased $128,000, or 0.4%. The decrease in interest expense of $673,000, or 5.7%, was due to a $283,000, or 3.4% decrease in interest expense on deposits and a decrease of $390,000, or 11.4%, in interest expense on FHLB borrowings.
The net interest margin for the six months ended June 30, 2020 was 2.80%, compared to 2.92% during the six months ended June 30, 2019. The net interest margin, on a tax-equivalent basis, was 2.82% for the six months ended June 30, 2020, compared to 2.95% for the six months ended June 30, 2019. Excluding the PPP interest and fee income of $1.3 million, the net interest margin decreased from 2.92% for the six months ended June 30, 2019 to 2.78% for the six months ended June 30, 2020. The decrease in the net interest margin was due to the continuing trend of market interest rates falling to historically low levels.
47
The average yield on interest-earning assets decreased 28 basis points from 4.15% for the six months ended June 30, 2019 to 3.87% for the six months ended June 30, 2020. During the six months ended June 30, 2020, the average cost of funds, including non-interest bearing demand accounts, decreased 15 basis points from 1.58% for the six months ended June 30, 2019 to 1.43%. For the six months ended June 30, 2020, the average cost of core deposits, including noninterest-bearing demand deposits, of 0.30% was comparable to the same period in 2019. The average cost of time deposits decreased 8 basis points from 2.06% for the six months ended June 30, 2019 to 1.98% during the same period in 2020. The average cost of borrowings decreased 27 basis points from 2.95% for the six months ended June 30, 2019 to 2.68% for the six months ended June 20, 2020. For the six months ended June 30, 2020, average demand deposits, an interest-free source of funds, increased $92.9 million, or 26.2%, from $353.9 million, or 21.8% of total average deposits, for the six months ended June 30, 2019 to $446.7 million, or 25.1% of total average deposits, for the six months ended June 30, 2020. During the six months ended June 30, 2020, average interest-earning assets increased $157.3 million, or 8.0%, to $2.1 billion. The increase in average interest-earning assets was due to an increase in average loans of $184.8 million, or 11.0%, partially offset by a decrease in average securities of $32.2 million, or 12.7%. Excluding average PPP loans, average loans increased $108.4 million, or 6.4%.
Provision for Loan Losses.
The amount that we provided for loan losses during the six months ended June 30, 2020 was based upon the changes that occurred in the loan portfolio during that same period. For the six months ended June 30, 2020, the Company increased the provision for loan losses by $4.2 million from $400,000 at June 30, 2019 to $4.6 million at June 30, 2020. This increase was based on management’s evaluation of certain qualitative factors included in the determination of the allowance, primarily as a result of the abrupt slowdown in commercial economic activity resulting from actions announced by the State of Massachusetts to close all non-essential businesses in the state as well as the dramatic rise in the unemployment rate. As a result, the Company established a special COVID-19 pandemic provision to build reserves resulting from the economic effects the pandemic may have on multiple industries. The increase in the loan provision for the six months ended June 30, 2020 related to COVID-19 factors was $1.5 million. This increase was based on management’s evaluation of certain qualitative factors included in the determination of the allowance, primarily a result of the abrupt slowdown in commercial economic activity resulting from actions announced by the State of Massachusetts to close all non-essential businesses in the state as well as the dramatic rise in the unemployment rate. Local unemployment rates were higher than national averages during the second quarter of 2020 due to the slower reopening plan for Massachusetts. In addition, loans demonstrating cash flow declines and borrowers sensitive to the prolonged shutdown were identified and contributed to an overall increase in reserves. Management will continue to closely monitor portfolio conditions and reevaluate the adequacy of the allowance. While the level of payment deferrals and PPP loan assistance will reduce the short-term risk in the Bank’s loan portfolio, management expects some risk rating downgrades and the potential for an increase in charge-offs in future periods.
