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EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Western New England Bancorp, Inc.ex32-2.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Western New England Bancorp, Inc.ex32-1.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Western New England Bancorp, Inc.ex31-2.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Western New England Bancorp, Inc.ex31-1.htm

 

 

 

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, 2017

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 ☒

 

At May 3, 2017, the registrant had 30,789,602 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    
       
  Consolidated Balance Sheets (Unaudited) – March 31, 2017 and December 31, 2016   1
       
  Consolidated Statements of Net Income (Unaudited) – Three Months Ended March 31, 2017 and 2016   2
       
  Consolidated Statements of Comprehensive Income (Unaudited) –Three Months Ended March 31, 2017 and 2016   3
       
  Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) –Three Months Ended March 31, 2017 and 2016   4
       
  Consolidated Statements of Cash Flows (Unaudited) – Three Months Ended March 31, 2017 and 2016   5
       
  Notes to Consolidated Financial Statements (Unaudited)   6
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   30
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   38
       
Item 4. Controls and Procedures   38
       
PART II – OTHER INFORMATION    
     
Item 1. Legal Proceedings   39
       
Item 1A. Risk Factors   39
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   40
       
Item 3. Defaults Upon Senior Securities   40
       
Item 4. Mine Safety Disclosures   40
       
Item 5. Other Information   40
       
Item 6. Exhibits   40

 

 

 

 

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,” “would,” “plan,” “estimate,” “potential” and other similar expressions. Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operation 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;

 

changes in the regulatory environment;

 

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 could adversely affect our financial condition;

 

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 line 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;

 

the effect on our operations of governmental legislation and regulation, including changes in accounting regulation or standards, the nature and timing of the adoption and effectiveness of new requirements under the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010, Basel guidelines, capital requirements and other applicable laws and regulations;

 

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.

 

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, 
   2017   2016 
ASSETS          
CASH AND DUE FROM BANKS  $14,683   $23,297 
FEDERAL FUNDS SOLD   831    4,388 
INTEREST-BEARING  DEPOSITS AND OTHER SHORT-TERM INVESTMENTS   25,202    42,549 
CASH AND CASH EQUIVALENTS   40,716    70,234 
           
SECURITIES AVAILABLE-FOR-SALE – AT FAIR VALUE   305,680    300,115 
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT COST   16,124    16,124 
LOANS - Net of allowance for loan losses of $10,227 and $10,068 at March 31, 2017 and  December 31, 2016, respectively   1,589,380    1,556,416 
PREMISES AND EQUIPMENT, Net   23,707    20,885 
ACCRUED INTEREST RECEIVABLE   5,508    5,782 
BANK-OWNED LIFE INSURANCE   67,377    66,938 
DEFERRED TAX ASSET, Net   16,409    16,159 
GOODWILL   12,487    13,747 
CORE DEPOSIT INTANGIBLE   4,344    4,438 
OTHER ASSETS   4,814    5,180 
TOTAL ASSETS  $2,086,546   $2,076,018 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
LIABILITIES:          
DEPOSITS :          
Noninterest-bearing  $311,481   $303,993 
Interest-bearing   1,209,738    1,214,078 
Total deposits   1,521,219    1,518,071 
           
SHORT-TERM BORROWINGS   176,883    172,351 
LONG-TERM DEBT   123,668    124,836 
OTHER LIABILITIES   18,972    22,364 
TOTAL LIABILITIES   1,840,742    1,837,622 
           
SHAREHOLDERS’ EQUITY:          
Preferred stock - $0.01 par value, 5,000,000 shares authorized, none outstanding at  March 31, 2017 and December 31, 2016        
Common stock - $0.01 par value, 75,000,000 shares authorized, 30,778,690 shares issued and outstanding at March 31, 2017; 30,380,231 shares issued and outstanding at December 31, 2016   308    304 
Additional paid-in capital   207,245    205,996 
Unearned compensation - ESOP   (6,265)   (6,418)
Unearned compensation - Equity Incentive Plan   (374)   (536)
Retained earnings   55,928    51,711 
Accumulated other comprehensive loss   (11,038)   (12,661)
Total shareholders’ equity   245,804    238,396 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $2,086,546   $2,076,018 
 
See accompanying notes to unaudited consolidated financial statements.

 

1

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME – UNAUDITED

(Dollars in thousands, except per share data)

 

   Three Months 
   Ended March 31, 
   2017   2016 
INTEREST AND DIVIDEND INCOME:          
Residential and commercial real estate loans  $13,162   $6,512 
Commercial and industrial loans   2,575    1,696 
Consumer loans   89    42 
Debt securities, taxable   1,830    2,427 
Debt securities, tax-exempt   31    75 
Equity securities   35    52 
Other investments   163    132 
Federal funds sold, interest-bearing deposits and other short-term investments   72    25 
Total interest and dividend income   17,957    10,961 
INTEREST EXPENSE:          
Deposits   2,009    1,472 
Long-term debt   551    842 
Short-term borrowings   894    404 
Total interest expense   3,454    2,718 
Net interest and dividend income   14,503    8,243 
PROVISION (CREDIT) FOR LOAN LOSSES   300    (600)
Net interest and dividend income after provision (credit) for loan losses   14,203    8,843 
           
NONINTEREST INCOME (LOSS):          
Service charges and fees   1,526    884 
Income from bank-owned life insurance   439    361 
Loss on prepayment of borrowings       (915)
Gain (loss) on sales of securities, net   (64)   685 
Other income   127     
Total noninterest income   2,028    1,015 
NONINTEREST EXPENSE:          
Salaries and employee benefits   6,297    3,871 
Occupancy   1,277    801 
Computer operations   759    621 
Professional fees   596    516 
FDIC insurance assessment   117    190 
Merger related expenses   410    154 
Other expenses   1,525    919 
Total noninterest expense   10,981    7,072 
INCOME BEFORE INCOME TAXES   5,250    2,786 
INCOME TAX PROVISION   147    822 
NET INCOME  $5,103   $1,964 
           
EARNINGS PER COMMON SHARE:          
Basic earnings per share  $0.17   $0.11 
Weighted average shares outstanding   29,597,694    17,304,088 
Diluted earnings per share  $0.17   $0.11 
Weighted average diluted shares outstanding   29,878,421    17,304,088 
           
