10-K 1 wneb-10k_123117.htm ANNUAL REPORT

 

United States Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2017

 

Commission File No.: 001-16767

 

Western New England Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Massachusetts73-1627673
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

 

141 Elm Street, Westfield, Massachusetts 01085

(Address of principal executive offices, including zip code)

 

(413) 568-1911

(Registrant’s telephone number, including area code)

 

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

 

Common Stock, $0.01 par value per share The NASDAQ Global Select Market
(Title of each class)(Name of each exchange on which registered)

 

Securities registered pursuant to Section 12(g) of the Act: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐ No ☒

 

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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such filed). Yes ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

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 Act). Yes ☐ No ☒

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2017, was $315,361,586. This amount was based on the closing price as of June 30, 2017 on The NASDAQ Global Select Market for a share of the registrant’s common stock, which was $10.15 on June 30, 2017.

 

As of March 9, 2018, the registrant had 30,276,673 shares of common stock, $0.01 per value, issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Portions of the Proxy Statement for the 2018 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

 

 

 

 

 

 

WESTERN NEW ENGLAND BANCORP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2017

 

TABLE OF CONTENTS

       
ITEM PART I PAGE
       
1 BUSINESS 2  
1A RISK FACTORS 30  
1B UNRESOLVED STAFF COMMENTS 34  
2 PROPERTIES 34  
3 LEGAL PROCEEDINGS 37  
4 MINE SAFETY DISCLOSURES 37  
       
  PART II    
       
5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 38  
6 SELECTED FINANCIAL DATA 41  
7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 43  
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 58  
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 58  
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 58  
9A CONTROLS AND PROCEDURES 58  
9B OTHER INFORMATION 61  
  PART III    
       
10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 61  
11 EXECUTIVE COMPENSATION 61  
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS 61  
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 61  
14 PRINCIPAL ACCOUNTING FEES AND SERVICES 61  
       
  PART IV    
       
15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 61  
16 FORM 10-K SUMMARY 62  

 

 

 

 

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 Annual Report on Form 10-K contains “forward-looking statements” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

 

changes in the interest rate environment that reduce margins;

 

changes in the regulatory environment;

 

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

 

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

 

changes in business conditions and inflation;

 

changes in credit market conditions;

 

changes in the securities markets which affect investment management revenues;

 

increases in Federal Deposit Insurance Corporation deposit insurance premiums and assessments could adversely affect our financial condition;

 

changes in technology used in the banking business;

 

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

 

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

 

our controls and procedures may fail or be circumvented;

 

new lines of business or new products and services, which may subject us to additional risks;

 

changes in key management personnel which may adversely impact our operations;

 

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

 

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

 

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

 

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

 

Unless the context indicates otherwise, all references in this prospectus to “Western New England Bancorp,” “WNEB” “we,” “us,” “our company,” and “our” refer to Western New England Bancorp, Inc. and its subsidiaries (including Westfield Bank, CSB Colts, Inc., Elm Street Securities Corporation, WFD Securities, Inc. and WB Real Estate Holdings, LLC).

 

1 

 

 

PART I

 

ITEM 1.BUSINESS

 

General. Western New England Bancorp, Inc. (“WNEB”) (f/k/a “Westfield Financial, Inc.”) is a Massachusetts-chartered stock holding company and the parent company of Westfield Bank (the “Bank”). On October 21, 2016, the Company acquired Chicopee Bancorp, Inc. (“Chicopee”), the holding company for Chicopee Savings Bank, whereby Chicopee merged with and into Western New England Bancorp, with Western New England Bancorp surviving, and Chicopee Savings Bank merged with and into Westfield Bank (the “Bank”), with the Bank surviving, and in conjunction with the acquisition, the name of the holding company was changed to Western New England Bancorp, Inc. The transaction qualified as a tax-free reorganization for federal income tax purposes. Under the terms of the merger agreement, each outstanding share of Chicopee common stock was converted into the right to receive 2.425 shares of WNEB common stock. The consideration paid in the transaction to shareholders of Chicopee consisted of 11,919,412 shares of our common stock. Based upon the per share closing price of $7.90 on October 21, 2016, the transaction was valued at approximately $98.8 million. As a result of this transaction, we added eight branches, $716.6 million in assets, $640.9 million in loans and $545.7 million in deposits to our franchise. Western New England Bancorp was formed in 2001 in connection with its reorganization from a federally-chartered mutual holding company to a Massachusetts-chartered stock holding company with the second step conversion being completed in 2007. The Bank was formed in 1853 and is a federally chartered savings bank regulated by the Office of the Comptroller of the Currency (“OCC”). As a community bank, we focus on servicing commercial customers, including commercial and industrial lending and commercial deposit relationships. We believe that this business focus is best for our long-term success and viability, and complements our existing commitment to high quality customer service.

 

Elm Street Securities Corporation, a Massachusetts-chartered security corporation, was formed by us for the primary purpose of holding qualified securities. In February 2007, we formed WFD Securities, Inc., a Massachusetts-chartered security corporation, for the primary purpose of holding qualified securities. In October 2009, we formed WB Real Estate Holdings, LLC, a Massachusetts-chartered limited liability company, for the primary purpose of holding real property acquired as security for debts previously contracted by the Bank. On October 21, 2016, in conjunction with the acquisition of Chicopee, we acquired CSB Colts, Inc., a Massachusetts-chartered security corporation, formed for the primary purpose of holding qualified securities.

 

Market Area. We operate 21 banking offices in Agawam, Chicopee, Feeding Hills, East Longmeadow, Holyoke, Ludlow, South Hadley, Southwick, Springfield, Ware, West Springfield and Westfield, Massachusetts and Granby and Enfield, Connecticut. Our banking offices in Granby and Enfield, Connecticut, which we opened in June 2013 and November 2014, respectively, are our first locations outside of western Massachusetts. In 2014, we relocated our middle market and commercial real estate lending team to offices in Springfield, Massachusetts. We also have 23 free-standing ATM locations in Chicopee, Holyoke, Southwick, Springfield, West Springfield and Westfield, Massachusetts and 24 traveling/seasonal ATMs. Our primary deposit gathering area is concentrated in the communities surrounding these locations and our primary lending area includes all of Hampden County and Hampshire County in western Massachusetts and Hartford and Tolland Counties in northern Connecticut. In addition, we provide online banking services through our website located at www.westfieldbank.com.

 

The markets served by our branches are primarily suburban in character, as we operate only one banking office and headquarter our middle market commercial lending team in Springfield, the Pioneer Valley’s primary urban market. Westfield, Massachusetts, is located in the Pioneer Valley near the intersection of U.S. Interstates 90 (the Massachusetts Turnpike) and 91. The Pioneer Valley of western Massachusetts encompasses the sixth largest metropolitan area in New England. The Springfield Metropolitan area covers a relatively diverse area ranging from densely populated urban areas, such as Springfield, to outlying rural areas.

 

Competition. We face intense competition both in making loans and attracting deposits. Our competition for loans comes principally from commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms. Historically, our most direct competition for deposits has come from savings and commercial banks. We face additional competition for deposits from internet-based institutions, credit unions, brokerage firms and insurance companies.

 

2 

 

 

Personnel. As of December 31, 2017, we had 255 full-time employees and 62 part-time employees. The employees are not represented by a collective bargaining unit, and we consider our relationship with our employees to be excellent.

 

Lending Activities

 

Loan Portfolio Composition. Our loan portfolio primarily consists of commercial real estate loans, commercial and industrial loans, residential real estate loans, home equity loans and consumer loans. At December 31, 2017, we had total loans of $1.6 billion, of which 58.6% were adjustable rate loans and 41.4% were fixed rate loans. Commercial real estate loans and commercial and industrial loans totaled $732.6 million and $238.5 million, respectively. The remainder of our loans at December 31, 2017 consisted of residential real estate loans, home equity loans and consumer loans. Residential real estate and home equity loans outstanding at December 31, 2017 totaled $650.4 million. Consumer loans outstanding at December 31, 2017 were $4.5 million.

 

3 

 

 

The interest rates we charge on loans are affected principally by the demand for loans, the supply of money available for lending purposes and the interest rates offered by our competitors. These factors are, in turn, affected by general and local economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.

 

The following table presents the composition of our loan portfolio in dollar amounts and in percentages of the total portfolio at the dates indicated.

 

   At December 31, 
   2017   2016   2015   2014   2013 
       Percent of       Percent of       Percent of       Percent of       Percent of 
   Amount   Total   Amount   Total   Amount   Total   Amount   Total   Amount   Total 
   (Dollars in thousands) 
Real estate loans:                                                  
Commercial  $732,616    45.06%  $720,741    46.15%  $303,036    37.21%  $278,405    38.49%  $264,476    41.54%
Residential   557,752    34.30    522,083    33.43    298,052    36.60    237,436    32.82    198,686    31.21 
Home equity   92,599    5.70    92,083    5.90    43,512    5.34    40,305    5.57    35,371    5.56 
Total real estate loans   1,382,967    85.06    1,334,907    85.48    644,600    79.15    556,146    76.88    498,533    78.31 
                                                   
Other loans                                                  
Commercial and industrial   238,502    14.67    222,286    14.23    168,256    20.66    165,728    22.91    135,555    21.29 
Consumer, other   4,478    0.27    4,424    0.28    1,534    0.19    1,542    0.21    2,572    0.40 
Total other loans   242,980    14.94    226,710    14.52    169,790    20.85    167,270    23.12    138,127    21.69 
                                                   
Total loans   1,625,947    100.00%   1,561,617    100.00%   814,390    100.00%   723,416    100.00%   636,660    100.00%
                                                   
Premiums and deferred loan fees and costs, net   4,734         4,867         3,823         1,270         767      
Allowance for loan losses   (10,831)        (10,068)        (8,840)        (7,948)        (7,459)     
Total loans, net  $1,619,850        $1,556,416        $809,373        $716,738        $629,968      

 

4

 

Loan Maturity and Repricing. The following table shows the repricing dates or contractual maturity dates of our loans as of December 31, 2017. The table does not reflect prepayments or scheduled principal amortization. Demand loans, loans having no stated maturity, and overdrafts are shown as due in within one year.

 

At December 31, 2017
   Commercial Real Estate   Residential   Home Equity   Commercial and Industrial   Consumer   Unallocated   Totals 
(In thousands)
Amount due:                                   
Within one year  $86,655   $43,068   $67,333   $119,324   $376   $   $316,756 
                                    
After one year:                                   
One to three years   159,189    39,809    665    32,354    529        232,546 
Three to five years   199,472    48,736    2,014    49,020    1,625        300,867 
Five to ten years   261,577    96,563    7,575    37,075    255        403,045 
Ten to twenty years   23,975    51,026    15,012    16    831        90,860 
Over twenty years   1,748    278,550        713    862        281,873 
Total due after one year   645,961    514,684    25,266    119,178    4,102        1,309,191 
                                    
Total amount due:   732,616    557,752    92,599    238,502    4,478        1,625,947 
                                    
Net deferred loan origination fees and costs and premiums   (660)   4,050    340    963    41        4,734 
Allowance for loan losses   (4,712)   (2,839)   (472)   (2,733)   (71)   (4)   (10,831)
                                    
Loans, net  $727,244   $558,963   $92,467   $236,732   $4,448   $(4)  $1,619,850 

 

The following table presents, as of December 31, 2017, the dollar amount of all loans contractually due or scheduled to reprice after December 31, 2018, and whether such loans have fixed interest rates or adjustable interest rates.

 

   Due After December 31, 2018 
   Fixed   Adjustable   Total 
   (In thousands) 
Real estate loans:               
Residential  $352,190   $162,494   $514,684 
Home equity   25,266        25,266 
Commercial real estate   162,152    483,809    645,961 
Total real estate loans   539,608    646,303    1,185,911 
                
Other loans:               
Commercial and industrial   106,104    13,074    119,178 
Consumer   4,095    7    4,102 
Total other loans   110,199    13,081    123,280 
                
Total loans  $649,807   $659,384   $1,309,191 

 

5

 

The following table presents our loan originations, purchases and principal payments for the years indicated:

 

   For the Years Ended December 31, 
   2017   2016   2015 
   (In thousands) 
Loans:            
Balance outstanding at beginning of year  $1,561,617   $814,390   $723,416 
                
Originations:               
Real estate loans:               
Residential   8,120    3,522    240 
Home equity   28,109    23,093    15,189 
Commercial   110,392    78,396    79,734 
Total mortgage originations   146,621    105,011    95,163 
                
 Commercial and industrial loans   64,324    75,034    51,063 
 Consumer loans   2,100    871    1,404 
Total originations   213,045    180,916    147,630 
 Purchase of one-to-four family mortgage loans   48,205    108,448    90,743 
    261,250    289,364    238,373 
                
Loans acquired from Chicopee Savings Bank at fair value       640,892     
                
Less:               
Principal repayments, unadvanced funds and other, net   196,168    183,384    147,016 
Loan charge-offs (recoveries), net   597    (653)   383 
Loans transferred to other real estate owned   155    298     
Total deductions   196,920    183,029    147,399 
Ending balance  $1,625,947   $1,561,617   $814,390 

 

Commercial and Industrial Loans. We offer commercial and industrial loan products and services that are designed to give business owners borrowing opportunities for modernization, inventory, equipment, construction, consolidation, real estate, working capital, vehicle purchases and the financing of existing corporate debt. We offer business installment loans, vehicle and equipment financing, lines of credit, and other commercial loans. At December 31, 2017, our commercial and industrial loan portfolio consisted of 1,777 loans totaling $238.5 million, or 14.7% of our total loans. Our commercial loan team includes thirteen commercial loan officers, six credit analysts and three portfolio managers. We may hire additional commercial loan officers on an as needed basis.