Based upon an analysis of the portfolio to identify potentially impacted industries from the COVID-19 pandemic, including the downgrade of several lending relationships, specifically within the hotel portfolio, we allocated a total provision for loan losses of $4.6 million for the six months ended June 30, 2020. Of the total provision, $2.2 million was related to assets quality changes, while $1.5 million was related to COVID-19 factors, as mentioned above. Our allowance as a percentage of total loans, excluding PPP loans and acquired loans that have been marked to fair value, was 1.09% at June 30, 2020 and March 31, 2020.
During the six months ended June 30, 2020, special mention loans increased $70.4 million to $96.3 million at June 30, 2020, from $25.9 million at December 31, 2019. During the three months ended June 30, 2020, we downgraded thirteen lending relationships from pass-rated to special mention. Nine of these relationships, totaling $46.0 million, are in the hotel industry, and the other relationships are in retail or manufacturing. The hotel industry has experienced disruption as a direct result of the negative economic impacts of the COVID-19 pandemic.
The Company recorded net charge-offs of $399,000 for the six months ended June 30, 2020, as compared to net recoveries of $30,000 for the six months ended June 30, 2019. During the six months ended June 30, 2020, the Company recorded charge-offs of $493,000, compared to $923,000 during the same period in 2019. The charge-offs recorded during the six months ended June 30, 2019 were primarily due to a partial charge-off of $440,000 related to one commercial and industrial loan relationship that was previously reported as substandard. During the six months ended June 30, 2019, the Company also recorded recoveries of $893,000, primarily due to a partial recovery of $812,000 related to a single commercial real estate loan previously charged-off in 2010. The increase in the provision for loan losses was primarily due to the impacts of the COVID-19 pandemic on multiple sectors.
Although we believe that we have established and maintained the allowance for loan losses at adequate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment. If the COVID-19 pandemic has an adverse effect on the ability of our borrowers to satisfy their obligations to us, the demand for our loans or our other products and services, other aspects of our business operations, or on financial markets, real estate markets, or economic growth, this could, depending on the extent of the loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations could be materially and adversely affected.
Non-interest Income.
For the six months ended June 30, 2020, non-interest income was $4.6 million, a decrease of $76,000, or 1.6%, compared to $4.7 million for the six months ended June 30, 2019. Service charges and fees decreased $150,000, or 4.3%, and other non-interest income decreased $29,000, or 13.6%. During the six months ended June 30, 2019, service charges and fees included $110,000 in non-recurring interchange fee income. During the six months ended June 30, 2020, the Company reported unrealized gains on marketable equity securities of $137,000 and a realized gain on the sale of securities of $36,000, compared to unrealized gains on marketable equity securities of $149,000 and a realized loss on the sale of securities of $61,000 during the six months ended June 30, 2019.
48
Non-interest Expense.
For the six months ended June 30, 2020, non-interest expense increased $396,000, or 1.6%, to $24.6 million, or 2.18% of average assets, compared to $24.2 million, or 2.31% of average assets for the six months ended June 30, 2019. The increase in non-interest expense was primarily due to the $683,000, or 5.0%, increase in salaries and employee benefits, an increase in occupancy expense of $70,000, or 3.2%, an increase in data processing expenses of $55,000, or 4.0%, and an increase in FDIC insurance expense of $27,000, or 6.6%. These increases were partially offset by a $263,000, or 35.8%, decrease in advertising expense, a decrease of $78,000, or 9.4%, in furniture and equipment related expenses, a decrease in professional fees of $76,000, or 5.8%, and a decrease of $22,000, or 0.6%, in other non-interest expenses. For the six months ended June 30, 2019, the efficiency ratio was 72.1%, compared to 72.9% for the six months ended June 30, 2019.
Income Taxes.
Income tax expense for the six months ended June 30, 2020 was $1.0 million, or an effective tax rate of 20.3%, compared to $2.0 million, or an effective tax rate of 22.7%, for six months ended June 30, 2019. The decrease in the Company’s effective tax rate was primarily due to the effect of lower projected pre-tax income for the fiscal year-end December 31, 2020.
