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EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Western New England Bancorp, Inc.ex31-2.htm
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EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Western New England Bancorp, Inc.ex32-2.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Western New England Bancorp, Inc.ex31-1.htm
EX-23.1 - CONSENT OF WOLF & COMPANY, P.C. - Western New England Bancorp, Inc.ex23-1.htm

 

 

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, 2015

 

Commission File No.: 001-16767

 

Westfield Financial, 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, $.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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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, 2015, was $135,203,011. This amount was based on the closing price as of June 30, 2015 on The NASDAQ Global Select Market for a share of the registrant’s common stock, which was $7.31 on June 30, 2015.

 

As of March 4, 2016, the registrant had 18,267,747 shares of common stock, $0.01 per value, issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Portions of the Proxy Statement for the 2016 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

 

 

 

 
 

 

 

WESTFIELD FINANCIAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2015

 

TABLE OF CONTENTS

 
     
ITEM PART I PAGE
     
1 BUSINESS 2
1A RISK FACTORS 26
1B UNRESOLVED STAFF COMMENTS 30
2 PROPERTIES 30
3 LEGAL PROCEEDINGS 31
4 MINE SAFETY DISCLOSURES 31
     
  PART II  
     
5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 32
6 SELECTED FINANCIAL DATA 35
7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 37
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 52
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 52
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 52
9A CONTROLS AND PROCEDURES 52
9B OTHER INFORMATION 53
  PART III  
     
10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 55
11 EXECUTIVE COMPENSATION 55
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS 55
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 55
14 PRINCIPAL ACCOUNTING FEES AND SERVICES 55
     
  PART IV  
     
15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 55

 

 
 

 

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 operation and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

 

·changes in the interest rate environment that reduce margins;

 

·changes in the regulatory environment;

 

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

 

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

 

·changes in business conditions and inflation;

 

·changes in credit market conditions;

 

·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 “Westfield Financial,” “we,” “us,” “our company,” and “our” refer to Westfield Financial, Inc. and its subsidiaries (including Westfield Bank, Elm Street Securities Corporation, WFD Securities, Inc. and WB Real Estate Holdings, LLC).

 

1
 

 

PART I

 

ITEM 1.            BUSINESS

 

General. Westfield Financial is a Massachusetts-chartered stock holding company and the parent company of Westfield Bank (the “Bank”). Westfield Financial 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 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 corporation, was formed by us for the primary purpose of holding qualified securities. In February 2007, we formed WFD Securities, Inc., a Massachusetts-chartered 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.

 

Market Area. We operate 13 banking offices in Agawam, Feeding Hills, East Longmeadow, Holyoke, Southwick, Springfield, 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 12 free-standing ATM locations in Holyoke, Southwick, Springfield, West Springfield and Westfield, Massachusetts. Our primary deposit gathering area is concentrated in the communities surrounding these locations and our primary lending area includes all of Hampden 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 primary market area is highly competitive and we face direct competition from approximately 17 financial institutions, many with a local, state-wide or regional presence and, in some cases, a national presence. Many of these financial institutions are significantly larger than us and have greater financial resources. 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.

 

Personnel. As of December 31, 2015, we had 164 full-time employees and 31 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, 2015, we had total loans of $814,390 million, of which 50.2% were adjustable rate loans and 49.8% were fixed rate loans. Commercial real estate loans and commercial and industrial loans totaled $303.0 million and $168.3 million, respectively. The remainder of our loans at December 31, 2015 consisted of residential real estate loans, home equity loans and consumer loans. Residential real estate and home equity loans outstanding at December 31, 2015 totaled $341.6 million. Consumer loans outstanding at December 31, 2015 were $1.5 million.

 

2
 

 

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,
   2015   2014   2013   2012   2011 
   Amount   Percent of
Total
   Amount   Percent of
Total
   Amount   Percent of
Total
   Amount   Percent of
Total
   Amount   Percent of
Total
 
   (Dollars in thousands)
Real estate loans:                                                  
Commercial  $303,036    37.21%  $278,405    38.49%  $264,476    41.54%  $245,764    41.38%  $232,491    42.04%
Residential   298,052    36.60    237,436    32.82    198,686    31.21    185,345    31.21    155,994    28.20 
Home equity   43,512    5.34    40,305    5.57    35,371    5.56    34,352    5.78    36,464    6.59 
Total real estate loans   644,600    79.15    556,146    76.88    498,533    78.31    465,461    78.37    424,949    76.83 
                                                   
Other 1oans                                                  
Commercial and industrial   168,256    20.66    165,728    22.91    135,555    21.29    126,052    21.22    125,739    22.73 
Consumer, other   1,534    0.19    1,542    0.21    2,572    0.40    2,431    0.41    2,451    0.44 
Total other loans   169,790    20.85    167,270    23.12    138,127    21.69    128,483    21.63    128,190    23.17 
                                                   
Total loans   814,390    100.00%   723,416    100.00%   636,660    100.00%   593,944    100.00%   553,139    100.00%
                                                   
Unearned premiums and net deferred                                                  
loan fees and costs, net   3,823         1,270         767         974         1,017      
Allowance for loan losses   (8,840)        (7,948)        (7,459)        (7,794)        (7,764)     
Total loans, net  $809,373        $716,738        $629,968        $587,124        $546,392      

 

3
 

 

Loan Maturity and Repricing. The following table shows the repricing dates or contractual maturity dates as of December 31, 2015. 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, 2015
   Commercial Real Estate  Residential  Home
Equity
  Commercial
and
Industrial
  Consumer  Unallocated  Totals
   (In thousands)
Amount due:                                   
Within one year  $43,951   $4,966   $27,041   $82,869   $510   $   $159,337 
                                    
After one year:                                   
                                    
One to three years   71,337    4,183    545    18,056    257       $94,378 
Three to five years   78,061    15,499    1,555    31,680    123        126,918 
Five to ten years   89,772    52,246    7,574    31,644            181,236 
Ten to twenty years   13,242    46,737    6,797    3,500            70,276 
Over twenty years   6,673    174,421        507    644        182,245 
Total due after one year   259,085    293,086    16,471    85,387    1,024        655,053 
                                    
Total amount due:   303,036    298,052    43,512    168,256    1,534        814,390 
                                    
Net deferred loan origination fees and costs and unearned premiums   (199)   3,551    286    150    35        3,823 
Allowance for loan losses   (3,856)   (2,122)   (309)   (2,485)   (22)   (46)   (8,840)
                                    
Loans, net  $298,981   $299,481   $43,489   $165,921   $1,547   $(46)  $809,373 

 

The following table presents, as of December 31, 2015, the dollar amount of all loans contractually due or scheduled to reprice after December 31, 2016, and whether such loans have fixed interest rates or adjustable interest rates.

 

   Due After December 31, 2016
   Fixed  Adjustable  Total
   (In thousands)
          
Real estate loans:               
Residential  $228,011   $65,075   $293,086 
Home equity   16,471        16,471 
Commercial real estate   67,023    192,062    259,085 
Total real estate loans   311,505    257,137    568,642 
                
Other loans:               
Commercial and industrial   81,121    4,266    85,387 
Consumer   1,024        1,024 
Total other loans   82,145    4,266    86,411 
                
Total loans  $393,650   $261,403   $655,053 

 

4
 

 

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

 

   For the Years Ended December 31,
   2015  2014  2013
   (In thousands)
Loans:               
Balance outstanding at beginning of year  $723,416   $636,660   $593,944 
                
Originations:               
Real estate loans:               
Residential   240    4,880    4,842 
Home equity   15,189    15,089    12,139 
Commercial   79,734    37,399    52,027 
 Total mortgage originations   95,163    57,368    69,008 
                
 Commercial and industrial loans   51,063    105,438    74,594 
 Consumer loans   1,404    1,491    858 
 Total originations   147,630    164,297    144,460 
 Purchase of one-to-four family mortgage loans   90,743    53,272    37,700 
    238,373    217,569    182,160 
Less:               
Principal repayments, unadvanced funds and other, net   147,016    129,727    139,365 
Loan charge-offs, net   383    1,086    79 
Total deductions   147,399    130,813    139,444 
Ending balance  $814,390   $723,416   $636,660 

 

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, 2015, our commercial and industrial loan portfolio consisted of 1,124 loans, totaling $168.3 million, or 20.7% of our total loans. Our commercial loan team includes nine commercial loan officers, four credit analysts and two 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 main and branch offices, and we view our potential branch expansion 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.

 

5
 

 

Our commercial and industrial loan portfolio does not have any significant loan concentration by type of property or borrower. The largest concentration of loans was for manufacturing which comprised approximately 6.2% of the total loan portfolio as of December 31, 2015. At December 31, 2015, our largest commercial and industrial loan relationship was $18.0 million to a college. The loan relationship is secured by business assets. 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 $168.2 million we have in our commercial and industrial loan portfolio as of December 31, 2015, $75.4 million have adjustable interest rates and $92.8 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, 2015, our commercial real estate loan portfolio consisted of 435 loans, totaling $303.0 million, or 37.2% of total loans. Since 2011, commercial real estate loans have grown by $70.5 million, or 30.3%, from $232.5 million at December 31, 2011 to $303.0 million at December 31, 2015.

 

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 $14.9 million at December 31, 2015, which is secured by a commercial property located in Rhode Island. 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, 2015, we had $22.9 million in commercial construction loans and commitments that are committed to refinance into permanent mortgages at the end of the construction period and $239,000 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.