 

As part of our strategy of increasing our emphasis on commercial lending, we seek to attract our business customers’ entire banking relationship. Most commercial borrowers also maintain commercial deposits. We provide complementary commercial products and services, a variety of commercial deposit accounts, cash management services, internet banking, sweep accounts, a broad ATM network and night deposit services. We offer a remote deposit capture product whereby commercial customers can receive credit for check deposits by electronically transmitting check images from their own locations. Commercial loan officers are based in our commercial lending centers in Springfield, Chicopee and Westfield, and we view our branch network as a means of facilitating these commercial relationships. We intend to continue to expand the volume of our commercial business products and services within our current underwriting standards.

 

6

 

Our commercial and industrial loan portfolio does not have any significant loan concentration by type of property or borrower. The largest concentration of commercial and industrial loans to an industry was to retail trade which comprised approximately 16.7% of the commercial and industrial loan portfolio inclusive of commercial and industrial owner occupied real estate loans as of December 31, 2017. At December 31, 2017, our largest commercial and industrial loan relationship was $29.8 million to a college. The loan relationship is secured by business assets and owner occupied real estate. The loans to this borrower have performed to contractual terms.

 

Commercial and industrial loans generally have terms of seven years or less, however, on an occasional basis, may have terms of up to ten years. Among the $238.5 million we have in our commercial and industrial loan portfolio as of December 31, 2017, $114.4 million have adjustable interest rates and $124.1 million have fixed interest rates. Whenever possible, we seek to originate adjustable rate commercial and industrial loans. Borrower activity and market conditions, however, may influence whether we are able to originate adjustable rate loans rather than fixed rate loans. We generally require the personal guarantee of the business owner. Interest rates on commercial and industrial loans generally have higher yields than residential or commercial real estate loans.

 

Commercial and industrial loans are generally considered to involve a higher degree of risk than residential or commercial real estate loans because the collateral may be in the form of intangible assets and/or inventory subject to market obsolescence. Please see “Risk Factors – Our loan portfolio includes loans with a higher risk of loss.” Commercial and industrial loans may also involve relatively large loan balances to single borrowers or groups of related borrowers, with the repayment of such loans typically dependent on the successful operation and income stream of the borrower. These risks can be significantly affected by economic conditions. In addition, business lending generally requires substantially greater oversight efforts by our staff compared to residential or commercial real estate lending, including obtaining and analyzing periodic financial statements of the borrowers. In order to mitigate this risk, we monitor our loan concentration and our loan policies generally to limit the amount of loans to a single borrower or group of borrowers. We also utilize the services of an outside consultant to conduct credit quality reviews of the commercial and industrial loan portfolio.

 

Commercial Real Estate Loans. We originate commercial real estate loans to finance the purchase of real property, which generally consists of apartment buildings, business properties, multi-family investment properties and construction loans to developers of commercial and residential properties. In underwriting commercial real estate loans, consideration is given to the property’s historic cash flow, current and projected occupancy, location and physical condition. At December 31, 2017, our commercial real estate loan portfolio consisted of 998 loans, totaling $732.6 million, or 45.1% of total loans. Since 2013, commercial real estate loans have grown by $468.1 million, or 177.0%, from $264.5 million at December 31, 2013 to $732.6 million at December 31, 2017. Organic commercial real estate loan growth since 2013 was $66.3 million, or 25.1%.

 

The majority of the commercial real estate portfolio consists of loans which are collateralized by properties in the Pioneer Valley of Massachusetts and northern Connecticut. Our commercial real estate loan portfolio is diverse, and does not have any significant loan concentration by type of property or borrower. We generally lend up to a loan-to-value ratio of 80% on commercial properties. We, however, will lend up to a maximum of 85% loan-to-value ratio and will generally require a minimum debt coverage ratio of 1.15. Our largest non-owner occupied commercial real estate loan relationship was $15.1 million at December 31, 2017, which is secured by multiple commercial properties located within the Bank’s primary lending area. The loans to this borrower are performing.

 

We also offer construction loans to finance the construction of commercial properties located in our primary market area. At December 31, 2017, we had $84.4 million in commercial construction loans and commitments that are committed to refinance into permanent mortgages at the end of the construction period and $13.4 million in commercial construction loans and commitments that are not committed to permanent financing at the end of the construction period.

 

Commercial real estate lending involves additional risks compared with one-to-four family residential lending. Payments on loans secured by commercial real estate properties often depend on the successful management of the properties, on the amount of rent from the properties, or on the level of expenses needed to maintain the properties. Repayment of such loans may therefore be adversely affected by conditions in the real estate market or the general economy. Also, commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. In order to mitigate this risk, we obtain and analyze periodic financial statements of the borrowers as well as monitor our loan concentration risk on a quarterly basis and our loan policies generally limit the amount of loans to a single borrower or group of borrowers.

 

7

 

Because of increased risks associated with commercial real estate loans, our commercial real estate loans generally have higher rates than residential real estate loans. Please see “Risk Factors – Our loan portfolio includes loans with a higher risk of loss.” Commercial real estate loans generally have adjustable rates with repricing dates of five years or less; however, occasionally repricing dates may be as long as 10 years. Whenever possible, we seek to originate adjustable rate commercial real estate loans. Borrower activity and market conditions, however, may influence whether we are able to originate adjustable rate loans rather than fixed rate loans.

 

Residential Real Estate Loans and Originations. Prior to the acquisition of Chicopee in 2016, Westfield Bank referred our residential real estate borrowers to a third-party mortgage company and substantially all of our residential real estate loans were underwritten, originated and serviced by a third-party mortgage company. Subsequent to the acquisition of Chicopee, Westfield Bank began to process and underwrite substantially all of our originations internally through our Loan Center located in Westfield, MA. Residential real estate borrowers submit applications to us and the loan is closed in Westfield Bank’s name and is booked directly into our portfolio. Loans can either be held in portfolio or, if eligible, can be sold on the secondary market for a fee. Westfield Bank retains the servicing rights to these loans. Some other mortgage types such as government-insured loans are brokered through a third-party mortgage company. The third-party mortgage company approves and closes the loan in their name. They keep the servicing rights to these loans and Westfield Bank retains no residual ownership interest. Westfield Bank receives a fee for each loan brokered to the third-party mortgage company.

 

In 2017, we purchased $48.2 million in residential loans from a New England-based bank as a means of supplementing our loan growth. While management has used residential loan growth to supplement the loan portfolio, the long-term strategy remains focused on commercial lending. At December 31, 2017, loans on one-to-four family residential properties, including home equity lines, accounted for $650.4 million, or 40.0% of our total loan portfolio.

 

Our residential adjustable rate mortgage loans generally are fully amortizing loans with contractual maturities of up to 30 years, payments due monthly. Our adjustable rate mortgage loans generally provide for specified minimum and maximum interest rates, with a lifetime cap and floor, and a periodic adjustment on the interest rate over the rate in effect on the date of origination. As a consequence of using caps, the interest rates on these loans are not generally as rate sensitive as our cost of funds. The adjustable rate mortgage loans that we originate generally are not convertible into fixed rate loans.

 

Adjustable rate mortgage loans generally pose different credit risks than fixed rate loans, primarily because as interest rates rise, the borrower’s payments rise, increasing the potential for default. To date, we have not experienced difficulty with payments for these loans. At December 31, 2017, our residential real estate included $205.4 million in adjustable rate loans, or 12.6% of our total loan portfolio, and $352.4 million in fixed rate loans, or 21.7% of our total loan portfolio.

 

Our home equity loans totaled $92.6 million, or 5.7% of total loans at December 31, 2017. Home equity loans include $25.3 million in fixed rate loans, or 1.6% of total loans, and $67.3 million in adjustable rate loans, or 4.1% of total loans. These loans may be originated in amounts up to 85% current loan to value (CLTV) of the appraised value of the property securing the loan. The term to maturity on our home equity and home improvement loans may be up to 20 years.

 

Consumer Loans. Consumer loans are generally originated at higher interest rates than residential and commercial real estate loans, but they also generally tend to have a higher credit risk than residential real estate loans because they are usually unsecured or secured by rapidly depreciable assets. Management, however, believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.

 

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We offer a variety of consumer loans to retail customers in the communities we serve. Examples of our consumer loans include automobile loans, collateral loans and personal lines of credit tied to deposit accounts to provide overdraft protection. At December 31, 2017, the consumer loan portfolio totaled $4.5 million, or 0.3% of total loans. Our consumer lending will allow us to diversify our loan portfolio while continuing to meet the needs of the individuals and businesses that we serve.

 

Loans collateralized by rapidly depreciable assets such as automobiles or that are unsecured entail greater risks than residential real estate loans. In such cases, repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance, since there is a greater likelihood of damage, loss or depreciation of the underlying collateral. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. Further, collections on these loans are dependent on the borrower’s continuing financial stability and, therefore, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. There was no repossessed collateral relating to consumer loans at December 31, 2017. Finally, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans if a borrower defaults.

 

Loan Approval Procedures and Authority. Individuals authorized to make loans on our behalf are designated by our Senior Lending Officer and approved by the Board of Directors. Each designated loan officer has loan approval authority up to prescribed limits that depend upon the officer’s level of experience.

 

Upon receipt of a completed loan application from a prospective borrower, we order a credit report and verify other information. If necessary, we obtain additional financial or credit related information. We also require an appraisal for all commercial real estate loans greater than $250,000, which is performed by licensed or certified third-party appraisal firms and reviewed by our credit administration department.

 

For loans that are $250,000 or under, an assessment of valuation will be performed by a qualified individual. The individual performing the assessment of valuation is independent from the loan production and will validate the evaluation methodology by supporting criteria. If the valuation assessment is over 80% loan to value (LTV) a full appraisal will be ordered by a licensed appraiser. For loan amounts over $250,000 a full appraisal is required by a licensed appraiser.

 

Commercial and Industrial Loans and Commercial Real Estate Loans. We lend up to a maximum loan-to-value ratio of 85% on commercial properties and the majority of these loans require a minimum debt coverage ratio of 1.15. Commercial real estate lending involves additional risks compared with one-to-four-family residential lending. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, and/or the collateral value of the commercial real estate securing the loan, repayment of such loans may be subject, to a greater extent, to adverse conditions in the real estate market or the economy. Also, commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. Our loan policies limit the amounts of loans to a single borrower or group of borrowers to reduce this risk.

 

Our lending policies permit our lending and underwriting departments to review and approve commercial and industrial loans and commercial real estate loans up to $3.0 million. Any commercial and industrial or commercial real estate loan application that exceeds $3.0 million or that would result in the borrower’s total credit exposure with us to exceed $3.0 million, or whose approval requires an exception to our standard loan approval procedures, requires approval of the Executive Committee of the Board of Directors. An example of an exception to our standard loan approval procedures would be if a borrower was located outside our primary lending area. For loans requiring Board approval, management is responsible for presenting to the Board information about the creditworthiness of a borrower and the estimated value of the subject equipment or property. Generally, these determinations are based on financial statements, corporate and personal tax returns, as well as any other necessary information, including real estate and or equipment appraisals.

 

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Residential Real Estate Loans. We originate and fund residential real estate loans secured by one-to-four family residential real estate primarily located in western Massachusetts and northern Connecticut. Loans are originated in amounts up to 97% of the lesser of the appraised value or purchase price of the property. Private mortgage insurance is required on all loans with a loan-to-value ratio in excess of 80%. Fixed-rate mortgages are generally originated for terms ranging in years from five to thirty years. Fixed-rate residential mortgage loans are underwritten to secondary market underwriting guidelines including FICO standards and debt-to-income ratio requirements. We are an approved seller and servicer with Fannie Mae, Freddie Mac and the FHLBB, an approved Mass Housing lender, and an approved broker for government insured loans such as FHA, VA and USRD.

 

Home Equity Loans. We originate and fund home equity loans secured by owner-occupied one-to-four family residences. These loans may be originated in amounts up to 85% (CLTV) of the current value of the property. Our underwriting standards include a review of the borrower’s credit history, an assessment of the borrower’s ability to repay and an evaluation of the value of the collateral securing the loan. Originated home equity loans may be offered with fixed-rates of interest and with terms up to twenty years; a fifteen year draw period and a fifteen year amortization period; or indexed to prime rate as reported in the Wall Street Journal. Our lending and underwriting department may approve home equity loans up to $250,000. Home equity loans in amounts greater than $250,000 and up to $350,000 may be approved by certain officers who have been approved by the Board of Directors. Home equity loans over $350,000, or approval requiring an exception to our standard approval procedures, are reviewed and approved by the Executive Committee of the Board of Directors.