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, 
   2017   2016 
         
Net income  $5,103   $1,964 
           
Other comprehensive income (loss):          
Unrealized gains (losses) on securities:          
Unrealized holding gains on available-for-sale securities   426    8,149 
Reclassification adjustment for losses (gains) realized in income (1)   64    (685)
Amortization of net unrealized loss on held-to-maturity securities (2)       26 
Net unrealized loss upon transfer of held-to-maturity to available-for-sale (3)       (2,288)
Net unrealized gains   490    5,202 
Tax effect   (46)   (1,797)
Net-of-tax amount   444    3,405 
           
Derivative instruments:          
Change in fair value of derivatives used for cash flow hedges   53    (2,551)
Reclassification adjustment for loss realized in interest expense (4)   274    95 
Reclassification adjustment for termination fee realized in interest expense (5)   264    152 
Net adjustments relating to derivative instruments   591    (2,304)
Tax effect   232    783 
Net-of-tax amount   823    (1,521)
           
Defined benefit pension plans:          
Amortization of defined benefit plans actuarial loss (6)   51    16 
Tax effect   305    (6)
Net-of-tax amount   356    10 
           
Other comprehensive income   1,623    1,894 
           
Comprehensive income  $6,726   $3,858 
           

 

(1) Gains (losses) realized in income on available-for-sale securities are recognized as a component of noninterest income. The income tax (benefit) provision applicable to net realized (losses) gains was $(26,000) and $236,000 for the three months ended March 31, 2017 and 2016, respectively.

 

(2) Amortization of net unrealized loss on held-to-maturity securities is recognized as a component of interest income on debt securities. Income tax effect associated with the reclassification adjustment was $9,000 for the three months ended March 31, 2016.

 

(3) Income tax effect associated with unrealized loss upon transfer of held-to-maturity to available-for-sale was $790,000 for the three months ended March 31, 2016.

 

(4) 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 $109,000 and $32,000 for the three months ended March 31, 2017 and 2016, respectively.

 

(5) Termination fee on derivative instruments is recognized as a component of interest expense on short-term debt. Income tax effects associated with the reclassification adjustments were $105,000 and $52,000 for the three months ended March 31, 2017 and 2016, respectively.

 

(6) Amounts represent the reclassification of defined benefit plans amortization and have been recognized as a component of salaries and employee benefit expense. Income tax effects associated with the reclassification adjustments were $20,000 and $5,000 for the three months ended March 31, 2017 and 2016, respectively.

 

Tax rate on reclassification adjustments was 39.94% for the 2017 period and 34.0% for the comparable 2016 period.

 

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, 2017 AND 2016
(Dollars in thousands, except share data)
                                                 
    Common Stock    

Additional
Paid-in
Capital

   

Unearned
Compensation-
ESOP

   

Unearned
Compensation-
Equity
Incentive
Plan

   

Retained
Earnings

   

Accumulated
Other
Comprehensive
Loss

   

Total

 
    Shares     Par  
Value
                         
                                                 
BALANCE AT DECEMBER 31, 2015     18,267,747     $ 183     $ 108,210     $ (6,952 )   $ (313 )   $ 49,316     $ (10,978 )   $ 139,466  
Comprehensive income                                   1,964       1,894       3,858  
Common stock held by ESOP committed to be released (74,430 shares)                 23       130                         153  
Share-based compensation - equity incentive plan                             34                   34  
Excess tax benefit from equity incentive plan                 3                               3  
Cash dividends declared and paid ($0.03 per share)                                   (519 )           (519 )
BALANCE AT MARCH 31, 2016     18,267,747     $ 183     $ 108,236     $ (6,822 )   $ (279 )   $ 50,761     $ (9,084 )   $ 142,995  
                                                                 
BALANCE AT DECEMBER 31, 2016     30,380,231     $ 304     $ 205,996     $ (6,418 )   $ (536 )   $ 51,711     $ (12,661 )   $ 238,396  
Comprehensive income                                   5,103       1,623       6,726  
Common stock held by ESOP committed to be released (93,679 shares)                 58       153                         211  
Share-based compensation - equity incentive plan                             162                   162  
Common stock repurchased     (321,015 )     (3 )     (3,071 )                             (3,074 )
Issuance of common stock in connection with stock option exercises     719,474       7       4,262                               4,269  
Cash dividends declared and paid ($0.03 per share)                                   (886 )           (886 )
BALANCE AT MARCH 31, 2017     30,778,690     $ 308     $ 207,245     $ (6,265 )   $ (374 )   $ 55,928     $ (11,038 )   $ 245,804  
                                                               

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, 
   2017   2016 
OPERATING ACTIVITIES:          
Net income  $5,103   $1,964 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision (credit) for loan losses   300    (600)
Depreciation and amortization of premises and equipment   475    323 
Net accretion of purchase accounting adjustments   (661)    
Amortization of core deposit intangible   94     
Net amortization of premiums and discounts on securities and deferred fees and costs on mortgage loans   1,286    1,212 
Net (accretion) amortization of premiums on modified debt   (1)   44 
Share-based compensation expense   162    34 
ESOP expense   211    153 
Excess tax benefits from equity incentive plan       (3)
Net (gain) loss on sales of securities   64    (685)
Loss on sale of other real estate owned   6     
Loss on prepayment of borrowings       915 
Deferred income tax benefit   (973)    
Income from bank-owned life insurance   (439)   (361)
Changes in assets and liabilities:          
Accrued interest receivable   274    493 
Other assets   75    229 
Other liabilities   (2,228)   (2,903)
Net cash provided by operating activities   3,748    815 
INVESTING ACTIVITIES:          
Securities, held to maturity:          
Proceeds from calls, maturities, and principal collections       6,835 
Securities, available for sale:          
Purchases   (35,194)   (25,843)
Proceeds from sales   4,530    136,826 
Proceeds from calls, maturities, and principal collections   24,247    5,457 
Purchase of residential mortgages   (34,375)   (9,587)
Loan originations and principal payments, net   1,415    1,436 
Redemption of Federal Home Loan Bank of Boston stock       994 
Proceeds from sale of other real estate owned   292     
Purchases of premises and equipment   (897)   (89)
Proceeds from sale of premises and equipment       20 
Net cash (used in) provided by investing activities   (39,982)   116,049 
FINANCING ACTIVITIES:          
Net increase in deposits   3,424    27,761 
Net change in short-term borrowings   4,532    30,186 
Repayment of long-term debt   (1,982)   (32,845)
Proceeds from long-term debt   888    41 
Cash dividends paid   (886)   (519)
Common stock repurchased   (3,529)    
Issuance of common stock in connection with stock option exercises   4,269     
Excess tax benefits in connection with equity incentive plan       3 
Net cash provided by financing activities   6,716    24,627 
           
