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Section 1: 10-Q (QUARTERLY REPORT)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q
 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

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 001-16767

 

Western New England Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

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

 

141 Elm Street, Westfield, Massachusetts 01086

(Address of principal executive offices)

(Zip Code)

 

(413) 568-1911

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

 

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

  

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

 

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

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

(Title of each class) (Trading symbol) (Name of exchange on which registered)
Common Stock, $0.01 par value per share WNEB NASDAQ

  

 

At May 3, 2019, the registrant had 26,953,429 shares of common stock, $0.01 par value, issued and outstanding.

 

 

 

 

 

TABLE OF CONTENTS

 

      Page
       
FORWARD-LOOKING STATEMENTS   i
       
PART I – FINANCIAL INFORMATION    
       
Item 1. Financial Statements of Western New England Bancorp, Inc. and Subsidiaries (Unaudited)    
       
  Consolidated Balance Sheets – March 31, 2019 and December 31, 2018   1
       
  Consolidated Statements of Operations – Three Months Ended March 31, 2019 and 2018   2
       
  Consolidated Statements of Comprehensive Income – Three Months Ended  March 31, 2019 and 2018   3
       
  Consolidated Statements of Changes in Shareholders’ Equity – Three Months Ended  March 31, 2019 and 2018   4
       
  Consolidated Statements of Cash Flows – Three Months Ended  March 31, 2019 and 2018   5
       
  Notes to Consolidated Financial Statements   6
       
Item 2. Management’s Discussion and Analysis of Financial Condition and  Results of Operations   32
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   40
       
Item 4. Controls and Procedures   40
       
PART II – OTHER INFORMATION    
       
Item 1. Legal Proceedings   41
       
Item 1A. Risk Factors   41
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   42
       
Item 3. Defaults upon Senior Securities   42
       
Item 4. Mine Safety Disclosures   42
       
Item 5. Other Information   42
       
Item 6. Exhibits   42

  

 

 

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” which 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:

 

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)

 

   March 31,   December 31, 
   2019   2018 
ASSETS          
Cash and due from banks  $19,782   $20,616 
Federal Funds Sold   1,275    1,246 
Interest-bearing deposits and other short-term investments   23,425    4,927 
Cash and cash equivalents   44,482    26,789 
           
Securities available-for-sale, at fair value   244,878    253,748 
Marketable equity securities, at fair value   6,518    6,408 
Federal Home Loan Bank stock and other restricted stock, at cost   12,407    14,695 
Loans, net of allowance for loan losses of $11,879 and $12,053 at March 31, 2019 and December 31, 2018, respectively   1,668,787    1,684,804 
Premises and equipment, net   24,432    24,624 
Accrued interest receivable   5,640    5,652 
Bank-owned life insurance   69,677    69,252 
Deferred tax asset, net   8,753    9,872 
Goodwill   12,487    12,487 
Core deposit intangible   3,594    3,688 
Other assets   14,042    6,803 
Total Assets  $2,115,697   $2,118,822 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
LIABILITIES:          
Deposits:          
Non-interest-bearing  $345,077   $355,389 
Interest-bearing   1,284,757    1,240,604 
Total deposits   1,629,834    1,595,993 
           
Short-term borrowings   35,000    59,250 
Long-term debt   196,039    208,018 
Other liabilities   27,507    18,532 
Total liabilities   1,888,380    1,881,793 
           
SHAREHOLDERS’ EQUITY:          
Preferred stock - $0.01 par value, 5,000,000 shares authorized, none outstanding at March 31, 2019 and December 31, 2018        
Common stock - $0.01 par value, 75,000,000 shares authorized, 26,953,429 shares issued and outstanding at March 31, 2019; 28,393,348 shares issued and outstanding at December 31, 2018   270    284 
Additional paid-in capital   167,812    182,096 
Unearned compensation - ESOP   (5,022)   (5,171)
Unearned compensation - Equity Incentive Plan   (1,702)   (872)
Retained earnings   76,156    74,108 
Accumulated other comprehensive loss   (10,197)   (13,416)
TOTAL SHAREHOLDERS’ EQUITY   227,317    237,029 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $2,115,697   $2,118,822 

 

See accompanying notes to unaudited consolidated financial statements.

 

1

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED

(Dollars in thousands, except per share data)

 

   Three Months Ended 
   March 31, 
    2019    2018 
Interest and dividend income:          
Residential and commercial real estate loans  $14,971   $13,799 
Commercial and industrial loans   3,002    2,814 
Consumer loans   85    89 
Debt securities, taxable   1,629    1,748 
Debt securities, tax-exempt   20    24 
Equity securities   41    36 
Other investments   236    201 
Short-term investments   76    21 
Total interest and dividend income   20,060    18,732 
           
Interest expense:          
Deposits   3,969    2,355 
Long-term debt   1,139    855 
Short-term borrowings   626    800 
Total interest expense   5,734    4,010 
Net interest and dividend income   14,326    14,722 
           
Provision for loan losses   50    500 
Net interest and dividend income after provision for loan losses   14,276    14,222 
           
Non-interest income (loss):          
Service charges and fees   1,633    1,583 
Income from BOLI   425    442 
Gain (loss) on available-for-sale securities, net   35    (201)
Unrealized gains (losses) on marketable equity securities   70    (106)
Gain on sale of other real estate owned       48 
Other income   8     
Total non-interest income   2,171    1,766 
           
Non-interest expense:          
Salaries and employees benefits   6,780    6,533 
Occupancy   1,171    1,060 
Furniture and equipment   405    367 
Data processing   665    637 
Professional fees   705    659 
FDIC insurance assessment   176    158 
Advertising   364    347 
Other expenses   1,757    1,665 
Total non-interest expense   12,023    11,426 
Income before income taxes   4,424    4,562 
Income tax provision   994    1,043 
Net income   $3,430   $3,519 
           
Earnings per common share:          
Basic earnings per share  $0.13   $0.12 
Weighted average shares outstanding   27,037,520    29,484,824 
Diluted earnings per share  $0.13   $0.12 
Weighted average diluted shares outstanding   27,153,160    29,620,929 

 

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
March 31,
 
   2019   2018 
         
Net income  $3,430   $3,519 
           
Other comprehensive income (loss):          
Unrealized gains (losses) on available-for-sale securities:          
Unrealized holding gains (losses)   4,327    (5,116)
Reclassification adjustment for net (gains) losses realized in income (1)   (35)   201 
Cumulative-effect adjustment due to change in accounting principle (ASU 2017-08)   7     
Cumulative-effect adjustment due to change in accounting principle (ASU 2016-01)       237 
Unrealized gains (losses)   4,299    (4,678)
Tax effect   (1,113)   1,070 
Net-of-tax amount   3,186    (3,608)
           
Cash flow hedges:          
Change in fair value of derivatives used for cash flow hedges   (328)   678 
Reclassification adjustment for loss realized in interest expense (2)   68    171 
Reclassification adjustment for termination fee realized in interest expense (3)   264    264 
Unrealized gains on cash flow hedges   4    1,113 
Tax effect   (1)   (313)
Net-of-tax amount   3    800 
           
Defined benefit pension plan:          
Amortization of defined benefit plans actuarial loss(4)   32    57 
Tax effect   (9)   (16)
Net-of-tax amount   23    41 
           
Other comprehensive income (loss)   3,212    (2,767)
           
Comprehensive income  $6,642   $752 

        

(1) Realized gains and losses on available-for-sale securities are recognized as a component of non-interest income. The tax effects applicable to net realized gains and losses were $10,000 and $(57,000) for the three months ended March 31, 2019 and 2018, respectively.

(2) Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term debt. Income tax effects associated with the reclassification adjustments were $19,000 and $48,000 for the three months ended March 31, 2019 and 2018, respectively.

(3) Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term debt. Income tax effects associated with the reclassification adjustments were $74,000 for the three months ended March 31, 2019 and 2018.

(4) Amounts represent the reclassification of defined benefit plans amortization and have been recognized as a component of non-interest expense. Income tax effects associated with the reclassification adjustments were $9,000 and $16,000 for the three months ended March 31, 2019 and 2018, respectively.

 

See accompanying notes to unaudited consolidated financial statements.

