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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549


'FORM 10-Q

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

For the quarterly period ended September 30, 2016

OR

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

For the transition period from _____ to _____.

Commission file number 001-16767

Western New England Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Massachusetts 73-1627673
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

141 Elm Street, Westfield, Massachusetts 01086

(Address of principal executive offices)

(Zip Code)

(413) 568-1911

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 Exchange Act). Yes ☐   No ☒

At November 7, 2016, the registrant had 30,249,899 shares of common stock, $.01 par value, issued and outstanding.

 
 

 

TABLE OF CONTENTS

    Page
FORWARD-LOOKING STATEMENTS i
   
PART I – FINANCIAL INFORMATION  
   
Item 1. Financial Statements of Western New England Bancorp, Inc. and Subsidiaries  
     
  Consolidated Balance Sheets (Unaudited) – September 30, 2016 and December 31, 2015 1
     
  Consolidated Statements of Net Income (Unaudited) – Three and Nine Months Ended September 30, 2016 and 2015 2
     
  Consolidated Statements of Comprehensive Income (Unaudited) – Three and Nine Months Ended September 30, 2016 and 2015 3
     
  Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) – Nine Months Ended September 30, 2016 and 2015 4
     
  Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 30, 2016 and 2015 5
     
  Notes to Consolidated Financial Statements (Unaudited) 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 42
     
Item 4. Controls and Procedures 43
     
PART II – OTHER INFORMATION  
   
Item 1. Legal Proceedings 43
     
Item 1A. Risk Factors 43
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44
     
Item 3. Defaults upon Senior Securities 44
     
Item 4. Mine Safety Disclosures 44
     
Item 5. Other Information 44
     
Item 6. Exhibits 44

 

 
 

 

FORWARD–LOOKING STATEMENTS

We may, from time to time, make written or oral “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements contained in our filings with the Securities and Exchange Commission (the “SEC”), our reports to shareholders and in other communications by us. This Quarterly Report on Form 10-Q contains “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “would,” “plan,” “estimate,” “potential” and other similar expressions. Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operation and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

changes in the interest rate environment that reduce margins;
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 line of business or new products and services, which may subject us to additional risks;
changes in key management personnel which may adversely impact our operations;
the effect on our operations of governmental legislation and regulation, including changes in accounting regulation or standards, the nature and timing of the adoption and effectiveness of new requirements under the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010, Basel guidelines, capital requirements and other applicable laws and regulations;
severe weather, natural disasters, acts of war or terrorism and other external events which could significantly impact our business; and
other factors detailed from time to time in our SEC filings.

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

i  
 

 

PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(Dollars in thousands, except share data)

    September 30,   December 31,
    2016   2015
       
ASSETS    
CASH AND DUE FROM BANKS   $ 9,799     $ 9,891  
FEDERAL FUNDS SOLD     630       100  
INTEREST-BEARING  DEPOSITS AND OTHER SHORT-TERM INVESTMENTS     40,374       3,712  
CASH AND CASH EQUIVALENTS     50,803       13,703  
                 
SECURITIES AVAILABLE FOR SALE – AT FAIR VALUE     295,577       182,590  
SECURITIES HELD TO MATURITY  (Fair value of $237,619 at December 31, 2015)     —         238,219  
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT COST     12,194       15,074  
LOANS - Net of allowance for loan losses of $9,927 and $8,840 at September 30, 2016 and  December 31, 2015, respectively     937,693       809,373  
PREMISES AND EQUIPMENT, Net     13,140       13,564  
ACCRUED INTEREST RECEIVABLE     3,578       3,878  
BANK-OWNED LIFE INSURANCE     51,363       50,230  
DEFERRED TAX ASSET, Net     9,546       10,881  
OTHER ASSETS     3,886       2,418  
TOTAL ASSETS   $ 1,377,780     $ 1,339,930  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
LIABILITIES:                
DEPOSITS :                
Noninterest-bearing   $ 180,624     $ 157,844  
Interest-bearing     781,934       742,519  
Total deposits     962,558       900,363  
                 
SHORT-TERM BORROWINGS     180,273       128,407  
LONG-TERM DEBT     71,165       153,358  
OTHER LIABILITIES     18,561       18,336  
TOTAL LIABILITIES     1,232,557       1,200,464  
                 
SHAREHOLDERS’ EQUITY:                
Preferred stock - $.01 par value, 5,000,000 shares authorized, none outstanding at September 30, 2016 and December 31, 2015     —         —    
Common stock - $.01 par value, 75,000,000 shares authorized, 18,330,487 shares issued and outstanding at September 30, 2016; 18,267,747 shares issued and outstanding at December 31, 2015     184       183  
Additional paid-in capital     108,761       108,210  
Unearned compensation - ESOP     (6,570 )     (6,952 )
Unearned compensation - Equity Incentive Plan     (612 )     (313 )
Retained earnings     50,738       49,316  
Accumulated other comprehensive loss     (7,278 )     (10,978 )
Total shareholders’ equity     145,223       139,466  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   $ 1,377,780     $ 1,339,930  

 

See accompanying notes to unaudited consolidated financial statements.