NET CHANGE IN CASH AND CASH EQUIVALENTS:   (29,518)   141,491 
Beginning of period   70,234    13,703 
End of period  $40,716   $155,194 
           
Supplemental cashflow information:          
Securities reclassified from held-to-maturity to available-for-sale  $   $(232,817)
Interest paid   3,435    2,845 
Taxes paid   528    35 
Net cash due to broker for common stock repurchased       30,570 
           
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, 2017

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of OperationsWestern New England Bancorp, Inc. (“Western New England Bancorp,” “WNEB,” the “Company,” “we” or “us”) is a Massachusetts-chartered stock holding company for Westfield Bank, a federally chartered stock savings bank (the “Bank”).

 

The Bank’s deposits are insured to the limits specified by the Federal Deposit Insurance Corporation (“FDIC”). The Bank operates 21 banking offices in western Massachusetts and northern Connecticut, and its primary sources of revenue are earnings on loans to small and middle-market businesses and to residential property homeowners and income from securities.

 

Wholly-Owned Subsidiaries and Acquisition - 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. On October 21, 2016, we acquired Chicopee Bancorp, Inc. (“Chicopee”), the holding company for Chicopee Savings Bank. The acquisition added eight full-service banking offices located in western Massachusetts.

 

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

 

Estimates – The preparation of unaudited 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, the disclosure of contingent assets and liabilities and the reported amounts of income and expenses for both at the date of the unaudited consolidated financial statements. 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, other-than-temporary impairment of securities, 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, 2017, 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, 2017 are not necessarily indicative of the results of operations for the year ending December 31, 2017. 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, 2016, included in our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 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 represent income available to shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential shares had been issued, as well as any adjustment to income that would result from the assumed issuance. No dilutive potential shares were outstanding during the periods presented. Share-based compensation awards that qualify as participating securities (entitled to receive non-forfeitable dividends) are included in basic earnings per share.

 

Earnings per common share for the three months ended March 31, 2017 and 2016 have been computed based on the following:

 

   Three Months Ended 
   March 31, 
   2017   2016 
   (In thousands, except per share data) 
         
Net income applicable to common stock  $5,103   $1,964 
           
Average number of common shares issued   30,508    18,268 
Less: Average unallocated ESOP Shares   (884)   (964)
Less: Average unvested equity incentive plan shares   (26)    
           
Average number of common shares outstanding used to calculate basic earnings per common share   29,598    17,304 
           
Effect of dilutive equity incentive plan   13     
Effect of dilutive stock options   267     
           
Average number of common shares outstanding used to calculate diluted earnings per common share   29,878    17,304 
           
Basic earnings per share  $0.17   $0.11 
Diluted earnings per share  $0.17   $0.11 

 

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.

 

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

 

  

March 31,

2017

   December 31, 2016 
   (In thousands) 
         
Net unrealized losses on securities available-for-sale  $(5,373)  $(5,863)
Tax effect   1,978    2,024 
Net-of-tax amount   (3,395)   (3,839)
           
Fair value of derivatives used for cash flow hedges   (2,825)   (3,152)
Termination fees on forward starting interest rate swaps   (4,469)   (4,733)
Total derivatives   (7,294)   (7,885)
Tax effect   2,913    2,681 
Net-of-tax amount   (4,381)   (5,204)
           
Unrecognized actuarial loss on defined benefit plan   (5,431)   (5,482)
Tax effect   2,169    1,864 
 Net-of-tax amount   (3,262)   (3,618)
           
Accumulated other comprehensive loss  $(11,038)  $(12,661)

 

The following table presents changes in accumulated other comprehensive loss for the periods ended March 31, 2017 and 2016 by component:

 

   Securities   Derivatives   Defined Benefit Plans   Accumulated Other Comprehensive Loss 
   (In thousands) 
Balance at December 31, 2015  $(3,046)  $(5,501)  $(2,431)  $(10,978)
Current-period other comprehensive income (loss)   3,405    (1,521)   10    1,894 
Balance at March 31, 2016  $359   $(7,022)  $(2,421)  $(9,084)
                     
Balance at December 31, 2016  $(3,839)  $(5,204)  $(3,618)  $(12,661)
Current-period other comprehensive income   444    823    356    1,623 
Balance at March 31, 2017  $(3,395)  $(4,381)  $(3,262)  $(11,038)

 

8 

 

 

4.  SECURITIES

 

Securities available-for-sale are summarized as follows:

 

   March 31, 2017 
   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Fair Value 
   (In thousands) 
Available-for-sale securities:                    
Government-sponsored mortgage-backed securities  $208,270   $21   $(3,880)  $204,411 
U.S. government guaranteed mortgage-backed securities   17,188        (463)   16,725 
Corporate bonds   50,074    352    (92)   50,334 
State and municipal bonds   3,750    20    (85)   3,685 
Government-sponsored enterprise obligations   25,150        (946)   24,204 
Mutual funds   6,621        (300)   6,321 
Total available-for-sale  $311,053   $393   $(5,766)  $305,680 

 

                     
   December 31, 2016 
   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Fair Value 
   (In thousands) 
Available-for-sale securities:                    
Government-sponsored mortgage-backed securities  $184,127   $33   $(4,024)  $180,136 
U.S. government guaranteed mortgage-backed securities   17,753        (403)   17,350 
Corporate bonds   50,255    265    (203)   50,317 
State and municipal bonds   4,117    13    (122)   4,008 
Government-sponsored enterprise obligations   43,140        (1,132)   42,008 
Mutual funds   6,586        (290)   6,296 
Total available-for-sale securities  $305,978   $311   $(6,174)  $300,115 
                     

Our repurchase agreements are collateralized by government-sponsored enterprise obligations and certain mortgage-backed securities (see Note 8).