 

Asset Quality

 

One of our key operating objectives has been and continues to be the achievement of a high level of asset quality. We maintain a large proportion of loans secured by residential and commercial properties, set sound credit standards for new loan originations and follow careful loan administration procedures. We also utilize the services of an outside consultant to conduct credit quality reviews of our commercial and industrial and commercial real estate loan portfolio on at least an annual basis.

 

Nonaccrual Loans and Foreclosed Assets. Our policies require that management continuously monitor the status of the loan portfolio and report to the Board of Directors on a monthly basis. These reports include information on nonaccrual loans and foreclosed real estate, as well as our actions and plans to cure the nonaccrual status of the loans and to dispose of the foreclosed property.

 

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The following table presents information regarding nonperforming mortgage, consumer and other loans, and foreclosed real estate as of the dates indicated. All loans where the payment is 90 days or more in arrears as of the closing date of each month are placed on nonaccrual status unless the loan is well secured and in the process of collection. At December 31, 2017, 2016 and 2015, nonperforming loans totaled $12.8 million, $14.1 million, and $8.1 million, respectively. In 2016, we acquired $6.4 million in nonperforming loans from Chicopee Bancorp. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $749,000, $535,000 and $406,000 for the years ended December 31, 2017, 2016 and 2015, respectively.

 

   At December 31, 
   2017   2016   2015   2014   2013 
   (Dollars in thousands) 
Nonaccrual real estate loans:                         
Residential  $5,961   $5,744   $1,470   $1,323   $712 
Home equity   696    120        1    38 
Commercial real estate   2,959    4,452    3,237    3,257    1,449 
Total nonaccrual real estate loans   9,616    10,316    4,707    4,581    2,199 
Other loans:                         
Commercial and industrial   3,019    3,714    3,363    4,233    386 
Consumer   120    27    10    16    1 
Total nonaccrual other loans   3,139    3,741    3,373    4,249    387 
Total nonperforming loans   12,755    14,057    8,080    8,830    2,586 
Foreclosed real estate, net   155    298             
Total nonperforming assets (1)  $12,910   $14,355   $8,080   $8,830   $2,586 
Nonperforming loans to total loans   0.78%   0.90%   0.99%   1.22%   0.41%
Nonperforming assets to total assets   0.63    0.69    0.60    0.67    0.20 
                          

 
(1)TDRs on accrual status not included above totaled $1.8 million, $2.1 million, $495,000, $50,000 and $14.5 million at December 31, 2017, 2016, 2015, 2014 and 2013, respectively.

 

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Allowance for Loan Losses. The following table presents the activity in our allowance for loan losses and other ratios at or for the dates indicated.

 

   At or for Years Ended December 31, 
   2017   2016   2015   2014   2013 
   (Dollars in thousands) 
Balance at beginning of year  $10,068   $8,840   $7,948   $7,459   $7,794 
                          
Charge-offs:                         
Residential   (124)   (115)   (24)   (31)   (80)
Commercial real estate   (292)   (170)       (350)   (20)
Home equity loans   (24)   (42)   (34)        
Commercial and industrial   (289)       (345)   (787)   (208)
Consumer   (319)   (159)   (73)   (55)   (33)
 Total charge-offs   (1,048)   (486)   (476)   (1,223)   (341)
                          
Recoveries:                         
Residential   122    9    4    1    1 
Commercial real estate   142    1,065            155 
Home equity loans   42        4         
Commercial and industrial   81    25    51    121    84 
Consumer   64    40    34    15    22 
 Total recoveries   451    1,139    93    137    262 
                          
Net (charge-offs) recoveries   (597)   653    (383)   (1,086)   (79)
                          
Provision (credit) for loan losses   1,360    575    1,275    1,575    (256)
                          
Balance at end of year  $10,831   $10,068   $8,840   $7,948   $7,459 
                          
Total loans receivable (1)  $1,625,947   $1,561,617   $814,390   $723,416   $636,660 
                          
Average loans outstanding  $1,597,599   $1,013,611   $766,548   $683,064   $604,732 
                          
Allowance for loan losses as a percent of total loans receivable   0.67%   0.64%   1.09%   1.10%   1.17%
                          
Net loans charged-off as a percent of average loans outstanding   0.04    (0.06)   0.05    0.16    0.01 

 

 
(1)Does not include premiums, deferred costs and fees, or the allowance for loan losses.

 

We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio based on ongoing quarterly assessments of the estimated losses. Our methodology for assessing the appropriateness of the allowance consists of a review of the components, which include a specific valuation allowance for impaired loans and a general allowance for non-impaired loans. The specific valuation allowance incorporates the results of measuring impairment for specifically identified non-homogenous problem loans and, as applicable, troubled debt restructurings (“TDRs”). The specific allowance reduces the carrying amount of the impaired loans to their estimated fair value, less costs to sell, if collateral dependent. A loan is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the loan’s contractual terms. The general allowance is calculated by applying loss factors to outstanding loans by type, excluding loans determined to be impaired. As part of this analysis, each quarter we prepare an allowance for loan losses worksheet which categorizes the loan portfolio by risk characteristics such as loan type and loan grade. The general allowance is inherently subjective as it requires material estimates that may be susceptible to significant change. There are a number of factors that are considered when evaluating the appropriate level of the allowance. These factors include current economic and business conditions that affect our key lending areas, new loan products, collateral values, loan volumes and concentrations, credit quality trends such as nonperforming loans, delinquency and loan losses, and specific industry concentrations within the portfolio segments that may impact the collectability of the loan portfolio. For information on our methodology for assessing the appropriateness of the allowance for loan losses please see Footnote 1 – “Summary of Significant Accounting Policies” of our notes to consolidated financial statements.

 

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In addition, management employs an independent third party to perform a semi-annual review of a sample of our commercial and industrial loans and commercial real estate loans. During the course of their review, the third party examines a sample of loans, including new loans, existing relationships over certain dollar amounts and classified assets.

 

Our methodologies include several factors that are intended to reduce the difference between estimated and actual losses; however, because these are management’s best estimates based on information known at the time, estimates may differ from actual losses incurred. The loss factors that are used to establish the allowance for pass graded loans are designated to be self-correcting by taking into account changes in loan classification, loan concentrations and loan volumes and by permitting adjustments based on management’s judgments of qualitative factors as of the evaluation date. Similarly, by basing the pass graded loan loss factors on loss experience over the prior six years, the methodology is designed to take loss experience into account.

 

Our allowance methodology has been applied on a consistent basis. Based on this methodology, we believe that we have established and maintained the allowance for loan losses at appropriate levels. Future adjustments to the allowance for loan losses, however, may be necessary if economic, real estate and other conditions differ substantially from the current operating environment resulting in estimated and actual losses differing substantially. Adjustments to the allowance for loan losses are charged to income through the provision for loan losses.

 

A summary of the components of the allowance for loan losses is as follows:

 

   December 31, 2017   December 31, 2016   December 31, 2015 
   Specific   General   Total   Specific   General   Total   Specific   General   Total 
   (In thousands) 
Commercial real estate  $   $4,712   $4,712   $   $4,083   $4,083   $   $3,856   $3,856 
Residential real estate:                                             
Residential       2,839    2,839        2,433    2,433        2,122    2,122 
Home equity       472    472        429    429        309    309 
Commercial and industrial       2,733    2,733        3,085    3,085        2,485    2,485 
Consumer       71    71        38    38        22    22 
Unallocated       4    4                    46    46 
Total  $   $10,831   $10,831   $   $10,068   $10,068   $   $8,840   $8,840 

 

   December 31, 2014   December 31, 2013 
   Specific   General   Total   Specific   General   Total 
   (In thousands) 
Commercial real estate  $   $3,705   $3,705   $82   $3,468   $3,550 
Residential real estate:                              
Residential       1,755    1,755        1,454    1,454 
Home equity       298    298        253    253 
Commercial and industrial       2,174    2,174    15    2,176    2,191 
Consumer       15    15        13    13 
Unallocated       1    1        (2)   (2)
Total  $   $7,948   $7,948   $97   $7,362   $7,459 

 

13

 

 

In addition, the OCC, as an integral part of its examination process, periodically reviews our loan and foreclosed real estate portfolios and the related allowance for loan losses and valuation allowance for foreclosed real estate. The OCC may require us to adjust the allowance for loan losses or the valuation allowance for foreclosed real estate based on their judgment of information available to them at the time of their examination, thereby adversely affecting our results of operations. There were no adjustments recommended during 2017 or 2016.

 

For the year ended December 31, 2017, we recorded a provision of $1.4 million to the allowance for loan losses based on our evaluation of the items discussed above. We believe that the allowance for loan losses adequately reflects the level of incurred losses in the current loan portfolio as of December 31, 2017.

 

Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans.

 

   December 31, 2017   December 31, 2016   December 31, 2015 
Loan Category  Amount of Allowance for Loan Losses   Loan Balances by Category   Percent of Loans in Each Category to Total Loans   Amount of Allowance for Loan Losses   Loan Balances by Category   Percent of Loans in Each Category to Total Loans   Amount of Allowance for Loan Losses   Loan Balances by Category   Percent of Loans in Each Category to Total Loans 
   (In thousands) 
Commercial real estate  $4,712   $732,616    45.06%  $4,083   $720,741    46.15%  $3,856   $303,036    37.21%
Real estate mortgage:                                             
Residential   2,839    557,752    34.30    2,433    522,083    33.43    2,122    298,052    36.60 
Home equity   472    92,599    5.70    429    92,083    5.90    309    43,512    5.34 
Commercial loans   2,733    238,502    14.67    3,085    222,286    14.24    2,485    168,256    20.66 
Consumer loans   71    4,478    0.27    38    4,424    0.28    22    1,534    0.19 
Unallocated   4        0.00            0.00    46        0.00 
Total allowances for loan losses  $10,831   $1,625,947    100.00%  $10,068   $1,561,617    100.00%  $8,840   $814,390    100.00%

 

   December 31, 2014   December 31, 2013 
   Amount of Allowance for Loan Losses   Loan Balances by Category   Percent of Loans in Each Category to Total Loans   Amount of Allowance for Loan Losses   Loan Balances by Category   Percent of Loans in Each Category to Total Loans 
   (In thousands) 
Commercial real estate  $3,705   $278,405    38.49%  $3,550   $264,476    41.54%
Real estate mortgage:                              
 Residential   1,755    237,436    32.82    1,454    198,686    31.21 
Home equity   298    40,305    5.57    253    35,371    5.56 
Commercial loans   2,174    165,728    22.91    2,191    135,555    21.29 
Consumer loans   15    1,542    0.21    13    2,572    0.40 
Unallocated   1        0.00    (2)       0.00 
Total allowances for loan losses  $7,948   $723,416    100.00%  $7,459   $636,660    100.00%

 

Potential Problem Loans. The Company performs an internal analysis of the loan portfolio in order to identify and quantify loans with higher than normal risk. Loans having a higher risk profile are assigned a risk rating corresponding to the level of weakness identified in the loan. The Company maintains a listing of “classified loans” consisting of Special Mention, Substandard and Doubtful loans, which are generally transferred to the Special Assets or Collections area for additional monitoring. Loans identified as containing loss are normally partially or fully charged off. In addition, the Company closely monitors the classified loans for signs of deterioration to mitigate the growth in nonaccrual loans, including performing additional due diligence, updating valuations and requiring additional financial reporting from the borrower. At December 31, 2017, classified loans, totaled $63.6 million, of which $43.7 million are not considered impaired. See the section titled Asset Quality in Part I, Item 1. Business found elsewhere in this report for further discussion on classification of potential problem loans.

 

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Loans Acquired with Deteriorated Credit Quality. Loans acquired in a transfer, including business combinations, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition the Company will not collect all contractually required principal and interest payments, are accounted for under accounting guidance for purchased credit-impaired loans. This guidance provides that the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the loans, provided that the timing and amount of future cash flows is reasonably estimated. The difference between the contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. Subsequent to acquisition, probable decreases in expected cash flows are recognized through a provision for loan losses, resulting in an increase to the allowance for loan losses. If the Company has probable and significant increases in cash flows expected to be collected, the Company will first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment.

 

Investment Activities. The Board of Directors reviews and approves our investment policy on an annual basis. The Chief Executive Officer and Chief Financial Officer, as authorized by the Board of Directors, implement this policy based on the established guidelines within the written policy.

 

Our investment policy is designed primarily to manage the interest rate sensitivity of our assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement our lending activities and to provide and maintain liquidity within the range established by policy. In determining our investment strategies, we consider our interest rate sensitivity, yield, credit risk factors, maturity and amortization schedules, and other characteristics of the securities to be held.

 

Federally-chartered savings banks have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various government-sponsored enterprises, mortgage-backed securities, certain certificates of deposit of insured financial institutions, repurchase agreements, overnight and short-term loans to other banks and corporate debt instruments.

 

Securities Portfolio. We invest in government-sponsored enterprise debt securities which consist of bonds issued by the Federal Home Loan Mortgage Corporation and the Federal Farm Credit Banks. We also invest in corporate bonds which are diversified amongst a number of companies and industries and are rated in one of the four highest nationally-recognized investment grade categories. These securities have maturities that do not exceed 7 years. In addition, we have investments in Federal Home Loan Bank stock and mutual funds that invest only in securities allowed by the OCC.