 

1
 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME – UNAUDITED

(Dollars in thousands, except share data)

    Three Months   Nine Months
    Ended September 30,   Ended September 30,
    2016   2015   2016   2015
INTEREST AND DIVIDEND INCOME:                
Residential and commercial real estate loans   $ 7,367     $ 6,105     $ 20,803     $ 17,415  
Commercial and industrial loans     1,728       1,703       5,098       4,921  
Consumer loans     43       41       126       113  
Debt securities, taxable     1,618       2,807       5,723       8,297  
Debt securities, tax-exempt     32       147       136       508  
Equity securities     45       43       140       126  
Other investments - at cost     130       126       398       263  
Federal funds sold, interest-bearing deposits and other short-term investments     14       2       67       13  
Total interest and dividend income     10,977       10,974       32,491       31,656  
INTEREST EXPENSE:                                
Deposits     1,582       1,414       4,589       4,135  
Long-term debt     446       1,083       1,749       3,244  
Short-term borrowings     621       317       1,580       748  
Total interest expense     2,649       2,814       7,918       8,127  
Net interest and dividend income     8,328       8,160       24,573       23,529  
PROVISION FOR LOAN LOSSES     375       150       400       800  
Net interest and dividend income after provision for loan losses     7,953       8,010       24,173       22,729  
                                 
NONINTEREST INCOME (LOSS):                                
Service charges and fees     953       789       2,696       2,266  
Income from bank-owned life insurance     369       374       1,133       1,149  
Loss on prepayment of borrowings     —         (429 )     (915 )     (1,300 )
Gain on sales of securities, net     1       414       684       1,507  
Total noninterest income     1,323       1,148       3,598       3,622  
NONINTEREST EXPENSE:                                
Salaries and employee benefits     4,114       3,903       11,895       11,588  
Occupancy     796       784       2,401       2,443  
Computer operations     667       636       1,916       1,779  
Professional fees     656       596       1,715       1,555  
FDIC insurance assessment     214       212       594       592  
Merger related expenses     830       —         1,913       —    
Other     948       736       2,861       2,486  
Total noninterest expense     8,225       6,867       23,295       20,443  
INCOME BEFORE INCOME TAXES     1,051       2,291       4,476       5,908  
INCOME TAX PROVISION     423       680       1,495       1,595  
NET INCOME   $ 628     $ 1,611     $ 2,981     $ 4,313  
                                 
EARNINGS PER COMMON SHARE:                                
Basic earnings per share   $ 0.04     $ 0.09     $ 0.17     $ 0.25  
Weighted average shares outstanding     17,377,844       17,461,472       17,340,101       17,554,361  
Diluted earnings per share   $ 0.04     $ 0.09     $ 0.17     $ 0.25  
Weighted average diluted shares outstanding     17,377,844       17,461,472       17,340,101       17,554,361  

 

See accompanying notes to unaudited consolidated financial statements.

 

2
 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED

(Dollars in thousands)

    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2016   2015   2016   2015
Net income   $ 628     $ 1,611     $ 2,981     $ 4,313  
                                 
Other comprehensive income (loss):                                
Unrealized gains (loss) on securities:                                
Unrealized holding gains (loss) on available for sale securities     (359 )     2,232       5,820       513  
Reclassification adjustment for gains realized in income (1)     (1 )     (414 )     (684 )     (1,507 )
Amortization of net unrealized (gain) loss on held-to-maturity securities (2)     —         (78 )     26       (269 )
Amortization of net unrealized loss upon transfer of held-to-maturity to available-for-sale (3)     —         —         2,288       —    
Net unrealized gains (losses)     (360 )     1,740       7,450       (1,263 )
Tax effect     125       (604 )     (2,567 )     432  
Net-of-tax amount     (235 )     1,136       4,883       (831 )
                                 