 

The amortized cost and fair value of securities available for sale at March 31, 2017, by maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or repay obligations.

 

   March 31, 2017 
   Amortized Cost   Fair Value 
   (In thousands) 
Mortgage-backed securities:          
Due after one year through five years  $17,127   $17,017 
Due after five years through ten years   17,303    17,102 
Due after ten years   191,028    187,017 
Total  $225,458   $221,136 
           
Debt securities:          
Due in one year or less  $2,859   $2,893 
Due after one year through five years   24,001    24,125 
Due after five years through ten years   45,363    44,771 
Due after ten years   6,751    6,434 
Total  $78,974   $78,223 

9 

 

 

Gross realized gains and losses on sales of securities available-for-sale for the three months ended March 31, 2017 and 2016 are as follows:

 

   Three Months Ended 
   March 31, 
   2017   2016 
   (In thousands) 
         
Gross gains realized  $   $1,519 
Gross losses realized   (64)   (834)
Net gain (loss) realized  $(64)  $685 

 

Proceeds from the sale of securities available for sale amounted to $4.5 million and $136.8 million for the three months ended March 31, 2017 and 2016, respectively.

 

Information pertaining to securities with gross unrealized losses at March 31, 2017 and December 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

 

   March 31, 2017 
   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  $3,050   $177,524   $830   $21,984 
U.S. government guaranteed mortgage-backed securities   235    12,136    228    4,589 
Corporate bonds   92    17,577         
State and municipal bonds   85    1,516         
Government-sponsored enterprise obligations   946    24,204         
Mutual funds   79    3,447    221    2,874 
                     
Total available-for-sale  $4,487   $236,404   $1,279   $29,447 

 

   December 31, 2016 
   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  $3,016   $147,691   $1,008   $27,303 
U.S. government guaranteed mortgage-backed securities   192    12,536    211    4,814 
Corporate bonds   203    18,481         
State and municipal bonds   95    1,507    27    305 
Government-sponsored enterprise obligations   1,132    42,008         
Mutual funds   79    3,429    211    2,867 
                     
Total available-for-sale  $4,717   $225,652   $1,457   $35,289 

 

10 

 

 

   March 31, 2017 
   Less Than 12 Months   Over 12 Months 
   Number of Securities   Amortized Cost Basis   Gross Loss   Depreciation from Amortized Cost Basis (%)   Number of Securities   Amortized Cost Basis   Gross Loss   Depreciation from Amortized Cost Basis (%) 
   (Dollars in thousands) 
                                 
Government sponsored mortgage-backed securities   63   $180,573   $3,050    1.7%   9   $22,814   $830    3.6%
U.S. government guaranteed mortgage-backed securities   4    12,371    235    1.9    2    4,817    228    4.7 
Government sponsored enterprise obligations   9    25,150    946    3.8    0             
Corporate bonds   4    17,669    92    0.5    0             
State and municipal bonds   3    1,601    85    5.3    0             
Mutual funds   1    3,526    79    2.2    2    3,095    221    7.1 
        $240,890   $4,487             $30,726   $1,279      

 

These unrealized losses are the result of changes in interest rates and not credit quality. Because we do not intend to sell the securities and it is more likely than not that we will not be required to sell the investments before recovery of their amortized cost basis, no declines are deemed to be other-than-temporary.

 

5.  LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Loans consisted of the following amounts:  March 31,   December 31, 
   2017   2016 
   (In thousands) 
Commercial real estate  $718,006   $720,741 
Residential real estate:          
Residential   546,692    522,083 
Home equity   92,895    92,083 
Commercial and industrial   232,502    222,286 
Consumer   4,286    4,424 
 Total Loans   1,594,381    1,561,617 
Unearned premiums and deferred loan fees and costs, net   5,226    4,867 
Allowance for loan losses   (10,227)   (10,068)
   $1,589,380   $1,556,416 

 

During the three months ended March 31, 2017 and 2016, we purchased residential real estate loans aggregating $34.4 million and $9.6 million, respectively.

 

We have transferred a portion of our originated commercial real estate and commercial and industrial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in our accompanying unaudited consolidated balance sheets. We share ratably with our participating lenders in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. We continue to service the loans on behalf of the participating lenders and, as such, collect cash payments from the borrowers, remit payments (net of servicing fees) to participating lenders and disburse required escrow funds to relevant parties. At March 31, 2017 and December 31, 2016, we serviced commercial loans for participants aggregating $32.6 million and $42.6 million, respectively.

 

11 

 

 

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balances of these loans totaled $72.7 million and $75.2 million at March 31, 2017 and December 31, 2016, respectively. Service fee income of $20,000 and $1,000 was recorded for the three months ended March 31, 2017 and 2016, respectively, and is included in service charges and fees on the consolidated statements of net income.

 

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 Federal Home Loan Mortgage Corporation. 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, 2017, include weighted average prepayment speed for the portfolio using the Public Securities Association Standard Prepayment Model (203 PSA), weighted average internal rate of return (10.05%), weighted average servicing fee (0.2501%), and average net cost to service loans ($58.90 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.

 

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

 

   Three Months
Ended March 31,
2017
 
    (In thousands) 
      
Balance at the beginning of period:  $465 
Capitalized mortgage servicing rights    
Amortization   (29)
Balance at the end of period  $436 
Fair value at the end of period  $605 

 

Prior to the acquisition of Chicopee in 2016, mortgage servicing rights were not material to the consolidated financial statements, and therefore, were not recorded.

 

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.

 

 12

 

 

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.

 

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.