 

3

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED

THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(Dollars in thousands, except share data)

  

   Common Stock          Unearned       Accumulated    
   Shares   Par Value   Additional
Paid-in
Capital
   Unearned
Compensation - ESOP
   Compensation -
Equity Incentive Plan
   Retained
Earnings
   Other
Comprehensive
Loss
   Total 
                                 
BALANCE AT DECEMBER 31, 2017   30,487,309   $305   $203,527   $(5,786)  $(791)  $62,578   $(12,552)  $247,281 
Comprehensive income                       3,519    (2,767)   752 
Cumulative-effect adjustment due to change in accounting principle (ASU 2016-01)                       (237)   237     
Common stock held by ESOP committed to be released (90,978 shares)           88    154                242 
Share-based compensation - equity incentive plan                   232            232 
Common stock repurchased   (451,641)   (5)   (4,798)                   (4,803)
Issuance of common stock in connection with stock option exercises   16,975    1    103                    104 
Issuance of common stock in connection with equity incentive plan   85,440    1    925        (926)            
Cash dividends declared and paid ($0.04 per share)                       (1,185)       (1,185)
BALANCE AT MARCH 31, 2018   30,138,083   $302   $199,845   $(5,632)  $(1,485)  $64,675   $(15,082)  $242,623 
                                         
BALANCE AT DECEMBER 31, 2018   28,393,348   $284   $182,096   $(5,171)  $(872)  $74,108   $(13,416)  $237,029 
Comprehensive income                       3,430    3,212    6,642 
Cumulative-effect adjustment due to change in accounting principle (ASU 2017-08)                            (7)   7     
Common stock held by ESOP committed to be released (88,117 shares)           60    149                209 
Share-based compensation - equity incentive plan           (45)       240            195 
Common stock repurchased   (1,555,352)   (15)   (15,432)                   (15,447)
Issuance of common stock in connection with stock option exercises   12,550        64                    64 
Issuance of common stock in connection with equity incentive plan   102,883    1    1,069        (1,070)            
Cash dividends declared and paid ($0.05 per share)                       (1,375)       (1,375)
BALANCE AT MARCH 31, 2019   26,953,429   $270   $167,812   $(5,022)  $(1,702)  $76,156   $(10,197)  $227,317 

 

See accompanying notes to unaudited consolidated financial statements.

 

4

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(Dollars in thousands)

 

   Three Months Ended
March 31,
 
   2019   2018 
OPERATING ACTIVITIES:          
Net income  $3,430   $3,519 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   50    500 
Depreciation and amortization of premises and equipment   529    494 
Accretion of purchase accounting adjustments, net   (10)   (225)
Amortization of core deposit intangible   94    94 
Net amortization of premiums and discounts on securities and mortgage loans   540    793 
Share-based compensation expense   195    232 
ESOP expense   209    242 
Net (gain) loss on available-for-sale securities   (35)   201 
Change in unrealized (gain) loss on equity securities   (70)   106 
Net gain on sales of other real estate owned       (48)
Income from bank-owned life insurance   (425)   (442)
Net change in:          
Accrued interest receivable   12    68 
Other assets   (7,249)   977 
Other liabilities   9,231    2,415 
Net cash provided by operating activities   6,501    8,926 
           
INVESTING ACTIVITIES:          
Securities, available-for-sale:          
Purchases   (15,294)   (2,577)
Proceeds from sales and redemption   21,642    5,635 
Proceeds from calls, maturities, and principal collections   6,296    5,966 
Loan originations and principal payments, net   15,912    (16,202)
Redemption of Federal Home Loan Bank of Boston stock   2,288    868 
Proceeds from sale of other real estate owned       203 
Purchases of premises and equipment   (374)   (677)
Proceeds from sale of premises and equipment   27    20 
Net cash provided by (used in) investing activities   30,497    (6,764)
           
FINANCING ACTIVITIES:          
Net increase in deposits   33,875    47,735 
Net change in short-term borrowings   (24,250)   (89,650)
Repayment of long-term debt   (11,951)   (31,992)
Proceeds from long-term debt       80,000 
Cash dividends paid   (1,375)   (1,185)
Common stock repurchased   (15,668)   (4,868)
Issuance of common stock in connection with stock option exercises   64    104 
Net cash (used in) provided by financing activities   (19,305)   144 
           
NET CHANGE IN CASH AND CASH EQUIVALENTS:   17,693    2,306 
Beginning of period   26,789    27,132 
End of period  $44,482   $29,438 
           
Supplemental cash flow information:          
Interest paid  $5,655   $3,969 
Taxes paid   832    30 
Net change in cash due to broker for common stock repurchased   (221)   (65)

 

See the accompanying notes to unaudited consolidated financial statements.

 

5

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

MARCH 31, 2019

 

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 22 banking offices in western Massachusetts and northern Connecticut, and its primary sources of revenue are interest income from loans as well as interest income from investment securities.

 

Wholly-owned Subsidiaries. Elm Street Securities Corporation, WFD Securities, Inc. and CSB Colts, Inc., are Massachusetts chartered securities corporations, formed for the primary purpose of holding qualified securities. WB Real Estate Holdings, LLC, is a Massachusetts-chartered limited liability company that holds real property acquired as security for debts previously contracted by the Bank.

 

Principles of Consolidation. The consolidated financial statements include the accounts of Western New England Bancorp, the Bank, CSB Colts, Inc., Elm Street Securities Corporation, WB Real Estate Holdings, LLC and WFD Securities, Inc. All material intercompany balances and transactions have been eliminated in consolidation.

 

Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses for each. Actual results could differ from those estimates. 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 March 31, 2019, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results of operations for the year ending December 31, 2019. 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, 2018, included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Annual Report”).

 

Reclassifications. Amounts in the prior period financial statements are reclassified when necessary to conform to the current year presentation.

 

6

 

 

2. EARNINGS PER SHARE

 

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 solely to stock options and are determined using the treasury stock method. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. There were no anti-dilutive shares outstanding during the three months ended March 31, 2019 and 2018.

 

Earnings per common share have been computed based on the following:

 

   Three Months Ended 
   March 31, 
   2019   2018 
   (In thousands, except per share data) 
         
Net income applicable to common stock  $3,430   $3,519 
           
Average number of common shares issued   27,834    30,358 
Less: Average unallocated ESOP Shares   (700)   (791)
Less: Average unvested equity incentive plan shares   (96)   (82)
           
Average number of common shares outstanding used to calculate basic earnings per common share   27,038    29,485 
Effect of dilutive equity incentive plan   79    35 
Effect of dilutive stock options   36    101 
Average number of common shares outstanding used to calculate diluted earnings per common share   27,153    29,621 
           
Basic earnings per share  $0.13   $0.12 
Diluted earnings per share  $0.13   $0.12 

 

7

 

 

3. COMPREHENSIVE INCOME (LOSS)

  

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income (loss).

 

The components of accumulated other comprehensive loss included in shareholders’ equity are as follows:

 

  

March 31,

2019

  

December 31,

2018

 
   (In thousands) 
         
Net unrealized losses on securities available-for-sale  $(5,585)  $(9,891)
Tax effect   1,378    2,491 
 Net-of-tax amount   (4,207)   (7,400)
           
Fair value of derivatives used for cash flow hedges   (1,518)   (1,259)
Termination fee on cancelled cash flow hedges   (2,332)   (2,595)
Total derivatives   (3,850)   (3,854)
Tax effect   1,083    1,084 
Net-of-tax amount   (2,767)   (2,770)
           
Unrecognized actuarial loss on the defined benefit plan   (4,484)   (4,516)
Tax effect   1,261    1,270 
Net-of-tax amount   (3,223)   (3,246)
           
Accumulated other comprehensive loss  $(10,197)  $(13,416)

 

The following table presents changes in accumulated other comprehensive loss for the periods ended March 31, 2019 and 2018 by component:

 

   Securities   Derivatives  

Defined Benefit

Plan

   Accumulated Other Comprehensive Loss 
   (In thousands) 
Balance at December 31, 2017  $(4,042)  $(4,181)  $(4,329)  $(12,552)
Cumulative-effect adjustment due to change in accounting
principle (ASU 2016-01)
   237            237 
Current-period other comprehensive (loss) income   (3,608)   800    41    (2,767)
Balance at March 31, 2018  $(7,413)  $(3,381)  $(4,288)  $(15,082)
                     
Balance at December 31, 2018  $(7,400)  $(2,770)  $(3,246)  $(13,416)
Cumulative-effect adjustment due to change in accounting
principle (ASU 2017-08)
   7            7 
Current-period other comprehensive income   3,186    3    23    3,212 
Balance at March 31, 2019  $(4,207)  $(2,767)  $(3,223)  $(10,197)
                     

8

 

 

4. SECURITIES

 

Securities available-for-sale are summarized as follows:

 

   March 31, 2019 
   Amortized Cost  

Gross

Unrealized

Gains

  

Gross Unrealized

Losses

   Fair Value 
   (In thousands) 
Available-for-sale securities:                    
Debt securities:                    
Government-sponsored enterprise obligations  $25,150   $   $(511)  $24,639 
State and municipal bonds   2,965    38    (11)   2,992 
Corporate bonds   26,060        (389)   25,671 
Total debt securities   54,175    38    (911)   53,302 
                     
