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, 2018

 

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, 2018, the registrant had 29,942,065 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, 2018 and December 31, 2017	1
	Consolidated Statements of Operations – Three Months Ended March 31, 2018 and 2017	2
	Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2018 and 2017	3
	Consolidated Statements of Changes in Shareholders’ Equity – Three Months Ended March 31, 2018 and 2017	4
	Consolidated Statements of Cash Flows – Three Months Ended March 31, 2018 and 2017	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,” “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 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;

 

●

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.

 

 

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,
		2018				2017
ASSETS
CASH AND DUE FROM BANKS		$	21,577			$	21,607
FEDERAL FUNDS SOLD			230				322
INTEREST-BEARING DEPOSITS AND OTHER SHORT-TERM INVESTMENTS			7,631				5,203
CASH AND CASH EQUIVALENTS			29,438				27,132
SECURITIES AVAILABLE-FOR-SALE – AT FAIR VALUE			266,963				288,416
MARKETABLE EQUITY SECURITIES – AT FAIR VALUE			6,327				—
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT COST			14,685				15,553
LOANS - Net of allowance for loan losses of $11,370 and $10,831 at March 31, 2018 and December 31, 2017, respectively			1,635,620				1,619,850
PREMISES AND EQUIPMENT, Net			23,653				23,500
ACCRUED INTEREST RECEIVABLE			5,878				5,946
BANK-OWNED LIFE INSURANCE			69,204				68,762
DEFERRED TAX ASSET, Net			9,854				8,784
GOODWILL			12,487				12,487
CORE DEPOSIT INTANGIBLE			3,969				4,063
OTHER ASSETS			7,453				8,577
TOTAL ASSETS		$	2,085,531			$	2,083,070
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
DEPOSITS :
Non-interest-bearing		$	315,482			$	311,851
Interest-bearing			1,238,245				1,194,231
Total deposits			1,553,727				1,506,082
SHORT-TERM BORROWINGS			55,000				144,650
LONG-TERM DEBT			212,730				164,786
SECURITIES PENDING SETTLEMENT			239				304
OTHER LIABILITIES			21,212				19,967
TOTAL LIABILITIES			1,842,908				1,835,789
SHAREHOLDERS’ EQUITY:
Preferred stock - $0.01 par value, 5,000,000 shares authorized, none outstanding at March 31, 2018 and December 31, 2017			—				—
Common stock - $0.01 par value, 75,000,000 shares authorized, 30,138,083 shares issued and outstanding at March 31, 2018; 30,487,309 shares issued and outstanding at December 31, 2017			302				305
Additional paid-in capital			199,845				203,527
Unearned compensation - ESOP			(5,632	)			(5,786	)
Unearned compensation - Equity Incentive Plan			(1,485	)			(791	)
Retained earnings			64,675				62,578
Accumulated other comprehensive loss			(15,082	)			(12,552	)
Total shareholders’ equity			242,623				247,281
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	2,085,531			$	2,083,070

 

See accompanying notes to unaudited consolidated financial statements.

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED 

(Dollars in thousands, except per share data)

 

		Three Months
		Ended March 31,
		2018				2017
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans		$	13,799			$	13,162
Commercial and industrial loans			2,814				2,575
Consumer loans			89				89
Debt securities, taxable			1,748				1,830
Debt securities, tax-exempt			24				31
Equity securities			36				35
Other investments			201				163
Federal funds sold, interest-bearing deposits and other short-term investments			21				72
Total interest and dividend income			18,732				17,957
INTEREST EXPENSE:
Deposits			2,355				2,009
Long-term debt			855				551
Short-term borrowings			800				894
Total interest expense			4,010				3,454
Net interest and dividend income			14,722				14,503
PROVISION FOR LOAN LOSSES			500				300
Net interest and dividend income after provision for loan losses			14,222				14,203
NON-INTEREST INCOME (LOSS):
Service charges and fees			1,583				1,526
Income from bank-owned life insurance			442				439
Losses on securities available-for-sale, net			(201	)			(64	)
Unrealized losses on marketable equity securities, net			(106	)			—
Gain on sale of other real estate owned			48				—
Other income			—				116
Total non-interest income			1,766				2,017
NON-INTEREST EXPENSE:
Salaries and employee benefits			6,533				6,225
Occupancy			1,060				1,007
Furniture and equipment			367				373
Data processing			637				391
Professional fees			659				596
FDIC insurance assessment			158				117
Merger related expenses			—				410
Advertising			347				248
Other expenses			1,665				1,603
Total non-interest expense			11,426				10,970
INCOME BEFORE INCOME TAXES			4,562				5,250
INCOME TAX PROVISION			1,043				147
NET INCOME		$	3,519			$	5,103
EARNINGS PER COMMON SHARE:
Basic earnings per share		$	0.12			$	0.17
Weighted average shares outstanding			29,484,824				29,597,594
Diluted earnings per share		$	0.12			$	0.17
Weighted average diluted shares outstanding			29,620,929				29,878,421

