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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 June 30, 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 August 3, 2018, the registrant had 29,746,707 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 – June 30, 2018 and December 31, 2017 1
     
  Consolidated Statements of Operations – Three and Six Months Ended June 30, 2018 and 2017 2
     
  Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2018 and 2017 3
     
  Consolidated Statements of Changes in Shareholders’ Equity – Six Months Ended June 30, 2018 and 2017 4
     
  Consolidated Statements of Cash Flows – Six Months Ended June 30, 2018 and 2017 5
     
  Notes to Consolidated Financial Statements 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 43
     
Item 4. Controls and Procedures 43
     
PART II – OTHER INFORMATION  
   
Item 1. Legal Proceedings 44
     
Item 1A. Risk Factors 44
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44
     
Item 3. Defaults upon Senior Securities 44
     
Item 4. Mine Safety Disclosures 44
     
Item 5. Other Information 44
     
Item 6. Exhibits 44

 

 

 

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;

 

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;

 

the highly competitive industry and market area in which we operate;

 

general economic conditions, either nationally or regionally, resulting in, among other things, a deterioration in credit quality;

 

changes in business conditions and inflation;

 

changes in credit market conditions;

 

the inability to realize expected cost savings or achieve other anticipated benefits in connection with business combinations and other acquisitions;

 

changes in the securities markets which affect investment management revenues;

 

increases in Federal Deposit Insurance Corporation deposit insurance premiums and assessments;

 

changes in technology used in the banking business;

 

the soundness of other financial services institutions which may adversely affect our credit risk;

 

certain of our intangible assets may become impaired in the future;

 

our controls and procedures may fail or be circumvented;

 

new 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;

 

severe weather, natural disasters, acts of war or terrorism and other external events which could significantly impact our business; and

 

other factors detailed from time to time in our SEC filings.

 

Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except to the extent required by law.

 

i

 

PART I – FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS.

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(Dollars in thousands, except share data)

 

   June 30,   December 31, 
   2018   2017 
ASSETS          
CASH AND DUE FROM BANKS  $18,646   $21,607 
FEDERAL FUNDS SOLD   1,329    322 
INTEREST-BEARING  DEPOSITS AND OTHER SHORT-TERM INVESTMENTS   2,950    5,203 
CASH AND CASH EQUIVALENTS   22,925    27,132 
           
SECURITIES AVAILABLE-FOR-SALE – AT FAIR VALUE   259,689    288,416 
MARKETABLE EQUITY SECURITIES – AT FAIR VALUE   6,324     
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT COST   15,584    15,553 
LOANS - Net of allowance for loan losses of $11,986 and $10,831 at June 30, 2018 and December 31, 2017, respectively   1,656,889    1,619,850 
PREMISES AND EQUIPMENT, Net   24,426    23,500 
ACCRUED INTEREST RECEIVABLE   5,581    5,946 
BANK-OWNED LIFE INSURANCE   68,353    68,762 
DEFERRED TAX ASSET, Net   9,926    8,784 
GOODWILL   12,487    12,487 
CORE DEPOSIT INTANGIBLE   3,875    4,063 
OTHER ASSETS   9,537    8,577 
            TOTAL ASSETS  $2,095,596   $2,083,070 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
LIABILITIES:          
DEPOSITS :          
Non-interest-bearing  $312,596   $311,851 
Interest-bearing   1,239,208    1,194,231 
Total deposits   1,551,804    1,506,082 
           
SHORT-TERM BORROWINGS   66,000    144,650 
LONG-TERM DEBT   214,672    164,786 
OTHER LIABILITIES   21,047    20,271 
TOTAL LIABILITIES   1,853,523    1,835,789 
           
SHAREHOLDERS’ EQUITY:          
Preferred stock - $0.01 par value, 5,000,000 shares authorized, none outstanding at June 30, 2018 and December 31, 2017        
Common stock - $0.01 par value, 75,000,000 shares authorized, 29,746,707 shares issued and outstanding at June 30, 2018; 30,487,309 shares issued and outstanding at December 31, 2017   298    305 
Additional paid-in capital   195,677    203,527 
Unearned compensation – ESOP   (5,478)   (5,786)
Unearned compensation – Equity Incentive Plan   (1,232)   (791)
Retained earnings   68,649    62,578 
Accumulated other comprehensive loss   (15,841)   (12,552)
TOTAL SHAREHOLDERS’ EQUITY:   242,073    247,281 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $2,095,596   $2,083,070 

 

  See accompanying notes to unaudited consolidated financial statements.

 

1

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED

(Dollars in thousands, except per share data) 

                 
   Three Months   Six Months 
   Ended June 30,   Ended June 30, 
   2018   2017   2018   2017 
INTEREST AND DIVIDEND INCOME:                    
Residential and commercial real estate loans  $14,543   $13,406   $28,342   $26,568 
Commercial and industrial loans   3,777    2,721    6,592    5,297 
Consumer loans   85    84    173    173 
Debt securities, taxable   1,770    1,871    3,518    3,700 
Debt securities, tax-exempt   21    25    45    56 
Equity securities   38    35    74    70 
Other investments - at cost   202    166    403    329 
Short-term investments   28    19    49    92 
Total interest and dividend income   20,464    18,327    39,196    36,285 
INTEREST EXPENSE:
                    
Deposits   2,718    2,059    5,073    4,068 
Long-term debt   1,130    549    1,985    1,100 
Short-term borrowings   751    976    1,551    1,871 
Total interest expense   4,599    3,584    8,609    7,039 
Net interest and dividend income   15,865    14,743    30,587    29,246 
                     
PROVISION FOR LOAN LOSSES:   750    350    1,250    650 
Net interest and dividend income after provision for loan losses   15,115    14,393    29,337    28,596 
                     