 

Our mortgage-backed securities, the majority of which are directly or indirectly insured or guaranteed by or Fannie Mae, Freddie Mac or Ginnie Mae, consist primarily of fixed rate securities.

 

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The following table sets forth the composition of our securities portfolio at the dates indicated.

 

   At December 31, 
   2017   2016   2015 
   Amortized   Fair   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value   Cost   Value 
Available-for-sale:                        
Debt securities:                              
Government-sponsored enterprise obligations  $25,151   $24,381   $43,140   $42,008   $4,000   $3,951 
State and municipal bonds   3,222    3,239    4,117    4,008    2,794    2,801 
Corporate bonds   56,084    56,144    50,255    50,317    21,176    21,136 
Total debt securities   84,457    83,764    97,512    96,333    27,970    27,888 
                               
Mortgage-backed securities:                              
Government-sponsored mortgage-backed securities   185,769    182,001    184,127    180,136    138,186    135,959 
U.S. government guaranteed mortgage-backed securities   16,821    16,254    17,753    17,350    11,030    10,903 
Total mortgage-backed securities   202,590    198,255    201,880    197,486    149,216    146,862 
                               
Marketable equity securities:                              
Mutual funds   6,727    6,397    6,586    6,296    6,438    6,247 
Common and preferred stock                   1,309    1,593 
Total marketable equity securities   6,727    6,397    6,586    6,296    7,747    7,840 
                               
Total available-for-sale securities  $293,774   $288,416   $305,978   $300,115   $184,933   $182,590 
                               
Held-to-maturity:                              
Debt securities:                              
Government-sponsored enterprise obligations  $   $   $   $   $30,146   $29,928 
State and municipal bonds                   6,845    6,811 
Corporate bonds                   23,969    23,717 
Total debt securities                   60,960    60,456 
                               
Mortgage-backed securities:                              
Government-sponsored mortgage-backed securities                   148,085    147,889 
U.S. government guaranteed mortgage-backed securities                   29,174    29,274 
Total mortgage-backed securities                   177,259    177,163 
                               
Total held-to-maturity securities  $   $   $   $   $238,219   $237,619 

 

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Mortgage-Backed Securities. The following table sets forth the amortized cost and fair value of our mortgage-backed securities, which are classified as available-for-sale or held-to-maturity at the dates indicated.

At December 31, 
   2017   2016   2015 
   Amortized   Percent of   Fair   Amortized   Percent of   Fair   Amortized   Percent of   Fair 
   Cost   Total   Value   Cost   Total   Value   Cost   Total   Value 
   (In thousands) 
Available-for-sale:                                    
Government-sponsored residential mortgage-backed  $185,769    91.70%  $182,001   $184,127    91.21%  $180,136   $138,186    42.32%  $135,959 
U.S. government guaranteed residential mortgage-backed   16,821    8.30    16,254    17,753    8.79    17,350    11,030    3.38    10,903 
Total available-for-sale   202,590    100.00    198,255    201,880    100.00    197,486    149,216    45.70    146,862 
                                              
Held-to-maturity:                                             
Government-sponsored residential mortgage-backed                           148,085    45.36    147,889 
U.S. government guaranteed residential mortgage-backed                           29,174    8.94    29,274 
Total held-to-maturity                           177,259    54.30    177,163 
                                              
Total  $202,590    100.00%  $198,255   $201,880    100.00%  $197,486   $326,475    100.00%  $324,025 

 

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Securities Portfolio Maturities. The composition and maturities of the debt securities portfolio and the mortgage-backed securities portfolio at December 31, 2017 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or redemptions that may occur. 

   One Year or Less   More than One Year through Five Years   More than Five Years
through Ten Years
   More than Ten Years   Total Securities 
       Weighted       Weighted       Weighted       Weighted           Weighted 
   Amortized   Average   Amortized   Average   Amortized   Average   Amortized   Average   Amortized   Fair   Average 
   Cost   Yield   Cost   Yield   Cost   Yield   Cost   Yield   Cost   Value   Yield 
   (Dollars in thousands) 
Debt securities available-for-sale:                                                       
Government-sponsored enterprise obligations  $    %  $1,500    1.44%  $18,500    2.23%  $5,151    3.00%  $25,151   $24,381    2.34%
State and municipal bonds           480    3.76    1,142    3.81    1,600    2.91    3,222    3,239    3.36 
Corporate bonds           31,103    2.97    24,981    3.08            56,084    56,144    3.02 
Total debt securities available-for-sale           33,083    2.91    44,623    2.74    6,751    2.98    84,457    83,764    2.83 
                                                        
Mortgage-backed securities available-for-sale:                                                       
Government-sponsored residential mortgage-backed           21,186    1.91    5,754    2.06    158,829    2.42    185,769    182,001    2.35 
U.S. government guaranteed residential mortgage-backed                           16,821    2.27    16,821    16,254    2.27 
Total mortgage-backed securities available-for-sale           21,186    1.91    5,754    2.06    175,650    2.41    202,590    198,255    2.35 
                                                        
Total available-for-sale  $    %  $54,269    2.52%  $50,377    2.67%  $182,401    2.43%  $287,047   $282,019    2.49%

 

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Sources of Funds

 

General. Deposits, short-term borrowings, long-term debt, scheduled amortization and prepayments of loan principal, maturities and calls of securities and funds provided by operations are our primary sources of funds for use in lending, investing and for other general purposes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

 

Deposits. We offer a variety of deposit accounts having a range of interest rates and terms. We currently offer regular savings deposits, interest-bearing demand accounts, non-interest-bearing demand accounts, money market accounts and time deposits. We have expanded the types of deposit products that we offer to include online and mobile banking services, tiered money market accounts and customer repurchase agreements to complement our increased emphasis on attracting commercial banking relationships.

 

Deposit flows are influenced significantly by general and local economic conditions, changes in prevailing interest rates, pricing of deposits and competition. Our deposits are primarily obtained from areas surrounding our offices. We rely primarily on paying competitive rates, service and long-standing relationships with customers to attract and retain these deposits.

 

When we determine our deposit rates, we consider local competition, U.S. Treasury securities offerings and the rates charged on other sources of funds. Core deposits (defined as regular accounts, money market accounts, and interest-bearing and non-interest-bearing demand accounts) represented 63.1% of total deposits on December 31, 2017 and 62.3% on December 31, 2016. At December 31, 2017 and December 31, 2016, time deposits with remaining terms to maturity of less than one year amounted to $300.5 million and $321.1 million, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Net Interest and Dividend Income” for information relating to the average balances and costs of our deposit accounts for the years ended December 31, 2017, 2016 and 2015.

 

Deposit Distribution and Weighted Average Rates. The following table sets forth the distribution of our deposit accounts, by account type, at the dates indicated.

 

   At December 31, 
   2017   2016   2015 
   Amount   Percent   Weighted Average Rates   Amount   Percent   Weighted Average Rates   Amount   Percent   Weighted Average Rates 
   (Dollars in thousands) 
                                     
Demand deposits  $311,851    20.72%   %  $303,993    20.03%   %  $157,844    17.54%   %
Interest-bearing checking accounts   87,394    5.80    0.39    82,406    5.43    0.46    28,913    3.21    0.30 
Regular accounts   140,081    9.30    0.12    149,455    9.85    0.13    75,225    8.35    0.11 
Money market accounts   410,223    27.24    0.40    409,274    26.96    0.41    242,647    26.95    0.34 
Total core deposit accounts   949,549    63.06    0.23    945,128    62.26    0.24    504,629    56.05    0.20 
                                              
Time deposits:                                             
Due within the year   300,531    19.95    1.15    321,078    21.15    1.13    240,662    26.73    1.02 
Over 1 year through 3 years   213,780    14.19    1.58    199,309    13.13    1.42    92,650    10.29    1.27 
Over 3 years   42,222    2.80    1.59    52,556    3.46    1.64    62,422    6.93    1.81 
Total time deposit accounts   556,533    36.94    1.35    572,943    37.74    1.28    395,734    43.95    1.20 
                                              
Total  $1,506,082    100.00%   0.65%  $1,518,071    100.00%   0.63%  $900,363    100.00%   0.64%

 

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Time Deposit Maturities. At December 31, 2017, we had $140.0 million in time deposits with balances of $250,000 and over maturing as follows:

 

Maturity Period   Amount   Weighted Average
Rate
 
     (In thousands)      
            
 3 months or less   $19,329    0.86%
 Over 3 months through 6 months    30,812    1.29 
 Over 6 months through 12 months    19,280    1.34 
 Over 12 months    70,572    1.71 
 Total   $139,993    1.45%

 

Time Deposit Balances by Rates. The following table sets forth, by interest rate ranges, information concerning our time deposits at the dates indicated.

 

   At December 31, 2017 
   Period to Maturity         
   Less than
One Year
   One to Two
Years
   Two to
Three Years
   More than
Three Years
   Total   Percent of
Total
 
   (Dollars in thousands)     
                         
1.00% and under  $73,441   $16,503   $6,555   $6,624   $103,123    18.53%
1.01% to 2.00%   227,090    162,058    22,419    35,235    446,802    80.28 
2.01% to 3.00%       1,219    5,026    363    6,608    1.19 
Total  $300,531   $179,780   $34,000   $42,222   $556,533    100.00%

 

Short-term borrowings and long-term debt. We also use 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 (including line of credit advances) with an original maturity of less than one year as well as customer repurchase agreements, which have an original maturity of one day. Short-term borrowings issued by the FHLBB were $133.0 million at December 31, 2017 and $155.0 million at December 31, 2016. We had an “Ideal Way” line of credit with the FHLBB for $9.5 million for the years ended December 31, 2017 and 2016. Interest on this line of credit is payable at a rate determined and reset by the FHLBB on a daily basis. The outstanding principal is due daily but the portion not repaid will be automatically renewed. There were no advances outstanding under this line at December 31, 2017 and 2016, respectively.

 

Our repurchase agreements are with commercial customers. These agreements are linked to customers’ checking accounts. Excess funds are swept out of certain commercial checking accounts and into repurchase agreements where the customers can earn interest on their funds. At December 31, 2017 and 2016, such repurchase agreement borrowings totaled $11.7 million and $17.4 million, respectively. In addition, we have a $4.0 million line of credit with Bankers Bank Northeast (“BBN”) and a $50.0 million line of credit with PNC Bank, respectively, at an interest rate determined and reset by BBN and PNC on a daily basis. At December 31, 2017 and 2016, we had no advances outstanding under these lines. As part of our contract with BBN, we are required to maintain a reserve balance of $300,000 with BBN for our use of this line.

 

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Long-term debt consists of FHLBB advances, securities sold under repurchase agreements and customer repurchase agreements with an original maturity of one year or more. At December 31, 2017, we had $164.8 million in long-term debt with the FHLBB and no long-term customer repurchase agreements. This compares to $124.8 million in FHLBB advances and no long-term customer repurchase agreements at December 31, 2016. During 2016, we prepaid FHLBB borrowings in the amount of $42.5 million with a weighted average rate of 2.29% and incurred a prepayment expense of $915,000.

 

Financial Services – In conjunction with our acquisition of Chicopee in October 2016, we retained a partnership with a third party registered broker dealer, Linsco/Private Ledger (“LPL”), while discontinuing our strategic alliance with our previous service provider, Charter Oak, a division of MassMutual. Through LPL, we offer customers a range of non-deposit investment products, including mutual funds, debt, equity and government securities, retirement accounts, insurance products and fixed and variable annuities. We receive a portion of the commissions generated by LPL from sales to customers.

 

Supervision and Regulation

 

Western New England Bancorp and the Bank are subject to extensive regulation under federal and state laws. The regulatory framework applicable to savings and loan holding companies and their insured depository institution subsidiaries is intended to protect depositors, the federal deposit insurance fund (the “DIF”), consumers and the U.S. banking system, rather than investors.

 

Set forth below is a summary of the significant laws and regulations applicable to Western New England Bancorp and its subsidiaries. The summary description that follows is qualified in its entirety by reference to the full text of the statutes, regulations, and policies that are described. Such statutes, regulations, and policies are subject to ongoing review by Congress and state legislatures and federal and state regulatory agencies. A change in any of the statutes, regulations, or regulatory policies applicable to Western New England Bancorp and its subsidiaries could have a material effect on the results of the Company.

 

Overview. Western New England Bancorp is a separate and distinct legal entity from the Bank. Western New England Bancorp is a Massachusetts corporation and registered savings and loan holding company under the Home Owners’ Loan Act (the “HOLA”), as amended, and is subject to the supervision of and regular examination by the Board of Governors of the Federal Reserve System (the “FRB,” the “Federal Reserve Board” or the “Federal Reserve”) as its primary federal regulator. In addition, the Federal Reserve Board has enforcement authority over Western New England Bancorp and its non-savings association subsidiaries. Western New England Bancorp is also subject to the jurisdiction of the SEC and is subject to the disclosure and other regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. Western New England Bancorp is traded on the NASDAQ under the ticker symbol, “WNEB,” and is subject to the NASDAQ stock market rules.