Explanation of Use of Non-GAAP Financial Measurements.
We believe that it is common practice in the banking industry to present interest income and related yield information on tax-exempt loans and securities on a tax-equivalent basis and that such information is useful to investors because it facilitates comparisons among financial institutions. However, the adjustment of interest income and yields on tax-exempt loans and securities to a tax-equivalent amount includes financial information that is not in compliance with GAAP. A reconciliation from GAAP to non-GAAP is provided below.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
| Interest | Average Yield | Interest | Average Yield | Interest | Average Yield | Interest | Average Yield | |||||||||||||||||||||||||
| Loans (no tax adjustment) | $ | 18,999 | 3.90 | % | $ | 18,302 | 4.35 | % | $ | 37,746 | 4.06 | % | $ | 36,360 | 4.35 | % | ||||||||||||||||
| Tax-equivalent adjustment (1) | 107 | 132 | 235 | 253 | ||||||||||||||||||||||||||||
| Loans (tax-equivalent basis) | $ | 19,106 | 3.92 | % | $ | 18,434 | 4.38 | % | $ | 37,981 | 4.08 | % | $ | 36,613 | 4.38 | % | ||||||||||||||||
| Securities (no tax adjustment) | $ | 1,165 | 2.15 | % | $ | 1,630 | 2.62 | % | $ | 2,564 | 2.32 | % | $ | 3,320 | 2.63 | % | ||||||||||||||||
| Tax-equivalent adjustment (1) | 5 | 5 | 11 | 10 | ||||||||||||||||||||||||||||
| Securities (tax-equivalent basis) | $ | 1,170 | 2.16 | % | $ | 1,635 | 2.63 | % | $ | 2,575 | 2.33 | % | $ | 3,330 | 2.64 | % | ||||||||||||||||
| Net interest income (no tax adjustment) | $ | 15,092 | $ | 14,201 | $ | 29,645 | $ | 28,527 | ||||||||||||||||||||||||
| Tax-equivalent adjustment (1) | 112 | 137 | 246 | 263 | ||||||||||||||||||||||||||||
| Net interest income (tax-equivalent basis) | $ | 15,204 | $ | 14,338 | $ | 29,891 | $ | 28,790 | ||||||||||||||||||||||||
| Interest rate spread (no tax adjustment) | 2.37 | % | 2.50 | % | 2.42 | % | 2.54 | % | ||||||||||||||||||||||||
| Net interest margin (no tax adjustment) | 2.74 | % | 2.89 | % | 2.80 | % | 2.92 | % | ||||||||||||||||||||||||
(1) The tax equivalent adjustment is based upon a 21% tax rate.
49
Liquidity and Capital Resources.
The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, deposit withdrawals and operating expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investment securities and funds provided by our operations. We also can borrow funds from the FHLB and FRB based on eligible collateral of loans and securities.
At June 30, 2020 and December 31, 2019, outstanding borrowings from the FHLB were $196.7 million and $240.5 million, respectively. At June 30, 2020, we had $268.3 million in available borrowing capacity with the FHLB. We have the ability to increase our borrowing capacity with the FHLB by pledging investment securities or additional loans. In addition, we have available lines of credit of $15.0 million and $50.0 million with other correspondent banks. Interest rates on these lines are determined and reset on a daily basis by each respective bank. The Bank also had a line of credit in the amount up to $15.0 million with a correspondent bank at an interest rate determined and reset on a daily basis. There were no advances outstanding under this line at June 30, 2020 and 2019. The Bank also had a $50.0 million line of credit with another correspondent bank at an interest rate determined and reset on a daily basis. There were no advances outstanding under this line at June 30, 2020 and 2019. As of June 30, 2020, the Bank also has an available line of credit of $21.8 million with the FRB Discount Window at an interest rate determined and reset on a daily basis. There were no advances outstanding under this line at June 30, 2020 or December 31, 2019. In addition, we may enter into reverse repurchase agreements with approved broker-dealers. Reverse repurchase agreements are agreements that allow us to borrow money using our securities as collateral.