Mortgage-backed securities:                    
Government-sponsored mortgage-backed securities   176,696    103    (4,177)   172,622 
U.S. government guaranteed mortgage-backed securities   19,592    19    (657)   18,954 
Total mortgage-backed securities   196,288    122    (4,834)   191,576 
                     
Total available-for-sale  $250,463   $160   $(5,745)  $244,878 

 

   December 31, 2018 
    

Amortized

Cost

    

Gross

Unrealized

Gains

    

Gross Unrealized

Losses

    Fair Value 
    (In thousands) 
Available-for-sale securities:                    
Debt securities:                    
Government-sponsored enterprise obligations  $25,150   $   $(1,203)  $23,947 
State and municipal bonds   2,976    33    (65)   2,944 
Corporate bonds   49,819        (1,651)   48,168 
Total debt securities   77,945    33    (2,919)   75,059 
                     
Mortgage-backed securities:                    
Government-sponsored mortgage-backed securities   165,605    1    (6,255)   159,351 
U.S. government guaranteed mortgage-backed securities   20,089    1    (752)   19,338 
Total mortgage-backed securities   185,694    2    (7,007)   178,689 
                     
Total available-for-sale  $263,639   $35   $(9,926)  $253,748 

 

At March 31, 2019, government-sponsored enterprise obligations with a fair value of $6.9 million and mortgage-backed securities with a fair value $54.5 million were pledged to secure public deposits and for other purposes as required or permitted by law.

 

During the three months ended March 31, 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 $7,000.

 

9

 

 

The amortized cost and fair value of available-for-sale debt securities at March 31, 2019, 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.

 

   March 31, 2019 
   Amortized Cost   Fair Value 
   (In thousands) 
Available-for-sale securities:          
Debt securities::          
Due in one year or less  $240   $240 
Due after one year through five years   29,482    29,003 
Due after five years through ten years   17,715    17,440 
Due after ten years   6,738    6,619 
Total debt securities   54,175    53,302 
           
Mortgage-backed securities   196,288    191,576 
Total available-for-sale securities  $250,463   $244,878 

 

Gross realized gains and losses on securities available-for-sale for the three months ended March 31, 2019 and 2018 are as follows:

 

   Three Months Ended 
   March 31, 
   2019   2018 
   (In thousands) 
         
Gross gains realized  $35   $ 
Gross losses realized       (201)
Net loss realized  $35   $(201)

 

Proceeds from the sales of securities available-for-sale amounted to $21.6 million for the three months ended March 31, 2019, while proceeds from the redemption of securities available-for-sale amounted to $5.6 million for the three months ended March 31, 2018.

 

10

 

 

Information pertaining to securities with gross unrealized losses at March 31, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

 

   March 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  $12   $1,044   $4,165   $146,695 
U.S. government guaranteed mortgage-backed securities           657    15,414 
Corporate bonds           389    25,671 
State and municipal bonds           11    1,576 
Government-sponsored enterprise obligations           511    24,639 
Total available-for-sale  $12   $1,044   $5,733   $213,995 

 

   December 31, 2018 
   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  $74   $7,354   $6,181   $148,762 
U.S. government guaranteed mortgage-backed securities   15    2,829    737    14,669 
Corporate bonds   110    9,995    1,541    38,173 
State and municipal bonds           65    1,532 
Government-sponsored enterprise obligations           1,203    23,947 
Total available-for-sale  $199   $20,178   $9,727   $227,083 

 

During the three months ended March 31, 2019 and year ended December 31, 2018, the Company did not record any fair value impairment charges on its investments. Management regularly reviews the portfolio for securities with unrealized losses. At March 31, 2019, 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.

 

11

 

 

5. LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Major classifications of loans at the periods indicated were as follows:

 

   March 31,   December 31, 
   2019   2018 
   (In thousands) 
     
Commercial real estate  $770,776   $768,881 
Residential real estate:          
Residential 1-4 family   575,561    577,641 
Home equity   95,997    97,238 
Commercial and industrial   228,709    243,493 
Consumer   5,270    5,203 
Total gross loans   1,676,313    1,692,456 
Premiums and deferred loan fees and costs, net   4,353    4,401 
Allowance for loan losses   (11,879)   (12,053)
Net loans  $1,668,787   $1,684,804 

 

There were no purchases of loans during the three months ended March 31, 2019 and year ended December 31, 2018.

 

Loans Serviced for Others.

 

The Company has transferred a portion of its originated commercial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in our accompanying consolidated balance sheets. We continue to service the loans on behalf of the participating lenders. We share with participating lenders, on a pro-rata basis, any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. At March 31, 2019 and December 31, 2018, the Company was servicing commercial loans participated out to various other institutions totaling $35.2 million and $35.4 million, respectively.

 

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 March 31, 2019, include weighted average prepayment speed for the portfolio using the Public Securities Association Standard Prepayment Model (148 PSA), weighted average internal rate of return (12.05%), weighted average servicing fee (0.25%), and net cost to service loans ($84.30 per loan). The estimated fair value of capitalized servicing rights may vary significantly in subsequent periods primarily due to changing market interest rates, and their effect on prepayment speeds and discount rates.

 

At March 31, 2019 and December 31, 2018, the Company was servicing residential mortgage loans owned by investors totaling $55.2 million and $56.6 million, respectively. Net service fee income of $18,000 and $25,000 was recorded for the three months ended March 31, 2019 and 2018, respectively, and is included in service charges and fees on the consolidated statements of operations.

 

12

 

 

A summary of the activity in the balances of mortgage servicing rights follows:

 

   Three Months Ended March 31, 
   2019   2018 
   (In thousands) 
         
Balance at the beginning of year:  $286   $352 
Capitalized mortgage servicing rights        
Amortization   (17)   (17)
Balance at the end of period  $269   $335 
Fair value at the end of period  $416   $537 

 

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.

 

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. There were no 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 80% and we do not grant subprime loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment. Home equity loans are secured by first or second mortgages on one-to-four family owner occupied properties.

 

13

 

 

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.

 

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.

 

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.

 

An analysis of changes in the allowance for loan losses by segment for the three months ended March 31, 2019 and 2018 is as follows:

 

   Commercial Real Estate   Residential Real Estate   Commercial and Industrial   Consumer   Unallocated   Total 
   (In thousands) 
Balance at December 31, 2017  $4,712   $3,311   $2,733   $71   $4   $10,831 
Provision (credit)   452    71    (59)   25    11    500 
Charge-offs               (36)       (36)
Recoveries   35    15    7    18        75 
Balance at March 31, 2018  $5,199   $3,397   $2,681   $78   $15   $11,370 
                               
Balance at December 31, 2018  $5,260   $3,556   $3,114   $135   $(12)  $12,053 
Provision (credit)   24    108    (127)   28    17    50 
Charge-offs   (116)   (94)   (37)   (46)       (293)
Recoveries   37    1    4    27        69 
Balance at March 31, 2019  $5,205   $3,571   $2,954   $144   $5   $11,879 

 

14

 

 

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) 
March 31, 2019                        
Amount of allowance for impaired loans  $    $    $    $    $    $  
Amount of allowance for non-impaired loans   5,205    3,571    2,954    144    5    11,879 
Total allowance for loan losses  $5,205   $3,571   $2,954   $144   $5   $11,879 
                               
Impaired loans  $7,156   $4,041   $3,300   $53   $   $14,550 
Non-impaired loans   753,175    664,340    224,530    5,217        1,647,262 
Impaired loans acquired with deteriorated credit quality   10,445    3,177    879            14,501 
Total loans  $770,776   $671,558   $228,709   $5,270   $   $1,676,313 
                               
December 31, 2018                              
Amount of allowance for impaired loans  $   $   $   $   $   $ 
Amount of allowance for non-impaired loans   5,260    3,556    3,114    135    (12)   12,053 
Total allowance for loan losses  $5,260   $3,556   $3,114   $135   $(12)  $12,053 
                               
Impaired loans  $5,237   $4,754   $2,345   $60   $   $12,396 
Non-impaired loans   752,770    666,883    240,235    5,143        1,665,031 
Impaired loans acquired with deteriorated credit quality   10,874    3,242    913            15,029 
Total loans  $768,881   $674,879   $243,493   $5,203   $   $1,692,456 

 

Past Due and Non-accrual Loans.