 

See accompanying notes to unaudited consolidated financial statements.

 

               

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED 

(Dollars in thousands)

 

		Three Months Ended March 31,
		2018				2017
Net income		$	3,519			$	5,103
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized holding (losses) gains on available-for-sale securities			(5,116	)			426
Reclassification adjustment for losses realized in income (1)			201				64
Cumulative-effect adjustment due to change in accounting principle (ASU 2016-01)			237				—
Unrealized (losses) gains on securities			(4,678	)			490
Tax effect			1,070				(46	)
Net-of-tax amount			(3,608	)			444
Cash flow hedges:
Change in fair value of derivatives used for cash flow hedges			678				53
Reclassification adjustment for loss realized in interest expense (2)			171				274
Reclassification adjustment for termination fee realized in interest expense (3)			264				264
Unrealized gains on cash flow hedges			1,113				591
Tax effect			(313	)			232
Net-of-tax amount			800				823
Defined benefit pension plan:
Amortization of defined benefit plan actuarial loss (4)			57				51
Tax effect			(16	)			305
Net-of-tax amount			41				356
Other comprehensive (loss) income			(2,767	)			1,623
Comprehensive income		$	752			$	6,726

 

(1) Realized losses on available-for-sale securities are recognized as a component of non-interest income. The tax effects applicable to net realized losses were $(57,000) and $(26,000) for the three months ended March 31, 2018 and 2017, 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 $48,000 and $109,000 for the three months ended March 31, 2018 and 2017, 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 and $105,000 for the three months ended March 31, 2018 and 2017, respectively.

 

(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 $16,000 and $20,000 for the three months ended March 31, 2018 and 2017, respectively.

 

See accompanying notes to unaudited consolidated financial statements.

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED

THREE MONTHS ENDED MARCH 31, 2018 AND 2017

(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, 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
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

 

See accompanying notes to unaudited consolidated financial statements

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(Dollars in thousands)

 

		Three Months Ended March 31,
		2018				2017
OPERATING ACTIVITIES:
Net income		$	3,519			$	5,103
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			500				300
Depreciation and amortization of premises and equipment			494				475
Net accretion of purchase accounting adjustments			(225	)			(661	)
Amortization of core deposit intangible			94				94
Net amortization of premiums and discounts on securities and deferred fees and costs on loans			793				1,286
Net accretion of premiums on modified debt			—				(1	)
Share-based compensation expense			232				162
ESOP expense			242				211
Net loss on redemption and sales of securities available-for-sale			201				64
Unrealized losses on marketable equity securities, net			106				—
Gain on sale of other real estate owned			(48	)			—
Deferred income tax benefit			—				(973	)
Income from bank-owned life insurance			(442	)			(439	)
Net change in:
Accrued interest receivable			68				274
Other assets			977				81
Other liabilities			2,415				(2,228	)
Net cash provided by operating activities			8,926				3,748
INVESTING ACTIVITIES:
Securities, available for sale:
Purchases			(2,577	)			(35,194	)
Proceeds from redemption and sales			5,635				4,530
Proceeds from calls, maturities, and principal collections			5,966				24,247
Purchase of residential mortgages			—				(34,375	)
Loan originations and principal payments, net			(16,202	)			1,415
Redemption of Federal Home Loan Bank of Boston stock			868				—
Proceeds from sale of other real estate owned			203				292
Purchases of premises and equipment			(677	)			(897	)
Proceeds from sale of premises and equipment			20				—
Net cash used in investing activities			(6,764	)			(39,982	)
FINANCING ACTIVITIES:
Net increase in deposits			47,735				3,424
Net change in short-term borrowings			(89,650	)			4,532
Repayment of long-term debt			(31,992	)			(1,982	)
Proceeds from issuance of long-term debt			80,000				888
Cash dividends paid			(1,185	)			(886	)
Common stock repurchased			(4,868	)			(3,529	)
Issuance of common stock in connection with stock option exercises			104				4,269
Net cash provided by financing activities			144				6,716
NET CHANGE IN CASH AND CASH EQUIVALENTS:			2,306				(29,518	)
Beginning of period			27,132				70,234
End of period		$	29,438			$	40,716
Supplemental cashflow information:
Interest paid		$	3,969			$	3,435
Taxes paid			30				528
Net change in cash due to broker for common stock repurchased			(65	)			(455	)