We also have outstanding at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. We are also obligated under agreements with the FHLB to repay borrowed funds.
At June 30, 2020, we exceeded each of the applicable regulatory capital requirements. As of June 30, 2020, the most recent notification from the Office of Comptroller of the Currency categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized,” the Bank must maintain minimum total risk-based, Tier 1 risk-based, Common Equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes would change our category.
| Actual | Minimum For Capital Adequacy Purpose | Minimum To Be Well Capitalized | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| June 30, 2020 | ||||||||||||||||||||||||
| Total Capital (to Risk Weighted Assets): | ||||||||||||||||||||||||
| Consolidated | $ | 238,703 | 14.00 | % | $ | 136,386 | 8.00 | % | N/A | N/A | ||||||||||||||
| Bank | 225,881 | 13.27 | 136,160 | 8.00 | $ | 170,199 | 10.00 | % | ||||||||||||||||
| Tier 1 Capital (to Risk Weighted Assets): | ||||||||||||||||||||||||
| Consolidated | 220,451 | 12.93 | 102,289 | 6.00 | N/A | N/A | ||||||||||||||||||
| Bank | 207,628 | 12.20 | 102,120 | 6.00 | 136,160 | 8.00 | ||||||||||||||||||
| Common Equity Tier 1 Capital (to Risk Weighted Assets) | ||||||||||||||||||||||||
| Consolidated | 220,451 | 12.93 | 76,717 | 4.50 | N/A | N/A | ||||||||||||||||||
| Bank | 207,628 | 12.20 | 76,590 | 4.50 | 110,630 | 6.50 | ||||||||||||||||||
| Tier 1 Leverage Ratio (to Adjusted Average Assets): | ||||||||||||||||||||||||
| Consolidated | 220,451 | 9.50 | 92,816 | 4.00 | N/A | N/A | ||||||||||||||||||
| Bank | 207,628 | 8.96 | 92,733 | 4.00 | 115,917 | 5.00 | ||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||
| Total Capital (to Risk Weighted Assets): | ||||||||||||||||||||||||
| Consolidated | $ | 240,226 | 13.93 | % | $ | 137,934 | 8.00 | % | N/A | N/A | ||||||||||||||
| Bank | 227,678 | 13.22 | 137,773 | 8.00 | $ | 172,217 | 10.00 | % | ||||||||||||||||
| Tier 1 Capital (to Risk Weighted Assets): | ||||||||||||||||||||||||
| Consolidated | 226,124 | 13.11 | 103,451 | 6.00 | N/A | N/A | ||||||||||||||||||
| Bank | 213,576 | 12.40 | 103,330 | 6.00 | 137,773 | 8.00 | ||||||||||||||||||
| Common Equity Tier 1 Capital (to Risk Weighted Assets) | ||||||||||||||||||||||||
| Consolidated | 226,124 | 13.11 | 77,588 | 4.50 | N/A | N/A | ||||||||||||||||||
| Bank | 213,576 | 12.40 | 77,498 | 4.50 | 111,941 | 6.50 | ||||||||||||||||||
| Tier 1 Leverage Ratio (to Adjusted Average Assets): | ||||||||||||||||||||||||
| Consolidated | 226,124 | 10.45 | 86,593 | 4.00 | N/A | N/A | ||||||||||||||||||
| Bank | 213,576 | 9.88 | 86,500 | 4.00 | 108,125 | 5.00 | ||||||||||||||||||
50
We also have outstanding, at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. The following table summarizes the contractual obligations and credit commitments at June 30, 2020:
| Amounts Due Within 1 Year | Amounts Due After 1 Year But Within 3 Years | Amounts Due After 3 Years But Within 5 Years | Amounts Due After 5 Years | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Lease Obligations | ||||||||||||||||||||
| Operating lease obligations | $ | 1,448 | $ | 2,643 | $ | 2,091 | $ | 6,129 | $ | 12,311 | ||||||||||
| Borrowings and Debt | ||||||||||||||||||||
| Federal Home Loan Bank | 140,385 | 53,564 | 2,798 | — | 196,747 | |||||||||||||||
| Federal Reserve Bank | — | 26,417 | — | — | 26,417 | |||||||||||||||
| Total borrowings and debt | 140,385 | 79,981 | 2,798 | — | 223,164 | |||||||||||||||
| Credit Commitments | ||||||||||||||||||||
| Available lines of credit | 236,533 | — | — | 87,038 | 323,571 | |||||||||||||||
| Other loan commitments | 81,377 | 24,846 | 2,791 | — | 109,014 | |||||||||||||||
| Letters of credit | 9,424 | 5,626 | 438 | 256 | 15,744 | |||||||||||||||
| Total credit commitments | 327,334 | 30,472 | 3,229 | 87,294 | 448,329 | |||||||||||||||
| Other Obligations | ||||||||||||||||||||