NON-INTEREST INCOME (LOSS):                    
Service charges and fees   1,693    1,549    3,276    3,075 
Income from bank-owned life insurance   484    480    926    919 
Bank-owned life insurance death benefit   715        715     
(Loss) gain on securities, net   (49)   46    (250)   (18)
Unrealized losses on marketable equity securities, net   (41)       (147)    
Gain on sale of other real estate owned           48     
Other income   131        131    116 
Total non-interest income   2,933    2,075    4,699    4,092 
                     
NON-INTEREST EXPENSE:                    
Salaries and employee benefits   6,564    6,239    13,097    12,464 
Occupancy   967    917    2,027    1,924 
Furniture and equipment   382    366    749    739 
Data processing   678    669    1,315    1,060 
Professional fees   681    681    1,340    1,277 
FDIC insurance assessment   147    186    305    303 
Merger related expenses       116        526 
Advertising   355    385    702    633 
Other expenses   1,772    1,737    3,437    3,340 
Total non-interest expense   11,546    11,296    22,972    22,266 
INCOME BEFORE INCOME TAXES   6,502    5,172    11,064    10,422 
INCOME TAX PROVISION   1,364    1,416    2,407    1,563 
NET INCOME  $5,138   $3,756   $8,657   $8,859 
                     
EARNINGS PER COMMON SHARE:                    
Basic earnings per share  $0.18   $0.13   $0.30   $0.30 
Weighted average shares outstanding   29,035,895    29,980,518    29,259,119    29,790,164 
Diluted earnings per share  $0.18   $0.12   $0.29   $0.30 
Weighted average diluted shares outstanding   29,178,264    30,120,025    29,398,356    30,000,280 

 

 See accompanying notes to unaudited consolidated financial statements.

 

2

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED

(Dollars in thousands)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Net income  $5,138   $3,756   $8,657   $8,859 
                     
Other comprehensive income (loss):                    
Unrealized (losses) gains on securities:                    
Unrealized holding (losses) gains on available-for-sale securities   (1,545)   1,326    (6,424)   1,752 
Reclassification adjustment for loss (gain) realized in income(1)   49    (46)   250    18 
Unrealized (losses) gains on securities   (1,496)   1,280    (6,174)   1,770 
Tax effect   259    (481)   1,329    (527)
Net-of-tax amount   (1,237)   799    (4,845)   1,243 
                     
Cash flow hedges:                    
Change in fair value of derivatives used for cash flow hedges   240    (346)   918    (293)
Reclassification adjustment for loss realized in interest expense(2)   102    249    273    523 
Reclassification adjustment for termination fee realized in interest expense(3)   266    266    530    530 
Unrealized gains on cash flow hedges   608    169    1,721    760 
Tax effect   (171)   (67)   (484)   165 
Net-of-tax amount   437    102    1,237    925 
                     
Defined benefit Plan:                    
Amortization of defined benefit plan actuarial loss(4)   57    51    114    102 
Tax effect   (16)   (21)   (32)   284 
Net-of-tax amount   41    30    82    386 
                     
Other comprehensive (loss) income   (759)   931    (3,526)   2,554 
                     
Comprehensive income  $4,379   $4,687   $5,131   $11,413 

 

 

(1)Realized gains and losses on available-for-sale securities are recognized as a component of non-interest income. The tax effects applicable to net realized (loss) gains were $(14,000) and $19,000 for the three months ended June 30, 2018 and 2017, respectively.   The tax effects applicable to net realized loss was $(70,000) and $(7,000) for the six months ended June 30, 2018 and 2017, respectively.
(2)Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term borrowings.  Income tax effects associated with the reclassification adjustments were $29,000 and $102,000 for the three months ended June 30, 2018 and 2017, respectively.  Income tax effects associated with the reclassification adjustments were $77,000 and $214,000 for the six months ended June 30, 2018 and 2017, respectively.
(3)Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term borrowings.  Income tax effects associated with the reclassification adjustments were $75,000 and $107,000 for the three months ended June 30, 2018 and 2017, respectively.  Income tax effects associated with the reclassification adjustments were $149,000 and $215,000 for the six months ended June 30, 2018 and 2017, respectively.
(4)Amounts represent the reclassification of defined benefit plan amortization and have been recognized as a component of non-interest expense.  Income tax effects associated with the reclassification adjustments were $16,000 and $21,000 for the three months ended June 30, 2018 and 2017, respectively.  Income tax effects associated with the reclassification adjustments were $32,000 and $42,000 for the six months ended June 30, 2018 and 2017, respectively.

 

See accompanying notes to unaudited consolidated financial statements.

                           

3

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED

SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(Dollars in thousands, except share data)

 

   Common Stock                         
   Shares     Par Value   Additional Paid-in Capital   Unearned Compensation
- ESOP
   Unearned Compensation
- Equity Incentive Plan
   Retained Earnings   Accumulated Other Comprehensive Loss   Total 
BALANCE AT
DECEMBER 31, 2016
   30,380,231   $304   $205,996   $(6,418)  $(536)  $51,711   $(12,661)  $238,396 
Comprehensive income                       8,859    2,554    11,413 
Common stock held by ESOP committed to be released (93,679 shares)           141    313                454 
Share-based compensation - equity incentive plan                   331            331 
Common stock repurchased   (321,015)   (3)   (3,071)                   (3,074)
Issuance of common stock in connection with stock option exercises   921,849    9    5,456                    5,465 
Issuance of common stock in connection with equity incentive plan   89,042    1    903        (904)            
Cash dividends declared and paid ($0.06 per share)                       (1,784)       (1,784)
BALANCE AT JUNE 30, 2017   31,070,107   $311   $209,425   $(6,105)  $(1,109)  $58,786   $(10,107)  $251,201 
                                         