 

6
 

 

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. We process substantially all of our originations of residential real estate loans through a third-party mortgage company. Residential real estate borrowers submit applications to us, but the loan is approved by and closed on the books of the mortgage company. The third-party mortgage company owns the servicing rights and services the loans. We retain no residual ownership interest in these loans. We receive a fee for each of these loans originated by the third-party mortgage company.

 

In 2015, we purchased $88.6 million in residential loans from a New England-based bank as a means of supplementing our loan growth. In addition, we purchased a total of $2.1 million in residential loans from a third-party mortgage company within and contiguous to our market area during 2015. While in prior quarters management has used residential loan growth to supplement the loan portfolio, the long-term strategy remains focused on commercial lending. At December 31, 2015, loans on one-to-four family residential properties, including home equity lines, accounted for $341.6 million, or 41.9% 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, 2015, our residential real estate included $70.0 million in adjustable rate loans, or 8.6% of our total loan portfolio, and $228.1 million in fixed rate loans, or 28.0% of our total loan portfolio.

 

Our home equity loans totaled $43.5 million, or 5.3% of total loans at December 31, 2015. Home equity loans include $16.5 million in fixed rate loans, or 2.0% of total loans, and $27.0 million in adjustable rate loans, or 3.3% of total loans. These loans may be originated in amounts up to 80% 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.

 

We offer a variety of consumer loans to retail customers in the communities we serve. Examples of our consumer loans include automobile loans, secured passbook loans, credit lines tied to deposit accounts to provide overdraft protection, and unsecured personal loans. At December 31, 2015, the consumer loan portfolio totaled $1.5 million, or 0.2% 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.

 

7
 

 

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, 2015. 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 70% 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 $1.0 million. Any commercial and industrial or commercial real estate loan application that exceeds $1.0 million or that would result in the borrower’s total credit exposure with us to exceed $1.0 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.

 

Home Equity Loans. We originate and fund home equity loans. These loans may be originated in amounts up to 85% (CLTV) of the current value of the property. 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 who approval requires an exception to our standard approval procedures, are reviewed and approved by the Executive Committee of the Board of Directors.

 

8
 

 

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.

 

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. At December 31, 2015, 2014 and 2013, we had $8.1 million, $8.8 million, and $2.6 million, respectively, of nonaccrual loans. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $406,000, $221,000 and $162,000 for the years ended December 31, 2015, 2014 and 2013, respectively.

 

   At December 31,
   2015  2014  2013  2012  2011
   (Dollars in thousands)
Nonaccrual real estate loans:                         
Residential  $1,470   $1,323   $712   $939   $670 
Home equity       1    38    103    230 
Commercial real estate   3,237    3,257    1,449    1,558    1,879 
Total nonaccrual real estate loans   4,707    4,581    2,199    2,600    2,779 
Other loans:                         
Commercial and industrial   3,363    4,233    386    409    154 
Consumer   10    16    1         
Total nonaccrual other loans   3,373    4,249    387    409    154 
Total nonperforming loans   8,080    8,830    2,586    3,009    2,933 
Foreclosed real estate, net               964    1,130 
Total nonperforming assets (1)  $8,080   $8,830   $2,586   $3,973   $4,063 
Nonperforming loans to total loans   0.99%   1.22%   0.41%   0.51%   0.53%
Nonperforming assets to total assets   0.60    0.67    0.20    0.31    0.32 

 

(1) TDRs on accrual status not included above totaled $495,000, $50,000, $14.5 million, $14.8 million and $15.0 million at December 31, 2015, 2014, 2013, 2012, and 2011, respectively.

 

9
 

 

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,
   2015  2014  2013  2012  2011
   (Dollars in thousands)
Balance at beginning of year  $7,948   $7,459   $7,794   $7,764   $6,934 
                          
Charge-offs:                         
Residential   (24)   (31)   (80)   —     (2)
Commercial real estate       (350)   (20)   (195)   (175)
Home equity loans   (34)           (155)   —  
Commercial and industrial   (345)   (787)   (208)   (391)   (442)
Consumer   (73)   (55)   (33)   (27)   (21)
 Total charge-offs   (476)   (1,223)   (341)   (768)   (640)
                          
Recoveries:                         
Residential   4    1    1    3    6 
Commercial real estate           155    78    140 
Home equity loans   4            2    3 
Commercial and industrial   51    121    84    7    90 
Consumer   34    15    22    10    25 
 Total recoveries   93    137    262    100    264 
                          
Net charge-offs   (383)   (1,086)   (79)   (668)   (376)
                          
Provision (credit) for loan losses   1,275    1,575    (256)   698    1,206 
                          
Balance at end of year  $8,840   $7,948   $7,459   $7,794   $7,764 
                          
Total loans receivable (1)  $814,390   $723,416   $636,660   $593,944   $553,139 
                          
Average loans outstanding  $766,548   $683,064   $604,732   $573,642   $536,084 
                          
Allowance for loan losses as a percent of total loans receivable   1.09%   1.10%   1.17%   1.31%   1.40%
                          
Net loans charged-off as a percent of average loans outstanding   0.05    0.16    0.01    0.12    0.07 

 

 

(1) Does not include unearned premiums, deferred costs and fees, or 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 for which a specific allowance has been determined. 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.

 

10
 

 

In addition, management employs an independent third party to perform a semi-annual review of a sample of our commercial and industrial loans and owner occupied 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, 2015  December 31, 2014  December 31, 2013
   Specific  General  Total  Specific  General  Total  Specific  General  Total
   (In thousands)
Commercial real estate  $   $3,856   $3,856   $   $3,705   $3,705   $82   $3,468   $3,550 
Residential real estate:                                             
Residential       2,122    2,122        1,755    1,755        1,454    1,454 
Home Equity       309    309        298    298        253    253 
Commercial and industrial       2,485    2,485        2,174    2,174    15    2,176    2,191 
Consumer       22    22        15    15        13    13 
Unallocated       46    46        1    1        (2)   (2)
Total  $   $8,840   $8,840   $   $7,948   $7,948   $97   $7,362   $7,459 

 

   December 31, 2012  December 31, 2011
   Specific  General  Total  Specific  General  Total
   (In thousands)
Commercial real estate  $377   $3,029   $3,406   $449   $3,055   $3,504 
Residential real estate:                              
Residential   57    1,425    1,482    70    1,152    1,222 
Home Equity       264    264    39    270    309 
Commercial and industrial   104    2,063    2,167    39    2,673    2,712 
Consumer       13    13        17    17 
Unallocated       462    462             
Total  $538   $7,256   $7,794   $597   $7,167   $7,764 

 

11
 

 

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 2015.

 

For the year ended December 31, 2015, we recorded a provision of $1.3 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, 2015.

 

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, 2015  December 31, 2014  December 31, 2013
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  $3,856   $303,036    37.21%  $3,705   $278,405    38.49%  $3,550   $264,476    41.54%
Real estate mortgage:                                             
 Residential   2,122    298,052    36.60    1,755    237,436    32.82    1,454    198,686    31.21 
Home equity   309    43,512    5.34    298    40,305    5.57    253    35,371    5.56 
Commercial loans   2,485    168,256    20.66    2,174    165,728    22.91    2,191    135,555    21.29 
Consumer loans   22    1,534    0.19    15    1,542    0.21    13    2,572    0.40 
Unallocated   46        0.00    1        0.00    (2)       0.00 
Total allowances for loan losses  $8,840   $814,390    100.00%  $7,948   $723,416    100.00%  $7,459   $636,660    100.00%

 

   December 31, 2012  December 31, 2011
   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  $3,406   $245,764    41.38%    $3,504   $232,491    42.04%
Real estate mortgage:                              
 Residential   1,482    185,345    31.21    1,222    155,994    28.20 
Home equity   264    34,352    5.78    309    36,464    6.59 
Commercial loans   2,167    126,052    21.22    2,712    125,739    22.73 
Consumer loans   13    2,431    0.41    17    2,451    0.44 
Unallocated   462        0.00            0.00 
Total allowances for loan losses  $7,794   $593,944    100.00%    $7,764   $553,139    100.00%

 

Potential Problem Loans. We have no potential problem loans not reported as impaired at December 31, 2015.

 

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 National Mortgage Association and the Federal Home Loan Mortgage Corporation. We also invest in municipal bonds issued by cities and towns in Massachusetts that are rated as investment grade by Moody’s, Standard and Poor’s, or Fitch, the majority of which are also independently insured. These securities have maturities that do not exceed 15 years; however, many have earlier call dates. In addition, we have investments in Federal Home Loan Bank stock and mutual funds that invest only in securities allowed by the OCC.