 

The following tables present an age analysis of past due 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 Loans

  

Total

Current Loans

  

Total

Loans

   Non-Accrual Loans 
   (In thousands) 
March 31, 2019                            
Commercial real estate  $3,238   $2,327   $2,890   $8,455   $762,321   $770,776   $6,547 
Residential real estate:                                   
Residential   1,513    378    3,199    5,090    570,471    575,561    4,945 
Home equity   301        197    498    95,499    95,997    369 
Commercial and industrial   305    357    301    963    227,746    228,709    3,399 
Consumer   77    17    3    97    5,173    5,270    52 
Total loans  $5,434   $3,079   $6,590   $15,103   $1,661,210   $1,676,313   $15,312 
                                    
December 31, 2018                                   
Commercial real estate  $1,857   $   $2,865   $4,722   $764,159   $768,881   $4,701 
Residential real estate:                                   
Residential   1,798    572    1,879    4,249    573,392    577,641    5,856 
Home equity   600    5    242    847    96,391    97,238    391 
Commercial and industrial   794    1,463    305    2,562    240,931    243,493    2,476 
Consumer   93    1    21    115    5,088    5,203    60 
Total loans  $5,142   $2,041   $5,312   $12,495   $1,679,961   $1,692,456   $13,484 

 

15

 

 

Impaired Loans.

 

The following is a summary of impaired loans by class:

 

               Three Months Ended 
   At March 31, 2019   March 31, 2019 
   Recorded Investment   Unpaid Principal Balance   Related Allowance   Average Recorded Investment   Interest
Income
Recognized
 
   (In thousands) 
Impaired Loans (1)                         
Commercial real estate  $17,601   $20,722   $   $16,856   $131 
Residential real estate   6,823    7,900        7,190    44 
Home equity   395    445        417     
Commercial and industrial   4,179    8,782        3,718    37 
Consumer   53    64        57     
Total impaired loans  $29,051   $37,913   $   $28,238   $212 

 

               Three Months Ended 
   At December 31, 2018   March 31, 2018 
   Recorded Investment   Unpaid Principal Balance   Related Allowance   Average Recorded Investment   Interest
Income
Recognized
 
   (In thousands) 
Impaired Loans (1)                         
Commercial real estate  $16,111   $19,081   $   $15,404   $190 
Residential real estate   7,558    8,614        6,578    10 
Home equity   438    468         737    1 
Commercial and industrial   3,258    7,788        3,990    44 
Consumer   60    70         108     
Total impaired loans  $27,425   $36,021   $   $26,817   $245 

 

 
(1)Includes loans acquired with deteriorated credit quality and performing troubled debt restructurings.

 

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 nonaccrual impaired loans during the three months ended March 31, 2019 and March 31, 2018. 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 March 31, 2019, we have not committed to lend any additional funds for loans that are classified as impaired. Payments received on performing impaired loans are recorded in accordance with the contractual terms of the loan. Interest income recognized on impaired loans during the three months ended March 31, 2019 and 2018 pertained to performing TDRs and purchased impaired loans.

 

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.

 

16

 

 

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.

 

There were no significant loans modified in TDRs during the three months ended March 31, 2019 or 2018. During the three months ended March 31, 2019 and 2018, no TDRs defaulted (defined as 30 days or more past due) within 12 months of restructuring. As of March 31, 2019, we have not committed to lend any additional funds for loans that are classified as impaired. There were no charge-offs on TDRs during the three months ended March 31, 2019 and 2018.

 

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 March 31, 2019 and 2018.

 

   Contractual
Required
Payments
Receivable
   Cash Expected
To Be Collected
   Non-
Accretable
Discount
   Accretable
Yield
   Loans
Receivable
 
   (In thousands) 
Balance at December 31, 2018  $24,793   $19,883   $4,910   $4,854   $15,029 
Collections   (702)   (646)   (56)   (158)   (488)
Dispositions   (71)   (71)       (31)   (40)
Balance at March 31, 2019  $24,020   $19,166   $4,854   $4,665   $14,501 

 

   Contractual
Required
Payments
Receivable
   Cash Expected
To Be Collected
   Non-
Accretable
Discount
   Accretable
Yield
   Loans
Receivable
 
   (In thousands) 
Balance at December 31, 2017  $29,362   $23,158   $6,204   $6,033   $17,125 
Collections   (1,412)   (1,194)   (218)   (175)   (1,019)
Balance at March 31, 2018  $27,950   $21,964   $5,986   $5,858   $16,106 

 

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.

 

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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.

 

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) 
March 31, 2019                        
Pass (Rated 1 – 4)  $732,542   $569,124   $95,422   $191,580   $5,218   $1,593,886 
Special Mention (Rated 5)   16,101            7,802        23,903 
Substandard (Rated 6)   22,133    6,437    575    29,327    52    58,524 
Total  $770,776   $575,561   $95,997   $228,709   $5,270   $1,676,313 
                               
December 31, 2018                              
Pass (Rated 1 – 4)  $732,729   $570,428   $96,643   $207,663   $5,143   $1,612,606 
Special Mention (Rated 5)   17,929            12,248        30,177 
Substandard (Rated 6)   18,223    7,213    595    23,582    60    49,673 
Total  $768,881   $577,641   $97,238   $243,493   $5,203   $1,692,456 

 

6.GOODWILL AND OTHER INTANGIBLES

 

At March 31, 2019 and December 31, 2018, the Company’s goodwill was related to the acquisition of Chicopee in October 2016. There was no goodwill impairment recorded during the three months ended March 31, 2019 or the year ended December 31, 2018. Annually, or more frequently if events or changes in circumstances warrant such evaluation, the Company evaluates its goodwill for impairment.

 

Core Deposit Intangibles.

 

In connection with the acquisition of Chicopee, the Bank recorded a core deposit intangible of $4.5 million which is amortized over twelve years using the straight-line method. Amortization expense was $94,000 for the three months ended March 31, 2019 and the three months ended March 31, 2018. At March 31, 2019, future amortization of the core deposit intangible totaled $375,000 for each of the next five years and $1.7 million thereafter.

 

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7. SHARE-BASED COMPENSATION

 

Stock Options – Under the terms of the Chicopee merger agreement dated October 21, 2016, each option to purchase shares of Chicopee common stock issued by Chicopee and outstanding at the effective time of the merger pursuant to the Chicopee 2007 Equity Incentive Plan fully vested and converted into an option to purchase shares of WNEB common stock on the same terms and conditions as were applicable before the merger, except (1) the number of shares of WNEB common stock subject to the new option was adjusted to be equal to the product of the number of shares of Chicopee common stock subject to the existing option and the exchange ratio (rounding fractional shares to the nearest whole share) and (2) the exercise price per share of WNEB common stock under the new option was adjusted to be equal to the exercise price per share of Chicopee common stock of the existing option divided by the exchange ratio (rounded to the nearest whole cent).

 

A summary of stock option activity for the three months ended March 31, 2019 is presented below:

  

   Shares   Weighted Average
Exercise Price
   Weighted Average
Remaining Contractual
Term
(in years)
   Aggregate
Intrinsic
Value
(in thousands)
 
                 
Outstanding at December 31, 2018   238,075   $6.33    3.44   $877 
Exercised   (12,550)   5.12    0.74    60 
Outstanding at March 31, 2019   225,525   $6.40    3.33   $633 
                     
Exercisable at March 31, 2019   225,525   $6.40    3.33   $633 

 

Cash received for options exercised during the three months ended March 31, 2019 and 2018 was $64,000 and $104,000, respectively.

 

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 516,000 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 48,560 shares granted under the RSA Plan. These shares vest ratably over five years. 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.

 

In 2016, the Compensation Committee (the “Committee”) approved a long-term incentive program (“LTI Plan”). The 2016 LTI Plan provides 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 2016 LTI Plan 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.

 

The 2016 LTI Plan includes eligible participants of the Company that are nominated by the Chief Executive Officer and approved by the Compensation Committee. The 2016 LTI Plan is triggered by the Company’s achievement of satisfactory safety and soundness results from its most recent regulatory examination and additional Company performance metrics. Stock grants made under the 2016 LTI Plan consist of 50% time-based stock and 50% performance-based stock.

 

In May 2016, there were 62,740 shares granted under the 2016 LTI Plan. Of the 62,740 shares granted, 36,543 shares were time-based stock, with 10,352 vesting in one year and 26,191 vesting ratably over a three year period. The remaining 26,197 shares granted were performance-based and are subject to the achievement of the 2016 LTI performance metrics. Under the 2016 LTI Plan, the primary performance metric was return on equity.

 

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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 and target metrics under the 2016 LTI Plan are as follows:

 

   Return on Equity Metrics 
   Threshold   Target 
Original metrics  5.85%  6.32%
Adjusted metrics  6.38%  6.79%

 

As of December 31, 2018, the three-year performance period for the 2016 LTI Plan performance-based share grant expired. Performance-based shares were earned based on the Company achieving the 2016 LTI Plan threshold and target metrics at the end of the three-year performance period. The Company’s return on equity for the year ended December 31, 2018 was 6.82%, which resulted in the achievement of the target return on equity metric for the 2016 LTI Plan grant. In February of 2019, 26,197 performance-based shares vested and were granted to eligible recipients under the Plan.