BALANCE AT
DECEMBER 31, 2017
   30,487,309   $305   $203,527   $(5,786)  $(791)  $62,578   $(12,552)  $247,281 
Comprehensive income                       8,657    (3,526)   5,131 
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)           177    308                485 
Share-based compensation - equity incentive plan                   485            485 
Common stock repurchased   (843,017)   (8)   (9,056)                   (9,064)
Issuance of common stock in connection with stock option exercises   16,975        104                    104 
Issuance of common stock in connection with equity incentive plan   85,440    1    925        (926)            
Cash dividends declared and paid ($0.08 per share)                       (2,349)       (2,349)
BALANCE AT JUNE 30, 2018   29,746,707   $298   $195,677   $(5,478)  $(1,232)  $68,649   $(15,841)  $242,073 

 

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)

 

   Six Months Ended June 30, 
   2018   2017 
OPERATING ACTIVITIES:          
Net income  $8,657   $8,859 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   1,250    650 
Depreciation and amortization of premises and equipment   1,001    970 
Accretion of purchase accounting adjustments, net   (1,124)   (998)
Amortization of core deposit intangible   188    188 
Net amortization of premiums and discounts on securities and mortgage loans   1,337    1,964 
Share-based compensation expense   485    331 
ESOP expense   485    454 
Unrealized losses on marketable equity securities, net   147     
Net loss on redemption and sales of securities   250    18 
(Gain) loss on sale of other real estate owned   (48)   6 
Deferred income tax benefit       (973)
Income from bank-owned life insurance   (926)   (919)
Bank-owned life insurance death benefits   (715)    
Net change in:          
Accrued interest receivable   365    188 
Other assets   (1,078)   (1,668)
Other liabilities   2,659    (2,768)
Net cash provided by operating activities   12,933    6,302 
           
INVESTING ACTIVITIES:
          
Securities, available for sale:          
Purchases   (10,681)   (44,621)
Proceeds from redemptions and sales   12,501    4,576 
Proceeds from calls, maturities, and principal collections   12,385    36,571 
Purchase of residential mortgages       (34,375)
Loan originations and principal payments, net   (37,479)   (7,786)
(Purchase) redemption of Federal Home Loan Bank of Boston stock   (31)   49 
Proceeds from sale of other real estate owned   203    292 
Purchases of premises and equipment   (1,992)   (1,445)
Proceeds from sale of premises and equipment   45     
Proceeds from payout on bank-owned life insurance   2,050     
Net cash used in investing activities   (22,999)   (46,739)
           
FINANCING ACTIVITIES:
          
Net increase (decrease) in deposits   45,885    (22,216)
Net change in short-term borrowings   (78,650)   18,657 
Repayment of long-term debt   (34,989)   (8,221)
Proceeds from long-term debt   85,000    1,238 
Cash dividends paid   (2,349)   (1,784)
Common stock repurchased   (9,142)   (3,529)
Issuance of common stock in connection with stock option exercises   104    5,465 
Net cash provided by (used in) financing activities   5,859    (10,390)
           
NET CHANGE IN CASH AND CASH EQUIVALENTS:   (4,207)   (50,827)
Beginning of period   27,132    70,234 
End of period  $22,925   $19,407 
           
Supplemental cash flow information:          
Net change in cash due to broker for common stock repurchased  $(78)  $(455)
Interest paid   8,514    7,028 
Taxes paid   1,042    3,148 

 

See the accompanying notes to unaudited consolidated financial statements

 

5

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2018

 

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 22 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 June 30, 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 and six months ended June 30, 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 SEC.

 

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”).

 

6

 

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 and six months ended June 30, 2018 and 2017 have been computed based on the following:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
   (In thousands, except per share data) 
Net income applicable to common stock  $5,138   $3,756   $8,657   $8,859 
                     
Average number of common shares issued   29,897    30,882    30,126    30,696 
Less: Average unallocated ESOP Shares   (768)   (861)   (779)   (873)
Less: Average unvested equity incentive plan shares   (93)   (40)   (88)   (33)
                     
Average number of common shares outstanding used to calculate basic earnings per common share   29,036    29,981    29,259    29,790 
                     
Effect of dilutive equity incentive plan   42        39    6 
Effect of dilutive stock options   100    141    100    204 
                     
Average number of common shares outstanding used to calculate diluted earnings per common share   29,178    30,120    29,398    30,000 
                     
Basic earnings per share  $0.18   $0.13   $0.30   $0.30 
Diluted earnings per share  $0.18   $0.12   $0.29   $0.30 
                     

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3. COMPREHENSIVE INCOME/LOSS

 

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

 

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

 

   June 30,
2018
   December 31,
2017
 
   (In thousands) 
Net unrealized losses on securities available-for-sale  $(11,532)  $(5,358)
Tax effect   2,882    1,316 
Net-of-tax amount   (8,650)   (4,042)
           
Fair value of derivatives used for cash flow hedges   (961)   (2,152)
Termination fees on cancelled cash flow hedges   (3,134)   (3,664)
Total derivatives   (4,095)   (5,816)
Tax effect   1,151    1,635 
Net-of-tax amount   (2,944)   (4,181)
           
Unrecognized actuarial loss on defined benefit plan   (5,907)   (6,021)
Tax effect   1,660    1,692 
    Net-of-tax amount   (4,247)   (4,329)
           
Accumulated other comprehensive loss  $(15,841)  $(12,552)

 

The following table presents changes in accumulated other comprehensive loss for the periods ended June 30, 2018 and 2017 by component:

 

   Securities   Derivatives   Defined Benefit  Plans   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)   1,243    925    386    2,554 
Balance at June 30, 2017  $(2,596)  $(4,279)  $(3,232)  $(10,107)
                     
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   (4,845)   1,237    82    (3,526)
Balance at June 30, 2018  $(8,650)  $(2,944)  $(4,247)  $(15,841)
                     

8

 

4.       SECURITIES

 

Securities available-for-sale are summarized as follows:

 

   June 30, 2018 
   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Fair Value 
   (In thousands) 
Available-for-sale securities:                    
Government-sponsored mortgage-backed securities  $172,152   $3   $(7,412)  $164,743 
U.S. government guaranteed mortgage-backed securities   20,929        (941)   19,988 
Corporate bonds   50,011        (1,674)   48,337 
State and municipal bonds   2,979    23    (62)   2,940 
Government-sponsored enterprise obligations   25,150        (1,469)   23,681 
Total available-for-sale  $271,221   $26   $(11,558)  $259,689 

 

   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 June 30, 2018, government-sponsored enterprise obligations with a fair value of $6.5 million and mortgage-backed securities with a fair value $57.5 million were pledged to secure public deposits and for other purposes as required or permitted by law. The securities collateralizing public deposits 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 such deposits.