 

See the accompanying notes to unaudited consolidated financial statements

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

MARCH 31, 2018

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations – Western 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. The primary purpose of the acquisition with Chicopee was to expand our presence in western Massachusetts and diversify our market area. The transaction qualified as a tax-free reorganization for federal income tax purposes. Merger consideration paid in the transaction to shareholders of Chicopee totaled $98.8 million, consisting of 11,919,412 shares of Company common stock, net of shares of Chicopee already owned, and shares of Chicopee’s ESOP liquidated to pay off the ESOP loan.

 

We accounted for the transaction using the acquisition method. The acquisition method requires an acquirer to recognize the assets acquired and the liabilities assumed at fair value as of the acquisition date. Additionally, our results of operations include Chicopee’s operating results from the date of acquisition.

 

Principles of Consolidation – The unaudited 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 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 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, 2018, 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, 2018 are not necessarily indicative of the results of operations for the year ending December 31, 2018. 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, 2017, included in our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Annual Report”).

 

 

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

 

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, 2018 and 2017 have been computed based on the following:

 

		Three Months Ended
		March 31,
		2018				2017
		(In thousands, except per share data)
Net income applicable to common stock		$	3,519			$	5,103
Average number of common shares issued			30,358				30,508
Less: Average unallocated ESOP Shares			(791	)			(884	)
Less: Average unvested equity incentive plan shares			(82	)			(26	)
Average number of common shares outstanding used to calculate basic earnings per common share			29,485				29,598
Effect of dilutive equity incentive plan			35				13
Effect of dilutive stock options			101				267
Average number of common shares outstanding used to calculate diluted earnings per common share			29,621				29,878
Basic earnings per share		$	0.12			$	0.17
Diluted earnings per share		$	0.12			$	0.17

 

 

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,  2018				December 31, 2017
		(In thousands)
Net unrealized losses on securities available-for-sale		$	(10,036	)		$	(5,358	)
Tax effect			2,623				1,316
Net-of-tax amount			(7,413	)			(4,042	)
Fair value of derivatives used for cash flow hedges			(1,302	)			(2,152	)
Termination fee on cancelled cash flow hedges			(3,401	)			(3,664	)
Total derivatives			(4,703	)			(5,816	)
Tax effect			1,322				1,635
Net-of-tax amount			(3,381	)			(4,181	)
Unrecognized actuarial loss on defined benefit plan			(5,964	)			(6,021	)
Tax effect			1,676				1,692
Net-of-tax amount			(4,288	)			(4,329	)
Accumulated other comprehensive loss		$	(15,082	)		$	(12,552	)

 

The following table presents changes in accumulated other comprehensive loss for the periods ended March 31, 2018 and 2017 by component:

 

		Securities				Derivatives				Defined Benefit Plan				Accumulated Other Comprehensive Loss
		(In thousands)
Balance at December 31, 2016		$	(3,839	)		$	(5,204	)		$	(3,618	)		$	(12,661	)
Current-period other comprehensive income (loss)			444				823				356				1,623
Balance at March 31, 2017		$	(3,395	)		$	(4,381	)		$	(3,262	)		$	(11,038	)
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	)