 

In May 2017, there were 89,042 shares granted under the 2017 LTI Plan. Of the 89,042 shares, 55,159 shares are time-based, with 21,276 vesting in one year and 33,883 vesting ratably over a three year period. The remaining 33,883 shares granted were performance-based and are subject to the achievement of the 2017 LTI performance metric. Vesting is realized after a three year period. Under the 2017 LTI Plan, the primary performance metric 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 three year period. Participants will be able to earn between 50% (for threshold performance) and 100% (for target performance) of the performance shares but will not earn additional shares if performance exceeds target 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 LTI Plan 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   6.50%  7.09%  7.20%  7.85%  7.90%  8.61%

 

Eligible participants will be able to earn between 50% (“threshold” performance), 100% (“target” performance) and 150% (“maximum” performance).

 

In January 2018, there were 83,812 shares granted under the 2018 LTI Plan. Of the 83,812 shares, 50,852 shares were time-based, with 17,908 vesting in one year and 32,944 vesting ratably over a three-year period. The remaining 32,960 shares granted are performance-based and are subject to the achievement of the 2018 long-term incentive performance metric. Under the 2018 LTI Plan, the primary performance metric 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 three-year period. The threshold, target and stretch metrics under the 2018 LTI Plan are as follows:

 

    Return on Equity Metrics 
Performance Period Ending   Threshold   Target   Stretch 
              
December 31, 2019   6.85%  7.35%  7.75%
December 31, 2020   7.40%  7.90%  8.30%

 

Eligible participants will be able to earn between 50% (“threshold” performance), 100% (“target” performance) and 150% (“maximum” performance).

 

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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.

 

In February 2019, there were 108,718 shares granted under the 2019 LTI Plan. Of the 108,718 shares, 64,496 shares were time-based, with 20,262 vesting in one year and 44,234 vesting ratably over a three-year period. The remaining 44,222 shares granted are performance-based and are subject to the achievement of the 2019 long-term incentive performance metric. Under the 2019 LTI Plan, the primary performance metric 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 three-year period. The threshold, target and stretch metrics under the 2019 LTI Plan are as follows:

 

   

 Return on Equity Metrics

 
Performance Period Ending   Threshold   Target   Stretch 
December 31, 2019   5.75%  6.13%  7.00%
December 31, 2020   6.00%  6.75%  7.75%
December 31, 2021   6.25%  7.00%  8.00%

 

Eligible participants will be able to earn between 50% (“threshold” performance), 100% (“target” performance) and 150% (“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 March 31, 2019, there were an additional 127,335 shares available for future grants under the RSA Plan.

 

A summary of the status of restricted stock awards at March 31, 2019 is presented below:

 

   Shares   Weighted Average
Grant Date Fair Value
 
Balance at December 31, 2018   155,712   $9.87 
Shares granted   108,718    9.77 
Shares vested   (53,465)   8.75 
Balance at March 31, 2019   210,965   $10.10 

 

We recorded total expense for restricted stock awards of $195,000 and $232,000 for the three months ended March 31, 2019 and 2018, 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.

 

FHLB advances with an original maturity of less than one year totaled $35.0 million and $59.3 million at March 31, 2019 and December 31, 2018, respectively, with a weighted average rate of 2.69% and 3.28%, respectively. At March 31, 2019, based on qualifying collateral less outstanding advances, the Bank had the capacity to borrow up to approximately $229.5 million from the FHLB.

 

In addition, at March 31, 2019 and December 31, 2018, the Company had an available Ideal Way line of credit with the FHLB for up to $9.5 million. Interest on this line of credit is payable at a rate determined and reset by the FHLB on a daily basis. The outstanding principal is due daily and the portion not repaid will be automatically renewed. At March 31, 2019 and December 31, 2018, there were no advances outstanding under this line.

 

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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 March 31, 2019 and 2018. We 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 the line at March 31, 2019 and 2018.

 

Long-term debt consists of FHLBB advances with an original maturity of one year or more. At March 31, 2019, we had $196.0 million in long-term debt with the FHLBB. This compares to $208.0 million in long-term debt with FHLBB advances at December 31, 2018.

 

9. PENSION BENEFITS

 

We provide a defined benefit pension plan for eligible employees (the “Plan”). Employees must work a minimum of 1,000 hours per year to be eligible for the Plan. Eligible employees become vested in the Plan after five years of service. We plan to contribute to the pension plan the amount required to meet the minimum funding standards under Section 412 of the Internal Revenue Code of 1986, as amended. Additional contributions will be made as deemed appropriate by management in conjunction with the pension plan’s actuaries. We have not yet determined how much we expect to contribute to our pension plan in 2019. No contributions have been made to the plan for the three months ended March 31, 2019. The pension plan assets are invested in various pooled separate investment accounts offered by Principal Life Insurance Company, a division of Principal Financial Group, who is the Custodian of the Plan (the “Custodian”). The Plan is administered by an officer of Westfield Bank. On September 30, 2016, we effected a soft freeze on the Plan and therefore no new participants will be included in the Plan after such effective date.

 

The following table provides information regarding net pension benefit costs for the periods shown:

 

  

Three Months Ended

March 31,

 
   2019   2018 
   (In thousands) 
Service cost  $274   $303 
Interest cost   284    253 
Expected return on assets   (308)   (347)
Amortization of actuarial loss   32    57 
Net periodic pension cost  $282   $266 

 

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.

 

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Fair Values of Derivative Instruments on the Balance Sheet

 

The table below presents the fair value of our derivative financial instruments designated as hedging instruments as well as our classification on the balance sheet as of March 31, 2019 and December 31, 2018.

 

 March 31, 2019  Asset Derivatives    Liability Derivatives  
   Balance Sheet Location  Fair Value   Balance Sheet Location  Fair Value 
   (In thousands)
                 
Interest rate swaps   Other Assets  $   Other Liabilities  $1,518 

 

December 31, 2018  Asset Derivatives    Liability Derivatives  
   Balance Sheet Location  Fair Value   Balance Sheet Location  Fair Value 
   (In thousands)
                 
Interest rate swaps  Other Assets  $   Other Liabilities  $1,259 

 

At March 31, 2019 and December 31, 2018, all derivatives were designated as hedging instruments.

 

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 our exposure to interest rate movements. To accomplish this objective, 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.

 

The following table presents information about our cash flow hedges at March 31, 2019 and December 31, 2018:

 

March 31, 2019  Notional   Weighted Average   Weighted Average Rate   Estimated Fair  
   Amount   Maturity   Receive   Pay   Value  
   (In thousands)   (In years)           (In thousands)  
                      
Interest rate swaps on FHLBB borrowings  $35,000    3.5    2.61%   3.54%  $ (1,518 )

 

December 31, 2018  Notional   Weighted Average   Weighted Average Rate   Estimated Fair  
   Amount   Maturity   Receive   Pay   Value  
   (In thousands)   (In years)           (In thousands)  
                      
Interest rate swaps on FHLBB borrowings  $35,000    3.7    2.79%   3.54%  $ (1,259 )

 

For derivatives designated as cash flow hedges, the effective portion of 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. The ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. We assess the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. We did not recognize any hedge ineffectiveness in earnings for the three months ended March 31, 2019 or the year ended December 31, 2018.

 

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).

 

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The table below presents the pre-tax net gains (losses) of our cash flow hedges for the periods indicated.

 

   Amount of Gain (Loss) Recognized in OCI on Derivative
(Effective Portion)
 
   Three Months Ended March 31, 
   2019   2018 
   (In thousands) 
     
Interest rate swaps  $(328)  $678 

 

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 amount reclassified from accumulated other comprehensive income into net income for interest rate swaps and termination fees was $332,000 and $435,000 during the three months ended March 31, 2019 and 2018, respectively. During the three months ended March 31, 2019 and 2018, no gains or losses were reclassified from accumulated other comprehensive loss into income for ineffectiveness on cash flow hedges.

 

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.

 

At March 31, 2019 and December 31, 2018, we had a net liability position of $1.5 million and $1.3 million with our counterparties, respectively. As of March 31, 2019, we had minimum collateral posting thresholds with certain of our derivative counterparties and had mortgage-backed securities with a fair value of $850,000 and $830,000 cash posted as collateral against our obligations under these agreements. If we had breached any of these provisions at March 31, 2019, we could have been required to settle our obligations under the agreements at the termination value.

 

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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.

 

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.