 

12
 

 

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

 

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

 

   At December 31,
   2015  2014  2013
   Amortized   Fair   Amortized   Fair   Amortized   Fair
   Cost  Value  Cost  Value  Cost  Value
Available for sale:                              
Debt Securities:                              
Government sponsored enterprise obligations  $4,000   $3,951   $24,066   $23,979   $10,992   $10,700 
State and municipal bonds   2,794    2,801    16,472    17,034    18,240    18,897 
Corporate Bonds   21,176    21,136    25,711    26,223    26,716    27,389 
Total debt securities   27,970    27,888    66,249    67,236    55,948    56,986 
                               
Mortgage-backed securities:                              
Government sponsored mortgage-backed securities   138,186    135,959    139,637    139,213    135,981    132,372 
U.S. government guaranteed mortgage-backed securities   11,030    10,903    1,591    1,586    46,225    46,328 
Total mortgage-backed securities   149,216    146,862    141,228    140,799    182,206    178,700 
                               
Marketable equity securities:                              
Mutual funds   6,438    6,247    6,296    6,176    6,150    5,919 
Common and preferred stock   1,309    1,593    1,309    1,539    1,310    1,599 
Total marketable equity securities   7,747    7,840    7,605    7,715    7,460    7,518 
                               
Total available for sale securities  $184,933   $182,590   $215,082   $215,750   $245,614   $243,204 
                               
Held to maturity:                              
Debt Securities:                              
Government sponsored enterprise obligations  $30,146   $29,928   $43,477   $42,882   $43,405   $40,034 
State and municipal bonds   6,845    6,811    7,285    7,250    7,351    7,011 
Corporate Bonds   23,969    23,717    24,751    24,579    27,566    27,029 
Total debt securities   60,960    60,456    75,513    74,711    78,322    74,074 
                               
Mortgage-backed securities:                              
Government sponsored mortgage-backed securities   148,085    147,889    164,001    164,932    176,986    170,167 
U.S. government guaranteed mortgage-backed securities   29,174    29,274    38,566    37,993    39,705    38,314 
Total mortgage-backed securities   177,259    177,163    202,567    202,925    216,691    208,481 
                               
Total held to maturity securities  $238,219   $237,619   $278,080   $277,636   $295,013   $282,555 

 

 

13
 

 

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,
   2015   2014   2013 
   Amortized
Cost
   Percent of
Total
   Fair
Value
   Amortized
Cost
   Percent of
Total
   Fair
Value
   Amortized
Cost
   Percent of
Total
   Fair
Value
 
                                              
Available for sale:                                             
Government sponsored residential mortgage-backed  $138,186    42.32%  $135,959   $139,637    40.62%  $139,213   $135,981    34.09%  $132,372 
U.S. Government guaranteed residential mortgage-backed   11,030    3.38    10,903    1,591    0.46    1,586    46,225    11.59    46,328 
                                              
Total available for sale   149,216    45.70    146,862    141,228    41.08    140,799    182,206    45.68    178,700 
                                              
Held to maturity:                                             
Government sponsored residential mortgage-backed   148,085    45.36    147,889    164,001    47.70    164,932    176,986    44.37    170,167 
U.S. Government guaranteed residential mortgage-backed   29,174    8.94    29,274    38,566    11.22    37,993    39,705    9.95    38,314 
                                              
Total held to maturity   177,259    54.30    177,163    202,567    58.92    202,925    216,691    54.32    208,481 
                                              
Total  $326,475    100.00%  $324,025   $343,795    100.00%  $343,724   $398,897    100.00%  $387,181 

 

14
 

 

Securities Portfolio Maturities. The composition and maturities of the debt securities portfolio and the mortgage-backed securities portfolio at December 31, 2015 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
   Amortized
Cost
   Weighted
Average
Yield
   Amortized
Cost
   Weighted
Average
Yield
   Amortized
Cost
   Weighted
Average
Yield
   Amortized
Cost
   Weighted
Average
Yield
   Amortized
Cost
   Fair
Value
   Weighted
Average
Yield
 
   (Dollars in thousands) 
Debt securities available for sale:                                                       
Government-sponsored enterprise obligations  $    %  $4,000    1.41%  $    %  $    %  $4,000   $3,951    1.41%
State and municipal bonds           2,514    3.90    280    4.05            2,794    2,801    3.92 
Corporate Bonds           8,789    2.81    12,387    3.14            21,176    21,136    3.00 
                                                        
    Total debt securities available for sale           15,303    2.62    12,667    3.16            27,970    27,888    2.87 
                                                        
Mortgage-backed securities available for sale:                                                       
Government-sponsored residential mortgage-backed           2,322    1.00    13,187    1.00    122,677    2.34    138,186    135,959    2.32 
U.S. Government guaranteed residential mortgage-backed                           11,030    2.62    11,030    10,903    2.62 
    Total mortgage-backed securities available for sale           2,322    1.00    13,187    1.00    133,707    2.37    149,216    146,862    2.35 
                                                        
Total available for sale  $    %  $17,625    2.41%  $25,854    2.06%  $133,707    2.37%  $177,186   $174,750    2.43%
                                                        
Debt securities held to maturity:                                                       
U.S. Government and federal agency  $    %  $    %  $30,146    2.41%  $    %  $30,146   $29,928    2.41 
State and municipal   178    1.03    176    2.40    3,033    3.04    3,458    3.37    6,845    6,811    3.14 
Corporate Bonds           23,969    1.96                    23,969    23,717    1.96 
                                                        
    Total debt securities held to maturity   178    1.03    24,145    1.96    33,179    2.47    3,458    3.37    60,960    60,456    2.32%
                                                        
Mortgage-backed securities held to maturity:                                                       
Government-sponsored residential mortgage-backed           9,649    1.00    35,723    1.00    102,713    3.02    148,085    147,889    2.78 
U.S. Government guaranteed residential mortgage-backed                           29,174    2.49    29,174    29,274    2.49 
                                                        
    Total mortgage-backed securities held to maturity           9,649    1.00    35,723    1.00    131,887    2.90    177,259    177,163    2.73 
                                                        
Total held to maturity  $178    1.03  $33,794    1.69%  $68,902    1.71%  $135,345    2.91%  $238,219   $237,619    2.63%

 

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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 (consisting of passbook and statement savings accounts), interest-bearing demand accounts, noninterest-bearing demand accounts, money market accounts and time deposits. We have expanded the types of deposit products that we offer to include jumbo certificates of deposit, 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 noninterest-bearing demand accounts) represented 56.1% of total deposits on December 31, 2015 and 57.1% on December 31, 2014. At December 31, 2015 and December 31, 2014, time deposits with remaining terms to maturity of less than one year amounted to $240.7 million and $199.0 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, 2015, 2014 and 2013.

 

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
   2015  2014  2013
   Amount  Percent  Weighted Average Rates  Amount  Percent  Weighted Average Rates  Amount  Percent  Weighted Average Rates
   (Dollars in thousands)
                            
Demand deposits  $157,844    17.54%   %  $136,186    16.33%   %  $145,040    17.75%   %
Interest-bearing checking accounts   28,913    3.21    0.30    37,983    4.55    0.24    44,924    5.50    0.27 
Regular accounts   75,225    8.35    0.11    74,970    8.99    0.10    81,244    9.94    0.10 
Money market accounts   242,647    26.95    0.34    227,330    27.25    0.37    204,469    25.02    0.38 
Total non-certificated accounts   504,629    56.05    0.20    476,469    57.12    0.21    475,677    58.21    0.21 
                                              
Time certificates of deposit:                                             
Due within the year   240,662    26.73    1.02    198,972    23.85    1.02    212,901    26.06    1.18 
Over 1 year through 3 years   92,650    10.29    1.27    110,214    13.21    1.27    104,527    12.79    1.45 
Over 3 years   62,422    6.93    1.81    48,563    5.82    1.72    24,007    2.94    1.41 
Total certificated accounts   395,734    43.95    1.20    357,749    42.88    1.19    341,435    41.79    1.28 
                                              
Total  $900,363    100.00%   0.64%  $834,218    100.00%   0.63%  $817,112    100.00%   0.66%

 

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Certificate of Deposit Maturities. At December 31, 2015, we had $108.6 million in time certificates of deposit with balances of $250,000 and over maturing as follows:

 

Maturity Period   Amount    Weighted Average Rate
    (In thousands)      
            
 3 months or less   $15,105    0.56%
 Over 3 months through 6 months    38,231    1.10 
 Over 6 months through 12 months    28,116    1.07 
 Over 12 months    27,149    1.58 
 Total   $108,601    1.14%

 

Certificate of Deposit Balances by Rates. The following table sets forth, by interest rate ranges, information concerning our time certificates of deposit at the dates indicated.

 

   At December 31, 2015
   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  $98,988   $14,347   $8,656   $3,920   $125,911    31.82%
1.01% to 2.00%   141,385    51,791    17,856    52,381    263,413    66.56 
2.01% to 3.00%   289            6,121    6,410    1.62 
Total  $240,662   $66,138   $26,512   $62,422   $395,734    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 $93.8 million at December 31, 2015 and $62.8 million at December 31, 2014. We have an “Ideal Way” line of credit with the FHLBB for $9.5 million for the years ended December 31, 2015 and 2014. 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, 2015. At December 31, 2014, there was a $1.8 million advance outstanding under this line.

 

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, 2015 and 2014, such repurchase agreement borrowings totaled $34.7 million and $31.2 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, 2015 and 2014, 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, 2015, we had $147.4 million in long-term debt with the FHLBB and $5.9 million in long-term customer repurchase agreements. This compares to $216.7 million in FHLBB advances, $10.0 million in securities sold under repurchase agreements with an approved broker-dealer and $5.8 million in long-term customer repurchase agreements at December 31, 2014. During 2015, we prepaid $10.0 million in repurchase agreements with a rate of 2.65% and incurred a prepayment expense of $593,000. In addition, we prepaid FHLBB borrowings in the amount of $19.0 million with a weighted average rate of 2.87% and incurred a prepayment expense of $707,000.

 

Supervision and Regulation

 

Westfield Financial 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, consumers and the U.S. banking system. This system is not designed to protect investors in savings and loan holding companies, such as Westfield Financial.