 

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 previously 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 ASU was to decrease retained earnings and reduce accumulated other comprehensive loss as of January 1, 2018 by $237,000.

 

9

 

The amortized cost and fair value of available-for-sale debt securities at June 30, 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.

 

   June 30, 2018 
   Amortized Cost   Fair Value 
  (In thousands) 
Available-for-sale securities:    
Debt securities:          
Due in one year or less  $240   $241 
Due after one year through five years   36,284    35,229 
Due after five years through ten years   34,867    33,142 
Due after ten years   6,749    6,346 
Total securities   78,140    74,958 
Mortgage-backed securities   193,081    184,731 
Total  $271,221   $259,689 

 

Gross realized gains and losses on sales of securities available-for-sale for the three and six months ended June 30, 2018 and 2017 are as follows:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
   (In thousands) 
Gross gains realized  $   $46   $   $46 
Gross losses realized   (49)       (250)   (64)
Net gain realized  $(49)  $46   $(250)  $(18)

 

Proceeds from the sale and redemption of securities available-for-sale amounted to $12.5 million and $4.6 million for the six months ended June 30, 2018 and 2017, respectively.

 

Information pertaining to securities with gross unrealized losses at June 30, 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:

 

   June 30, 2018 
   Less Than Twelve Months   Over Twelve Months 
   Number of Securities   Fair Value   Gross Unrealized Loss   Depreciation from Amortized Cost Basis (%)   Number of Securities   Fair Value   Gross Unrealized Loss   Depreciation from Amortized Cost Basis (%) 
   (Dollars in thousands) 
Government-sponsored mortgage-backed securities   21   $60,237   $1,774    2.9%   56   $104,423   $5,638    5.1%
U.S. government guaranteed mortgage-backed securities   4    6,004    105    1.7    6    13,984    836    5.6 
Government-sponsored enterprise obligations   0                9    23,681    1,469    5.8 
Corporate bonds   13    43,896    1,481    3.3    2    4,441    193    4.2 
State and municipal bonds   0                3    1,537    62    3.9 
        $110,137   $3,360             $148,066   $8,198      

 

10

 

   December 31, 2017 
   Less Than Twelve Months   Over Twelve Months 
   Number of Securities   Fair Value   Gross Unrealized Loss   Depreciation from Amortized Cost Basis (%)   Number of Securities   Fair Value   Gross Unrealized Loss   Depreciation from Amortized Cost Basis (%) 
   (Dollars in thousands) 
Government-sponsored mortgage-backed securities   21   $68,538   $613    0.9%   53   $111,595   $3,165    2.8%
U.S. government guaranteed mortgage-backed securities   1    1,205    23    1.8    6    15,049    544    3.5 
Government-sponsored enterprise obligations   0                9    24,381    770    3.1 
Corporate bonds   9    26,016    292    1.1    0             
State and municipal bonds   0                3    1,581    19    1.2 
Mutual funds   0                3    6,397    330    4.9 
        $95,759   $928             $159,003   $4,828      

 

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:  June 30,   December 31, 
   2018   2017 
   (In thousands) 
Commercial real estate  $748,062   $732,616 
Residential real estate:          
Residential   570,384    557,752 
Home equity   94,729    92,599 
Commercial and industrial   246,281    238,502 
Consumer   4,752    4,478 
Total Loans   1,664,208    1,625,947 
Unearned premiums and deferred loan fees and costs, net   4,667    4,734 
Allowance for loan losses   (11,986)   (10,831)
   $1,656,889   $1,619,850 

 

There were no purchases of loans during the six months ended June 30, 2018. During the six months ended June 30, 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 June 30, 2018 and December 31, 2017, we serviced commercial loans for participants aggregating $35.7 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 $61.0 million and $65.8 million at June 30, 2018 and December 31, 2017, respectively. Net service fee income of $48,000 and $34,000 was recorded for the six months ended June 30, 2018 and 2017, respectively, and is included in service charges and fees on the consolidated statements of operations.

 

11

 

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 June 30, 2018, include weighted average prepayment speed for the portfolio using the Public Securities Association Standard Prepayment Model (126 PSA), weighted average internal rate of return (12.05%), weighted average servicing fee (0.2501%), and average net cost to service loans ($83.80 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

June 30,

2018

  

Six Months Ended

June 30,

2018

 
   (In thousands) 
Balance at the beginning of period:  $335   $352 
Capitalized mortgage servicing rights        
Amortization   (16)   (33)
Balance at the end of period  $319   $319 
Fair value at the end of period  $501   $501 

 

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 June 30, 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 March 31, 2017  $4,334   $3,086   $2,744   $43   $20   $10,227 
Provision (credit)   138    60    108    51    (7)   350 
Charge-offs       (42)   (120)   (53)       (215)
Recoveries       22    22    12        56 
Balance at June 30, 2017  $4,472   $3,126   $2,754   $53   $13   $10,418 
                               
Balance at March 31, 2018  $5,199   $3,397   $2,681   $78   $15   $11,370 
Provision (credit)   259    211    263    47    (30)   750 
Charge-offs       (80)   (25)   (49)       (154)
Recoveries       1    3    16        20 
Balance at June 30, 2018  $5,458   $3,529   $2,922   $92   $(15)  $11,986 
                               