Derivative instruments:                                
Change in fair value of derivatives used for cash flow hedges     417       (3,089 )     (2,863 )     (4,366 )
Reclassification adjustment for loss realized in interest expense (4)     128       126       313       393  
Reclassification adjustment for termination fee realized in interest expense (5)     269       83       687       122  
Net adjustments relating to derivative instruments     814       (2,880 )     (1,863 )     (3,851 )
Tax effect     (277 )     979       633       1,309  
Net-of-tax amount     537       (1,901 )     (1,230 )     (2,542 )
                                 
Defined benefit pension plans:                                
Gains and losses arising during the period pertaining to defined benefit plans     —         —         —         (62 )
Reclassification adjustment (6):                                
Actuarial loss     24       32       71       156  
Net adjustments pertaining to defined benefit plans     24       32       71       94  
Tax effect     (8 )     (11 )     (24 )     (32 )
Net-of-tax amount     16       21       47       62  
                                 
Other comprehensive income (loss)     318       (744 )     3,700       (3,311 )
                                 
Comprehensive income   $ 946     $ 867     $ 6,681     $ 1,002  

 

(1) Gain realized in income on available-for-sale securities is recognized as a component of noninterest income. The tax provision applicable to net realized gains was $407 and $141,000 for the three months ended September 30, 2016 and 2015, respectively. The tax provision applicable to net realized gains was $236,000 and $517,000 for the nine months ended September 30, 2016 and 2015, respectively.

(2) Amortization of net unrealized (gain) loss on held-to-maturity securities is recognized as a component of interest income on debt securities. Income tax effects associated with the reclassification adjustments were $27,000 for the three months ended September 30, 2015. Income tax effects associated with the reclassification adjustments were $(9,000) and a benefit of $91,000 for the nine months ended September 30, 2016 and 2015, respectively.

(3) Income tax effect associated with the reclassification adjustments upon transfer of held-to-maturity to available-for-sale was $790,000 for the nine months ended September 30, 2016.

(4) Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term debt. Income tax benefits associated with the reclassification adjustments were $44,000 and $43,000 for the three months ended September 30, 2016 and 2015, respectively. Income tax benefits associated with the reclassification adjustments were $106,000 and $134,000 for the nine months ended September 30, 2016 and 2015, respectively.

(5) Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term debt. Income tax benefits associated with the reclassification adjustments were $91,000 and $28,000 for the three months ended September 30, 2016 and 2015, respectively. Income tax benefits associated with the reclassification adjustments were $234,000 and $41,000 for the nine months ended September 30, 2016 and 2015, respectively.

(6) Amounts represent the reclassification of defined benefit plans amortization and have been recognized as a component of salaries and employee benefit expense. Income tax benefits associated with the reclassification adjustments were $8,000 and $11,000 for the three months ended September 30, 2016 and 2015, respectively. Income tax benefits associated with the reclassification adjustments were $24,000 and $32,000 for the nine months ended September 30, 2016 and 2015, respectively.

 

See accompanying notes to unaudited consolidated financial statements.

 

3
 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED

NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(Dollars in thousands, except share data)

    Common Stock   Additional Paid-in Capital   Unearned Compensation- ESOP   Unearned Compensation- Equity Incentive Plan   Retained Earnings   Accumulated Other Comprehensive Loss   Total
  Shares   Par  Value          
BALANCE AT DECEMBER 31, 2014     18,734,791     $ 187     $ 111,696     $ (7,469 )   $ (95 )   $ 45,699     $ (7,475 )   $ 142,543  
Comprehensive income     —         —         —         —         —         4,313       (3,311 )     1,002  
Common stock held by ESOP committed to be released (76,888 shares)     —         —         40       388       —         —         —         428  
Share-based compensation - equity incentive plan     —         —         —         —         98       —         —         98  
Excess tax benefit from equity incentive plan     —         —         2       —         —         —         —         2  
Common stock repurchased     (385,306 )     (4 )     (2,881 )     —         —         —         —         (2,885 )
Issuance of common stock in connection with equity incentive plan     48,560       1       348       —         (349 )     —         —         —    
Cash dividends declared and paid ($0.09 per share)     —         —         —         —         —         (1,580 )     —         (1,580 )
BALANCE AT SEPTEMBER 30, 2015     18,398,045     $ 184     $ 109,205     $ (7,081 )   $ (346 )   $ 48,432     $ (10,786 )   $ 139,608  
                                                                 