 

 

4.       SECURITIES

 

Securities available-for-sale are summarized as follows:

 

		March 31, 2018
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In thousands)
Available-for-sale securities:
Government-sponsored mortgage-backed securities		$	175,117			$	3			$	(6,659	)		$	168,461
U.S. government guaranteed mortgage-backed securities			17,538				—				(845	)			16,693
Corporate bonds			55,974				3				(1,196	)			54,781
State and municipal bonds			3,220				28				(61	)			3,187
Government-sponsored enterprise obligations			25,150				—				(1,309	)			23,841
Total available-for-sale securities		$	276,999			$	34			$	(10,070	)		$	266,963

 

			December 31, 2017
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In thousands)
Available-for-sale securities:
Government-sponsored mortgage-backed securities		$	185,769			$	10			$	(3,778	)		$	182,001
U.S. government guaranteed mortgage-backed securities			16,821				—				(567	)			16,254
Corporate bonds			56,084				352				(292	)			56,144
State and municipal bonds			3,222				36				(19	)			3,239
Government-sponsored enterprise obligations			25,151				—				(770	)			24,381
Mutual funds			6,727				—				(330	)			6,397
Total available-for-sale securities		$	293,774			$	398			$	(5,756	)		$	288,416

 

At March 31, 2018, government-sponsored enterprise obligations with a fair value of $6.6 million and mortgage-backed securities with a fair value $60.4 million were pledged to secure public deposits and for other purposes as required or permitted by law.

 

In 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments —Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which affects current U.S. GAAP primarily as it relates to the accounting for equity investments. ASU No. 2016-01 also supersedes the guidance that requires (1) classification of equity securities with readily determinable fair values into different categories (i.e., trading or available-for-sale), and (2) recognition of changes in fair value of available-for-sale securities in other comprehensive income.

 

The main significant effect resulting from the adoption of this ASU is that marketable equity securities reported within securities available-for-sale are now shown as a single line item (“Marketable equity securities”) in the Company’s balance sheet and the recognition in net income of the changes in fair value of marketable equity securities. The cumulative-effect adjustment resulting from the adoption of this Update was to decrease retained earnings and reduce accumulated other comprehensive loss as of January 1, 2018 by $237,000.

 

 

The amortized cost and fair value of available-for-sale debt securities at March 31, 2018, 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, 2018
		Amortized Cost				Fair Value
		(In thousands)
Available-for-sale securities:
Debt securities:
Due in one year or less		$	—			$	—
Due after one year through five years			42,680				41,887
Due after five years through ten years			34,915				33,563
Due after ten years			6,749				6,359
Total securities			84,344				81,809
Mortgage-backed securities			192,655				185,154
Total		$	276,999			$	266,963

 

Gross realized gains and losses on securities available-for-sale for the three months ended March 31, 2018 and 2017 are as follows:

 

		Three Months Ended
		March 31,
		2018				2017
		(In thousands)
Gross gains realized		$	—			$	—
Gross losses realized			(201	)			(64	)
Net loss realized		$	(201	)		$	(64	)

 

Proceeds from the redemption of securities available-for-sale amounted to $5.6 million for the three months ended March 31, 2018, while proceeds from the sale of securities available-for-sale amounted to $4.5 million for the three months ended March 31, 2017.

 

Information pertaining to securities with gross unrealized losses at March 31, 2018 and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

 

		March 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		$	1,574			$	61,920			$	5,085			$	106,457
U.S. government guaranteed mortgage-backed securities			58				2,215				787				14,478
Corporate bonds			1,196				52,473				—				—
State and municipal bonds			—				—				61				1,539
Government-sponsored enterprise obligations			—				—				1,309				23,841
Total available-for-sale		$	2,828			$	116,608			$	7,242			$	146,315

 

 

		December 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		$	613			$	68,538			$	3,165			$	111,595
U.S. government guaranteed mortgage-backed securities			23				1,205				544				15,049
Corporate bonds			292				26,016				—				—
State and municipal bonds			—				—				19				1,581
Government-sponsored enterprise obligations			—				—				770				24,381
Mutual funds			—				—				330				6,397
Total available-for-sale		$	928			$	95,759			$	4,828			$	159,003