 

The Bank is organized as a federal savings association under the HOLA. The Bank is subject to the supervision of, and to regular examination by, the Office of the Comptroller of the Currency (the “OCC”) as its chartering authority and primary federal regulator. To a limited extent, the Bank is also subject to the supervision and regulation of the Federal Deposit Insurance Corporation (the “FDIC”) as its deposit insurer. Financial products and services offered by Western New England Bancorp and the Bank are subject to federal consumer protection laws and implementing regulations promulgated by the Consumer Financial Protection Bureau (the “CFPB”). Western New England Bancorp and the Bank are also subject to oversight by state attorneys general for compliance with state consumer protection laws. The Bank’s deposits are insured by the FDIC up to the applicable deposit insurance limits in accordance with FDIC laws and regulations. The Bank is a member of the FHLBB, and is subject to the rules and requirements of the FHLBB. The subsidiaries of Western New England Bancorp and the Bank are subject to federal and state laws and regulations, including regulations of the FRB and the OCC, respectively.

 

Set forth below is a description of the significant elements of the laws and regulations applicable to Western New England Bancorp and its subsidiaries. Statutes, regulations and policies are subject to ongoing review by Congress, state legislatures and federal and state agencies. A change in any statute, regulation or policy applicable to Western New England Bancorp may have a material effect on the results of Western New England Bancorp and its subsidiaries.

 

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Federal Savings and Loan Holding Company Regulation. Western New England Bancorp is a savings and loan holding company as defined by the HOLA. In general, the HOLA restricts the business activities of savings and loan holding companies to those permitted for financial holding companies under the Bank Holding Company Act of 1956 as amended (the “BHC Act”), as amended. Permissible businesses activities includes banking, managing or controlling banks and other activities that the FRB has determined to be so closely related to banking “as to be a proper incident thereto,” as well as any activity that is either (i) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as determined solely by the FRB). Activities that are financial in nature include, among others, securities underwriting and dealing, insurance underwriting and making merchant banking investments.

 

Mergers and Acquisitions. The HOLA, the federal Bank Merger Act and other federal and state statutes regulate direct and indirect acquisitions of savings associations by savings and loan holding companies or other savings associations. The HOLA requires the prior approval of the FRB for the direct or indirect acquisition of more than 5% of the voting shares of a savings association or its parent holding company and for a company, other than a savings and loan holding company, to acquire 25% or more of any class of voting securities of a savings association or a savings and loan holding company. Under the Change in Bank Control Act, any person, including a company, may not acquire, directly or indirectly, control of an insured depository institution without providing 60 days’ prior notice and receiving a non-objection from the appropriate federal banking agency.

 

Under the Bank Merger Act, the prior approval of the OCC is required for a federal savings association to merge with another insured depository institution, where the resulting institution is a federal savings association, or to purchase the assets or assume the deposits of another insured depository institution. In reviewing applications seeking approval of merger and acquisition transactions, the federal bank regulatory agencies must consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, performance records under the Community Reinvestment Act of 1977 (the “CRA”) (see the section captioned “Community Reinvestment Act of 1977” included elsewhere in this section) and the effectiveness of the subject organizations in combating money laundering.

 

Source of Strength Doctrine. FRB policy requires savings and loan holding companies to act as a source of financial and managerial strength to their subsidiary savings associations. Section 616 of the Dodd-Frank Act codified the requirement that holding companies act as a source of financial strength to their insured depository institution subsidiaries. As a result, Western New England Bancorp is expected to commit resources to support the Bank, including at times when Western New England Bancorp may not be in a financial position to provide such resources. Any capital loans by a savings and loan holding company to any of its subsidiary savings associations are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary savings associations. In the event of a savings and loan holding company’s bankruptcy, any commitment by the savings and loan holding company to a federal banking agency to maintain the capital of a subsidiary insured depository institution will be assumed by the bankruptcy trustee and entitled to priority of payment.

 

Dividends. The principal source of Western New England Bancorp’s liquidity is dividends from the Bank. The OCC imposes various restrictions and requirements on the Bank’s ability to make capital distributions, including cash dividends. The OCC’s prior approval is required if the total of all distributions, including the proposed distribution, declared by a federal savings association in any calendar year would exceed an amount equal to the Bank’s net income for the year-to-date plus the Bank’s retained net income for the previous two years, or that would cause the Bank to be less than well capitalized. In addition, section 10(f) of the HOLA requires a subsidiary savings association of a savings and loan holding company, such as the Bank, to file a notice with the Federal Reserve prior to declaring certain types of dividends.

 

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Western New England Bancorp and the Bank are also subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal banking agency is authorized to determine, under certain circumstances relating to the financial condition of a savings and loan holding company or a savings association, that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The federal banking agencies have indicated that paying dividends that deplete an insured depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.

 

Capital Adequacy. In July 2013, the FRB, the OCC and the FDIC approved final rules (the “Capital Rules”) that established a new capital framework for U.S. banking organizations. The Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. In addition, the Capital Rules implement certain provisions of the Dodd-Frank Act. Pursuant to the Dodd-Frank Act, Western New England Bancorp, as a savings and loan holding company, is subject to the Capital Rules.

 

The Capital Rules substantially revised the risk-based capital requirements applicable to holding companies and their depository institution subsidiaries as compared to prior U.S. general risk-based capital rules. The Capital Rules revised the definitions and the components of regulatory capital and impacted the calculation of the numerator in banking institutions’ regulatory capital ratios. The Capital Rules became effective on January 1, 2015, subject to phase-in periods for certain components and other provisions.

 

The Capital Rules: (i) require a capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. Under the Capital Rules, for most banking organizations, including Western New England Bancorp, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common forms of Tier 2 capital are subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the Capital Rules’ specific requirements.

 

Pursuant to the Capital Rules, the minimum capital ratios as of January 1, 2015 are:

 

4.5% CET1 to risk-weighted assets;

 

6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;

 

8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and

 

4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).

 

The Capital Rules also require a “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity and other capital instrument repurchases and compensation based on the amount of the shortfall. Thus, when fully phased-in on January 1, 2019, the capital standards applicable to Western New England Bancorp will include an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.

 

The Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.

 

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In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss (“AOCI”) items included in shareholders’ equity (for example, marks-to-market of securities held in the available-for-sale portfolio) under U.S. GAAP are reversed for the purposes of determining regulatory capital ratios. Under the Capital Rules, the effects of certain AOCI items are not excluded; however, banking organizations not using advanced approaches, were permitted to make a one-time permanent election to continue to exclude these items in January 2015. The Company and the Bank made this election.

 

Implementation of the deductions and other adjustments to CET1 that began on January 1, 2015, are phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019. The risk-weighting categories in the Capital Rules are standardized and include a risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of assets.

 

In November 2017, the FRB finalized a rule extending the currently applicable capital rules for non-advanced approaches institutions, including the treatment of mortgage servicing assets. This rule is in effect pending the comment period and review of the general proposal to simplify the Capital Rules for non-advanced approaches institutions.

 

Western New England Bancorp is in compliance with the targeted capital ratios under the Capital Rules at December 31, 2017. The Bank is subject to the Capital Rules on the same phase-in schedule as Western New England Bancorp. We believe that Western New England Bancorp and the Bank will remain in compliance with the targeted capital ratios as such requirements are phased in.

 

Prompt Corrective Action. Pursuant to Section 38 of the Federal Deposit Insurance Act (“FDIA”), federal banking agencies are required to take “prompt corrective action” (“PCA”) should an insured depository institutions fail to meet certain capital adequacy standards. At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.

 

For purposes of PCA, to be: (i) well-capitalized, an insured depository institution must have a total risk based capital ratio of at least 10%, a Tier 1 risk based capital ratio of at least 8%, a CET1 risk based capital ratio of at least 6.5%, and a Tier 1 leverage ratio of at least 5%; (ii) adequately capitalized, an insured depository institution must have a total risk based capital ratio of at least 8%, a Tier 1 risk based capital ratio of at least 6%, a CET1 risk based capital ratio of at least 4.5%, and a Tier 1 leverage ratio of at least 4%; (iii) undercapitalized, an insured depository institution would have a total risk based capital ratio of less than 8%, a Tier 1 risk based capital ratio of less than 6%, a CET1 risk based capital ratio of less than 4.5%, and a Tier 1 leverage ratio of less than 4%; (iv) significantly undercapitalized, an insured depository institution would have a total risk based capital ratio of less than 6%, a Tier 1 risk based capital ratio of less than 4%, a CET1 risk based capital ratio of less than 3%, and a Tier 1 leverage ratio of less than 3%.; (v) critically undercapitalized, an insured depository institution would have a ratio of tangible equity to total assets that is less than or equal to 2%. As of December 31, 2017, the most recent notification from the OCC categorized the Bank as “well-capitalized” under the PCA framework.

 

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Volcker Rule. Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, restricts the ability of banking entities, such as Western New England Bancorp, from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain types of funds (“Covered Funds”), subject to certain limited exceptions. The implementing regulation defines a Covered Fund to include certain investments such as collateralized loan obligation (“CLO”) and collateralized debt obligation securities. The regulation also provides, among other exemptions, an exemption for CLOs meeting certain requirements. As of December 31, 2017, Western New England Bancorp is compliant with the Volcker Rule.

 

Business Activities. The Bank derives its lending and investment powers from the HOLA and its implementing regulations promulgated by the OCC. Those laws and regulations limit the Bank’s authority to invest in certain types of assets and to make certain types of loans. Permissible investments include, but are not limited to, mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage.

 

Loans to One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single borrower or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2017, we were in compliance with these limitations on loans to one borrower.

 

Qualified Thrift Lender Test. Under federal law, as a federal savings association the Bank must comply with the qualified thrift lender, or “QTL” test. Under the QTL test, the Bank is required to maintain at least 65% of its “portfolio assets” in certain “qualified thrift investments” in at least nine months of the most recent 12-month period. “Portfolio assets” means, in general, the Bank’s total assets less the sum of:

 

specified liquid assets up to 20% of total assets;

 

goodwill and other intangible assets; and

 

value of property used to conduct the Bank’s business.

 

“Qualified thrift investments” include certain assets that are includable without limit, such as residential and manufactured housing loans, home equity loans, education loans, small business loans, credit card loans, mortgage backed securities, Federal Home Loan Bank stock and certain U.S. government obligations. In addition, certain assets are includable as “qualified thrift investments” in an amount up to 20% of portfolio assets, including certain consumer loans and loans in “credit-needy” areas.

 

The Bank may also satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code. Failure by the Bank to maintain its status as a QTL would result in restrictions on activities, including restrictions on branching and the payment of dividends. If the Bank were unable to correct that failure within a specified period of time, it must either continue to operate under those restrictions on its activities or convert to a national bank charter. The Bank met the QTL test in each of the prior 12 months and, therefore, is a “qualified thrift lender.”

 

The Community Reinvestment Act of 1977. The Bank has a responsibility under the CRA, as implemented by OCC regulations, to help meet the credit needs of its communities, including low and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for insured depository institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The OCC assesses the Bank’s record of compliance with the CRA. The Bank’s failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities and the activities of Western New England Bancorp. The Bank’s most recent CRA rating was “Outstanding.”

 

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Consumer Protection and CFPB Supervision. The Dodd-Frank Act centralized responsibility for consumer financial protection by creating the CFPB, an independent federal agency responsible for implementing, enforcing, and examining compliance with federal consumer financial laws. As Western New England Bancorp has less than $10 billion in total consolidated assets, the OCC continues to exercise primary examination authority over the Bank with regard to compliance with federal consumer financial laws and regulations. Under the Dodd-Frank Act, state attorneys general are empowered to enforce rules issued by the CFPB.

 

Western New England Bancorp and the Bank are subject to a number of federal and state laws designed to protect borrowers and promote fair lending. These laws include, among others, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, various state law counterparts, and the Consumer Financial Protection Act of 2010.

 

Transactions with Affiliates and Loans to Insiders. Under federal law, transactions between insured depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act (“FRA”), and the FRB’s implementing Regulation W. In a holding company context, at a minimum, the parent holding company of a bank or savings association, and any companies which are controlled by such parent holding company, are “affiliates” of the bank or savings association. Generally, sections 23A and 23B are intended to protect insured depository institutions from losses arising from transactions with non-insured affiliates, by limiting the extent to which a depository institution or its subsidiaries may engage in covered transactions with any one affiliate and with all affiliates of the depository institution in the aggregate, and by requiring that such transactions be on terms that are consistent with safe and sound banking practices.

 

Section 22(h) of the FRA restricts loans to directors, executive officers, and principal stockholders (“insiders”). Under Section 22(h), loans to insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the insured depository institution’s total capital and surplus. Loans to insiders above specified amounts must receive the prior approval of the board of directors. Further, under Section 22(h), loans to insiders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available to the bank’s employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to executive officers.

 

Enforcement. The OCC has primary enforcement responsibility over savings associations, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to unsafe or unsound practices, and any violation of laws and regulations.

 

Standards for Safety and Soundness. The Bank is subject to certain standards designed to maintain the safety and soundness of individual insured depository institutions and the banking system. The OCC has prescribed safety and soundness guidelines relating to (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate exposure; (v) asset growth, concentration, and quality; (vi) earnings; and (vii) compensation and benefit standards for officers, directors, employees and principal shareholders. A savings association not meeting one or more of the safety and soundness guidelines may be required to file a compliance plan with the OCC.

 

Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management is not aware of any practice, condition or violation that might lead to the termination of the Bank’s deposit insurance.