| Vendor Contracts | 3,656 | 7,247 | 6,024 | — | 16,927 | |||||||||||||||
| Total Obligations | $ | 472,823 | $ | 120,343 | $ | 14,142 | $ | 93,423 | $ | 700,731 | ||||||||||
OFF-BALANCE SHEET ARRANGEMENTS.
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
51
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our assessment of our sensitivity to market risk since our presentation in our 2019 Annual Report. Please refer to Item 7 of the 2019 Annual Report for additional information.
ITEM 4: CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered by this report. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.
Changes in Internal Control Over Financial Reporting.
There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS. |
We are subject to claims and legal actions in the ordinary course of business. We believe that all such claims and actions currently pending against us, if any, are either adequately covered by insurance or would not have a material adverse effect on us if decided in a manner unfavorable to us.
| ITEM 1A. | RISK FACTORS. |
For a summary of risk factors relevant to our operations, see Part 1, Item 1A, “Risk Factors” in our 2019 Annual Report. There was one material change in the risk factors relevant to our operations discussed in our 2019 Annual Report, as described below:
The recent COVID-19 pandemic is adversely impacting us and our customers, counterparties, employees and third-party service providers. Further, the COVID-19 pandemic could lead to an economic recession or other severe disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which we operate and the adverse impacts on our business, financial position, results of operations and prospects could be significant.
Our business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions. The COVID-19 global public health crisis and the resulting “stay-at-home” orders have resulted in widespread volatility, severe disruptions in the U.S. economy at large, and for small businesses in particular, deterioration in household, business, economic and market conditions. The extent of the impact of the COVID-19 pandemic and actions taken in response to the pandemic on our capital, liquidity and other financial positions and on our business, results of operations and prospects will depend on a number of evolving factors, including:
| ● | The duration, extent, and severity of the pandemic. COVID-19 does not yet appear to be contained and could affect significantly more households and businesses. The duration and severity of the pandemic continue to be impossible to predict. |
52
| ● | The effects on our customers, counterparties, employees and third-party service providers. COVID-19 and its associated consequences and uncertainties may affect individuals, households, and businesses differently and unevenly. In the near-term if not longer, however, our credit, operational and other risks are generally expected to increase. |
| ● | The effects on economies and markets. Whether the actions of governmental and nongovernmental authorities will be successful in mitigating the adverse effects of COVID-19 is unclear. National, regional and local economies and markets could suffer disruptions that are lasting. In addition, governmental actions are meaningfully influencing the interest-rate environment, which could adversely affect our results of operations and financial condition. |
Additionally, if the COVID-19 pandemic has an adverse effect on (i) customer deposits, (ii) the ability of our borrowers to satisfy their obligations to us, (iii) the demand for our loans or our other products and services, (iv) other aspects of our business operations, or (v) on financial markets, real estate markets, or economic growth, this could, depending on the extent of the decline in customer deposits or loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations could be materially and adversely affected.