BALANCE AT DECEMBER 31, 2015     18,267,747     $ 183     $ 108,210     $ (6,952 )   $ (313 )   $ 49,316     $ (10,978 )   $ 139,466  
Comprehensive income     —         —         —         —         —         2,981       3,700       6,681  
Common stock held by ESOP committed to be released (74,430 shares)     —         —         62       382       —         —         —         444  
Share-based compensation - equity incentive plan     —         —         —         —         186       —         —         186  
Excess tax benefit from equity incentive plan     —         —         5       —         —         —         —         5  
Issuance of common stock in connection with equity incentive plan     62,740       1       484       —         (485 )     —         —         — 
Cash dividends declared and paid ($0.09 per share)     —         —         —         —         —         (1,559 )     —         (1,559 )
BALANCE AT SEPTEMBER 30, 2016     18,330,487     $ 184     $ 108,761     $ (6,570 )   $ (612 )   $ 50,738     $ (7,278 )   $ 145,223  

 

See accompanying notes to unaudited consolidated financial statements

 

4
 

 

WESTERN NEW ENGLAND BANDCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

    Nine Months Ended September 30,
    2016   2015
OPERATING ACTIVITIES:        
Net income   $ 2,981     $ 4,313  
Adjustments to reconcile net income to net cash provided by operating activities:                
Provision for loan losses     400       800  
Depreciation and amortization of premises and equipment     969       987  
Net amortization of premiums and discounts on securities and mortgage loans     2,758       3,620  
Net amortization of premiums on modified debt     60       319  
Share-based compensation expense     186       98  
ESOP expense     444       428  
Excess tax benefits from equity incentive plan     (5 )     (2 )
Net gains on sales of securities     (684 )     (1,507 )
Loss on prepayment of borrowings     915       1,300  
Income from bank-owned life insurance     (1,133 )     (1,149 )
Changes in assets and liabilities:                
Accrued interest receivable     300       127  
Other assets     (1,468 )     (229 )
Other liabilities     (2,184 )     331  
Net cash provided by operating activities     3,539       9,436  
INVESTING ACTIVITIES:                
Securities, held to maturity:                
Purchases     —         (2,619 )
Proceeds from calls, maturities, and principal collections     6,835       29,731  
Securities, available for sale:                
Purchases     (59,595 )     (138,395 )
Proceeds from sales     136,825       130,647  
Proceeds from calls, maturities, and principal collections     46,639       31,091  
Purchase of residential mortgages     (107,632 )     (77,115 )
Loan originations and principal payments, net     (21,185 )     (5,550 )
Redemption (purchase) of Federal Home Loan Bank of Boston stock     2,880       (905 )
Purchases of premises and equipment     (565 )     (3,064 )
Proceeds from sale of premises and equipment     20       44  
Net cash provided by (used in) investing activities     4,222       (36,135 )
FINANCING ACTIVITIES:                
Net increase in deposits     62,195       74,823  
Net change in short-term borrowings     51,866       27,225  
Repayment of long-term debt     (84,333 )     (67,800 )
Proceeds from long-term debt     1,165       109  
Cash dividends paid     (1,559 )     (1,580 )
Common stock repurchased     —         (2,885 )
Excess tax benefits in connection with equity incentive plan     5       2  
Net cash provided by financing activities     29,339       29,894  
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS:     37,100       3,195  
Beginning of period     13,703       18,785  
End of period   $ 50,803     $ 21,980  
                 
Supplemental cashflow information:                
Securities reclassified from held-to-maturity to available-for-sale   $ (232,817 )   $ —    
Interest paid     8,036       8,180  
Taxes paid     2,150       1,725  

 

See the accompanying notes to unaudited consolidated financial statements

 

5
 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2016

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of OperationsWestern New England Bancorp, Inc. (formerly known as “Westfield Financial, Inc.”) (“WNEB,” “we” or “us”) is a Massachusetts-chartered stock holding company and the parent company of Westfield Bank (the “Bank”), a federally chartered stock savings bank (the “Bank”).

The Bank’s deposits are insured to the limits specified by the Federal Deposit Insurance Corporation (“FDIC”). The Bank operates 13 banking offices in western Massachusetts and Granby and Enfield, Connecticut, and its primary sources of revenue are income from securities and earnings on loans to small and middle-market businesses and to residential property homeowners.

Elm Street Securities Corporation and WFD Securities Corporation, Massachusetts-chartered security corporations, were formed by us for the primary purpose of holding qualified securities. WB Real Estate Holdings, LLC, a Massachusetts-chartered limited liability company was formed for the primary purpose of holding real property acquired as security for debts previously contracted by the Bank.

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

Estimates – The preparation of unaudited consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of income and expenses for both at the date of the unaudited consolidated financial statements. Actual results could differ from those estimates. Estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, other-than-temporary impairment of securities, and the valuation of deferred tax assets.