 

Federal Deposit Insurance. The FDIC’s deposit insurance limit is $250,000 per depositor, per insured bank, for each account ownership category. The deposits of the Bank are insured up to applicable limits by the DIF of the FDIC. The Bank is subject to deposit insurance assessments to maintain the DIF. The FDIC uses a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account an insured depository institution’s capital level and supervisory rating, commonly known as the “CAMELS” rating. The risk matrix utilizes different risk categories which are distinguished by capital levels and supervisory ratings. As a result of the Dodd-Frank Act, the base for insurance assessments is now consolidated average assets less average tangible equity. Assessment rates are calculated using formulas that take into account the risk of the institution being assessed.

 

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FDIC insurance expenses include deposit insurance assessments and Financing Corporation (“FICO”) assessments related to outstanding FICO bonds. The FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987, whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings & Loan Insurance Corporation. FICO bonds mature in 2017 through 2019.

 

Depositor Preference. The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.

 

Federal Home Loan Bank System. The Bank is a member of the FHLBB, which is one of the regional Federal Home Loan Banks comprising the Federal Home Loan Bank System. Each Federal Home Loan Bank serves as a central credit facility primarily for its member institutions. The Bank, as a member of the FHLBB, is required to acquire and hold shares of capital stock in the FHLBB. Required percentages of stock ownership are subject to change by the FHLBB, and the Bank was in compliance with this requirement with an investment in FHLBB capital stock at December 31, 2017. If there are any developments that cause the value of our stock investment in the FHLBB to become impaired, we would be required to write down the value of our investment, which could affect our net income and shareholders’ equity.

 

Reserve Requirements. FRB regulations require insured depository institutions to maintain non-interest earning reserves against their transaction accounts (primary interest-bearing and regular checking accounts). The Bank’s required reserves can be in the form of vault cash. If vault cash does not fully satisfy the required reserves, in the form of a balance maintained with the Federal Reserve Bank of Boston.

 

Financial Privacy and Data Security. Western New England Bancorp is subject to federal laws, including the Gramm-Leach Bliley Act, and certain state laws containing consumer privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose non-public information about consumers to affiliated and non-affiliated third parties and limit the reuse of certain consumer information received from non-affiliated institutions. These provision require notice of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of “opt out” or “opt in” authorizations.

 

The Gramm-Leach Bliley Act requires that financial institutions implement comprehensive written information security programs that include administrative, technical, and physical safeguards to protect consumer information. Further, pursuant to interpretive guidance issued under the Gramm-Leach Bliley Act and certain state laws, financial institutions are required to notify customers of security breaches that result in unauthorized access to their nonpublic personal information.

 

Preventing Suspicious Activity. Under Title III of the USA PATRIOT Act, all financial institutions are required to take certain measures to identify their customers, prevent money laundering, monitor customer transactions and report suspicious activity to U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from federal banking agencies and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of Gramm-Leach Bliley Act and other privacy laws. Financial institutions are required to have anti-money laundering programs in place, which include, among other things, performing risk assessments and customer due diligence. The primary federal banking agencies and the Secretary of the Treasury have adopted regulations to implement several of these provisions. On May 11, 2018, the Bank must comply with the new Customer Due Diligence Rule, which clarifies and strengthens the existing obligations for identifying new and existing customers and explicitly include risk-based procedures for conducting ongoing customer due diligence. Financial institutions also are required to establish internal anti-money laundering programs. The effectiveness of institutions in combating money laundering activities is a factor to be considered in any application submitted by an insured depository institution under the Bank Merger Act. Western New England Bancorp and the Bank have in place a Bank Secrecy Act and USA PATRIOT Act compliance program and engage in limited transactions with foreign financial institutions or foreign persons.

 

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The Fair Credit Reporting Act’s (“FCRA”) Red Flags Rule requires financial institutions with covered accounts (e.g. consumer bank accounts and loans) to develop, implement, and administer an identity theft prevention program. This program must include reasonable policies and procedures to detect suspicious patterns or practices that indicate the possibility of identity theft, such an inconsistencies in personal information or changes in account activity.

 

Office of Foreign Assets Control Regulation. The U.S. has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the Office of Foreign Assets Control, which is an office within the U.S. Department of Treasury (the “OFAC”). The OFAC-administered sanctions targeting countries take many different forms. Generally, the sanctions contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without an OFAC license. Failure to comply with these sanctions could have legal and reputational consequences.

 

Incentive Compensation. The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on “golden parachute” payments in connection with approvals of mergers and acquisitions. The legislation also authorized the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The Dodd-Frank Act requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities with at least $1 billion in total consolidated assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. The federal banking agencies and the SEC most recently proposed such regulations in 2016, but the regulations have not yet been finalized. If the regulations are adopted in the form initially proposed, they will restrict the manner in which executive compensation is structured.

 

The Dodd-Frank Act also gives the SEC authority to prohibit broker discretionary voting on elections of directors, executive compensation matters and any other significant matter. At the 2012 Annual Meeting of Shareholders, Western New England Bancorp’s shareholders voted on a non-binding, advisory basis to hold a non-binding, advisory vote on the compensation of named executive officers of Western New England Bancorp annually. In light of the results, the Western New England Bancorp Board of Directors determined to hold the vote annually.

 

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Future Legislative and Regulatory Initiatives. Various legislative and regulatory initiatives are introduced by Congress, state legislatures and different financial regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies, savings and loan holding companies and/or depository institutions. Proposed legislation and regulatory initiatives could change banking statutes and the operating environment of Western New England Bancorp in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. Western New England Bancorp cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it or any implementing regulations would have on the financial condition or results of operations of Western New England Bancorp. Other legislation may be introduced in Congress, which would further regulate, deregulate or restructure the financial services industry, including proposals to substantially reform the financial regulatory framework. It is not possible to predict whether any such proposals will be enacted into law or, if enacted, the effect which they may have on our business and earnings.

 

Available Information

 

We maintain a website at www.westfieldbank.com. The website contains information about us and our operations. Through a link to the Investor Relations section of our website, copies of each of our filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports Form 10-Q and Current Reports on Form 8-K and all amendments to those reports, can be viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC. In addition, copies of any document we file with or furnish to the SEC may be obtained from the SEC at its public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference room by calling the SEC at 1-800-SEC-0330. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, N.E., Washington, D.C. 20549. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file or furnish such information electronically with the SEC. The information found on our website or the website of the SEC is not incorporated by reference into this Annual Report on Form 10-K or any other report we file with or furnish to the SEC.

 

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ITEM 1A.RISK FACTORS

 

Our loan portfolio includes loans with a higher risk of loss. We originate commercial and industrial loans, commercial real estate loans, consumer loans, and residential mortgage loans primarily within our market area. We have developed and implemented a lending strategy that focuses on residential real estate lending as well as servicing commercial customers, including increased emphasis on commercial and industrial lending and commercial deposit relationships. Commercial and industrial loans, commercial real estate loans, and consumer loans may expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans may not be sold as easily as residential real estate. In addition, commercial real estate and commercial and industrial loans may also involve relatively large loan balances to individual borrowers or groups of borrowers. These loans also have greater credit risk than residential real estate for the following reasons:

 

Commercial Real Estate Loans. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service.

 

Commercial and Industrial Loans. Repayment is generally dependent upon the successful operation of the borrower’s business.

 

Consumer Loans. Consumer loans are collateralized, if at all, with assets that may not provide an adequate source of payment of the loan due to depreciation, damage or loss.

 

Any downturn in the real estate market or local economy could adversely affect the value of the properties securing the loans or revenues from the borrowers’ businesses thereby increasing the risk of non-performing loans.

 

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease. Our loan customers may not repay their loans according to their terms and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. We therefore may experience significant loan losses, which could have a material adverse effect on our operating results. Material additions to our allowance for loan losses also would materially decrease our net income, and the charge-off of loans may cause us to increase the allowance. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We rely on our loan quality reviews, our experience and our evaluation of economic conditions, among other factors, in determining the amount of the allowance for loan losses. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance.

 

If a significant portion of any future unrealized losses in our portfolio of investment securities were to become other than temporarily impaired with credit losses, we would recognize a material charge to our earnings, and our capital ratios would be adversely impacted. As of December 31, 2017, the fair value of our securities portfolio was approximately $304.0 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of those securities. These factors include, but are not limited to, changes in interest rates, rating agency downgrades of the securities, defaults by the issuer or individual mortgagors with respect to the underlying securities, and instability in the credit markets. Any of the foregoing factors could cause an-other-than-temporary impairment (“OTTI”) in future periods and result in realized losses.

 

We analyze our investment securities quarterly to determine whether, in the opinion of management, any of the securities have OTTI. To the extent that any portion of the unrealized losses in our portfolio of investment securities is determined to have OTTI and is credit loss related, we will recognize a charge to our earnings in the quarter during which such determination is made, and our capital ratios will be adversely impacted. Generally, a fixed income security is determined to have OTTI when it appears unlikely that we will receive all of the principal and interest due in accordance with the original terms of the investment. In addition to credit losses, losses are recognized for a security having an unrealized loss if the Company has the intent to sell the security or if it is more likely than not that the Company will be required to sell the security before collection of the principal amount.

 

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If dividends are not paid on our investment in the FHLBB, or if our investment is classified as other-than-temporarily impaired, our earnings and/or shareholders’ equity could decrease. We own common stock of the FHLBB to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the FHLBB’s advance program. There is no market for our FHLBB common stock. There can be no assurance that such dividends will be declared in the future. Further, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks also will not cause a decrease in the value of the FHLBB stock held by us.

 

It is possible that the capitalization of a Federal Home Loan Bank, including the FHLBB, could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk that our investment in FHLBB common stock could be deemed other-than-temporarily impaired at some time in the future, and if this occurs, it would cause our earnings and shareholders’ equity to decrease by the after-tax amount of the impairment charge.

 

Changes in interest rates could adversely affect our results of operations and financial condition. Our profitability, like that of most financial institutions, depends substantially on our net interest income, which is the difference between the interest income earned on our interest-earning assets and the interest expense paid on our interest-bearing liabilities. Increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans. In addition, as market interest rates rise, we will have competitive pressures to increase the rates we pay on deposits, which will result in a decrease of our net interest income.

 

We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities as borrowers refinance to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities.

 

Changes in the local economy may affect our future growth possibilities. Our current market area is principally located in Hampden and Hampshire Counties, Massachusetts and Hartford and Tolland Counties in northern Connecticut. Our local economy may affect our future growth possibilities. Our future growth opportunities depend on the growth and stability of our regional economy and our ability to expand our market area. A downturn in our local economy may limit funds available for deposit and may negatively affect our borrowers’ ability to repay their loans on a timely basis, both of which could have an impact on our profitability.

 

We depend on our executive officers and key personnel to continue the implementation of our long-term business strategy and could be harmed by the loss of their services. We believe that our continued growth and future success will depend in large part upon the skills of our management team. The competition for qualified personnel in the financial services industry is intense, and the loss of our key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect our business. We cannot assure you that we will be able to retain our existing key personnel or attract additional qualified personnel. We have employment agreements with our Chief Executive Officer, Chief Financial Officer, and Executive Vice President and General Counsel and change of control agreements with several other senior executive officers, and the loss of the services of one or more of our executive officers and key personnel could impair our ability to continue to develop our business strategy.

 

Competition in our primary market area may reduce our ability to attract and retain deposits and originate loans. We operate in a competitive market for both attracting deposits, which is our primary source of funds, and originating loans. Historically, our most direct competition for deposits has come from savings and commercial banks. Our competition for loans comes principally from commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms. We also face additional competition from internet-based institutions, brokerage firms and insurance companies. Competition for loan originations and deposits may limit our future growth and earnings prospects.

 

We operate in a highly-regulated environment that is subject to extensive government supervision and regulation, which may interfere with our ability to conduct business and may adversely impact the results of our operations. We are subject to extensive federal and state supervision and regulation that govern nearly all aspects of our operations and can have a material impact on our business. Federal banking agencies have significant discretion regarding the supervision, regulation and enforcement of banking laws and regulations.

 

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Financial laws, regulations and policies are subject to amendment by Congress, state legislatures and federal and state regulatory agencies. Changes to statutes, regulations or policies, including changes in the interpretation of regulations or policies, could materially impact our business. These changes could also impose additional costs on us and limit the types of products and services that we may offer our customers. Compliance with laws and regulations can be difficult and costly, and the failure to comply with any law, regulation or policy could result in sanctions by financial regulatory agencies, including civil monetary penalties, private lawsuits, or reputational damage, any of which could adversely affect our business, financial condition, or results of operations. While we have policies and procedures designed to prevent such violations, there can be no assurance that violations will not occur. See the section titled, “Supervision and Regulation” in ITEM 1. Business.

 

Since the 2008 global financial crisis, financial institutions have been subject to increased scrutiny from Congress, state legislatures and federal and state financial regulatory agencies. Changes to the legal and regulatory framework have significantly altered the laws and regulations under which we operate. Compliance with these changes and any additional or amended laws, regulations and regulatory policies may reduce our ability to effectively compete in attracting and retaining customers. The passage and continued implementation of the Dodd-Frank Act, among other laws and regulations, has increased our costs of doing business and resulted in decreased revenues and net income. Several provisions of the Dodd-Frank Act are subject to further rulemaking, guidance and interpretation by the federal financial regulatory agencies. As a result, we cannot provide assurance that future changes in laws, regulations and policies will not adversely affect our business.