We are unable to estimate the impact of COVID-19 on our business and operations at this time. The global pandemic could cause us to experience higher credit losses in our lending portfolio, impairment of our goodwill and other financial assets, further reduced demand for our products and services and other negative impacts on our financial position, results of operations and prospects. Sustained adverse effects may also prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements or result in downgrades in our credit ratings.
There are no additional material changes in the risk factors relevant to our operations since December 31, 2019.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
The following table sets forth information with respect to purchases made by us of our common stock during the three months ended June 30, 2020.
| Period | Total Number of Shares Purchased | Average Price Paid per Share ($) | Total Number of Shares Purchased as Part of Publicly Announced Programs | Maximum Number of Shares that May Yet Be Purchased Under the Program (1) | |||||||||||||
| April 1 - 30, 2020 | — | — | — | 117,135 | |||||||||||||
| May 1 - 31, 2020 | — | — | — | 117,135 | |||||||||||||
| June 1 – 30, 2020 | — | — | — | 117,135 | |||||||||||||
| Total | — | — | — | 117,135 | |||||||||||||
| (1) | On January 29, 2019, the Board of Directors authorized the 2019 Plan under which the Company may purchase up to 2,814,200 shares, or 10%, of its outstanding common stock. As of June 30, 2020, the Company has repurchased 2,697,065 shares under the 2019 Plan. |
There were no sales by us of unregistered securities during the three months ended June 30, 2020.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
| ITEM 4. | MINE SAFETY DISCLOSURE. |
Not applicable.
| ITEM 5. | OTHER INFORMATION. |
None.
53
| ITEM 6. | EXHIBITS. |
The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.
54
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 7, 2020.
| Western New England Bancorp, Inc. | |||
| By: | /s/ James C. Hagan | ||
| James C. Hagan | |||
| President and Chief Executive Officer | |||
| By: | /s/ Guida R. Sajdak | ||
| Guida R. Sajdak | |||
| Executive Vice President and Chief Financial Officer | |||
EXHIBIT INDEX
_______________________________
| * | Filed herewith. |
| ** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
Western New England Bancorp, Inc. 10-Q
EXHIBIT 31.1
CERTIFICATION
I, James C. Hagan, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Western New England Bancorp, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: | August 7, 2020 | /s/ James C. Hagan |
| James C. Hagan | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) |
Western New England Bancorp, Inc. 10-Q
EXHIBIT 31.2
CERTIFICATION
I, Guida R. Sajdak, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Western New England Bancorp, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: | August 7, 2020 | /s/ Guida R. Sajdak |
| Guida R. Sajdak | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) |
Western New England Bancorp, Inc. 10-Q
EXHIBIT 32.1
statement
furnished pursuant to section 906 of the
sarbanes-oxley act of 2002, 18 u.s.c. section 1350
In connection with the Quarterly Report on Form 10-Q of Western New England Bancorp, Inc. (the “Company”) for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), James C. Hagan, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
| A) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), and |
| B) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. |
| August 7, 2020 | /s/ James C. Hagan |
| Dated | James C. Hagan |
| President and Chief Executive Officer |
Western New England Bancorp, Inc. 10-Q
EXHIBIT 32.2
statement
furnished pursuant to section 906 of the
sarbanes-oxley act of 2002, 18 u.s.c. section 1350
In connection with the Quarterly Report on Form 10-Q of Western New England Bancorp, Inc. (the “Company”) for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Guida R. Sajdak, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
| A) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), and |
| B) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. |
| August 7, 2020 | /s/ Guida R. Sajdak |
| Dated | Guida R. Sajdak |
| Chief Financial Officer |