Basis of Presentation – In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial condition as of September 30, 2016, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results of operations for the year ending December 31, 2016. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2015, included in our Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Annual Report”).

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

6
 

 

2.   BUSINESS COMBINATION

On October 21, 2016, we closed our previously announced acquisition of Chicopee Bancorp, Inc. (“Chicopee”), the holding company for Chicopee Savings Bank, whereby Chicopee merged with and into WNEB, with WNEB surviving, and Chicopee Savings Bank merged with and into the Bank, with the Bank surviving. At September 30, 2016, Chicopee had approximately $724.5 million of total assets, net loans of approximately $610.8 million (excluding loans held for sale), and total deposits and borrowings of $632.6 million. Under the terms of the merger agreement, each outstanding share of Chicopee common stock was converted into the right to receive 2.425 shares of WNEB common stock. Management is currently in the process of determining estimated fair values of assets acquired and liabilities assumed as of the closing date. Our financial statements as of September 30, 2016 do not include the effects of this acquisition or the results of operations of Chicopee.

3.   EARNINGS PER SHARE

Basic earnings per share represent income available to shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential shares had been issued, as well as any adjustment to income that would result from the assumed issuance. No dilutive potential shares were outstanding during the periods presented. Share-based compensation awards that qualify as participating securities (entitled to receive non-forfeitable dividends) are included in basic earnings per share.

Earnings per common share for the three and nine months ended September 30, 2016 and 2015 have been computed based on the following:

    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2016   2015   2016   2015
    (In thousands, except per share data)
Net income applicable to common stock   $ 628     $ 1,611     $ 2,981     $ 4,313  
                                 
Average number of common shares issued     18,330       18,464       18,298       18,576  
Less: Average unallocated ESOP Shares     (926 )     (1,002 )     (945 )     (1,021 )
Less: Average unvested equity incentive plan shares     (26 )     —         (13 )     —    
                                 
Average number of common shares outstanding used to calculate basic and diluted earnings per common share     17,378       17,462       17,340       17,555  
                                 
Basic and diluted earnings per share   $ 0.04     $ 0.09     $ 0.17     $ 0.25  

 

7
 

 

4.   COMPREHENSIVE INCOME/LOSS

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

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

 

    September 30, 2016   December 31, 2015
    (In thousands)
Net unrealized gain (loss) on securities available for sale   $ 2,793     $ (2,343 )
Tax effect     (956 )     812  
Net-of-tax amount     1,837       (1,531 )
                 
Net unrealized losses on securities transferred from available-for-sale to held-to-maturity     —         (2,314 )
Tax effect     —         799  
Net-of-tax amount     —         (1,515 )
                 
Fair value of derivatives used for cash flow hedges     (5,195 )     (6,064 )
Termination fee     (5,002 )     (2,270 )
Total derivatives     (10,197 )     (8,334 )
Tax effect     3,466       2,833  
Net-of-tax amount     (6,731 )     (5,501 )
                 
Unrecognized deferred loss pertaining to defined benefit plan     (3,614 )     (3,685 )
Tax effect     1,230       1,254  
     Net-of-tax amount     (2,384 )     (2,431 )
                 
Accumulated other comprehensive loss   $ (7,278 )   $ (10,978 )
                 

The following table presents changes in accumulated other loss for the periods ended September 30, 2016 and 2015 by component:

 

    Securities   Derivatives   Defined
Benefit  Plans
  Accumulated
Other
Comprehensive
Loss
    (In thousands)
Balance at December 31, 2014   $ (728 )   $ (3,788 )   $ (2,959 )   $ (7,475 )
Current-period other comprehensive income (loss)     (831 )     (2,542 )     62       (3,311 )
Balance at September 30, 2015   $ (1,559 )   $ (6,330 )   $ (2,897 )   $ (10,786 )
                                 
Balance at December 31, 2015   $ (3,046 )   $ (5,501 )   $ (2,431 )   $ (10,978 )
Current-period other comprehensive income (loss)     4,883       (1,230 )     47       3,700  
Balance at September 30, 2016   $ 1,837     $ (6,731 )   $ (2,384 )   $ (7,278 )

 

8
 

 

5.   SECURITIES

Securities available for sale and held to maturity are summarized as follows:

    September 30, 2016
    Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair Value
    (In thousands)
Available for sale securities:                
Government-sponsored mortgage-backed securities   $ 184,235     $ 1,606     $ (361 )   $ 185,480  
U.S. government guaranteed mortgage-backed securities     18,797       113       (140 )     18,770  
Corporate bonds     52,454       1,290       —         53,744  
State and municipal bonds     4,293       41       (16 )     4,318  
Government-sponsored enterprise obligations     25,150       48       (48 )     25,150  
Mutual funds     6,546       31       (161 )     6,416  
Common and preferred stock     1,309       390       —         1,699  
                                 
Total   $ 292,784     $ 3,519     $ (726 )   $ 295,577  

 

 

    December 31, 2015
    Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair Value
    (In thousands)
Available for sale securities:                
Government-sponsored mortgage-backed securities   $ 138,186     $ —       $ (2,227 )   $ 135,959  
U.S. government guaranteed mortgage-backed securities     11,030       —         (127 )     10,903  
Corporate bonds     21,176       45       (85 )     21,136  
State and municipal bonds     2,794       7       —         2,801  
Government-sponsored enterprise obligations     4,000       —         (49 )     3,951  
Mutual funds     6,438       —         (191 )     6,247  
Common and preferred stock     1,309       284       —         1,593  
                                 
Total available for sale securities     184,933       336       (2,679 )     182,590  
                                 
Held to maturity securities:                                
Government-sponsored mortgage-backed securities   $ 148,085     $ 1,319     $ (1,515 )   $ 147,889  
U.S. government guaranteed mortgage-backed securities     29,174       166       (66 )     29,274  
Corporate bonds     23,969       64       (316 )     23,717  
State and municipal bonds     6,845       68       (102 )     6,811  
Government-sponsored enterprise obligations     30,146       254       (472 )     29,928  
                                 
Total held to maturity securities     238,219       1,871       (2,471 )     237,619  
                                 
Total   $ 423,152     $ 2,207     $ (5,150 )   $ 420,209  

U.S. government-sponsored and guaranteed mortgage-backed securities are collateralized by both residential and multifamily loans.

Our repurchase agreements and advances from the Federal Home Loan Bank of Boston (“FHLBB”) are collateralized by government-sponsored enterprise obligations and certain mortgage-backed securities (see Note 8).

9
 

The amortized cost and fair value of securities available for sale and held to maturity at September 30, 2016, by maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or repay obligations.

    September 30, 2016
    Amortized Cost   Fair Value
    (In thousands)
Mortgage-backed securities:        
     Due after one year through five years   $ 16,313     $ 16,616  
     Due after five years through ten years     23,285       23,644  
     Due after ten years     163,434       163,990  
Total   $ 203,032     $ 204,250  
                 
Debt securities:                
     Due in one year or less   $ 2,472     $ 2,481  
     Due after one year through five years     26,880       27,431  
     Due after five years through ten years     45,460       46,216  
     Due after ten years     7,085       7,084  
Total   $ 81,897     $ 83,212  

Gross realized gains and losses on sales of securities available for sale for the three and nine months ended September 30, 2016 and 2015 are as follows:

    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2016   2015   2016   2015
    (In thousands)
Gross gains realized   $ 1     $ 469     $ 1,521     $ 1,632  
Gross losses realized     —         (55 )     (837 )     (125 )
Net gain realized   $ 1     $ 414     $ 684     $ 1,507  

Proceeds from the sale of securities available for sale amounted to $136.8 million and $130.6 million for the nine months ended September 30, 2016 and 2015, respectively.

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Information pertaining to securities with gross unrealized losses at September 30, 2016, and December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

    September 30, 2016
    Less Than Twelve Months   Over Twelve Months
    Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
    (In thousands)
Available for sale:                
Government-sponsored mortgage-backed securities   $ 57     $ 10,335     $ 304     $ 29,789  
U.S. government guaranteed  mortgage-backed securities     —         1,483       140       5,186  
State and municipal bonds     —         —         16       316  
Government sponsored enterprise obligations     48       8,952       —         —    
Mutual funds     —         —         161       2,898  
                                 
Total   $ 105     $ 20,770     $ 621     $ 38,189  

 

 

    December 31, 2015
    Less Than 12 Months   Over 12 Months
    Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
    (In thousands)
Available for sale:                
Government-sponsored mortgage-backed securities   $ 2,090     $ 129,731     $ 137     $ 6,228  
U.S. government guaranteed  mortgage-backed securities     116       10,290       11       613  
Corporate bonds     85       13,374       —         —    
Government-sponsored enterprise obligations     49       3,951       —         —    
Mutual funds     32       4,478       159       1,769  
                                 