 

State and federal regulatory agencies periodically conduct examinations of our business, including for compliance with laws and regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such examinations may adversely affect our business. Federal and state regulatory agencies periodically conduct examinations of our business, including our compliance with laws and regulations. If, as a result of an examination, an agency were to determine that the financial, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of any of our operations had become unsatisfactory, or violates any law or regulation, such agency may take certain remedial or enforcement actions it deems appropriate to correct any deficiency. Remedial or enforcement actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced against a bank, to direct an increase in the bank’s capital, to restrict the bank’s growth, to assess civil monetary penalties against a bank’s officers or directors, and to remove officers and directors. In the event that the FDIC concludes that, among other things, our financial conditions cannot be corrected or that there is an imminent risk of loss to our depositors, it may terminate our deposit insurance. The OCC, as the supervisory and regulatory authority for federal savings associations, has similar enforcement powers with respect to our business. The CFPB also has authority to take enforcement actions, including cease-and-desist orders or civil monetary penalties, if it finds that we offer consumer financial products and services in violation of federal consumer financial protection laws.

 

If we were unable to comply with future regulatory directives, or if we were unable to comply with the terms of any future supervisory requirements to which we may become subject, then we could become subject to a variety of supervisory actions and orders, including cease and desist orders, prompt corrective actions, MOUs, and other regulatory enforcement actions. Such supervisory actions could, among other things, impose greater restrictions on our business, as well as our ability to develop any new business. We could also be required to raise additional capital, or dispose of certain assets and liabilities within a prescribed time period, or both. Failure to implement remedial measures as required by financial regulatory agencies could result in additional orders or penalties from federal and state regulators, which could trigger one or more of the remedial actions described above. The terms of any supervisory action and associated consequences with any failure to comply with any supervisory action could have a material negative effect on our business, operating flexibility and overall financial condition.

 

We may be subject to more stringent capital requirements. The Bank and Western New England Bancorp are each subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital which each of the Bank and Western New England Bancorp must maintain. From time to time, the regulators implement changes to these regulatory capital adequacy guidelines. If we fail to meet these minimum capital guidelines and other regulatory requirements, our financial condition would be materially and adversely affected. In light of proposed changes to regulatory capital requirements contained in the Dodd-Frank Act and the regulatory accords on international banking institutions formulated by the Basel Committee and implemented by the Federal Reserve and the OCC, we may be required to satisfy additional, more stringent, capital adequacy standards. The ultimate impact of the revised capital and liquidity standards on us cannot be determined at this time and will depend on a number of factors, including the treatment and implementation by the U.S. banking regulators. These requirements, however, and any other new regulations, could adversely affect our ability to pay dividends, or could require us to reduce business levels or to raise capital, including in ways that may adversely affect our financial condition or results of operations.

 

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If the goodwill or other intangible assets recorded in connection with the Company’s acquisitions becomes impaired, it could have a negative impact on the Company’s profitability. Applicable accounting standards require that the acquisition method of accounting be used for all business combinations. Under this method, if the purchase price of an acquired entity exceeds the fair value of its net assets, the excess is carried on the acquirer’s balance sheet as goodwill. At December 31, 2017, we had $12.5 million of goodwill and $4.1 million of core deposit intangible on our balance sheet. We will evaluate goodwill for impairment at least annually or more frequently if events or changes in circumstances warrant such evaluation. Write-downs of the amount of impairment, if necessary, are to be charged to earnings in the period in which the impairment occurs. No impairment related to goodwill or core deposit intangibles was recorded for the year ended December 31, 2017. Future evaluations may result in findings of impairment and related write-downs, which could have a material adverse effect on our financial condition and results of operations.

 

The Company, as part of its strategic plans, periodically considers potential acquisitions. The risks presented by acquisitions could adversely affect our financial condition and results of operations. Any acquisitions will be accompanied by the risks commonly encountered in acquisitions including, among other things: our ability to realize anticipated cost savings and avoid unanticipated costs relating to the merger, the difficulty of integrating operations and personnel, the potential disruption of our or the acquired company’s ongoing business, the inability of our management to maximize our financial and strategic position, the inability to maintain uniform standards, controls, procedures and policies, and the impairment of relationships with the acquired company’s employees and customers as a result of changes in ownership and management. These risks may prevent us from fully realizing the anticipated benefits of an acquisition or cause the realization of such benefits to take longer than expected.

 

A breach of information security, including as a result of cyber-attacks, could disrupt our business and impact our earnings. We depend upon data processing, communication and information exchange on a variety of computing platforms and networks, and over the internet. In addition, we rely on the services of a variety of vendors to meet our data processing and communication needs. Despite existing safeguards, we cannot be certain that all of our systems are free from vulnerability to attack or other technological difficulties or failures. If information security is breached or difficulties or failures occur, despite the controls we and our third party vendors have instituted, information can be lost or misappropriated, resulting in financial loss or costs to us, reputational harm or damages to others. Such costs or losses could exceed the amount of insurance coverage, if any, which would adversely affect our earnings.

 

We continually encounter technological change and the failure to understand and adapt to these changes could hurt our business. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to customers. Failure to successfully keep pace with technological changes affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

 

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ITEM 1B.UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.PROPERTIES

 

We currently conduct our business through our twenty-one banking offices, twenty-three off-site ATMs and twenty-four seasonal/traveling ATMs. The following table sets forth certain information regarding our properties as of December 31, 2017. As of this date, the properties and leasehold improvements owned by us had an aggregate net book value of $23.5 million. We believe that our existing facilities are sufficient for our current needs.

 

Location Ownership  Year Opened Year of Lease or License Expiration
       
Main Office:      
141 Elm St. Owned 1964 N/A
Westfield, MA      
       
Technology Center:      
9-13 Chapel St. Leased 2015 2023
Westfield, MA      
       
Retail Lending:      
136 Elm St. Owned 2011 N/A
Westfield, MA      
       
Commercial Lending & Middle Market:      
1500 Main St. Leased 2014 2019
Springfield, MA      
       
Commercial Lending/Credit Admin and Training Center:      
219/229 Exchange Street Owned 2009/1998 N/A
Chicopee, MA      
       
Branch Offices:      
206 Park St. Owned 1957 N/A
West Springfield, MA      
       
655 Main St. Owned 1968 N/A
Agawam, MA      
       
26 Arnold St. Owned 1976 N/A
Westfield, MA      
       
300 Southampton Rd. Owned 1987 N/A
Westfield, MA      
       
462 College Highway Owned 1990 N/A
Southwick, MA      

 

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382 North Main St. Leased 1997 2022
E. Longmeadow, MA      
       
1500 Main St. Leased 2006 2018
Springfield, MA      
       
1642 Northampton St. Owned 2001 N/A
Holyoke, MA      
       
560 East Main St. Owned 2007 N/A
Westfield, MA      
       
237 South Westfield St. Leased 2009 2018
Feeding Hill, MA      
       
10 Hartford Avenue Leased 2013 2018
Granby, CT      
       
47 Palomba Drive Leased 2014 2024
Enfield, CT      
       
39 Morgan Road Owned 2005 N/A
West Springfield, MA      
       
70 Center Street Owned 1973 N/A
Chicopee, MA      
       
569 East Street Owned 1976 N/A
Chicopee, MA      
       
599 Memorial Drive Leased 1977 2027
Chicopee, MA      
       
435 Burnett Road Owned 1990 N/A
Chicopee, MA      
       
477A Center Street Leased 2002 2022
Ludlow, MA      
       
350 Palmer Road Leased 2009 2027
Ware, MA      
       
32 Willamansett Street Leased 2008  2027 (1)
South Hadley, MA      
       
 (1) This lease is for the land only, the building is owned by Westfield Bank.  

 

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ATMs:      
516 Carew Street Tenant at will 2002 N/A
Springfield, MA      
       
1000 State Street Tenant at will 2003 N/A
Springfield, MA      
       
788 Memorial Avenue Leased 2006 2020
West Springfield, MA      
       
2620 Westfield Street Leased 2006 2020
West Springfield, MA      
       
98 Southwick Road Leased 2006 2026
Westfield, MA      
       
115 West Silver Street Tenant at will 2005 N/A
Westfield, MA      
       
1342 Liberty Street Owned 2001 N/A
Springfield, MA      
       
98 Lower Westfield Road Leased 2010 2020
Holyoke, MA      
       
Westfield State University      
577 Western Avenue      
Westfield, MA      
Woodward Center Leased 2010 2020
Wilson Hall Leased 2010 2020
Ely Hall Leased 2010 2020
       
214 College Highway Leased 2010 2020
Southwick, MA      
       
705 Memorial Drive Leased 2013 At will
Chicopee, MA      
       
291 Springfield Street Owned 2015 N/A
Chicopee, MA      

 

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Big E ATMs:      
1305 Memorial Avenue      
West Springfield, MA      
       
Better Living Center Owned 2011 N/A
Better Living Center Owned 2011 N/A
Better Living Center (Door 6) Owned 2011 N/A
Big E Coliseum Owned 2015 N/A
Big E Young Building Owned 2011 N/A
Big E Mallory Complex Owned 2011 N/A
       
627 Randall Road Owned 2015 N/A
Ludlow, MA      
       
229 Exchange Street Owned 2015 N/A
Chicopee, MA      

 

ITEM 3.LEGAL PROCEEDINGS

 

We are not involved in any pending legal proceeding other than routine legal proceedings occurring in the ordinary course of business. In the opinion of management, no legal proceedings will have a material effect on our consolidated financial position or results of operations.

 

ITEM 4.MINE SAFETY DISCLOSURES

 

none.

 

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PART II

 

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock is currently listed on The NASDAQ Stock Market under the symbol “WNEB.” At December 31, 2017, there were 30,487,309 shares of common stock issued and outstanding, and there were approximately 2,295 shareholders of record.

 

The table below shows the high and low sales prices during the periods indicated as well as dividends declared per share.

 

   Price Per Share   Cash Dividends Declared 
2017  High ($)   Low ($)   ($) 
Fourth Quarter ended December 31, 2017   11.10    10.00    0.03 
Third Quarter ended September 30, 2017   11.03    9.30    0.03 
Second Quarter ended June 30, 2017   10.95    9.75    0.03 
First Quarter ended March 31, 2017   10.75    9.00    0.03 

 

   Price Per Share   Cash Dividends Declared 
2016  High ($)   Low ($)   ($) 
Fourth Quarter ended December 31, 2016   9.75    7.45    0.03 
Third Quarter ended September 30, 2016   7.97    7.41    0.03 
Second Quarter ended June 30, 2016   8.50    7.35    0.03 
First Quarter ended March 31, 2016   8.85    7.57    0.03 

 

Dividend Policy

 

The continued payment of dividends depends upon our debt and equity structure, earnings, financial condition, need for capital in connection with possible future acquisitions and other factors, including economic conditions, regulatory restrictions and tax considerations. We cannot guarantee the payment of dividends or that, if paid, that dividends will not be reduced or eliminated in the future.

 

The only funds available for the payment of dividends on our capital stock will be cash and cash equivalents held by us, dividends paid to us by the Bank, and borrowings. The Bank will be prohibited from paying cash dividends to us to the extent that any such payment would reduce the Bank’s capital below required capital levels or would impair the liquidation account to be established for the benefit of the Bank’s eligible account holders and supplemental eligible account holders at the time of the reorganization and stock offering.

 

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Recent Sales of Unregistered Securities

 

There were no sales by us of unregistered securities during the year ended December 31, 2017.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

The following table sets forth information with respect to purchases made by us of our common stock during the three months ended December 31, 2017.

 

Period   Total Number of Shares Purchased  

Average Price Paid per Share 

($) 

   Total Number of Shares Purchased as Part of Publicly Announced Programs   Maximum Number of Shares that May Yet Be Purchased Under the Program(1) 
October 1 - 31, 2017    158,848    10.87    158,848    2,599,695 
November 1 - 30, 2017    87,858    10.41    87,858    2,511,837 
December 1 - 31, 2017    82,798(2)(3)   10.27    71,228    2,440,609 
Total    329,504    10.60    317,934    2,440,609 

 

(1)On January 31, 2017, the Board of Directors authorized an additional stock repurchase program under which the Company may purchase up to 3,047,000 shares, or 10%, of its outstanding common stock. This plan began March 13, 2017 and as of December 31, 2017 there were 2,440,609 shares remaining to be purchased under the repurchase program.

 

(2)Number includes repurchase of 6,389 shares related to tax obligations for shares of restricted stock that vested on December 31, 2017 under our 2014 Omnibus Incentive Plan. These repurchases were reported by each reporting person on January 3, 2018.

 

(3)Number includes repurchase of 5,181 shares related to restricted shares under the legacy Chicopee recognition and retention plan.