 

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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:

 

   March 31, 2019 
   Level 1   Level 2   Level 3   Total 
   (In thousands) 
Assets:    
Government-sponsored mortgage-backed securities  $   $172,622   $   $172,622 
U.S. government guaranteed mortgage-backed securities       18,954        18,954 
Corporate bonds       25,671        25,671 
State and municipal bonds       2,992        2,992 
Government-sponsored enterprise obligations       24,639        24,639 
Marketable equity securities   6,518            6,518 
Total assets  $6,518   $244,878   $   $251,396 
                     
Liabilities:                    
Interest rate swaps  $   $1,518   $   $1,518 

 

   December 31, 2018 
   Level 1   Level 2   Level 3   Total 
   (In thousands) 
Assets:    
Government-sponsored mortgage-backed securities  $   $159,351   $   $159,351 
U.S. government guaranteed mortgage-backed securities       19,338        19,338 
Corporate bonds       48,168        48,168 
State and municipal bonds       2,944        2,944 
Government-sponsored enterprise obligations       23,947        23,947 
Marketable equity securities   6,408            6,408 
Total assets  $6,408   $253,748   $   $260,156 
                     
Liabilities:                    
Interest rate swaps  $   $1,259   $   $1,259 

 

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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. There were no assets measured at fair value on a non-recurring basis at March 31, 2019 or December 31, 2018. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related assets at March 31, 2019 and December 31, 2018. Total losses 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 
   March 31, 2019   March 31, 2019 
               Total 
   Level 1   Level 2   Level 3   Losses 
   (In thousands)   (In thousands) 
         
Impaired loans  $   $   $2,115   $130 

 

   At   Three Months Ended 
   December 31, 2018   March 31, 2018 
               Total 
   Level 1   Level 2   Level 3   Losses 
   (In thousands)   (In thousands) 
         
Impaired loans  $   $   $1,676   $170 

 

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 March 31, 2019 and December 31, 2018.

 

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Summary of Fair Values of Financial Instruments.

 

The estimated fair values of our financial instruments are as follows:

 

   March 31, 2019 
   Carrying Value   Fair Value 
       Level 1   Level 2   Level 3   Total 
   (In thousands) 
Assets:                    
Cash and cash equivalents  $44,482   $44,482   $   $   $44,482 
Securities available-for-sale   244,878        244,878        244,878 
Marketable equity securities   6,518    6,518            6,518 
Federal Home Loan Bank of Boston and other restricted stock   12,407            12,407    12,407 
Loans - net   1,668,787            1,627,630    1,627,630 
Accrued interest receivable   5,640            5,640    5,640 
Mortgage servicing rights   269        416        416 
                          
Liabilities:                         
Deposits   1,629,834            1,628,896    1,628,896 
Short-term borrowings   35,000        35,000        35,000 
Long-term debt   196,039        195,575        195,575 
Accrued interest payable   608            608    608 
Derivative liabilities   1,518        1,518        1,518 

 

   December 31, 2018 
   Carrying Value   Fair Value 
       Level 1   Level 2   Level 3   Total 
   (In thousands) 
Assets:                    
Cash and cash equivalents  $26,789   $26,789   $   $   $26,789 
Securities available-for-sale   253,748        253,748        253,748 
Marketable equity securities   6,408    6,408            6,408 
Federal Home Loan Bank of Boston and other restricted stock   14,695            14,695    14,695 
Loans - net   1,684,804            1,631,558    1,631,558 
Accrued interest receivable   5,652            5,652    5,652 
Mortgage servicing rights   286        456        456 
                          
Liabilities:                         
Deposits   1,595,993            1,592,521    1,592,521 
Short-term borrowings   59,250        59,247        59,247 
Long-term debt   208,018        206,789        206,789 
Accrued interest payable   530            530    530 
Derivative liabilities   1,259        1,259        1,259 

 

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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 one year to 19 years, some of which include options to extend the leases for additional five-year terms up to 15 years.

 

The components of lease expense were as follows:

 

   Three Months Ended 
   March 31, 2019 
   (In thousands) 
      
Amortization of right-of-use assets  $242 
Interest on lease liabilities   63 
Operating lease cost  $305 

 

Supplemental cash flow information related to leases was as follows:

 

   Three Months Ended 
   March 31, 2019 
   (In thousands) 
      
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flows from operating leases  $292 

 

Supplemental balance sheet information related to leases was as follows:

 

   March 31, 2019 
   (In thousands) 
      
Operating lease right-of-use assets  $6,993 
Operating lease liabilities  $7,005 

 

The weighted average remaining lease term for our operating leases was 11 years with a weighted average discount rate of 3.52% at March 31, 2019.

 

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Maturities of the Company’s operating lease liabilities were as follows (in thousands):

      
Years Ending December 31,     
2019   $836 
2020    995 
2021    916 
2022    887 
2023    700 
Thereafter    4,333 
Total lease payments    8,667 
Less imputed interest    (1,662)
Total   $7,005 

 

13. RECENT ACCOUNTING PRONOUNCEMENTS

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the requirements in Topic 840, Leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this ASU on January 1, 2019 and recorded an increase in assets of $7.2 million and an increase in liabilities of $7.2 million on the consolidated balance sheet as a result of recognizing the right-of-use assets and lease liabilities.

 

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 is effective for the first interim period in fiscal years beginning after December 15, 2019. 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 March 2017, the FASB issued ASU 2017-08—Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer (that is, at a premium). The Company adopted this ASU on January 1, 2019, which reduced premiums on callable debt securities and resulted in a cumulative-effect adjustment directly to retained earnings, net of tax, of $7,000.

 

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In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU refine and expand hedge accounting for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. It also makes certain targeted improvements to simplify the application of hedge accounting guidance. The ASU is effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early adoption, including adoption in the interim period, is permitted. Management does not expect the adoption of this ASU to have a material impact on our consolidated financial statements.

 

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 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As this standard relates to disclosures, Management does not expect adoption to 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 the 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 real estate 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 continues to focus on increasing commercial lending and residential lending. Our strategy also calls for increasing deposit relationships, specifically core deposits, 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 and 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 months ended March 31, 2019 in the context of this strategy.

 

Net income was $3.4 million, or $0.13 per diluted share, for the three months ended March 31, 2019, compared to $3.5 million, or $0.12 per diluted share, for the same period in 2018.

 

The provision for loan losses was $50,000 for the three months ended March 31, 2019, compared to $500,000 for the same period in 2018.

 

Net interest income decreased $396,000, or 2.7%, to $14.3 million, for the three months ended March 31, 2019, from $14.7 million, for the three months ended March 31, 2018. The decrease in net interest income was due to an increase of $1.7 million, or 43.0%, in interest expense, partially offset by an increase in interest and dividend income of $1.3 million, or 7.1%. Net interest income included $22,000 and $235,000 in favorable purchase accounting adjustments for the three months ended March 31, 2019 and 2018, respectively.

 

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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 three months ended March 31, 2019. 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 2018 Annual Report.

 

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2019 AND DECEMBER 31, 2018

 

At March 31, 2019, total assets were $2.1 billion, a decrease of $3.1 million, or 0.2%, from December 31, 2018. During the same period, total loans decreased $16.2 million, or 1.0%, and securities decreased $8.9 million, or 3.5%, partially offset by the increase in cash and cash equivalents of $17.7 million or 66.1%.

 

Total loans were $1.7 billion, a decrease of $16.2 million, or 1.0%, from December 31, 2018 due to a decrease in commercial and industrial loans of $14.8 million, or 6.1%, and a decrease in residential loans, including home equity loans, of $3.3 million, or 0.5%. During the same period, commercial real estate loans increased $1.9 million, or 0.3%. The decrease in total loans at March 31, 2019 was a combination of payoffs in the commercial and industrial loan portfolio as well as seasonal factors. Total loan originations during the first quarter of 2019 were strong despite elevated levels of loan payoffs, particularly in the commercial and industrial loan portfolio. During the first quarter of 2019, the Company originated $57.9 million in new loans, which included $21.2 million in commercial and industrial loans, $22.2 million in commercial real estate loans and $14.5 million in residential real estate loans.

 

All loans where the payments are 90 days or more in arrears as of the closing date of each month are placed on nonaccrual status. At March 31, 2019, non-performing loans increased $1.8 million, or 13.3%, to $15.3 million, or 0.91% of total loans, compared to $13.5 million, or 0.79% of total loans, at December 31, 2018. There were no loans 90 or more days past due and still accruing interest. At March 31, 2019, non-performing assets to total assets was 0.72%, an increase of eight basis points from 0.64% at December 31, 2018. The allowance for loan losses as a percentage of total loans was 0.71% at both March 31, 2019 and December 31, 2018. At March 31, 2019, the allowance for loan losses as a percentage of non-performing loans was 77.6%, compared to 89.4% at December 31, 2018. The allowance for loan losses as a percentage of total loans, excluding loans acquired, which were recorded at fair value with no related allowance for loan losses, was 0.96% at March 31, 2019 and 0.98% at December 31, 2018. A summary of our nonaccrual and past due loans by class are listed in Note 5 of the accompanying unaudited consolidated financial statements.