 

Overview. Westfield Financial is a separate and distinct legal entity from the Bank. Westfield Financial is a 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 Westfield Financial and its non-savings association subsidiaries. Westfield Financial 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. Westfield Financial is traded on the NASDAQ under the ticker symbol, “WFD,” 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 OCC as its chartering authority and primary federal regulator. 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 Westfield Financial and the Bank are subject to federal consumer protection laws and implementing regulations promulgated by the Consumer Financial Protection Bureau (the “CFPB”). Westfield Financial 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 Westfield Financial and the Bank are subject to federal and state laws and regulations, including regulations of the FRB and the OCC, respectively.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) has significantly changed the financial regulatory landscape in the U.S. Several provisions of the Dodd-Frank Act are subject to further rulemaking, guidance and interpretation by the federal banking agencies. As a result, management cannot predict the ultimate impact of the Dodd-Frank Act or the extent to which it could affect operations of Westfield Financial and the Bank. Management will allocate resources to ensure compliance with all applicable laws and regulations, including the Dodd-Frank Act and its implementing rules, which may increase our costs of operations and adversely impact our earnings.

 

Set forth below is a description of the significant elements of the laws and regulations applicable to Westfield Financial 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 Westfield Financial may have a material effect on the results of Westfield Financial and its subsidiaries.

 

Federal Savings and Loan Holding Company Regulation. Westfield Financial 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 (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 solely determined by the FRB). Activities that are financial in nature include, among others, securities underwriting and dealing, insurance underwriting and making merchant banking investments.

 

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Mergers and Acquisitions. The HOLA, the federal Bank Merger Act and other federal and state statutes regulate direct and indirect acquisitions of 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. 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 and managerial strength to their insured depository institution subsidiaries. As a result, Westfield Financial is expected to commit resources to support the Bank, including at times when Westfield Financial 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 Westfield Financial’s liquidity is dividends from the Bank. The OCC imposes various restrictions or 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.

 

Westfield Financial 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 and Prompt Corrective Action. 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, including the requirements of Section 939A to remove references to credit ratings from the federal banking agencies’ rules.

 

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Prior to the enactment of the Dodd-Frank Act, savings and loan holding companies were not subject to regulatory capital requirements. Pursuant to the Dodd-Frank Act, Westfield Financial, 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 Westfield Financial, 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 Westfield Financial 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.

 

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.

 

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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 will begin on January 1, 2016 at the 0.625% level and increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.

 

Westfield Financial is in compliance with the targeted capital ratios under the Capital Rules at December 31, 2015. The Bank is subject to the Capital Rules on the same phase-in schedule as Westfield Financial. We believe that Westfield Financial and the Bank will remain in compliance with the targeted capital ratios as such requirements are phased in.

 

With respect to the Bank, the Capital Rules revised the PCA regulations adopted pursuant to Section 38 of the Federal Deposit Insurance Act (“FDIA”), by: (i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the provision that allowed a bank with a composite supervisory rating of 1 to have a 3% leverage ratio and still be considered adequately capitalized. The Capital Rules did not change the total risk-based capital requirement for any PCA category.

 

The federal banking agencies have established by regulation, for each capital measure, the levels at which an insured institution is “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” The federal banking agencies are required to take prompt corrective action (“PCA”) with respect to insured institutions that fall below the “adequately capitalized” level. Any insured depository institution that falls below the “adequately capitalized” level must submit a capital restoration plan, and, if its capital levels further decline or do not increase, will face increased scrutiny and more stringent supervisory action. As of December 31, 2015, the most recent notification from the OCC categorized the Bank as “well-capitalized” under the PCA framework.

 

Volcker Rule. Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, restricts the ability of banking entities, such as Westfield Financial, 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. Compliance with the Volcker Rule is generally required by July 21, 2017. Given the size and the scope of Westfield Financial’s activities, it does not believe that the implementation of the Volcker Rule will have a significant effect on its financial statements.

 

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, 2015, we were in compliance with these limitations on loans to one borrower.

 

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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 Westfield Financial. The Bank’s latest CRA rating was “Outstanding.”

 

Consumer Protection and CFPB Supervision. The Dodd-Frank Act centralized responsibility for consumer financial protection by creating the CFPB, an independent federal agency charged with responsibility for implementing, enforcing, and examining compliance with federal consumer financial laws. As Westfield Financial is smaller 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.

 

Westfield Financial 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.

 

On January 10, 2013, the CFPB issued a final rule implementing the ability-to-repay and qualified mortgage (“QM”) provisions of the Truth in Lending Act, as amended by the Dodd-Frank Act (the “QM Rule”). The ability-to-repay provision requires creditors to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending the credit based on a number of factors and consideration of financial information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the definition of “qualified mortgage” are entitled to a presumption that the lender satisfied the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor for prime loans meeting the QM requirements, and a rebuttable presumption for higher-priced/subprime loans meeting the QM requirements. The definition of a “qualified mortgage” incorporates the statutory requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet GSE, FHA and VA underwriting guidelines may, for a period not to exceed seven years, meet the QM definition without being subject to the 43% debt-to-income limits. The QM Rule became effective January 10, 2014.

 

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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 deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund (“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.

 

In 2011, the FDIC issued rules to implement changes to the deposit insurance assessment base and risk-based assessments mandated by the Dodd-Frank Act. The base for insurance assessments changed from domestic deposits to consolidated assets less tangible equity. Assessment rates are calculated using formulas that take into account the risk of the institution being assessed.

 

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.

 

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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, 2015. 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 Laws. Federal law and certain state laws currently contain client privacy protection provisions. These provisions limit the ability of insured depository institutions and other financial institutions to disclose non-public information about consumers to affiliated companies and non-affiliated third parties. These rules require disclosure of privacy policies to clients 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. Pursuant to the Gramm-Leach-Bliley Act and certain state laws companies are required to notify clients of security breaches resulting in unauthorized access to their personal information.

 

USA PATRIOT Act. 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. 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. Westfield Financial 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.

 

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.

 

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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 authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules requiring the reporting of incentive-based compensation and prohibiting excessive incentive-based compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded. In April 2011, the FRB, along with other federal financial regulators, issued a joint notice of proposed rulemaking that would implement those requirements. This rule has not yet been finalized.

 

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, Westfield Financial’s shareholders voted on a non-binding, advisory basis to hold a non-binding, advisory vote on the compensation of named executive officers of Westfield Financial annually. In light of the results, the Westfield Financial Board of Directors determined to hold the vote annually.

 

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 Westfield Financial 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. Westfield Financial 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 Westfield Financial. 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, 2015, the fair value of our securities portfolio was approximately $420.2 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 national and local economy may affect our future growth possibilities. Our current market area is principally located in Hampden County, Massachusetts. Our future growth opportunities depend on the growth and stability of our regional economy and our ability to expand our market area. The continued 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.

 

Dramatic declines in the housing market, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of assets by many financial institutions. In addition, the values of real estate collateral supporting many loans have declined and may continue to decline. The ongoing economic recession, reduced availability of commercial credit and increasing unemployment have negatively impacted the credit performance of commercial and consumer credit, resulting in additional write-downs. Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other. This market turmoil and tightening of credit has led to increased commercial and consumer delinquencies, lack of customer confidence, increased market volatility and widespread reduction in general business activity. We do not believe these difficult conditions are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market and economic conditions on us, our customers and the other financial institutions in our market. As a result, we may experience increases in foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to funds and decrease in our stock price.

 

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.

 

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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. Financial regulatory authorities have significant discretion regarding the supervision, regulation and enforcement of banking laws and regulations.

 

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. Recent changes to the legal and regulatory framework have significantly altered the laws and regulations under which we operate. These changes 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. The Dodd-Frank Act and implementing regulations could also have adverse implications on the financial industry, the competitive environment and our ability to conduct business. 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.

 

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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 Westfield Financial are each subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital which each of the Bank and Westfield Financial 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.

 

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 13 banking offices and 12 off-site ATMs. The following table sets forth certain information regarding our properties as of December 31, 2015. As of this date, the properties and leasehold improvements owned by us had an aggregate net book value of $13.6 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., Westfield, MA Owned 1964 N/A
       
Loan Center:      
9-13 Chapel St., Westfield, MA Leased 2015 2020
       
Training and Conference Center:      
136 Elm St., Westfield, MA Leased 2011 2016
       
Location Ownership Year Opened Year of Lease or
License Expiration
       
Commercial Lending & Middle Market:      
       
1500 Main St., Springfield, MA Leased 2014 2019
       
Branch Offices:
       
206 Park St., West Springfield, MA Owned 1957 N/A
       
655 Main St., Agawam, MA Owned 1968 N/A
       
26 Arnold St., Westfield, MA Owned 1976 N/A
       
300 Southampton Rd., Westfield, MA Owned 1987 N/A
       
462 College Highway, Southwick, MA Owned 1990 N/A
       
382 North Main St., E. Longmeadow, MA Leased 1997 2017
       
1500 Main St., Springfield, MA Leased 2006 2016
       
1642 Northampton St., Holyoke, MA Owned 2001 N/A
       
560 East Main St., Westfield, MA Owned 2007 N/A
       
237 South Westfield St., Feeding Hills, MA Leased 2009 2038
       
10 Hartford Avenue, Granby, CT Leased 2013 2018
       
47 Palomba Drive, Enfield, CT Leased 2014 2024

 

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

 

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.

 

31
 

 

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 “WFD.” Prior to August 21, 2007, we were listed on the American Stock Exchange. At December 31, 2015, there were 18,267,747 shares of common stock issued and outstanding, and there were approximately 2,019 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
2015   High ($)   Low ($)   ($)
Fourth Quarter ended December 31, 2015   8.49   7.30   0.03
Third Quarter ended September 30, 2015   7.82   7.06   0.03
Second Quarter ended June 30, 2015   8.02   7.12   0.03
First Quarter ended March 31, 2015   7.74   7.05   0.03

  

    Price Per Share   Cash
Dividends
Declared
2014   High ($)   Low ($)   ($)
Fourth Quarter ended December 31, 2014   7.55   6.88   0.03
Third Quarter ended September 30, 2014   7.68   7.00   0.06
Second Quarter ended June 30, 2014   7.58   6.85   0.06
First Quarter ended March 31, 2014   8.00   7.10   0.06

 

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 by 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.