 

 13

 

 

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 periods ended March 31, 2017 and 2016 is as follows:

 

   Commercial
Real Estate
   Residential
Real Estate
   Commercial
and Industrial
   Consumer   Unallocated   Total 
   (In thousands) 
Three Months Ended    
Balance at December 31, 2015  $3,856   $2,431   $2,485   $22   $46   $8,840 
Provision (credit)   (751)   47    105    13    (14)   (600)
Charge-offs   (170)   (50)       (23)       (243)
Recoveries   851    1        6        858 
Balance at March 31, 2016  $3,786   $2,429   $2,590   $18   $32   $8,855 
                               
Balance at December 31, 2016  $4,083   $2,862   $3,085   $38   $   $10,068 
Provision (credit)   169    223    (182)   70    20    300 
Charge-offs   (36)       (163)   (80)       (279)
Recoveries   118    1    4    15        138 
Balance at March 31, 2017  $4,334   $3,086   $2,744   $43   $20   $10,227 

 

Further information pertaining to the allowance for loan losses by segment at March 31, 2017 and December 31, 2016 follows:

 

   Commercial
Real Estate
   Residential
Real Estate
   Commercial
and
Industrial
   Consumer   Unallocated   Total 
   (In thousands) 
March 31, 2017                        
                         
Amount of allowance for impaired loans  $   $   $   $   $   $ 
Amount of allowance for non-impaired loans   4,334    3,086    2,744    43    20    10,227 
Total allowance for loan losses  $4,334   $3,086   $2,744   $43   $20   $10,227 
                               
Impaired loans  $4,728   $2,583   $3,454   $70   $   $10,835 
Non-impaired loans   698,119    632,785    227,952    4,216        1,563,072 
Loans acquired with deteriorated credit quality   15,159    4,219    1,096            20,474 
Total loans  $718,006   $639,587   $232,502   $4,286   $   $1,594,381 
                               
December 31, 2016                              
                               
Amount of allowance for impaired loans  $   $   $   $   $   $ 
Amount of allowance for non-impaired loans   4,083    2,862    3,085    38        10,068 
Total allowance for loan losses   4,083    2,862    3,085    38        10,068 
                               
Impaired loans   3,335    452    3,042            6,829 
Non-impaired loans   701,766    609,107    217,972    4,424        1,533,269 
Loans acquired with deteriorated credit quality   15,640    4,607    1,272            21,519 
Total loans  $720,741   $614,166   $222,286   $4,424   $   $1,561,617 

 

 14

 

 

The following is a summary of past due and non-accrual loans by class at March 31, 2017 and December 31, 2016:

 

   30 – 59 Days
Past Due
   60 – 89 Days
Past Due
   Greater than
90 Days Past Due
   Total Past
Due
   Past Due 90
Days or More
and Still Accruing
   Loans on Non-Accrual 
   (In thousands) 
March 31, 2017                        
Commercial real estate  $300   $131   $135   $566   $    2,816 
Residential real estate:                              
Residential   895    150    686    1,731        1,333 
Home equity   167    2    36    205        36 
Commercial and industrial   81    126    12    219        3,280 
Consumer   32    13    4    49        13 
Total legacy loans   1,475    422    873    2,770        7,478 
                               
Loans acquired from Chicopee Savings Bank   4,361    1,144    1,965    7,470        7,275 
                               
Total  $5,836   $1,566   $2,838   $10,240   $   $14,753 
                               
December 31, 2016                              
Commercial real estate  $302   $555   $137   $994   $   $2,740 
Residential real estate:                              
Residential   791    262    689    1,742        1,658 
Home equity   208    36        244        37 
Commercial and industrial   326    32        358        3,214 
Consumer   27    9    7    43        14 
Total legacy loans   1,654    894    833    3,381        7,663 
                               
Loans acquired from Chicopee Savings Bank   3,854    1,907    551    6,312        6,394 
                               
Total past due loans  $5,508   $2,801   $1,384   $9,693   $   $14,057 

 

The following is a summary of impaired loans by class at March 31, 2017 and December 31, 2016:

 

   Impaired Loans (1) 
               Three Months Ended 
   At March 31, 2017   March 31, 2017 
   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded Investment
   Interest
Income
Recognized
 
   (In thousands) 
Impaired loans without a valuation allowance: (2)                         
Commercial real estate  $19,887   $22,320   $   $19,431   $217 
Residential real estate   6,552    7,104        5,805    12 
Home equity   250    341        125    1 
Commercial and industrial   4,550    11,215        4,432    62 
Consumer   70    72        35     
                          
Total impaired loans  $31,309   $41,052   $   $29,828   $292 

 

 

(1)Includes loans acquired with deteriorated credit quality and performing troubled debt restructurings.
(2)Includes loans acquired with deteriorated credit quality from the Chicopee Bancorp, Inc. merger.

 

 15

 

 

   Impaired Loans (1) 
               Three Months Ended 
   At December 31, 2016   March 31, 2016 
   Recorded Investment   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded Investment
   Interest
Income
Recognized
 
   (In thousands) 
Impaired loans without a valuation allowance: (2)                         
Commercial real estate  $18,975   $21,330   $   $3,618   $12 
Residential real estate   5,059    5,676        425     
Commercial and industrial   4,314    11,049        3,413     
                          
Total impaired loans  $28,348   $38,055   $   $7,456   $12 

 

 

(1)Includes loans acquired with deteriorated credit quality and performing troubled debt restructurings.
(2)Includes loans acquired with deteriorated credit quality from the Chicopee Bancorp, Inc. merger.

 

No interest income was recognized for impaired loans on a cash-basis method during the three months ended March 31, 2017 or 2016. Interest income recognized on impaired loans during the three months ended March 31, 2017 and 2016 related to TDRs.

 

We may periodically agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). These concessions could include a reduction in the interest rate on the loan, payment extensions, postponement or forgiveness of principal, forbearance or other actions intended to maximize collection. All TDRs are classified as impaired.

 

When we modify loans in a TDR, we measure impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, we evaluate all TDRs, including those that have payment defaults, for possible impairment and recognize impairment through the allowance.

 

There were no significant loans modified in TDRs during the three months ended March 31, 2017 or 2016.

 

A default occurs when a loan is 30 days or more past due. No TDRs defaulted within twelve months of restructuring during the three months ended March 31, 2017 or 2016.