 

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Performance Graph

 

The following graph compares our total cumulative shareholder return by an investor who invested $100.00 on December 31, 2012 to December 31, 2017, to the total return by an investor who invested $100.00 in the Russell 2000 Index for the same period.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

Among Western New England Bancorp, Inc. and the Russell 2000 Index

 

 (LINE GRAPH)

 

  Period Ending
Index 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17
Western New England Bancorp, Inc. 100.00 107.35 108.75 126.43 142.93 168.62
Russell 2000 Index 100.00 138.82 145.62 139.19 168.85 193.58

 

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ITEM 6.SELECTED FINANCIAL DATA

 

The summary information presented below at or for each of the years presented is derived in part from our consolidated financial statements. The following information is only a summary, and you should read it in conjunction with our consolidated financial statements and notes beginning on page F-1.

 

   At December 31, 
   2017   2016(1)   2015   2014   2013 
   (In thousands) 
Selected Financial Condition Data:                         
Total assets  $2,083,070   $2,076,018   $1,339,930   $1,320,096   $1,276,841 
Loans, net (2)   1,619,850    1,556,416    809,373    716,738    629,968 
Securities available-for-sale   288,416    300,115    182,590    215,750    243,204 
Securities held to maturity (3)           238,219    278,080    295,013 
Deposits   1,506,082    1,518,071    900,363    834,218    817,112 
Short-term borrowings   144,650    172,351    128,407    93,997    48,197 
Long-term debt   164,786    124,836    153,358    232,479    248,377 
Total shareholders’ equity   247,281    238,396    139,466    142,543    154,144 
Allowance for loan losses   10,831    10,068    8,840    7,948    7,459 
Nonperforming loans   12,755    14,057    8,080    8,830    2,586 

 

   For the Years Ended December 31, 
   2017   2016(1)   2015   2014   2013 
   (In thousands, except per share data) 
Selected Operating Data:                         
Interest and dividend income  $74,039   $48,598   $42,476   $40,991   $41,031 
Interest expense   14,645    11,285    10,794    9,923    10,290 
Net interest and dividend income   59,394    37,313    31,682    31,068    30,741 
Provision for loan losses   1,360    575    1,275    1,575    (256)
Net interest and dividend income after provision for loan losses   58,034    36,738    30,407    29,493    30,997 
Total non-interest income   8,501    5,971    4,865    4,460    4,272 
Total non-interest expense   (44,787)   (35,306)   (27,433)   (25,909)   (26,642)
Income before income taxes   21,748    7,403    7,839    8,044    8,627 
Income taxes   9,428    2,569    2,124    1,882    1,871 
Net income  $12,320   $4,834   $5,715   $6,162   $6,756 
                          
Basic earnings per share  $0.41   $0.25   $0.33   $0.34   $0.34 
Diluted earnings per share  $0.41   $0.24   $0.33   $0.34   $0.34 
                          
Dividends per share paid  $0.12   $0.12   $0.12   $0.21   $0.29 

 

(1)Reflects the acquisition of Chicopee during 2016.
(2)Loans are shown net of deferred loan fees and costs, premiums, allowance for loan losses and unadvanced loan funds.
(3)During 2016, securities with an amortized cost of $136.8 million were reclassified from held-to-maturity to available-for-sale.

 

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   At or for the Years Ended December 31, 
   2017   2016(1)   2015   2014   2013 
                          
Selected Financial Ratios and                         
Other Data(2)                         
Performance Ratios:                         
Return on average assets   0.59%   0.32%   0.42%   0.48%   0.53%
Return on average equity   4.94    2.95    4.10    4.18    4.04 
Average equity to average assets   12.02    11.02    10.35    11.42    13.02 
Equity to total assets at end of year   11.87    11.48    10.41    10.80    12.07 
Interest rate spread   2.91    2.49    2.35    2.42    2.39 
Net interest margin(3)   3.12    2.70    2.53    2.60    2.58 
Average interest-earning assets to average interest-earning liabilities   128.64    125.21    121.47    121.90    122.92 
Total non-interest expense to average assets   2.16    2.37    2.04    2.01    2.07 
Efficiency ratio(4)   65.25    67.40    75.49    73.59    76.79 
Dividend payout ratio   0.29    0.50    0.36    0.62    0.85 
Regulatory Capital Ratios:                         
Total risk-based capital   15.53    15.10    17.20    18.68    21.17 
Tier 1 risk-based capital   14.87    14.47    16.23    17.73    20.21 
Common equity tier 1 capital   14.87    14.47    16.23    N/A    N/A 
Tier 1 leverage capital   11.84    12.19    11.16    11.30    12.28 
Asset Quality Ratios:                         
Nonperforming loans to total loans   0.78    0.90    0.99    1.22    0.41 
Nonperforming assets to total assets   0.62    0.69    0.60    0.67    0.20 
Allowance for loan losses to total loans   0.66    0.64    1.09    1.10    1.17 
Allowance for loan losses to nonperforming assets   0.84    0.70    1.09    0.90    2.88 
Number of:                         
Banking offices   21    21    13    13    12 
Full-time equivalent employees   279    273    189    183    191 

 

 

(1)Reflects the acquisition of Chicopee during 2016.
(2)Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios.
(3)Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets.
(4)The efficiency ratio represents the ratio of operating expenses excluding merger related charges divided by the sum of net interest and dividend income and non-interest income, excluding gain and loss on sale of securities and loss on prepayment of borrowings.

 

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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

We have adopted a growth-oriented strategy that has focused on increasing commercial lending while decreasing our securities portfolio. 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 portfolio by targeting businesses in our primary market area and in 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;

 

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

 

grow through acquisitions. We may pursue expansion opportunities in our existing market areas or adjacent areas in strategic locations that maximize growth opportunities or with companies that add complementary products to our existing business and we will look to be opportunistic to expand through the acquisition of banks or other financial service companies.

 

You should read the following financial results for the year ended December 31, 2017 in the context of this strategy.

 

Net income was $12.3 million, or $0.41 per diluted share, for the year ended December 31, 2017, compared to $4.8 million, or $0.24 per diluted share, for the same period in 2016. The results for the year ended December 31, 2017 showed increases in net interest and dividend income and non-interest income, however, these were partially offset by an increase in non-interest expense, all primarily due to reflecting a full year of combined operating activity since the October 21, 2016 acquisition of Chicopee.

 

We had provision for loan loss expense of $1.4 million for the year ended December 31, 2017, compared to $575,000 for the year ended December 31, 2016. The allowance was $10.8 million at December 31, 2017 and $10.1 million at December 31, 2016, or 0.66% and 0.64% of total loans, respectively. The allowance as a percentage of loans was impacted by the addition of $640.9 million in loans acquired from Chicopee that were recorded at fair value on October 21, 2016 and required no further allowance subsequent to the acquisition.

 

Net interest and dividend income increased $22.1 million to $59.4 million for the year ended December 31, 2017, compared to $37.3 million for the year ended December 31, 2016, primarily due to a $25.4 million increase in interest income resulting from a $584.0 million increase in the average balance of loans from the comparable 2016 period resulting from the acquisition of Chicopee on October 21, 2016. Non-interest income increased $2.5 million to $8.5 million for the year ended December 31, 2017, compared to $6.0 million for the same period in 2016 primarily driven by an increase in service charges and fee income.

 

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Non-interest expense increased $9.5 million to $44.8 million at December 31, 2017, compared to $35.3 million at December 31, 2016. The increase in non-interest expense for the year ended December 31, 2017 was primarily due to a full year of combined operating activity since the October 21, 2016 acquisition of Chicopee.

 

General. Our consolidated results of operations depend primarily on net interest and dividend income. Net interest and dividend income is the difference between the interest income earned on interest-earning assets and the interest paid on interest-bearing liabilities. Interest-earning assets consist primarily of commercial real estate loans, commercial and industrial loans, residential real estate loans and securities. Interest-bearing liabilities consist primarily of certificates of deposit and money market account, demand deposit accounts and savings account deposits, borrowings from the FHLBB and securities sold under repurchase agreements. The consolidated results of operations also depend on the provision for loan losses, non-interest income, and non-interest expense. Non-interest expense includes salaries and employee benefits, occupancy expenses and other general and administrative expenses. Non-interest income includes service fees and charges, income on bank-owned life insurance, and gains (losses) on securities.

 

Critical Accounting Policies. Our accounting policies are disclosed in Note 1 to our consolidated financial statements. Given our current business strategy and asset/liability structure, the more critical policies are the allowance for loan losses and provision for loan losses, accounting for nonperforming loans, the realizability of deferred taxes and other-than-temporary impairment of securities. In addition to the informational disclosure in the notes to the consolidated financial statements, our policy on each of these accounting policies is described in detail in the applicable sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Senior management has discussed the development and selection of these accounting policies and the related disclosures with the Audit Committee of our Board of Directors.

 

The process of evaluating the loan portfolio, classifying loans and determining the allowance and provision is described in detail in Part I under “Business – Lending Activities - Allowance for Loan Losses.” This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. Our methodology for assessing the allocation of the allowance consists of two key components, which are a specific allowance for impaired loans and a general allowance for the remainder of the portfolio. Measurement of impairment can be based on present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. The allocation of the allowance is also reviewed by management based upon our evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as new loan products, credit quality trends (including trends in nonperforming loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectability of the loan portfolio. Although management believes it has established and maintained the allowance for loan losses at adequate levels, if management’s assumptions and judgments prove to be incorrect due to continued deterioration in economic, real estate and other conditions, and the allowance for loan losses is not adequate to absorb inherent losses, our earnings and capital could be significantly and adversely affected.

 

Our general policy regarding recognition of interest on loans is to discontinue the accrual of interest when principal or interest payments are delinquent 90 days or more, or earlier if collection of principal or interest is doubtful. 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 when subsequent performance reduces 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.

 

We must make certain estimates in determining income tax expense for financial statement purposes. These estimates occur in the calculation of the deferred tax assets and liabilities, which arise from the temporary differences between the tax basis and financial statement basis of our assets and liabilities. The carrying value of our net deferred tax asset is based on our historic taxable income for the two prior years as well as our belief that it is more likely than not that we will generate sufficient future taxable income to realize these deferred tax assets. Judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws or other factors which could result in a change in the assessment of the realization of the net deferred tax asset.

 

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On a quarterly basis, we review securities with a decline in fair value below the amortized cost of the investment to determine whether the decline in fair value is temporary or other than temporary. Declines in the fair value of marketable equity securities below their cost that are deemed to be other than temporary based on the severity and duration of the impairment are reflected in earnings as realized losses. In estimating other than temporary impairment losses for securities, impairment is required to be recognized if (1) we intend to sell the security; (2) it is “more likely than not” that we will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired available for sale securities that we intend to sell, or more likely than not will be required to sell, the full amount of the other than temporary impairment is recognized through earnings. For other impaired debt securities, credit-related other than temporary impairment is recognized through earnings, while non-credit related other than temporary impairment is recognized in other comprehensive income, net of applicable taxes.

 

Average Balance Sheet and Analysis of Net Interest and Dividend Income

 

The following table sets forth information relating to our financial condition and net interest and dividend income for the years ended December 31, 2017, 2016 and 2015 and reflects the average yield on assets and average cost of liabilities for the years indicated. The yields and costs were derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the years shown. Average balances were derived from actual daily balances over the years indicated. Interest income includes fees earned from making changes in loan rates or terms, and fees earned when commercial real estate loans were prepaid or refinanced.

 

The interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.

 

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       For the Years Ended December 31,     
   2017   2016   2015 
   Average       Avg Yield/   Average       Avg Yield/   Average       Avg Yield/ 
   Balance   Interest   Cost   Balance   Interest   Cost   Balance   Interest   Cost 
   (Dollars in thousands) 
ASSETS:                                    
Interest-earning assets                                             
Loans(1)(2)  $1,597,599   $66,619    4.17%  $1,013,611   $40,422    3.99%  $766,548   $30,646    4.00%
Securities(2)   302,246    7,636    2.53    326,011    7,811    2.40    472,616    11,832    2.50 
Other investments - at cost   17,715    678    3.83    15,207    550    3.62    16,509    396    2.40 
Short-term investments(3)   19,244    120    0.62    40,552    115    0.28    12,067    18    0.15 
Total interest-earning assets   1,936,804    75,053    3.88    1,395,381    48,898    3.50    1,267,740    42,892    3.38 
Total non-interest-earning assets   138,241              93,611              78,938           
                                              
Total assets  $2,075,045             $1,488,992             $1,346,678           
                                              
LIABILITIES AND EQUITY:                                             
Interest-bearing liabilities                                             
Interest-bearing checking accounts  $86,069    330    0.38   $42,408    147    0.35   $34,351    79    0.23 
Savings accounts   149,497    179    0.12    90,666    106    0.12    75,691    79    0.10 
Money market accounts   401,935    1,565    0.39    294,247    1,189    0.40    237,782    830    0.35 
Time deposits   567,088    6,374    1.12    426,213    5,139    1.21    390,155    4,583    1.17 
Total interest-bearing deposits   1,204,589    8,448    0.70    853,534    6,581    0.77    737,979    5,571    0.75 
Short-term borrowings and long-term debt   300,964    6,197    2.06    260,890    4,704    1.80    305,646    5,223    1.71 
Interest-bearing liabilities   1,505,553    14,645    0.97    1,114,424    11,285    1.01    1,043,625    10,794    1.03 
Non-interest-bearing deposits   305,701              193,953              145,519           
Other non-interest-bearing liabilities