 

		March 31, 2018
		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			21			$	63,494			$	1,574				2.5	%			54			$	111,542			$	5,085				4.6	%
U.S. government guaranteed mortgage-backed securities			2				2,273				58				2.6				6				15,265				787				5.2
Government-sponsored enterprise obligations			0				—				—				—				9				25,150				1,309				5.2
Corporate bonds			18				53,669				1,196				2.2				0				—				—				—
State and municipal bonds			0				—				—				—				3				1,600				61				3.8
						$	119,436			$	2,828											$	153,557			$	7,242

 

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

 

A summary of the balances of loans, at March 31, 2018 and December 31, 2017, follows:

 

		March 31,				December 31,
		2018				2017
		(In thousands)
Commercial real estate		$	746,626			$	732,616
Residential real estate:
Residential			559,738				557,752
Home equity			94,051				92,599
Commercial and industrial			237,337				238,502
Consumer			4,539				4,478
Total loans			1,642,291				1,625,947
Premiums and deferred loan fees and costs, net			4,699				4,734
Allowance for loan losses			(11,370	)			(10,831	)
Loans, net		$	1,635,620			$	1,619,850

 

There were no purchases of loans during the three months ended March 31, 2018. During the three months ended March 31, 2017, we purchased residential real estate loans aggregating $34.4 million.

 

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, 2018 and December 31, 2017, we serviced commercial loans for participants aggregating $32.5 million and $32.6 million, respectively.

 

Residential real estate loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balances of these loans totaled $63.3 million and $65.8 million at March 31, 2018 and December 31, 2017, respectively. Net service fee income of $25,000 and $20,000 was recorded for the three months ended March 31, 2018 and 2017, respectively, and is included in service charges and fees on the consolidated statements of operations.

 

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, 2018, 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 (0.25%), and average net cost to service loans ($59.08 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,
		2018				2017
		(In thousands)
Balance at the beginning of period:		$	352			$	465
Capitalized mortgage servicing rights			—				—
Amortization			(17	)			(29	)
Balance at the end of period		$	335			$	436
Fair value at the end of period		$	537			$	605

 

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.

 

 

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 periods ended March 31, 2018 and 2017 is as follows:

 

		Commercial Real Estate				Residential Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		(In thousands)
Three Months Ended
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
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

 

 

Further information pertaining to the allowance for loan losses by segment at March 31, 2018 and December 31, 2017 follows:

 

		Commercial Real Estate				Residential Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		(In thousands)
March 31, 2018
Amount of allowance for impaired loans		$	—			$	—			$	—			$	—			$	—			$	—
Amount of allowance for non-impaired loans			5,199				3,397				2,681				78				15				11,370
Total allowance for loan losses		$	5,199			$	3,397			$	2,681			$	78			$	15			$	11,370
Impaired loans		$	2,977			$	3,769			$	3,035			$	95			$	—			$	9,876
Non-impaired loans			731,863				646,724				233,278				4,444				—				1,616,309
Impaired loans acquired with deteriorated credit quality			11,786				3,296				1,024				—				—				16,106
Total loans		$	746,626			$	653,789			$	237,337			$	4,539			$	—			$	1,642,291
December 31, 2017
Amount of allowance for impaired loans		$	—			$	—			$	—			$	—			$	—			$	—
Amount of allowance for non-impaired loans			4,712				3,311				2,733				71				4				10,831
Total allowance for loan losses		$	4,712			$	3,311			$	2,733			$	71			$	4			$	10,831
Impaired loans		$	3,674			$	3,964			$	2,766			$	120			$	—			$	10,524
Non-impaired loans			716,571				642,787				234,582				4,358				—				1,598,298
Impaired loans acquired with deteriorated credit quality			12,371				3,600				1,154				—				—				17,125
Total loans		$	732,616			$	650,351			$	238,502			$	4,478			$	—			$	1,625,947

 

 

The following is a summary of past due and non-accrual loans by class at March 31, 2018 and December 31, 2017:

 

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

Non-Accrual Loans

(In thousands)

March 31, 2018