Six Months Ended                              
Balance at December 31, 2016  $4,083   $2,862   $3,085   $38   $   $10,068 
Provision (credit)   307    281    (71)   120    13    650 
Charge-offs   (36)   (41)   (285)   (133)       (495)
Recoveries   118    24    25    28        195 
Balance at June 30, 2017  $4,472   $3,126   $2,754   $53   $13   $10,418 
                               
Balance at December 31, 2017  $4,712   $3,311   $2,733   $71   $4   $10,831 
Provision (credit)   710    282    204    73    (19)   1,250 
Charge-offs       (80)   (25)   (85)       (190)
Recoveries   36    16    10    33        95 
Balance at June 30, 2018  $5,458   $3,529   $2,922   $92   $(15)  $11,986 

14

 

Further information pertaining to the allowance for loan losses by segment at June 30, 2018 and December 31, 2017 follows:

 

   Commercial Real Estate   Residential Real Estate   Commercial and Industrial   Consumer   Unallocated   Total 
  (In thousands) 
June 30, 2018    
Amount of allowance for impaired loans  $   $   $   $   $   $ 
Amount of allowance for non-impaired loans   5,458    3,529    2,922    92    (15)   11,986 
Total allowance for loan losses  $5,458   $3,529   $2,922   $92   $(15)  $11,986 
                               
Impaired loans  $2,787   $4,820   $3,411   $94   $   $11,112 
Non-impaired loans   733,696    657,031    241,943    4,658        1,637,328 
Loans acquired with deteriorated credit quality   11,579    3,262    927            15,768 
Total loans  $748,062   $665,113   $246,281   $4,752   $   $1,664,208 
                               
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 
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 
                               

 

15

 

The following is a summary of past due and non-accrual loans by class at June 30, 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) 
June 30, 2018                        
Commercial real estate  $3,405   $   $473   $3,878   $   $2,284 
Residential real estate:                              
Residential   1,268    1,888    1,528    4,684        6,580 
Home equity   464    319    32    815        437 
Commercial and industrial   1,676    369    453    2,498        3,615 
Consumer   18    6    18    42        94 
Total  $6,831   $2,582   $2,504   $11,917   $   $13,010 
                               
                               
December 31, 2017                              
Commercial real estate  $1,951   $144   $290   $2,385   $   $2,959 
Residential real estate:                              
Residential   2,992    1,480    1,911    6,383        5,961 
Home equity   635        48    683        696 
Commercial and industrial   1,731    797    162    2,690        3,019 
Consumer   65        41    106        120 
Total  $7,374   $2,421   $2,452   $12,247   $   $12,755 
                               

 

The following is a summary of impaired loans by class at June 30, 2018 and December 31, 2017:

 

           Three Months Ended   Six Months Ended(1) 
   At June 30, 2018(1)   June 30, 2018   June 30, 2018 
   Recorded Investment   Unpaid Principal Balance   Average Recorded Investment   Interest Income Recognized   Average Recorded Investment   Interest Income Recognized 
  (In thousands) 
Impaired Loans(1):    
Commercial real estate  $14,366   $17,167   $14,564   $182   $14,984   $372 
Residential real estate   7,595    8,142    6,968    9    6,773    19 
Home equity   487    520    606    1    671    2 
Commercial and industrial   4,338    8,782    4,198    28    4,094    72 
Consumer   94    104    95        101     
Total impaired loans  $26,880   $34,715   $26,431   $220   $26,623   $465 

 

 

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

 

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           Three Months Ended   Six Months Ended 
   At December 31, 2017   June 30, 2017   June 30, 2017 
   Recorded Investment   Unpaid Principal Balance   Average Recorded Investment   Interest Income Recognized   Average Recorded Investment   Interest Income Recognized 
  (In thousands) 
Impaired Loans(1):    
Commercial real estate  $16,045   $18,773   $19,202   $234   $19,316   $451 
Residential real estate   6,816    7,298    6,822    11    6,314    23 
Home equity   748    783    249    1    187    2 
Commercial and industrial   3,920    9,215    4,740    67    4,586    129 
Consumer   120    129    93        64     
                               
Total impaired loans  $27,649   $36,198   $31,106   $313   $30,467   $605 

 

 

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

 

No interest income was recognized for impaired loans on a cash-basis method during the three and six months ended June 30, 2018 or 2017. Interest income recognized on impaired loans during the three and six months ended June 30, 2018 and 2017 related to performing purchase impaired loans and troubled debt restructuring (“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 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.

 

Nonperforming TDRs are shown as nonperforming assets. There were no loans modified as TDRs during the three and six months ended June 30, 2018 or 2017.

 

A default occurs when a loan is 30 days or more past due. No TDRs defaulted within twelve months of restructuring during the three and six months ended June 30, 2018 or 2017.

 

There were no charge-offs on TDRs during the three and six months ended June 30, 2018 or 2017.

 

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Loans Acquired with Deteriorated Credit Quality

 

The following is a summary of loans acquired with evidence of credit deterioration from Chicopee as of June 30, 2018 and 2017.

 

   Contractual Required Payments Receivable   Cash Expected To Be Collected   Non- Accretable
Discount
   Accretable
Yield
   Loans
Receivable
 
   (In thousands) 
Balance at December 31, 2017  $29,362   $23,158   $6,204   $6,033   $17,125 
Collections   (2,783)   (1,702)   (1,081)   (345)   (1,357)
Dispositions                    
Balance at June 30, 2018  $26,579   $21,456   $5,123   $5,688   $15,768 

 

   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   (2,314)   (1,981)   (333)   (692)   (1,289)
Dispositions   (632)   (406)   (226)   6    (412)
Balance at June 30, 2017  $34,491   $26,653   $7,838   $6,835   $19,818 

 

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 – 4 are considered “Pass” or “Pass Watch” rated loans with acceptable risk.

 

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 $91.4 million and $88.9 million at June 30, 2018 and December 31, 2017, 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.