Total available for sale     2,372       161,824       307       8,610  
                                 
Held to maturity:                                
Government-sponsored mortgage-backed securities     947       45,760       568       32,825  
U.S. government guaranteed  mortgage-backed securities     37       2,522       29       15,401  
Corporate bonds     204       5,412       112       13,382  
State and municipal bonds     —         —         102       4,809  
Government-sponsored enterprise obligations     —         —         472       20,193  
                                 
Total held to maturity     1,188       53,694       1,283       86,610  
                                 
Total   $ 3,560     $ 215,518     $ 1,590     $ 95,220  

 

11
 

 

    September 30, 2016
    Less Than 12 Months   Over 12 Months
    Number of Securities   Amortized Cost Basis   Gross Loss   Depreciation from Amortized Cost Basis (%)   Number of Securities   Amortized Cost Basis   Gross Loss   Depreciation from Amortized Cost Basis (%)
    (Dollars in thousands)
Government sponsored mortgage-backed securities     6     $ 10,392     $ 57       0.5 %     10     $ 30,093     $ 304       1.0 %
U.S. government guaranteed  mortgage-backed securities     1       1,483       —         —         2       5,326       140       2.6  
Government sponsored enterprise obligations     5       9,000       48       0.5       0       —         —         —    
State and municipal bonds     0       —         —         —         1       332       16       4.8  
Mutual funds     0       —         —         —         2       3,059       161       5.3  
            $ 20,875     $ 105                     $ 38,810     $ 621          

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

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6.   LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consisted of the following amounts:   September 30,   December 31,
    2016   2015
    (In thousands)
Commercial real estate   $ 357,752     $ 303,036  
Residential real estate:                
Residential     364,412       298,052  
Home equity     50,605       43,512  
Commercial and industrial     168,434       168,256  
Consumer     1,378       1,534  
    Total Loans     942,581       814,390  
Unearned premiums and deferred loan fees and costs, net     5,039       3,823  
Allowance for loan losses     (9,927 )     (8,840 )
    $ 937,693     $ 809,373  

During the nine months ended September 30, 2016 and 2015, we purchased residential real estate loans aggregating $107.6 million and $77.1 million, respectively.

We have transferred a portion of our originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in our accompanying unaudited consolidated balance sheets. We share ratably with our participating lenders in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. We continue to service the loans on behalf of the participating lenders and, as such, collect cash payments from the borrowers, remit payments (net of servicing fees) to participating lenders and disburse required escrow funds to relevant parties. At September 30, 2016 and December 31, 2015, we serviced loans for participants aggregating $20.0 million and $19.5 million, respectively.

Loans are recorded at the principal amount outstanding, adjusted for charge-offs, unearned premiums and deferred loan fees and costs. Interest on loans is calculated using the effective yield method on daily balances of the principal amount outstanding and is credited to income on the accrual basis to the extent it is deemed collectable. Our general policy is to discontinue the accrual of interest when principal or interest payments are delinquent 90 days or more based on the contractual terms of the loan, or earlier if the loan is considered impaired. Any unpaid amounts previously accrued on these loans are reversed from income. Subsequent cash receipts are applied to the outstanding principal balance or to interest income if, in the judgment of management, collection of the principal balance is not in question. Loans are returned to accrual status when they become current as to both principal and interest and perform in accordance with contractual terms for a period of at least six months, reducing the concern as to the collectability of principal and interest. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income over the estimated average lives of the related loans.

The allowance for loan losses is established through provisions for loan losses charged to expense. Loans are charged-off against the allowance when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated, and unallocated components, as further described below.

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General component

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate (includes one-to-four family and home equity), commercial real estate, commercial and industrial, and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: trends in delinquencies and nonperforming loans; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; and national and local economic trends and industry conditions. There were no changes in our policies or methodology pertaining to the general component of the allowance for loan losses during the periods presented for disclosure.

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate – We require private mortgage insurance for all loans originated with a loan-to-value ratio greater than 80% and we do not grant subprime loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment. Home equity loans are secured by first or second mortgages on one-to-four family owner occupied properties.

Commercial real estate – Loans in this segment are primarily income-producing investment properties and owner occupied commercial properties throughout New England. The underlying cash flows generated by the properties or operations can be adversely impacted by a downturn in the economy due to increased vacancy rates or diminished cash flows, which in turn, would have an effect on the credit quality in this segment. Management obtains financial information annually and continually monitors the cash flows of these loans.

Commercial and industrial loans – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

Consumer loans – Loans in this segment are secured or unsecured and repayment is dependent on the credit quality of the individual borrower.