 

32
 

 

Recent Sales of Unregistered Securities

 

There were no sales by us of unregistered securities during the year ended December 31, 2015.

 

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, 2015.

 

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
 
October 1 - 31, 2015    61,835(2)   7.82    61,266    552,888(1)
November 1 - 30, 2015    43,558    7.82    43,558    509,330 
December 1 - 31, 2015    24,905(3)   7.90    24,662    484,668 
Total    130,298    7.84    129,486    484,668 

 

(1)On June 24, 2015, the Board of Directors announced a renewal of the repurchase program under which the Company may purchase up to 711,733 shares of its outstanding common stock, to be affected via a combination of Rule 10b5-1 plans and discretionary share repurchases. This plan began July 24, 2015 and as of December 31, 2015, there were 484,668 shares remaining to be purchased under the new repurchase program.

 

(2)Number includes repurchase of 569 shares from certain executives as payment of their tax obligations for shares of restricted stock that vested on October 20, 2015, under our 2007 Recognition and Retention Plan. These repurchases were reported by each reporting person on October 20, 2015.

 

(3)Number includes open-market repurchase of 24,662 shares with an average price of $7.90 and 243 shares with an average price of $7.34. These shares were repurchased for forfeited ESOP shares to offset our ESOP annual contribution.

 

33
 

 

Performance Graph

 

The following graph compares our total cumulative shareholder return by an investor who invested $100.00 on December 31, 2010 to December 31, 2015, to the total return by an investor who invested $100.00 in each of the Russell 2000 Index and the NASDAQ Bank Index for the same period.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

Among Westfield Financial, Inc., The Russell 2000 Index and the

NASDAQ Bank Index

 

(BAR CHART) 

 

    Period Ending  
Index 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15
Westfield Financial, Inc. 100.00 85.22 88.82 95.35 96.59 112.30
Russell 2000 100.00 95.82 111.49 154.78 162.35 155.18
NASDAQ Bank 100.00 89.50 106.23 150.55 157.95 171.92

 

34
 

 

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,
   2015  2014  2013  2012  2011
   (In thousands)
Selected Financial Condition Data:                         
Total assets  $1,339,930   $1,320,096   $1,276,841   $1,301,462   $1,263,264 
Loans, net (1)   809,373    716,738    629,968    587,124    546,392 
Securities available for sale   182,590    215,750    243,204    621,507    617,537 
Securities held to maturity (2)   238,219    278,080    295,013         
Deposits   900,363    834,218    817,112    753,413    732,958 
Short-term borrowings   128,407    93,997    48,197    69,934    52,985 
Long-term debt   153,358    232,479    248,377    278,861    247,320 
Total shareholders’ equity   139,466    142,543    154,144    189,187    218,988 
Allowance for loan losses   8,840    7,948    7,459    7,794    7,764 
Nonperforming loans   8,080    8,830    2,586    3,009    2,933 
                          
   For the Years Ended December 31,
    2015    2014    2013    2012    2011 
   (In thousands, except per share data)
Selected Operating Data:                         
Interest and dividend income  $42,476   $40,991   $41,031   $43,104   $45,005 
Interest expense   10,794    9,923    10,290    12,663    14,467 
Net interest and dividend income   31,682    31,068    30,741    30,441    30,538 
Provision for loan losses   1,275    1,575    (256)   698    1,206 
Net interest and dividend income after provision for loan losses   30,407    29,493    30,997    29,743    29,332 
Total noninterest income   4,865    4,460    4,272    5,990    3,806 
Total noninterest expense   27,433    25,909    26,642    27,223    25,958 
Income before income taxes   7,839    8,044    8,627    8,510    7,180 
Income taxes   2,124    1,882    1,871    2,256    1,306 
Net income  $5,715   $6,162   $6,756   $6,254   $5,874 
                          
Basic earnings per share  $0.33   $0.34   $0.34   $0.26   $0.22 
Diluted earnings per share  $0.33   $0.34   $0.34   $0.26   $0.22 
                          
Dividends per share paid  $0.12   $0.21   $0.29   $0.44   $0.54 

 

(1)Loans are shown net of deferred loan fees and costs, unearned premiums, allowance for loan losses and unadvanced loan funds.

(2)During 2013, securities with an amortized cost of $304.9 million were reclassified from available-for-sale to held-to-maturity.

 

35
 

 

   At or for the Years Ended December 31,
   2015  2014  2013  2012  2011
                
Selected Financial Ratios and                         
Other Data(1)                         
Performance Ratios:                         
Return on average assets   0.42%   0.48%   0.53%   0.48%   0.47%
Return on average equity   4.10    4.18    4.04    2.97    2.65 
Average equity to average assets   10.35    11.42    13.02    16.17    17.79 
Equity to total assets at end of year   10.41    10.80    12.07    14.54    17.34 
Interest rate spread   2.35    2.42    2.39    2.24    2.34 
Net interest margin (2)   2.53    2.60    2.58    2.53    2.67 
Average interest-earning assets to average interest-earning liabilities   121.47    121.90    122.92    126.80    127.30 
Total noninterest expense to average assets   2.04    2.01    2.07    2.09    2.08 
Efficiency ratio (3)   75.49    73.59    76.79    78.81    76.22 
Dividend payout ratio   0.36    0.62    0.85    1.69    2.45 
Regulatory Capital Ratios:                         
Total risk-based capital   17.20    18.68    21.17    25.41    31.60 
Tier 1 risk-based capital   16.23    17.73    20.21    24.33    30.46 
Common equity tier 1 capital   16.23                 
Tier 1 leverage capital   11.16    11.30    12.28    13.91    16.76 
Asset Quality Ratios:                         
Nonperforming loans to total loans   0.99    1.22    0.41    0.51    0.53 
Nonperforming assets to total assets   0.60    0.67    0.20    0.31    0.32 
Allowance for loan losses to total loans   1.09    1.10    1.17    1.31    1.40 
Allowance for loan losses to nonperforming assets   1.09    0.90    2.88    1.96    1.91 
Number of:                         
Banking offices   13    13    12    11    11 
Full-time equivalent employees   189    183    191    199    180 

 

 

(1) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios.

 

(2) Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest earning assets.

 

(3) The efficiency ratio represents the ratio of operating expenses divided by the sum of net interest and dividend income and noninterest income excluding gains and losses on sale and losses on other-than-temporary impairment of securities and gain or loss on sale of premises and equipment.

 

36

 

 

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; and

 

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

 

You should read the following financial results for the year ended December 31, 2015 in the context of this strategy.

 

·Net income was $5.7 million, or $0.33 per diluted share, for the year ended December 31, 2015, compared to $6.2 million, or $0.34 per diluted share, for the same period in 2014. The results for the year ended December 31, 2015 showed increases in net interest and dividend income and noninterest income, however, these were offset by an increase in noninterest expense.

 

·We had provision for loan loss expense of $1.3 million for the year ended December 31, 2015, compared to $1.6 million for the year ended December 31, 2014.  The allowance was $8.8 million for December 31, 2015 and $7.9 million for December 31, 2014, or 1.08% and 1.10% of total loans, respectively.

 

·Net interest and dividend income increased $614,000 to $31.7 million for the year ended December 31, 2015, compared to $31.1 million for the year ended December 31, 2014 primarily due to a $1.5 million increase in interest income resulting from an $83.5 million increase in the average balance of loans from the comparable 2014 period. Noninterest income increased $405,000 to $4.9 million for the year ended December 31, 2015, compared to $4.5 million for the same period in 2014. The year ended December 31, 2015 included a one-time $130,000 credit pertaining to a vendor contract renegotiation.

 

·Noninterest expense increased $1.5 million to $27.4 million at December 31, 2015, compared to $25.9 million at December 31, 2014. The increase in noninterest expense for the year ended December 31, 2015 was primarily due to an increase in salaries and benefits of $701,000 resulting from an increase in employee benefits costs.

 

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, noninterest income, and noninterest expense. Noninterest expense includes salaries and employee benefits, occupancy expenses and other general and administrative expenses. Noninterest income includes service fees and charges, income on bank-owned life insurance, and gains (losses) on securities.

 

37

 

 

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 valuation 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 an 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 the loan is considered impaired. Any unpaid amounts previously accrued on these loans are reversed from income. Subsequent cash receipts are applied to the outstanding principal balance or to interest income if, in the judgment of management, collection of the principal balance is not in question. Loans are returned to accrual status when they become current as to both principal and interest and 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.

 

38

 

 

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, 2015, 2014 and 2013 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.