 

There were no charge-offs on TDRs during the three months ended March 31, 2017 and 2016.

 

Loans Acquired with Deteriorated Credit Quality

 

The following is a summary of loans acquired with evidence of credit deterioration from Chicopee as of March 31, 2017.

 

    Contractual
Required
Payments
Receivable
   Cash Expected
to Be Collected
   Non-
Accretable
Discount
   Accretable
Yield
   Loans
Receivable
 
    (In thousands) 
Balance at December 31, 2016   $37,437   $29,040   $8,397   $7,521   $21,519 
Collections    (1,195)   (1,061)   (134)   (346)   (715)
Dispositions    (414)   (324)   (90)   6    (330)
Balance at March 31, 2017   $35,828   $27,655   $8,173   $7,181   $20,474 

 

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Credit Quality Information

 

We utilize 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. Nonperforming residential real estate, home equity and consumer loans are monitored individually for impairment and risk rated as “Substandard.”

 

Loans rated 1 – 3 are considered “Pass” rated loans with low to average risk.

 

Loans rated 4 are considered “Pass Watch,” which represent loans to borrowers with declining earnings, losses, or strained cash flow.

 

Loans rated 5 are considered “Special Mention.” These loans exhibit potential credit weaknesses or downward trends and are being closely monitored by us.

 

Loans rated 6 are considered “Substandard.” Generally, a loan is considered substandard if the borrower exhibits a well-defined weakness that may be inadequately protected by the current net worth and cash flow capacity to pay the current debt.

 

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 in full, on the basis of currently existing facts, highly questionable and improbable and that a partial loss of principal is likely.

 

Loans rated 8 are considered uncollectible and of such little value that their continuance as loans is not warranted.

 

On an annual basis, or more often if needed, we formally review the ratings on all commercial real estate and commercial and industrial loans. Construction loans are reported within commercial real estate loans and total $98.4 million and $88.9 million at March 31, 2017 and December 31, 2016, respectively. We engage an independent third party to review a significant portion of loans within these segments on a semi-annual basis. We use the results of these reviews as part of our annual review process. In addition, management utilizes delinquency reports, the watch list and other loan reports to monitor credit quality in other segments.

 

The following table presents our loans by risk rating at March 31, 2017 and December 31, 2016:

 

   Commercial Real Estate   Residential 1-4 Family   Home Equity   Commercial and Industrial   Consumer   Total 
   (In thousands) 
March 31, 2017                        
Loans rated 1 – 3  $668,755   $540,830   $92,575   $181,964   $4,216   $1,488,340 
Loans rated 4   25,745            34,793        60,538 
Loans rated 5   13,041    328    125    6,884        20,378 
Loans rated 6   10,465    5,534    195    8,861    70    25,125 
   $718,006   $546,692   $92,895   $232,502   $4,286   $1,594,381 
                               
December 31, 2016                              
Loans rated 1 – 3  $673,957   $516,339   $91,964   $180,675   $4,391   $1,467,326 
Loans rated 4   24,207            16,621    6    40,834 
Loans rated 5   14,068            6,727        20,795 
Loans rated 6   6,604    5,744    119    15,379    27    27,873 
Loans rated 7   1,905            2,884        4,789 
   $720,741   $522,083   $92,083   $222,286   $4,424   $1,561,617 

 

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6.       GOODWILL AND OTHER INTANGIBLES

 

Goodwill

Goodwill for the three months ended March 31, 2017 is summarized as follows:

 

   Three Months
Ended March 31,
2017
 
   (In thousands) 
Balance at December 31, 2016  $13,747 
Current period adjustments   (1,260)
Balance at March 31, 2017  $12,487 

 

At March 31, 2017 and December 31, 2016, the Company’s goodwill related to the acquisition of Chicopee in October 2016. Annually, or more frequently if events or changes in circumstances warrant such evaluation, the Company evaluates its goodwill for impairment. No goodwill impairment was recorded for the three months ended March 31, 2017.

 

During the three months ended March 31, 2017, management completed their evaluation of premises and equipment acquired from Chicopee, which resulted in a $2.4 million adjustment to the provisional fair values of bank premises acquired and a $1.4 million reduction in goodwill. The remaining adjustments to goodwill of $140,000 during the three months ended March 31, 2017 resulted from information obtain during the quarter about events and circumstances that existed as of the acquisition date.

 

Core Deposit Intangibles

In connection with the assumption of $545.7 million of deposit liabilities from the Chicopee acquisition in October 2016, of which $345.2 million were core deposits, the Bank recorded a core deposit intangible of $4.5 million. The resulting core deposit intangible is amortized over twelve years using the straight-line method. Core deposit intangibles are summarized as follows:

 

   Three Months
Ended March 31,
2017
 
   (In thousands) 
Balance at December 31, 2016  $4,438 
Amortization   (94)
Balance at March 31, 2017  $4,344 

 

Amortization expense was $94,000 for the three months ended March 31, 2017. At March 31, 2017, future amortization of the core deposit intangible totals $375,000 for each of the next five years and $2.5 million thereafter.

 

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)

 

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A summary of stock option activity for the three months ended March 31, 2017 is presented below. No options were outstanding during the three months ended March 31, 2016.

 

   Shares   Weighted
Average
Exercise
Price
  

Weighted
Average
Remaining

Contractual
Term

(In years)

  

Aggregate
Intrinsic
Value

(In thousands)

 
                 
Outstanding at December 31, 2016   1,178,899   $6.01    1.98   $3,930 
Exercised   (719,474)   5.93    0.92    2,796 
Outstanding at March 31, 2017   459,425   $6.14    3.63   $1,472 
                     
Exercisable at March 31, 2017   459,425   $6.14    3.63   $1,472 

 

Cash received for options exercised during the three months ended March 31, 2017 was $4.3 million.

 

Restricted Stock Awards In May 2014, our shareholders approved a stock-based compensation plan under which up to 516,000 shares of our 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. Authorized but unissued shares are issued to awardees upon vesting of such awards. Any shares not issued because vesting requirements are not met will again be available for issuance under the plans.