 

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The following table presents our loans by risk rating at June 30, 2018 and December 31, 2017:

 

   Commercial Real Estate   Residential 1-4 Family   Home Equity   Commercial and Industrial   Consumer   Total 
   (In thousands) 
June 30, 2018                        
Loans rated 1 – 4  $712,470   $562,970   $94,049   $214,115   $4,750   $1,588,354 
Loans rated 5   24,811            7,684        32,495 
Loans rated 6   10,781    7,414    680    24,482    2    43,359 
   $748,062   $570,384   $94,729   $246,281   $4,752   $1,664,208 
                               
December 31, 2017                              
Loans rated 1 – 4  $708,992   $551,469   $91,903   $205,537   $4,475   $1,562,376 
Loans rated 5   15,098            24,565        39,663 
Loans rated 6   8,526    6,283    696    8,400    3    23,908 
   $732,616   $557,752   $92,599   $238,502   $4,478   $1,625,947 

 

6.       GOODWILL AND OTHER INTANGIBLES

 

At June 30, 2018 and December 31, 2017, the Company’s goodwill related to the acquisition of Chicopee in October 2016. No goodwill impairment was recorded for the six months ended June 30, 2018. Annually, or more frequently if events or changes in circumstances warrant such evaluation, the Company evaluates its goodwill for impairment.

 

Core Deposit Intangibles

 

In connection with the 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. Amortization expense was $188,000 for the six months ended June 30, 2018. At June 30, 2018, future amortization of the core deposit intangible totals $375,000 for each of the next five years and $2.0 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 six months ended June 30, 2018 is presented below:

 

   Shares   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining Contractual
Term
(in years)
   Aggregate
Intrinsic
Value
(in thousands)
 
Outstanding at December 31, 2017   257,050   $6.31    4.41   $1,175 
Exercised   (16,975)  $6.13    4.11   $77 
Outstanding at June 30, 2018   240,075   $6.32    3.92   $1,118 
                     
Exercisable at June 30, 2018   240,075   $6.32    3.92   $1,118 

 

Cash received for options exercised during the six months ended June 30, 2018 was $104,000.

 

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 and additional performance metric as determined upon issuance. Stock grants made through the 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. 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. As a result of the Tax Cuts and Jobs Act of 2017, the return on equity performance metrics were adjusted to incorporate the impact and benefits of the corporate tax rate reductions thereunder. The original and adjusted threshold and target metrics under the LTI Plan for 2016 are as follows:

 

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

 

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Participants will be able to earn between 50% (for threshold performance) and 100% (for target performance) of the performance shares but will not earn additional shares if performance exceeds target performance.

 

In May 2017, 89,042 shares were granted under the LTI Plan. Of this total, 55,159 shares are retention-based, with 21,276 vesting in one year and 33,883 vesting ratably over a three-year period. The remaining 33,883 shares granted are performance based and are subject to the achievement of the 2017 LTI performance metric before vesting is realized after a three-year period. For the performance shares, the primary performance metric for 2017 awards is return on equity. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period, but will be distributed at the end of the three year period. As a result of the Tax Cuts and Jobs Act of 2017, the return on equity performance metrics were adjusted to incorporate the impact and benefits of the corporate tax rate reductions thereunder.

 

The original and adjusted threshold, target and maximum metrics under the LTI Plan for 2017 are as follows:

 

   Return on Equity Metrics 
Performance
Period Ending
   

Original

Threshold

    Adjusted
Threshold
    Original
Target
    Adjusted
Target
    Original
Maximum
    Adjusted
Maximum
 
December 31, 2018   6.30%   6.87%   7.00%   7.63%   7.60%   8.28%
December 31, 2019   6.50%   7.09%   7.20%   7.85%   7.90%   8.61%

 

Participants will be able to earn between 50% (for threshold performance), 100% (for target performance) and 150% (for maximum performance).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.

 

In January 2018, 83,812 shares were granted under the LTI Plan. Of this total, 50,852 shares are retention-based, with 17,908 vesting in one year and 32,944 vesting ratably over a three-year period. The remaining 32,960 shares granted are performance based and are subject to the achievement of the 2018 LTI performance metric before vesting is realized after a three year period. For the performance shares, the primary performance metric for 2018 awards is return on equity. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period, but will be distributed at the end of the three-year period. The threshold, target and stretch metrics under the LTI Plan for 2018 are as follows:

 

   Return on Equity Metrics 
Performance Period Ending  Threshold   Target   Stretch 
December 31, 2018   6.30%   6.80%   7.20%
December 31, 2019   6.85%   7.35%   7.75%
December 31, 2020   7.40%   7.90%   8.30%

 

Participants will be able to earn between 50% (for threshold performance), 100% (for target performance) and 150% (for maximum performance).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 metrics established, with any necessary adjustments being recognized through share-based compensation expense and unearned compensation.

 

At June 30, 2018, an additional 231,846 shares were available for future grants under this plan.

 

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Our stock award plan activity for the six months ended June 30, 2018 and 2017 is summarized below:

 

   Unvested Stock Awards Outstanding 
   Shares   Weighted Average Grant Date Fair Value 
Outstanding at December 31, 2017   138,833   $8.98 
Shares granted   83,812    11.05 
Shares vested   (32,476)   9.13 
Outstanding at June 30, 2018   190,169   $9.87 
           
Outstanding at December 31, 2016   91,371   $7.51 
Shares granted   89,042    10.15 
Shares vested   (21,552)   7.44 
Outstanding at June 30, 2017   158,861   $9.00 

 

We recorded compensation cost related to the stock awards of $485,000 and $331,000 for the six months ended June 30, 2018 and 2017, 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 and a line of credit with the FHLBB. Short-term borrowings issued by the FHLBB were $66.0 million at June 30, 2018 and $133.0 million at December 31, 2017. We have an “Ideal Way” line of credit with the FHLBB for $9.5 million at June 30, 2018 and December 31, 2017. 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 at June 30, 2018 and December 31, 2017. There were no customer repurchase agreements at June 30, 2018 while there were $11.7 million at December 31, 2017. 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 Atlantic Community Bankers Bank (“ACBB”) 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 June 30, 2018 or December 31, 2017.  As part of our contract with ACBB, we are required to maintain a reserve balance of $300,000 with ACBB 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 June 30, 2018, we had $214.7 million in long-term debt with the FHLBB. This compares to $164.8 million in long-term debt with FHLBB advances at December 31, 2017.