 

39

 

 

                                     
               For the Years Ended December 31,             
   2015   2014   2013 
   Average
Balance
   Interest   Avg Yield/
Cost
   Average
Balance
   Interest   Avg Yield/
Cost
   Average
Balance
    Interest   Avg Yield/
Cost
 
   (Dollars in thousands) 
ASSETS:                                             
Interest-earning assets                                             
Loans(1)(2)  $766,548   $30,646    4.00%  $683,064   $27,989    4.10%  $604,732   $25,558    4.23%
Securities(2)   472,616    11,832    2.50    504,532    13,299    2.64    584,029    16,027    2.74 
Other investments - at cost   16,509    396    2.40    16,597    246    1.48    17,258    93    0.54 
Short-term investments(3)   12,067    18    0.15    13,749    13    0.09    9,790    9    0.09 
Total interest-earning assets   1,267,740    42,892    3.38    1,217,942    41,547    3.41    1,215,809    41,687    3.43 
Total noninterest-earning assets   78,938              73,334              69,753           
                                              
Total assets  $1,346,678             $1,291,276             $1,285,562           
                                              
LIABILITIES AND EQUITY:                                             
Interest-bearing liabilities                                             
Interest-bearing checking  $34,351    79    0.23   $40,412    99    0.24   $46,982    134    0.29 
Savings accounts   75,691    79    0.10    79,086    80    0.10    87,535    119    0.14 
Money market accounts   237,782    830    0.35    221,391    846    0.38    196,265    763    0.39 
Time certificates of deposit   390,155    4,583    1.17    343,190    4,152    1.21    330,510    4,509    1.36 
Total interest-bearing deposits   737,979    5,571         684,079    5,177         661,292    5,525      
Short-term borrowings and long-term debt   305,646    5,223    1.71    315,089    4,746    1.51    327,783    4,765    1.45 
Interest-bearing liabilities   1,043,625    10,794    1.03    999,168    9,923    0.99    989,075    10,290    1.04 
Noninterest-bearing deposits   145,519              132,923              118,749           
Other noninterest-bearing liabilities   18,098              11,692              10,373           
Total noninterest-bearing liabilities   163,617              144,615              129,122           
                                              
Total liabilities   1,207,242              1,143,783              1,118,197           
Total equity   139,436              147,493              167,365           
Total liabilities and equity  $1,346,678             $1,291,276             $1,285,562           
Less: Tax-equivalent adjustment(2)        (416)             (556)             (656)     
Net interest and dividend income       $31,682             $31,068             $30,741      
Net interest rate spread(4)             2.35%             2.42%             2.39%
Net interest margin(5)             2.53%             2.60%             2.58%
Ratio of average interest-earning assets to average interest-bearing liabilities             121.47              121.90              122.92 

 

 

(1)Loans, including non-accrual loans, are net of deferred loan origination costs, and unadvanced funds and allowance for loan losses.

(2)Securities income, loan income and net interest income are presented on a tax-equivalent basis using a tax rate of 34%. The tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported in the statements of income.

(3)Short-term investments include federal funds sold.

(4)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(5)Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets.

 

40
 

 

Rate/Volume Analysis. The following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest and dividend income and interest expense during the periods indicated. Information is provided in each category with respect to: (1) interest income changes attributable to changes in volume (changes in volume multiplied by prior rate); (2) interest income changes attributable to changes in rate (changes in rate multiplied by prior volume); and (3) the net change.

 

The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

 

   Year Ended December 31, 2015 Compared to Year
Ended December 31, 2014
   Year Ended December 31, 2014 Compared to Year
Ended December 31, 2013
 
   Increase (Decrease) Due to        Increase (Decrease) Due to      
   Volume   Rate   Net   Volume   Rate   Net 
Interest-earning assets  (In thousands)   (In thousands) 
Loans (1)  $3,421   $(764)  $2,657   $3,311   $(880)  $2,431 
Investment securities (1)   (841)   (626)   (1,467)   (2,182)   (546)   (2,728)
Other investments - at cost   (1)   151    150    (4)   157    153 
Short-term investments   (2)   7    5    4        4 
Total interest-earning assets   2,577    (1,232)   1,345    1,129    (1,269)   (140)
                               
Interest-bearing liabilities                              
NOW accounts   (15)   (5)   (20)   (19)   (16)   (35)
Savings accounts   (3)   2    (1)   (11)   (28)   (39)
Money market accounts   63    (79)   (16)   98    (15)   83 
Time deposits   568    (137)   431    173    (530)   (357)
Short-term borrowing and long-term debt   (142)   619    477    (185)   166    (19)
Total interest-bearing liabilities   471    400    871    56    (423)   (367)
Change in net interest and dividend income  $2,106   $(1,632)  $474   $1,073   $(846)  $227 

 

 

(1)Securities and loan income and net interest income are presented on a tax-equivalent basis using a tax rate of 34%. The tax-equivalent adjustment is deducted from tax-equivalent net interest income to agree to the amount reported in the statements of income.

 

41
 

 

Comparison of Financial Condition at December 31, 2015 and December 31, 2014

 

Total assets increased $19.8 million to $1.3 billion at December 31, 2015. Net loans increased by $92.7 million to $809.4 million at December 31, 2015 from $716.7 million at December 31, 2014. The increase in loans was partially offset by a $72.9 million decrease in the securities portfolio to $435.9 million at December 31, 2015. The decrease in securities from December 2014 was primarily due to the sales of securities to fund loan growth.

 

Net loans increased by $92.7 million to $809.4 million at December 31, 2015 from $716.7 million at December 31, 2014. The increase in net loans was primarily the result of increases in residential real estate loans, commercial real estate loans and commercial and industrial loans. Residential real estate loans increased $63.9 million to $341.6 million at December 31, 2015 from $277.7 million at December 31, 2014. We purchased $88.6 million in residential loans from a New England-based bank as a means of supplementing our loan growth. In addition, we purchased $2.1 million in residential loans from a third-party mortgage company within and contiguous to our market area.

 

Commercial real estate loans increased $24.6 million to $303.0 million at December 31, 2015 from $278.4 million at December 31, 2014. Non-owner occupied commercial real estate loans totaled $189.2 million at December 31, 2015 and $169.1 million at December 31, 2014, while owner occupied commercial real estate loans totaled $113.8 million at December 31, 2015 and $109.3 million at December 31, 2014. The growth in commercial real estate loans was due to executing on our strategy of increasing loan originations.

 

Commercial and industrial loans increased $2.6 million to $168.3 million at December 31, 2015 from $165.7 million at December 31, 2014. The growth in commercial and industrial loans was the result of new loan originations and customers increasing balances on their lines of credit, which were both partially offset by normal loan payments and payoffs.

 

Securities decreased $72.9 million to $435.9 million at December 31, 2015 from $508.8 million at December 31, 2014. The securities portfolio is primarily comprised of mortgage-backed securities, which totaled $326.5 million at December 31, 2015 and $343.4 million at December 31, 2014, the majority of which were issued by government-sponsored enterprises such as the Federal National Mortgage Association. There were no privately issued mortgage-backed securities in the portfolio at December 31, 2015 and 2014.

 

Debt securities issued by government-sponsored enterprises were $34.1 million at December 31, 2015 and $67.5 million at December 31, 2014. Securities issued by government-sponsored enterprises include bonds issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Corporate bonds totaled $45.1 million and $51.0 million at December 31, 2015 and 2014, respectively. We began investing in investment-grade corporate bonds during the second quarter of 2012 as a means of diversifying our securities portfolio while also increasing the average yield on the portfolio. We also invest in municipal bonds primarily issued by cities and towns in Massachusetts that are rated as investment grade by Moody’s, Standard & Poor’s or Fitch, and the majority of which are also independently insured. Municipal bonds were $9.6 million at December 31, 2015 and $24.3 million at December 31, 2014. In addition, we have investments in FHLBB stock, common stock and mutual funds that invest only in securities allowed by the OCC.

 

Total deposits increased $66.2 million to $900.4 million at December 31, 2015, compared to $834.2 million at December 31, 2014. Time deposits increased $38.0 million to $395.7 million at December 31, 2015 from $357.7 million at December 31, 2014. Money market accounts increased $15.3 million to $242.6 million at December 31, 2015 from $227.3 million at December 31, 2014. Checking accounts increased $12.6 million to $186.8 million at December 31, 2015 from $174.2 million at December 31, 2014. Regular savings accounts increased $200,000 to $75.2 million at December 31, 2015 from $75.0 million at December 31, 2014.

  

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Short-term borrowings increased $34.4 million to $128.4 million at December 31, 2015 from $94.0 million at December 31, 2014. Short-term borrowings are made up of FHLBB 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 from the FHLBB were $93.8 million and $62.8 million at December 31, 2015 and 2014, respectively. Customer repurchase agreements increased $3.5 million to $34.7 million at December 31, 2015 from $31.2 million at December 31, 2014. A customer repurchase agreement is an agreement by us to sell to and repurchase from the customer an interest in specific securities issued by or guaranteed by the United States government or government-sponsored enterprises. This transaction settles immediately on a same day basis in immediately available funds. Interest paid is commensurate with other products of equal interest and credit risk.

 

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, 2015, we had $147.4 million in long-term debt with the FHLBB and $5.9 million in customer repurchase agreements. This compares to $216.7 million in FHLBB advances, $10.0 million in securities sold under repurchase agreements and $5.8 million in customer repurchase agreements at December 31, 2014. The decrease of $79.3 million in long-term debt for the year ended December 31, 2015 was primarily due to maturing FHLBB long-term advances that were repaid and not renewed. In addition, during 2015, we prepaid $29.0 million in FHLBB borrowings with a weighted average rate of 2.87% and incurred a prepayment expense of $707,000. We also prepaid $10.0 million in repurchase agreements with a rate of 2.65% and incurred a prepayment expense of $593,000.

 

At December 31, 2015 and 2014, we had forward starting interest rate swap contracts with a combined notional value of $107.5 million and $155.0 million, respectively. The swap contracts have start dates through the third quarter 2016 and have durations ranging from four to six years. This hedge strategy converts the variable rate of interest on certain FHLB advances to fixed interest rates, thereby protecting us from floating interest rate variability. On a stand-alone basis, the interest rate swaps introduce potential future volatility in tangible book value and accumulated other comprehensive income (“AOCI”); however, the valuation of the swaps is expected to change in the opposite direction of the valuations on the available-for-sale securities portfolio. This is consistent with our objective to reduce total volatility in tangible book value and AOCI. During the second quarter of 2015, we terminated a forward-starting interest rate swap with a notional amount of $35.0 million and incurred a termination fee of $1.6 million, and in the fourth quarter of 2015, we terminated a forward-starting interest rate swap with a notional amount of $12.5 million and incurred a termination fee of $847,000. Both termination fees will be amortized monthly over a five-year period as a component of interest expense and other comprehensive income over the term of the previously hedged borrowing.