 

In January 2015, 48,560 shares were granted under this plan and vest ratably over five years. The fair market value of shares awarded, based on the market price at the date of grant, was recorded as unearned compensation and is being amortized over the applicable vesting period.

 

In 2016, the Compensation Committee (the “Committee”) approved the long-term incentive program (the “LTI Plan”). The LTI Plan provides a periodic award that is both performance and retention based in that it is designed to recognize the executive’s responsibilities, reward demonstrated performance and leadership and to retain such executives. The objective of the 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 LTI Plan includes eligible officers of the Company who are nominated by the Company’s Chief Executive Officer and approved by the Committee. The LTI Plan is triggered by the Company’s achievement of satisfactory safety and soundness results from its most recent regulatory examination. Stock grants made through the 2016 LTI plan will be a combination of 50% time-vested restricted stock and 50% performance-based restricted stock.

 

In May 2016, 62,740 shares were granted under the LTI Plan. Of this total, 36,543 shares are retention-based, with 10,352 vesting in one year and 26,191 vesting ratably over a three year period. The remaining 26,197 shares granted are performance based and are subject to the achievement of the 2016 LTI performance metric before vesting is realized after a three year period. For the performance shares, the primary performance metric for 2016 awards is return on equity. Performance shares will be earned based upon how the Company performs relative to threshold and target absolute goals (i.e. Company-specific, not relative to a peer index) over the three-year performance period. The threshold amount for the performance period will be a return on equity of 5.85% and a target amount of 6.32%. Participants will be able to earn between 50% (for threshold performance) and 100% of the target amount for the performance shares but will not earn additional shares if performance exceeds target performance.

 

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The fair market value of shares awarded, based on the market price at the date of grant, is recorded as unearned compensation and amortized over the applicable vesting period. Shares granted under performance-based conditions are monitored on a quarterly basis in order to compare actual results to the performance metric established, with any necessary adjustments being recognized through share-based compensation expense and unearned compensation. At March 31, 2017, an additional 404,700 shares were available for future grants under this plan.

 

Our stock award plan activity for the three months ended March 31, 2017 and 2016 is summarized below:

 

    Unvested Stock Awards
Outstanding
 
   Shares   Weighted
Average
Grant Date
Fair Value
 
           
Outstanding at December 31, 2016   91,371   $7.51 
Shares vested   (11,200)   7.18 
Outstanding at March 31, 2017   80,171   $7.56 
           
Outstanding at December 31, 2015   54,160   $7.28 
Shares vested   (11,200)   7.18 
Outstanding at March 31, 2016   42,960   $7.30 

 

We recorded compensation cost related to the stock awards of $162,000 and $34,000 for the three months ended March 31, 2017 and 2016, respectively.

 

8.  SHORT-TERM BORROWINGS AND LONG-TERM DEBT

 

We utilize short-term borrowings and long-term debt as an additional source of funds to finance our lending and investing activities and to provide liquidity for daily operations.

 

Short-term borrowings are made up of Federal Home Loan Bank of Boston (“FHLBB”) advances with an original maturity of less than one year, a line of credit with the FHLBB and customer repurchase agreements, which have an original maturity of one day. Short-term borrowings issued by the FHLBB were $155.0 million at both March 31, 2017 and December 31, 2016. We have an “Ideal Way” line of credit with the FHLBB for $9.5 million at March 31, 2017 and December 31, 2016. Interest on this line of credit is payable at a rate determined and reset by the FHLBB on a daily basis. The outstanding principal is due daily, but the portion not repaid will be automatically renewed. There were no advances outstanding on the line of credit as of March 31, 2017 or December 31, 2016. Customer repurchase agreements were $21.9 million at March 31, 2017 and $17.4 million at December 31, 2016. A customer repurchase agreement is an agreement by us to sell to and repurchase from the customer an interest in specific securities issued by or guaranteed by the U.S. government. This transaction settles immediately on a same day basis in immediately available funds. Interest paid is commensurate with other products of equal interest and credit risk. In addition, we have lines of credit of $4.0 million and $50.0 million with Bankers Bank Northeast (“BBN”) and PNC Bank, respectively. The interest rates on these lines are determined and reset on a daily basis by each respective bank. There were no advances outstanding under these lines of credit at March 31, 2017 or December 31, 2016. As part of our contract with BBN, we are required to maintain a reserve balance of $300,000 with BBN for our use of this line of credit.

 

Long-term debt consists of FHLBB advances with an original maturity of one year or more. At March 31, 2017, we had $123.7 million in long-term debt with the FHLBB. This compares to $124.8 million in long-term debt with FHLBB advances at December 31, 2016.

 

Customer repurchase agreements are collateralized by government-sponsored enterprise obligations with fair value of $6.7 million and $24.6 million, and mortgage backed securities with a fair value of $69.9 million and $57.6 million, at March 31, 2017 and December 31, 2016, respectively. The securities collateralizing repurchase agreements are subject to fluctuations in fair value. We monitor the fair value of the collateral on a periodic basis, and would pledge additional collateral if necessary based on changes in fair value of collateral or the balances of the repurchase agreements.

 

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All FHLBB advances are collateralized by a blanket lien on our owner occupied residential real estate loans and certain mortgage-backed securities.

 

9.  PENSION BENEFITS

 

We maintain a pension plan for our eligible employees. 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. 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 2017. No contributions have been made to the plan for the three months ended March 31, 2017. The pension plan assets are invested in group annuity contracts with the Principal Financial Group, who also acts as third-party administrator for our 401(k) and ESOP plans.

 

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

 

  

Three Months Ended

March 31,

 
   2017   2016 
   (In thousands) 
Service cost  $267   $293 
Interest cost   254    240 
Expected return on assets   (298)   (274)
Amortization of actuarial loss   51    16 
Net periodic pension cost  $274   $275 

 

10.  DERIVATIVES AND HEDGING ACTIVITIES

 

Risk Management Objective of Using Derivatives

 

We are 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, 2017 and December 31, 2016.