 

At March 31, 2019, total deposits were $1.6 billion, an increase of $33.8 million, or 2.1%, from December 31, 2018. Core deposits, which the Company defines as all deposits except time deposits, increased $11.0 million, or 1.2%, from $935.9 million, or 58.6% of total deposits, at December 31, 2018, to $946.9 million, or 58.1% of total deposits, at March 31, 2019. Non-interest bearing deposits decreased $10.3 million, or 2.9%, to $345.1 million, money market accounts remained relatively unchanged at $398.2 million, interest-bearing checking accounts increased $16.6 million, or 26.1%, to $80.2 million, and savings accounts increased $4.9 million, or 4.1%, to $123.4 million compared to December 31, 2018. Time deposits increased $23.0 million, or 3.5%, from $660.0 million at December 31, 2018 to $683.0 million at March 31, 2019. Brokered deposits, which are included within time deposits, increased $4.3 million to $28.1 million at March 31, 2019, from $23.8 million at December 31, 2018.

 

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FHLB advances decreased $36.3 million, or 13.6%, from $267.3 million at December 31, 2018, to $231.0 million at March 31, 2019. The Company utilized the increase in deposit balances during the quarter to pay down FHLB borrowings. Our short-term borrowings and long-term debt are discussed in Note 8 of the accompanying consolidated financial statements.

 

At March 31, 2019, shareholders’ equity was $227.3 million, or 10.8% of total assets, compared to $237.0 million, or 11.2% of total assets, at December 31, 2018. The decrease in shareholders’ equity during the three months ended March 31, 2019 reflects $15.4 million for the repurchase of the Company’s shares during the quarter and the payment of regular cash dividends of $1.4 million partially offset by net income of $3.4 million and a decrease of $3.2 million in accumulated other comprehensive loss. Total shares outstanding as of March 31, 2019 were 26,953,429.

 

The Company’s book value per share increased by $0.08, or 1.0%, to $8.43 at March 31, 2019, from $8.35 at December 31, 2018. The Company’s tangible book value per share increased by $0.06, or 0.8%, to $7.84 at March 31, 2019 from $7.78 at December 31, 2018. The Bank’s regulatory capital ratios continued to exceed the levels required to be considered “well-capitalized” under federal banking regulations.

 

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND MARCH 31, 2018

 

General.

 

Net income was $3.4 million, or $0.13 per diluted share, for the three months ended March 31, 2019, compared to $3.5 million, or $0.12 per diluted share, for the same period in 2018. Net interest income was $14.3 million and $14.7 million for the three months ended March 31, 2019 and 2018, respectively.

 

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 March 31, 2019 and 2018, 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.

 

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   Three Months Ended March 31, 
   2019   2018 
   Average       Average Yield/   Average       Average Yield/ 
   Balance   Interest   Cost   Balance   Interest   Cost 
   (Dollars in thousands) 
ASSETS:                        
Interest-earning assets                              
Loans(1)(2)  $1,684,094   $18,179    4.38%  $1,626,738   $16,827    4.20%
Securities(2)   259,179    1,695    2.65    282,556    1,814    2.60 
Other investments - at cost   15,942    236    6.00    17,111    201    4.76 
Short-term investments(3)   15,112    76    2.04    5,946    21    1.43 
Total interest-earning assets   1,974,327    20,186    4.15    1,932,351    18,863    3.96 
Total non-interest-earning assets   133,870              137,017           
Total assets  $2,108,197             $2,069,368           
                               
LIABILITIES AND EQUITY:                              
Interest-bearing liabilities                              
Interest-bearing checking accounts  $72,934   $81    0.45%  $93,117   $80    0.35%
Savings accounts   122,608    33    0.11    142,890    40    0.11 
Money market accounts   395,215    556    0.57    418,183    419    0.41 
Time deposits   673,852    3,299    1.99    561,106    1,816    1.31 
Total interest-bearing deposits   1,264,609    3,969    1.27    1,215,296    2,355    0.79 
Short-term borrowings and long-term debt   248,982    1,765    2.87    282,710    1,655    2.37 
Interest-bearing liabilities   1,513,591    5,734    1.54    1,498,006    4,010    1.09 
Non-interest-bearing deposits   344,273              310,193           
Other non-interest-bearing liabilities   20,370              15,886           
Total non-interest-bearing liabilities   364,643              326,079           
                               
Total liabilities   1,878,234              1,824,085           
Total equity   229,963              245,283           
Total liabilities and equity  $2,108,197             $2,069,368           
Less: Tax-equivalent adjustment(2)        (126)             (131)     
Net interest and dividend income       $14,326             $14,722      
Net interest rate spread             2.58%             2.85%
Net interest rate spread, on a tax equivalent basis(4)             2.61%             2.87%
Net interest margin             2.94%             3.09%
Net interest margin, on a tax equivalent basis(5)             2.97%             3.12%
Ratio of average interest-earning assets to average interest-bearing liabilities             130.44%             128.99%

 

 

 

(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 operations.

(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”.

 

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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 March 31, 2019 compared to
Three Months Ended March 31, 2018
 
   Increase (Decrease) Due to     
   Volume   Rate   Net 
Interest-earning assets  (In thousands) 
Loans (1)  $593   $759   $1,352 
Securities (1)   (150)   31    (119)
Other investments - at cost   (14)   49    35 
Short-term investments   32    23    55 
Total interest-earning assets   461    862    1,323 
                
Interest-bearing liabilities               
Interest-bearing checking accounts   (17)   18    1 
Savings accounts   (6)   (1)   (7)
Money market accounts   (23)   160    137 
Time deposits   365    1,118    1,483 
Short-term borrowing and long-time debt   (197)   307    110 
Total interest-bearing liabilities   122    1,602    1,724 
Change in net interest and dividend income (1)  $339   $(740)  $(401)

 

 

 

(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.

 

The net interest margin was 2.94% for the three months ended March 31, 2019, compared to 3.09% for the three months ended March 31, 2018. The net interest margin, on a tax-equivalent basis, was 2.97% for the three months ended March 31, 2019, compared to 3.12% for the three months ended March 31, 2018. The amortization of purchase accounting adjustments related to the merger with Chicopee increased net interest income by $22,000 and $235,000 during the three months ended March 31, 2019 and 2018, respectively. Excluding the favorable purchase accounting amortization, the net interest margin was 2.96% for the three months ended March 31, 2019 and 3.07% for the three months ended March 31, 2018.

 

Net interest and dividend income decreased $396,000, or 2.7%, to $14.3 million for the three months ended March 31, 2019, compared to $14.7 million for the three months ended March 31, 2018. The average yield on interest-earning assets increased 19 basis points to 4.15% for the three months ended March 31, 2019, from 3.96% for the three months ended March 31, 2018. During the three months ended March 31, 2019, the average cost of funds increased 45 basis points to 1.54%, from 1.09% for the three months ended March 31, 2018. The average cost of time deposits increased 68 basis points to 1.99% for the three months ended March 31, 2019 from 1.31% for the three months ended March 31, 2018. The average cost of borrowings increased 50 basis points to 2.87% for the three months ended March 31, 2019 from 2.37% for the three months ended March 31, 2018.

 

Average interest-earning assets increased $42.0 million, or 2.2%, to $2.0 billion for the three months ended March 31, 2019 from $1.9 billion for the three months ended March 31, 2018. The increase in average interest-earning assets was due to an increase in average loans of $57.4 million, or 3.5%, and an increase in short-term investments of $9.2 million, partially offset by a decrease in average securities of $23.4 million, or 8.3%.

 

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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 March 31, 2019 was based upon the changes that occurred in the loan portfolio during that same period. After evaluating these factors, we recorded a provision for loan losses of $50,000 for the three months ended March 31, 2019, compared to $500,000 for the same period in 2018, primarily due to a decrease in loan balances for the three months ended March 31, 2019. The allowance was $11.9 million and $12.1 million, respectively, and 0.71% of total loans at each of March 31, 2019 and December 31, 2018. At March 31, 2019, the allowance for loan losses as a percentage of nonperforming loans was 77.6%, compared to 89.4% at December 31, 2018. Net charge-offs were $224,000 for the three months ended March 31, 2019, compared to net recoveries of $39,000 for the three months ended March 31, 2018.

 

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.

 

Non-interest Income.

 

Non-interest income increased $405,000, or 22.9%, to $2.2 million for the three months ended March 31, 2019, from $1.8 million for the three months ended March 31, 2018 as a result of the Company recognizing $201,000 in previously unamortized premiums on a bond which was paid in full prior to its final maturity and $106,000 in unrealized losses on the Company’s marketable equity securities portfolio during the three months ended March 31, 2018.

 

Non-interest Expense.