 

Shareholders’ equity was $139.5 million and $142.5 million, which represented 10.4% and 10.8% of total assets at December 31, 2015 and December 31, 2014, respectively. The decrease in shareholders’ equity reflects the repurchase of 515,604 shares of our common stock at a cost of $3.9 million pursuant to our stock repurchase program, a decrease in accumulated other comprehensive income of $3.5 million primarily due to the change in market values of securities and interest rate swaps and the payment of regular dividends amounting to $2.1 million. This was partially offset by net income of $5.7 million for the year ended December 31, 2015 and an increase of $715,000 related to the recognition of share-based compensation.

 

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Comparison of Operating Results for Years Ended December 31, 2015 and 2014

 

General. Net income for the year ended December 31, 2015 was $5.7 million, or $0.33 per diluted share, compared to $6.2 million, or $0.34 per diluted share, for the same period in 2014.

 

Interest and Dividend Income. Total interest and dividend income increased $1.5 million to $42.5 million for the year ended December 31, 2015 compared to $41.0 million for the same period in 2014.

 

The increase in interest and dividend income was primarily the result of executing on our strategy to improve the balance sheet mix by decreasing securities while increasing loans. At December 31, 2015, the average balance of loans increased $83.5 million to $766.5 million, while the average balance of securities decreased $31.9 million to $472.6 million. The balance of interest-earning assets increased $49.8 million to $1.3 billion for the year ended December 31, 2015, compared to $1.2 billion for the same period in 2014. The average yield on interest-earning assets, on a tax-equivalent basis, decreased 3 basis points to 3.38% for the year ended December 31, 2015 from 3.41% for the same period in 2014.

 

Interest income on loans increased $2.7 million to $30.5 million for the year ended December 31, 2015 from $27.8 million for the year ended December 31, 2014. The tax-equivalent yield on loans decreased 10 basis points from 4.10% for the year 2014 to 4.00% for the same period in 2015. The increase in interest income on loans for the year ended December 31, 2015 was due to the average balance of loans increasing $83.5 million in executing our strategy to improve the balance sheet mix by reinvesting cash flows from securities sales and pay downs into loans.

 

Interest income on securities decreased $1.4 million to $11.5 million for the year ended December 31, 2015 from $12.9 million for the year ended December 31, 2014. The tax-equivalent yield on securities decreased 14 basis points from 2.64% for the year 2014 to 2.50% for the same period in 2015. The decrease in interest income and tax-equivalent yield on securities for the year ended December 31, 2014 was primarily due to the average balance of securities decreasing $31.9 million in executing our strategy to improve the balance sheet mix by reinvesting cash flows from securities sales and pay downs into loans.

 

Interest Expense. Interest expense for the year ended December 31, 2015 increased $871,000 to $10.8 million from $9.9 million for the comparable 2014 period. This was attributable to a 4 basis point increase in the average cost of interest-bearing liabilities to 1.03% for the year ended December 31, 2015 from 0.99% in 2014. The increase in the cost of interest-bearing liabilities was primarily due to an increase in rates on short-term borrowings and long-term debt along with an increase in the average volume of time deposits. The cost of short-term borrowings and long-term debt increased 20 basis points to 1.71% for the year ended December 31, 2015 from 1.51% for the year ended December 31, 2014, primarily due to the conversion of variable rates of interest on certain FHLBB advances to fixed interest rates in conjunction with our interest rate swaps. In addition, the average balance of time deposits increased $47.0 million to $390.2 million at December 31, 2015 from $343.2 million for the comparable 2014 period. Interest expense on time deposits increased $431,000 to $4.6 million for the year ended December 31, 2015 from $4.2 million for the comparable 2014 period.

 

Net Interest and Dividend Income. Net interest and dividend income increased $614,000 to $31.7 million for the year ended December 31, 2015 as compared to $31.1 million for same period in 2014. The net interest margin, on a tax-equivalent basis, was 2.53% and 2.60% for the years ended December 31, 2015 and 2014, respectively. The increase in net interest income was primarily driven by an increase in the volume of our average interest-earnings assets, which was partially offset by an increase in the average volume of and cost of interest-bearing liabilities.

 

Provision for Loan Losses. The provision for loan losses is reviewed by management based upon our evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as new loan products, credit quality trends (including trends in nonperforming loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectability of the loan portfolio.

 

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The amount that we provided for loan losses during the year ended December 31, 2015 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio, described in detail below, include increases in the balances of commercial real estate loans and residential real estate loans, the downgrade of two commercial loan relationships to a higher risk profile for allowance purposes during the fourth quarter of 2015 and a decrease in net charge-offs. After evaluating these factors, we recorded a provision for loan losses of $1.3 million for the year ended December 31, 2015, compared to $1.6 million for the same period in 2014. The allowance was $8.8 million at December 31, 2015 and $7.9 million at December 31, 2014, respectively. The allowance for loan losses as a percentage of total loans was 1.08% and 1.10% at December 31, 2015 and 2014, respectively.

 

Commercial real estate loans increased $24.6 million to $303.0 million at December 31, 2015 from $278.4 million at December 31, 2014. Residential real estate loans increased $60.6 million to $298.1 million at December 31, 2015. We consider residential real estate loans to contain less credit risk and market risk than commercial and industrial loans and commercial real estate. In addition, although still performing, two commercial loan relationships were downgraded to a higher risk profile for allowance purposes that resulted in an additional $230,000 in provision expense for the fourth quarter of 2015.

 

Net charge-offs were $383,000 for the year ended December 31, 2015. This comprised charge-offs of $476,000 for the year ended December 31, 2015, offset by recoveries of $93,000. Net charge-offs were $1.1 million for the year ended December 31, 2014. This comprised charge-offs of $1.2 million for the year ended December 31, 2014, offset by recoveries of $137,000.

 

Although management believes it has established and maintained the allowance for loan losses at appropriate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment.

 

Noninterest Income. Noninterest income increased $405,000 to $4.9 million for the year ended December 31, 2015 compared to $4.5 million for the same period in 2014.

 

The primary reason for the increase in noninterest income was due to an increase in service charges and fees, which increased $515,000 to $3.1 million for the year ended December 31, 2015 from $2.6 million for the year ended December 31, 2014. Fees collected from insufficient funds, overdraft and card-based transactions increased $307,000 for the year ended December 31, 2015. The 2015 year reflects a $130,000 one-time credit pertaining to a vendor contract renegotiation in addition to an increase in customer debit card and automated teller machine transactions. Wealth management fees increased $56,000 to $110,000 for the year ended December 31, 2015, compared to $54,000 for the year ended December 31, 2014. We introduced the addition of wealth management services during the first quarter of 2014.

 

Net gains on the sales of securities were $1.5 million and $320,000 for the years ended December 31, 2015 and 2014, respectively. The net gains for the years ended December 31, 2015 and 2014 were primarily the result of management selling securities to fund loan growth and decrease the expected duration of the portfolio. For the year ended December 31, 2015, we also prepaid a repurchase agreement and FHLBB advances and incurred prepayment expenses of $1.3 million. The repurchase agreement was in the amount of $10.0 million with a cost of 2.65% and incurred a prepayment expense of $593,000. FHLBB advances were in the amount of $29.0 million with a weighted average rate of 2.87% and incurred a prepayment expense of $707,000.

 

Noninterest Expense. Noninterest expense increased $1.5 million to $27.4 million for the year ended December 31, 2015, from $25.9 million for the same period in 2014. The increase in noninterest expense for the year ended December 31, 2015 was due to an increase in salaries and benefits of $701,000 mainly the result of an increase in employee benefits costs. Occupancy expense increased $163,000 for the year ended December 31, 2015 due to the addition of the Enfield branch in November 2014 as well as normal improvements to premises.

 

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Income Taxes. The provision for income taxes was $2.1 million and $1.9 million for the years ended December 31, 2015 and 2014, respectively. The effective tax rate was 27.1% for the year ended December 31, 2015 and 23.4% for the same period in 2014. While income before tax was comparable, the change in effective tax rate is primarily due to maintaining slightly lower levels of tax-advantaged income such as bank-owned life insurance (“BOLI”) and tax-exempt municipal obligations for the year ended December 31, 2015.

 

Comparison of Operating Results for Years Ended December 31, 2014 and 2013

 

General. Net income for the year ended December 31, 2014 was $6.2 million, or $0.34 per diluted share, compared to $6.8 million, or $0.34 per diluted share, for the same period in 2013.

 

Interest and Dividend Income. Total interest and dividend was stable, decreasing $40,000 to $41.0 million for the year ended December 31, 2014 compared to the same period in 2013.

 

The stable interest and dividend income was primarily the result executing our strategy to improve the balance sheet mix by decreasing securities while increasing loans. At December 31, 2014, the average balance of securities decreased $79.5 million to $504.5 million, while the average balance of loans increased $78.4 million to $683.1 million. The favorable shift in assets out of securities and into loans helped to offset the stable balance of interest-earning assets, which remained unchanged at $1.2 billion for the years-ended December 31, 2014 and 2013, respectively. The average yield on interest-earning assets, on a tax-equivalent basis, decreased 2 basis points to 3.41% for the year ended December 31, 2014 from 3.43% for the same period in 2013.