 

March 31, 2017  Asset Derivatives  Liability Derivatives
   Balance Sheet
Location
  Fair Value   Balance Sheet
Location
  Fair Value 
   (In thousands)
                
Interest rate swaps   Other Assets  $7   Other Liabilities  $2,832 

 

December 31, 2016  Asset Derivatives  Liability Derivatives
   Balance Sheet
Location
  Fair Value   Balance Sheet
Location
  Fair Value 
   (In thousands)
                
Interest rate swaps  Other Assets  $   Other Liabilities  $3,152 

 

Cash Flow Hedges of Interest Rate Risk

 

Our 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, 2017 and December 31, 2016:

 

March 31, 2017  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  $75,000    3.1    1.07%   2.46%  $ (2,825)

 

December 31, 2016  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  $75,000    3.4    0.92%   2.46%  $ (3,152)

 

During 2016, we terminated a forward-starting interest rate swap with a notional amount of $32.5 million and incurred a termination fee of $3.4 million. During 2015, we terminated forward-starting interest rate swaps with a notional amount of $47.5 million and incurred a termination fee of $2.4 million. The termination fees are amortized as a reclassification of other comprehensive income into interest expense over the terms of the previously hedged borrowings, which were six and five years for the swaps terminated in 2016 and 2015, respectively.

 

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, and 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 during the three months ended March 31, 2017 or 2016.

 

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 losses of our cash flow hedges for the periods indicated.

 

   Amount of Loss Recognized in OCI on Derivative (Effective Portion) 
   Three Months Ended March 31, 
   2017   2016 
   (In thousands) 
Interest rate swaps  $53   $(2,551)

 

Amounts reported in accumulated other comprehensive loss related to these derivatives are reclassified to interest expense as interest payments are made on our rate sensitive assets/liabilities. The amount reclassified from accumulated other comprehensive income into net income for the effective portion of interest rate swaps and termination fees was $538,000 and $247,000 during the three months ended March 31, 2017 and 2016, respectively. During the three months ended March 31, 2017 and 2016, 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.

 

As of March 31, 2017, the termination value of derivatives in a net liability position related to these agreements, which includes accrued interest but excludes any adjustment for nonperformance risk, was $2.9 million. As of March 31, 2017, we have minimum collateral posting thresholds with certain of our derivative counterparties and have no collateral posted against our obligations under these agreements. If we had breached any of these provisions at March 31, 2017, 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 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.

 

Cash and cash equivalents – The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets.

 

Securities and mortgage-backed securities – Fair value of securities are primarily measured using unadjusted information from an independent pricing service. 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.

 

FHLBB and other stock - These investments are carried at cost which is their estimated redemption value.

 

Loans receivable – For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans and residential real estate loans) are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

 

Accrued interest – The carrying amounts of accrued interest approximate fair value.

 

Deposit liabilities – The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

 

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Short-term borrowings and long-term debt – The fair values of our debt instruments are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

 

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.

 

Commitments to extend credit - Fair values for off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the term and credit risk. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Such differences are not considered significant.

 

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

   March 31, 2017 
   Level 1   Level 2   Level 3   Total 
Assets:  (In thousands) 
Securities available-for-sale                    
Government-sponsored mortgage-backed securities  $   $204,411   $   $204,411 
U.S. government guaranteed mortgage-backed securities       16,725        16,725 
Corporate bonds       50,334        50,334 
State and municipal bonds       3,685        3,685 
Government-sponsored enterprise obligations       24,204        24,204 
Mutual funds   6,321            6,321 
Total securities available for sale   6,321    299,359        305,680 
                     
Interest rate swaps       7        7 
Total assets  $6,321   $299,366   $   $305,687 
                     
Liabilities:                    
Interest rate swaps  $   $2,832   $   $2,832 

 

   December 31, 2016 
   Level 1   Level 2   Level 3   Total 
Assets:  (In thousands) 
Government-sponsored mortgage-backed securities  $   $180,136   $   $180,136 
U.S. government guaranteed mortgage-backed securities       17,350        17,350 
Corporate bonds       50,317        50,317 
State and municipal bonds       4,008        4,008 
Government-sponsored enterprise obligations       42,008        42,008 
Mutual funds   6,296            6,296 
Total assets  $6,296   $293,819   $   $300,115 
                     
Liabilities:                    
Interest rate swaps  $   $3,152   $   $3,152 

 

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Also, we may 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, 2017. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related assets at March 31, 2016. Total losses represent the change in carrying value as a result of fair value adjustments related to assets still held at March 31, 2016.

 

   At   Three Months Ended 
   March 31, 2016   March 31, 2016 
               Total 
   Level 1   Level 2   Level 3   Losses 
   (In thousands)   (In thousands) 
Impaired loans  $   $   $2,010   $170 

 

The amount of impaired loans represents the carrying value and related write-down and 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. Impaired loans with adjustments resulting from discounted cash flows or without a specific reserve are not included in this disclosure.

 

There were no transfers to or from Level 1 and 2 during the three months ended March 31, 2017 and 2016. We did not measure any liabilities at fair value on a non-recurring basis on the consolidated balance sheets.

 

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Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument. Where quoted market prices are not available, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment. Changes in assumptions could significantly affect the estimates. The estimated fair values of our financial instruments are as follows:

 

   March 31, 2017 
   Carrying Value   Fair Value 
       Level 1   Level 2   Level 3   Total 
   (In thousands) 
Assets:                    
Cash and cash equivalents  $40,716   $40,716   $   $   $40,716 
Securities available-for-sale   305,680    6,321    299,359        305,680 
Federal Home Loan Bank of Boston and other restricted stock   16,124            16,124    16,124 
Loans - net   1,589,380            1,557,138    1,557,138 
Accrued interest receivable   5,508            5,508    5,508 
Mortgage servicing rights   436        605        605 
Derivative assets   7        7        7 
                          
Liabilities:                         
Deposits   1,521,219            1,521,230    1,521,230 
Short-term borrowings   176,883        176,876        176,876 
Long-term debt   123,668        124,260        124,260 
Accrued interest payable   428            428    428 
Derivative liabilities   2,832        2,832        2,832 

 

   December 31, 2016 
   Carrying Value   Fair Value 
       Level 1   Level 2   Level 3   Total 
   (In thousands) 
Assets:                    
Cash and cash equivalents  $70,234   $70,234   $