 

The customer repurchase agreements outstanding at December 31, 2017 were collateralized by government-sponsored enterprise obligations with fair value of $6.7 million and mortgage backed securities with a fair value of $58.4 million, respectively.

 

All FHLBB advances are collateralized by a blanket lien on our residential real estate loans and eligible commercial real estate loans.

 

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9. PENSION BENEFITS

 

We provide a defined benefit pension plan for eligible employees (the “Plan”). Employees must work a minimum of 1,000 hours per year to be eligible for the Plan. Eligible employees become vested in the Plan after five years of service. We plan to contribute to the 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 Plan’s actuaries. We have not yet determined how much we expect to contribute to our Plan in 2018. No contributions have been made to the Plan for the six months ended June 30, 2018. The Plan assets are invested in various pooled separate investment accounts offered by Principal Life Insurance Company, a division of Principal Financial Group, who is the Custodian of the Plan (the “Custodian”). The Plan is administered by an officer of Westfield Bank (the “Plan Administrator”). On September 30, 2016, we effected a soft freeze on the Plan and therefore no new participants will be included in the Plan after such effective date.

 

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

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2018   2017   2018   2017 
   (In thousands) 
Service cost  $303   $266   $606   $533 
Interest cost   253    253    506    507 
Expected return on assets   (347)   (299)   (694)   (597)
Actuarial loss   57    51    114    102 
Net periodic pension cost  $266   $271   $532   $545 

 

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 June 30, 2018 and December 31, 2017.

 

 June 30, 2018  Asset Derivatives    Liability Derivatives  
   Balance Sheet Location  Fair Value   Balance Sheet Location  Fair Value 
   (In thousands)
Interest rate swaps    Other Assets  $29      Other Liabilities  $990 

 

 December 31, 2017  Asset Derivatives    Liability Derivatives  
   Balance Sheet Location  Fair Value   Balance Sheet Location  Fair Value 
   (In thousands)
Interest rate swaps    Other Assets  $     Other Liabilities  $2,152 

 

At June 30, 2018 and December 31, 2017, all derivatives were designated as hedging instruments.

 

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 June 30, 2018 and December 31, 2017:

 

  Notional   Weighted Average   Weighted Average Rate   Estimated Fair
June 30, 2018  Amount   Maturity   Receive   Pay   Value
   (In thousands)   (In years)           (In thousands)
Interest rate swaps on FHLBB borrowings  $55,000    2.8    2.34%   2.93%  $(961)

 

  Notional   Weighted Average   Weighted Average Rate   Estimated Fair
December 31, 2017  Amount   Maturity   Receive   Pay   Value
   (In thousands)   (In years)           (In thousands)
Interest rate swaps on FHLBB borrowings  $55,000    3.3    1.64%   2.93%  $(2,152)

 

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received on the Company’s variable-rate borrowings. During the next twelve months, the Company estimates that an additional $1.4 million will be reclassified as an increase to interest expense.

 

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 Gain (Loss) Recognized in OCI on Derivative 
   Three Months Ended June 30,   Six Months Ended June 30, 
   2018   2017   2018   2017 
   (In thousands) 
Interest rate swaps  $240   $(346)  $918   $(293)

 

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. Fees on previously terminated swaps are being amortized as a reclassification of other comprehensive income into interest expense over the terms of the previously hedged borrowings. The amount reclassified from accumulated other comprehensive income into net income for interest rate swaps and termination fees was $368,000 and $515,000 during the three months ended June 30, 2018 and 2017, respectively and $803,000 and $1.1 million during the six months ended June 30, 2018 and 2017, respectively.

 

Credit-risk-related Contingent Features

 

By using derivative financial instruments, we expose ourselves to credit risk. Credit risk is the risk of failure by the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative is negative, we owe the counterparty and, therefore, it does not possess credit risk. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that we believe to be creditworthy and by limiting the amount of exposure to each counterparty.

 

We have agreements with our derivative counterparties that contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. We also have agreements with certain of our derivative counterparties that contain a provision where if we fail to maintain our status as well capitalized, then the counterparty could terminate the derivative positions and we would be required to settle our obligations under the agreements. Certain of our agreements with our derivative counterparties contain provisions where if a formal administrative action by a federal or state regulatory agency occurs that materially changes our creditworthiness in an adverse manner, we may be required to fully collateralize our obligations under the derivative instrument.

 

At June 30, 2018 and December 31, 2017, we had a net liability position of $959,000 and $2.2 million with our counterparties, respectively. As of June 30, 2018, we had minimum collateral posting thresholds with certain of our derivative counterparties and had mortgage-backed securities with a fair value of $1.7 million posted as collateral against our obligations under these agreements. If we had breached any of these provisions at June 30, 2018, 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.

 

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.

 

Interest rate swaps The valuation of our interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. We have determined that the majority of the inputs used to value our interest rate derivatives fall within Level 2 of the fair value hierarchy.