 

Interest income on securities decreased $2.6 million to $12.9 million for the year ended December 31, 2014 from $15.5 million for the year ended December 31, 2013. The tax-equivalent yield on securities decreased 10 basis points from 2.74% for the year 2013 to 2.64% for the same period in 2014. The decrease in interest income and tax-equivalent yield on securities for the year ended December 31, 2014 was due to the average balance of securities decreasing $79.5 million in executing our strategy to improve the balance sheet mix by reinvesting cash flows from securities sales and pay downs into loans.

 

Interest income on loans increased $2.4 million to $27.8 million for the year ended December 31, 2014 from $25.4 million for the year ended December 31, 2013. The tax-equivalent yield on loans decreased 13 basis points from 4.23% for the year 2013 to 4.10% for the same period in 2014. The increase in interest income on loans for the year ended December 31, 2014 was due to the average balance of loans increasing $78.4 million in executing our strategy to improve the balance sheet mix by reinvesting cash flows from securities sales and pay downs into loans.

 

Interest Expense. Interest expense for the year ended December 31, 2014 decreased $367,000 to $9.9 million from 2013. This was attributable to a 5 basis point decrease in the average cost of interest-bearing liabilities to 0.99% for the year ended December 31, 2014 from 1.04% in 2013. The decrease in the cost of interest-bearing liabilities was due to decreases in rates on time deposits, savings and checking accounts.

 

Net Interest and Dividend Income. Net interest and dividend income increased $327,000 to $31.1 million for the year ended December 31, 2014 as compared to $30.7 million for same period in 2013. The net interest margin, on a tax-equivalent basis, was 2.60% and 2.58% for the years ended December 31, 2014 and 2013, respectively. The increase in the net interest margin was due to the improvement of our balance sheet mix by reducing securities and reinvesting in loans along with the cost of interest-bearing liabilities decreasing 5 basis points, while the yield on average interest-bearing assets decreased 2 basis points.

 

Provision (Credit) for Loan Losses. The provision (credit) for loan losses is reviewed by management based upon our evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as new loan products, credit quality trends (including trends in nonperforming loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectability of the loan portfolio.

 

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The amount that we provided for loan losses during the year ended December 31, 2014 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio, described in detail below, include increases in the balances of commercial and industrial loans, commercial real estate loans and residential real estate loans; an increase in nonaccrual loans and charge-offs related to a single commercial loan relationship of $6.8 million; and a decrease in the balance of impaired loans. After evaluating these factors, we recorded a provision for loan losses of $1.6 million for the year ended December 31, 2014, compared to a credit of $256,000 for the same period in 2013. The allowance was $7.9 million at December 31, 2014 and $7.5 million at December 31, 2013, respectively. The allowance for loan losses as a percentage of total loans was 1.10% and 1.17% at December 31, 2014 and 2013, respectively.

 

Commercial and industrial loans increased $30.1 million to $165.7 million at December 31, 2014 from $135.6 million at December 31, 2013. Commercial real estate loans increased $13.9 million to $278.4 million at December 31, 2014 from $264.5 million at December 31, 2013. Residential real estate loans increased $43.6 million to $277.7 million at December 31, 2014. We consider residential real estate loans to contain less credit risk and market risk than commercial and industrial loans and commercial real estate.

 

Nonaccrual loans were $8.8 million at December 31, 2014 and $2.6 million at December 31, 2013. During the third quarter of 2014, one manufacturing loan relationship with a balance of $6.8 million, which is comprised of commercial and industrial loans of $4.1 million and a commercial real estate loan of $2.7 million, was placed into nonaccrual status and deemed impaired. We have maintained a relationship with this borrower for over 15 years. The relationship has been classified as a substandard credit since 2011 and has experienced declining sales that impacted their business operations. Based upon the fair value of the underlying business collateral, we recorded a charge-off of $950,000 in the third quarter of 2014 related to this single relationship.

 

Net charge-offs were $1.1 million for the year ended December 31, 2014. This comprised charge-offs of $1.2 million for the year ended December 31, 2014, offset by recoveries of $137,000. Net charge-offs were $79,000 for the year ended December 31, 2013. This comprised charge-offs of $341,000, partially offset by recoveries of $262,000 for the year ended December 31, 2013.

 

Impaired loans decreased $8.7 million to $7.8 million at December 31, 2014 from $16.5 million at December 31, 2013. The decrease in impaired loan balances was due to the financial improvement of a single commercial real estate loan relationship with a balance of $14.3 million, which returned to the general allowance pool for reserve measurement during the third quarter of 2014. This decrease was partially offset by an increase in impaired loan balances of $6.8 million related to the manufacturing loan relationship described above as of December 31, 2014.

 

Although management believes it has established and maintained the allowance for loan losses at appropriate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment.

 

Noninterest Income. Noninterest income increased $188,000 to $4.5 million for the year ended December 31, 2014 compared to $4.3 million for the same period in 2013.

 

The primary reason for the increase in noninterest income was due to an increase in service charges and fees, which increased $213,000 to $2.6 million for the year ended December 31, 2014 from $2.4 million for the year ended December 31, 2013. The increase was primarily due to the collection of $97,000 in prepayment fees on a commercial loan relationship that paid off early. Fees collected from card-based transactions increased $76,000 for the year ended December 31, 2014, which reflects an increase in customer debit card and automated teller machine transactions. Wealth management fees were $54,000 for the year ended December 31, 2014. We introduced the addition of wealth management services during the first quarter of 2014. In addition, fees from the third-party mortgage company increased $37,000 to $153,000 for the year ended December 31, 2014.

 

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Net gains on the sales of securities were $320,000 for the year ended December 31, 2014, compared to $3.1 million for the comparable 2013 period. The net gains for the years ended December 31, 2014 and 2013 were primarily the result of management selling securities to fund loan growth and decrease the expected duration of the portfolio. The net gains on the sales of securities were completely offset by prepayment expenses during the year ended December 31, 2013, as we prepaid repurchase agreements in the amount of $43.3 million and incurred a prepayment expense of $3.4 million. The repurchase agreements had a weighted average cost of 2.99%. We also recorded gains on the proceeds of BOLI death benefits of $563,000 for the year ended December 31, 2013.

 

Noninterest Expense. Noninterest expense decreased $733,000 to $25.9 million for the year ended December 31, 2014, from $26.6 million for the same period in 2013. The decrease in noninterest expense for the year ended December 31, 2014 was due to a decrease in salaries and benefits of $749,000 mainly the result of a decrease in employee benefits costs and share-based compensation expense. Professional fees decreased $97,000 to $1.9 million for the year ended December 31, 2014, compared to $2.0 million for the year ended December 31, 2013 partially due to one-time consulting services utilized for the year ended December 31, 2013.

 

Stock Option Tender Offer. During 2013, we completed a cash tender offer for certain out-of-the-money stock options that were granted prior to January 1, 2013 and held by current and former employees, officers, and directors of Westfield Financial, Inc., provided that such stock options had not expired or terminated prior to the expiration of the offering period. The cash purchase price paid in exchange for the cancellation of eligible options was $2.1 million. Costs associated with the stock option tender offer were $90,000 related to remaining unamortized stock-based compensation expense associated with the unvested portion of the options tendered in the offer, plus $566,000 related to associated taxes.

 

Income Taxes. The provision for income taxes was $1.9 million for the years ended December 31, 2014 and 2013, respectively. The effective tax rate was 23.4% for the year ended December 31, 2014 and 21.7% for the same period in 2013. The change in effective tax rate is primarily due to the net gain on BOLI death benefits recognized during the year ended December 31, 2013. In addition, we also maintained slightly lower levels of tax-advantaged income such as bank-owned life insurance (“BOLI”) and tax-exempt municipal obligations for the year ended December 31, 2014.

 

Liquidity and Capital Resources

 

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, deposit withdrawals and operating expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investment securities and funds provided by our operations. We also can borrow funds from the FHLBB based on eligible collateral of loans and securities. Outstanding borrowings from the FHLBB were $241.2 million at December 31, 2015, and $279.5 million at December 31, 2014. At December 31, 2015, we had $116.5 million in available borrowing capacity with the FHLBB. We have the ability to increase our borrowing capacity with the FHLBB by pledging investment securities or loans. In addition, we have a $4.0 million line of credit with BBN at an interest rate determined and reset by BBN on a daily basis. At December 31, 2015 and 2014, we did not have an outstanding balance under this line. 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. In addition, we may enter into reverse repurchase agreements with approved broker-dealers. Reverse repurchase agreements are agreements that allow us to borrow money using our securities as collateral.

 

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We also have outstanding at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. We are also obligated under agreements with the FHLBB to repay borrowed funds and are obligated under leases for certain of our branches and equipment. A summary of lease obligations, borrowings and credit commitments at December 31, 2014 follows:

 

   Within 1
Year
  After 1 Year But Within
3 Years
  After 3 Year But Within
5 Years
  After 5
Years
  Total
   (Dollars in thousands)
Lease Obligations                         
Operating lease obligations  $590   $898   $717   $3,576   $5,781 
                          
Borrowings and Debt                         
Federal Home Loan Bank   128,690    89,500    23,000        241,190 
Securities sold under agreements to repurchase   40,575                40,575 
Total borrowings and debt   169,265    89,500    23,000        281,765 
                          
Credit Commitments                         
Available lines of credit   91,828        16    28,195    120,039 
Other loan commitments   50,491    28,767        82    79,340 
Letters of credit   3,218        392    255    3,865 
Total credit commitments   145,537    28,767    408    28,532    203,244 
                          
Other Obligations                         
Vendor Contracts