 

Non-interest expense increased $597,000, or 5.2%, to $12.0 million, or 2.31% of average assets, for the three months ended March 31, 2019, from $11.4 million, or 2.24% of average assets, for the three months ended March 31, 2018. Salaries and benefits increased $247,000, or 3.8%, primarily due to annual merit increases as well as the addition of new staff to support the Company’s business initiatives. Occupancy expense increased $111,000, or 10.5%, data processing expense increased $28,000, or 4.4%, FDIC insurance expense increased $18,000, or 11.4%, advertising expense increased $17,000, or 4.9%, professional fees increased $46,000, or 7.0%, and other non-interest expense increased $92,000, or 5.5%. For the three months ended March 31, 2019, the efficiency ratio was 73.4%, compared to 68.2% for the three months ended March 31, 2018.

 

Income Taxes.

 

The Company’s effective tax rate was 22.5% and 22.9% for the three months ended March 31, 2019 and 2018, respectively.

 

37

 

 

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 may be considered to include financial information that is not in compliance with GAAP. A reconciliation from GAAP to non-GAAP is provided below.

 

   Three Months Ended March 31, 
   2019   2018 
   (Dollars in thousands) 
   Interest   Average
Yield
   Interest   Average
Yield
 
Loans (no tax adjustment)  $18,058    4.35%  $16,702    4.16%
Tax-equivalent adjustment (1)   121         125      
Loans (tax-equivalent basis)  $18,179    4.38%  $16,827    4.20%
                     
Securities (no tax adjustment)  $1,690    2.64%  $1,808    2.60%
Tax-equivalent adjustment (1)   5         6      
Securities (tax-equivalent basis)  $1,695    2.65%  $1,814    2.60%
                     
Net interest income (no tax adjustment)  $14,326        $14,722      
Tax-equivalent adjustment (1)   126         131      
Net interest income (tax-equivalent basis)  $14,452        $14,853      
                     
Interest rate spread (no tax adjustment)        2.58%        2.85%
   Net interest margin (no tax adjustment)        2.94%        3.09%

 

 

(1)The tax equivalent adjustment is based upon a 21% tax rate.

 

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 based on eligible collateral of loans and securities.

 

At March 31, 2019 and December 31, 2018, outstanding borrowings from the FHLB were $231.0 million and $267.3 million, respectively. At March 31, 2019, we had $229.5 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. At March 31, 2019 and December 31, 2018, we did not have an outstanding balance under these lines. 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.

 

38

 

 

At March 31, 2019, we exceeded each of the applicable regulatory capital requirements. As of March 31, 2019, 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) 
March 31, 2019                        
Total Capital (to Risk Weighted Assets):                              
Consolidated  $234,322    14.28%  $131,230    8.00%    N/A      N/A  
Bank   222,102    13.56    131,046    8.00   $163,808    10.00%
Tier 1 Capital (to Risk Weighted Assets):                              
Consolidated   222,443    13.56    98,423    6.00     N/A      N/A  
Bank   210,223    12.83    98,285    6.00    131,046    8.00 
Common Equity Tier 1 Capital (to Risk Weighted Assets)                              
Consolidated   222,443    13.56    73,817    4.50     N/A      N/A  
Bank   210,223    12.83    73,714    4.50    106,475    6.50 
Tier 1 Leverage Ratio (to Adjusted Average Assets):                              
Consolidated   222,443    10.58    84,070    4.00     N/A      N/A  
Bank   210,223    9.99    84,134    4.00    105,168    5.00 
                               
December 31, 2018                              
Total Capital (to Risk Weighted Assets):                              
Consolidated  $247,361    14.87%  $133,089    8.00%    N/A      N/A  
Bank   235,569    14.18    132,892    8.00   $166,115    10.00%
Tier 1 Capital (to Risk Weighted Assets):                              
Consolidated   235,308    14.14    99,817    6.00     N/A      N/A  
Bank   223,516    13.46    99,669    6.00    132,892    8.00 
Common Equity Tier 1 Capital (to Risk Weighted Assets):                              
Consolidated   235,308    14.14    74,862    4.50     N/A      N/A  
Bank   223,516    13.46    74,752    4.50    107,974    6.50 
Tier 1 Leverage Ratio (to Adjusted Average Assets):                              
Consolidated   235,308    11.14    84,497    4.00     N/A      N/A  
Bank   223,516    10.59    84,465    4.00    105,581    5.00 

 

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.

 

39

 

 

The following table summarizes the contractual obligations and credit commitments at March 31, 2019:

 

   Amounts Due Within 1 Year   Amounts Due After 1 Year But Within 3 Years   Amounts Due After 3 Year But Within 5 Years   Amounts Due After 5 Years   Total 
   (In thousands) 
                     
Borrowings                         
Federal Home Loan Bank  $133,606   $93,908   $2,920   $605   $231,039 
                          
Credit Commitments:                         
Available lines of credit   186,538            75,740    262,278 
Other loan commitments   82,243    33,577    1,630    352    117,802 
Letters of credit   9,394    646    301    693    11,034 
Total credit commitments   278,175    34,223    1,931    76,785    391,114 
                          
Other Obligations                         
Vendor Contracts   3,356    6,712    6,712    3,071    19,851 
                          
Total Obligations  $415,137   $134,843   $11,563   $80,461   $642,004 

 

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.

 

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 its presentation in our 2018 Annual Report. Please refer to Item 7A of the 2018 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.

 

40

 

 

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 2018 Annual Report. There are no material changes in the risk factors relevant to our operations.

 

41

 

 

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 March 31, 2019.

 

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)(3) 
January 1 - 31, 2019    191,419    10.14    191,419    59,914 
February 1 - 28, 2019    464,124(2)   9.87    455,752    2,418,362 
March 1 - 31, 2019    899,809    9.92    899,809    1,518,553 
Total    1,555,352    9.93    1,546,980    1,518,553 

 

(1)On January 31, 2017, the Board of Directors authorized a stock repurchase program under which the Company may purchase up to 3,047,000 shares, or 10%, of its outstanding common stock (the “2017 Plan”). The 2017 Plan began March 13, 2017 and on March 1, 2019, the Company announced the completion of the 2017 Plan.

 

(2)Number includes repurchases of 8,372 shares related to tax obligations for shares of restricted stock that vested on February 14, 2019 under our 2014 Omnibus Incentive Plan. These repurchases were reported by each reporting person on February 19, 2019.

 

(3)On January 29, 2019, the Board of Directors authorized an additional stock repurchase program under which the Company may purchase up to 2,814,200 shares, or 10%, of its outstanding common stock (the “2019 Plan”). As of March 31, 2019, the Company has repurchased 1,295,647 shares under the 2019 Plan.

 

There were no sales by us of unregistered securities during the three months ended March 31, 2019.

 

ITEM 3.DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4.MINE SAFETY DISCLOSURE.

 

Not applicable.

 

ITEM 5.OTHER INFORMATION.

 

None.

 

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.

 

42

 

 

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 May 8, 2019.

 

  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

 

Exhibit  

Number 

 

Description 

2.1   Agreement and Plan of Merger, dated as of April 4, 2016, by and between Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) and Chicopee Bancorp, Inc. (incorporated by reference to Exhibit 2.1 of the Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on April 7, 2016).
     
3.2   Restated Articles of Organization of Western New England Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of the Form 8-K filed with the SEC on October 26, 2016).
     
3.3   Amended and Restated Bylaws of Western New England Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of the Form 8-K filed with the SEC on February 2, 2017).
     
4.1   Form of Stock Certificate of Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 4.1 of the Registration Statement No. 333-137024 on Form S-1 filed with the Securities and Exchange Commission on August 31, 2006).
     
31.1*   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101**   Financial statements from the quarterly report on Form 10-Q of Western New England Bancorp, Inc. for the quarter ended March 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.

 

 

*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.

 

 

 

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Section 2: EX-31.1 (CERTIFICATION OF CHIEF EXECUTIVE OFFICER)

 

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: May 8, 2019 /s/ James C. Hagan  
    James C. Hagan
    President and Chief Executive Officer
    (Principal Executive Officer)

   

 

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Section 3: EX-31.2 (CERTIFICATION OF CHIEF FINANCIAL 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: May 8, 2019 /s/ Guida R. Sajdak  
    Guida R. Sajdak
    Chief Financial Officer
    (Principal Financial Officer)

  

 

 

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Section 4: EX-32.1 (CERTIFICATION OF CHIEF EXECUTIVE 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 March 31, 2019, 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.

 

May 8, 2019   /s/ James C. Hagan  
Dated   James C. Hagan
    President and Chief Executive Officer

 

 

 

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Section 5: EX-32.2 (CERTIFICATION OF CHIEF FINANCIAL 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 March 31, 2019, 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.

 

 

May 8, 2019   /s/ Guida R. Sajdak  
Dated   Guida R. Sajdak
    Chief Financial Officer

 

 

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