 

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

 

   June 30, 2018 
   Level 1   Level 2   Level 3   Total 
  (In thousands) 
Assets:    
Securities available-for-sale                    
Government-sponsored mortgage-backed securities  $   $164,743   $   $164,743 
U.S. government guaranteed mortgage-backed securities       19,988        19,988 
Corporate bonds       48,337        48,337 
State and municipal bonds       2,940        2,940 
Government-sponsored enterprise obligations       23,681        23,681 
Marketable equity securities   6,324            6,324 
Interest rate swaps       29        29 
Total assets  $6,324   $259,718   $   $266,042 
                     
Liabilities:                    
Interest rate swaps  $   $990   $   $990 

 

 

   December 31, 2017 
   Level 1   Level 2   Level 3   Total 
  (In thousands) 
Assets:    
Government-sponsored mortgage-backed securities  $   $182,001   $   $182,001 
U.S. government guaranteed mortgage-backed securities       16,254        16,254 
Corporate bonds       56,144        56,144 
State and municipal bonds       3,239        3,239 
Government-sponsored enterprise obligations       24,381        24,381 
Mutual funds   6,397            6,397 
Total assets  $6,397   $282,019   $   $288,416 
                     
Liabilities:                    
Interest rate swaps  $   $2,152   $   $2,152 

 

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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. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related assets at June 30, 2018. Total losses represent the change in carrying value as a result of fair value adjustments related to assets still held at June 30, 2018. There were no assets measured at fair value on a non-recurring basis at June 30, 2017.

 

   At   Three Months Ended   Six Months Ended 
   June 30, 2018   June 30, 2018   June 30, 2018 
   Level   Level   Level   Total Gains   Total Gains 
   1   2   3   (Losses)   (Losses) 
   (In thousands)         
Impaired Loans  $   $   $1,413   $(80)  $(80)
Total Assets  $   $   $1,413   $(80)  $(80)

 

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 and six months ended June 30, 2018 and 2017. 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:

 

   June 30, 2018 
   Carrying
Value
   Fair
Value
 
       Level 1   Level 2   Level 3   Total 
   (In thousands) 
Assets:                    
Cash and cash equivalents  $22,925   $22,925   $   $   $22,925 
Securities available-for-sale   259,689        259,689        259,689 
Marketable equity securities   6,324    6,324            6,324 
Federal Home Loan Bank of Boston and other restricted stock   15,584            15,584    15,584 
Loans - net   1,656,889            1,597,876    1,597,876 
Accrued interest receivable   5,581            5,581    5,581 
Mortgage servicing rights   319        501        501 
Derivative assets   29        29        29 
                          
Liabilities:                         
Deposits   1,551,804            1,546,467    1,546,467 
Short-term borrowings   66,000        66,012        66,012 
Long-term debt   214,672        212,931        212,931 
Accrued interest payable   536            536    536 
Derivative liabilities   990        990        990 

  

   December 31, 2017 
   Carrying
Value
   Fair
Value
 
       Level 1   Level 2   Level 3   Total 
   (In thousands) 
Assets:                    
Cash and cash equivalents  $27,132   $27,132   $   $   $27,132 
Securities available-for-sale   288,416    6,397    282,019        288,416 
Federal Home Loan Bank of Boston and other restricted stock   15,553            15,553    15,553 
Loans - net   1,619,850            1,581,929    1,581,929 
Accrued interest receivable   5,946            5,946    5,946 
Mortgage servicing rights   352        528        528 
                          
Liabilities:                         
Deposits   1,506,082            1,503,311    1,503,311 
Short-term borrowings   144,650        144,650        144,650 
Long-term debt   164,786        164,016        164,016 
Accrued interest payable   441            441    441 
Derivative liabilities   2,152        2,152        2,152 

 

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12. RECENT ACCOUNTING PRONOUNCEMENTS

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the requirements in Topic 840, Leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in this ASU is permitted for all entities. Management is currently evaluating the impact to the consolidated financial statements of adopting this ASU but does not expect adoption to have a material impact on our consolidated financial statements. As of June 30, 2018, the Company had $9.0 million of future lease payments outstanding on operating leases pertaining to banking premises.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements.  This ASU is effective for the first interim period in fiscal years beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is in the process of evaluating the standard.  We have put together a project team that has begun to identify appropriate loan segments along with related historical losses for each segment and potential models that would be most appropriate for each individual segment.  We have not quantified the effects of any models, but do expect the standard to significantly change the approach to calculating our allowance for loan losses.

 

In March 2017, the FASB issued ASU 2017-08—Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We do not expect the application of this guidance to have a material impact on our consolidated financial statements.

 

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Overview

 

We strive to remain a leader in meeting the financial service needs of our local community, and to provide quality service to the individuals and businesses in the market areas that we have served since 1853. Historically, we have been a community-oriented provider of traditional banking products and services to business organizations and individuals, including products such as residential and commercial loans, consumer loans and a variety of deposit products. We meet the needs of our local community through a community-based and service-oriented approach to banking.

 

We have adopted a growth-oriented strategy that has focused on increasing commercial lending. Our strategy also calls for increasing deposit relationships and broadening our product lines and services. We believe that this business strategy is best for our long-term success and viability, and complements our existing commitment to high-quality customer service. In connection with our overall growth strategy, we seek to:

 

grow our commercial and industrial and commercial real estate loan portfolios by targeting businesses in our primary market areas of western Massachusetts and northern Connecticut as a means to increase the yield on and diversify our loan portfolio and build transactional deposit account relationships;

 

focus on expanding our retail banking franchise and increase the number of households served within our market area; and

 

supplement the commercial focus, grow the residential loan portfolio to diversify risk and deepen customer relationships.

 

You should read the following financial results for the three and six months ended June 30, 2018 in the context of this strategy.

 

Net income was $5.1 million, or $0.18 per diluted share, for the three months ended June 30, 2018, compared to $3.8 million, or $0.12 per diluted share, for the same period in 2017. For the six months ended June 30, 2018, net income was $8.7 million, or $0.29 per diluted share, as compared to net income of $8.9 million, or $0.30 per diluted share, for the same period in 2017.

 

The provision for loan losses was $750,000 and $350,000 for the three months ended June 30, 2018 and 2017, respectively, and $1.3 million and $650,000 for the six months ended June 30, 2018 and 2017, respectively.

 

Net interest income was $15.9