Allocated component

The allocated component relates to loans that are classified as impaired. Impaired loans are identified by analysis of loan performance, internal credit ratings and watch list loans that management believes are subject to a higher risk of loss. Impairment is measured on a loan by loan basis for commercial real estate and commercial and industrial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

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Unallocated component

An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance, if any, reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

An analysis of changes in the allowance for loan losses by segment for the periods ended September 30, 2016 and 2015 is as follows:

    Commercial
Real Estate
  Residential
Real Estate
  Commercial
and
Industrial
  Consumer   Unallocated   Total
    (In thousands)
Three Months Ended    
Balance at June 30, 2015   $ 3,850     $ 2,117     $ 2,334     $ 24     $ (30 )   $ 8,295  
Provision (credit)     (176 )     270       34       8       14       150  
Charge-offs     —         (12 )     (52 )     (21 )     —         (85 )
Recoveries     —         1       2       9       —         12  
Balance at September 30, 2015   $ 3,674     $ 2,376     $ 2,318     $ 20     $ (16 )   $ 8,372  
                                                 
Balance at June 30, 2016   $ 3,956     $ 2,804     $ 2,797     $ 20     $ (7 )   $ 9,570  
Provision (credit)     62       189       83       43       (2 )     375  
Charge-offs     —         (40 )     —         (46 )     —         (86 )
Recoveries     59       —         —         9       —         68  
Balance at September 30, 2016   $ 4,077     $ 2,953     $ 2,880     $ 26     $ (9 )   $ 9,927  
                                                 
Nine Months Ended                                                
Balance at December 31, 2014   $ 3,705     $ 2,053     $ 2,174     $ 15     $ 1     $ 7,948  
Provision (credit)     (31 )     342       473       33       (17 )     800  
Charge-offs     —         (26 )     (334 )     (51 )     —         (411 )
Recoveries     —         7       5       23       —         35  
Balance at September 30, 2015   $ 3,674     $ 2,376     $ 2,318     $ 20     $ (16 )   $ 8,372  
                                                 
Balance at December 31, 2015   $ 3,856     $ 2,431     $ 2,485     $ 22     $ 46     $ 8,840  
Provision (credit)     (614 )     610       395       64       (55 )     400  
Charge-offs     (170 )     (90 )     —         (87 )     —         (347 )
Recoveries     1,005       2       —         27       —         1,034  
Balance at September 30, 2016   $ 4,077     $ 2,953     $ 2,880     $ 26     $ (9 )   $ 9,927  

 

15
 

 

Further information pertaining to the allowance for loan losses by segment at September 30, 2016 and December 31, 2015 follows:

    Commercial
Real Estate
  Residential
Real Estate
  Commercial
and
Industrial
  Consumer   Unallocated   Total
    (In thousands)
September 30, 2016                        
                         
Amount of allowance for loans individually evaluated and deemed impaired   $ —       $ —       $ —       $ —       $ —       $ —    
Amount of allowance for loans collectively or individually evaluated for impairment and not deemed impaired     4,077       2,953       2,880       26       (9 )     9,927  
Total allowance for loan losses   $ 4,077     $ 2,953     $ 2,880     $ 26     $ (9 )   $ 9,927  
                                                 
Loans individually evaluated and deemed impaired   $ 3,381     $ 467     $ 3,113     $ —       $ —       $ 6,961  
Loans collectively or individually evaluated and not deemed impaired     354,371       414,550       165,321       1,378       —         935,620  
Total loans   $ 357,752     $ 415,017     $ 168,434     $ 1,378     $ —       $ 942,581  
                                                 
December 31, 2015                                                
                                                 
Amount of allowance for loans individually evaluated and deemed impaired   $ —       $ —       $ —       $ —       $ —       $ —    
Amount of allowance for loans collectively or individually evaluated for impairment and not deemed impaired     3,856       2,431       2,485       22       46       8,840  
Total allowance for loan losses   $ 3,856     $ 2,431     $ 2,485     $ 22     $ 46     $ 8,840  
                                                 
Loans individually evaluated and deemed impaired     3,732       399       3,363       —         —         7,494  
Loans collectively or individually evaluated and not deemed impaired     299,304       341,165       164,893       1,534       —         806,896  
Total loans   $ 303,036     $ 341,564     $ 168,256     $ 1,534     $ —       $ 814,390  
                                                 

The following is a summary of past due and non-accrual loans by class at September 30, 2016 and December 31, 2015:

    30 – 59 Days
Past Due
  60 – 89 Days
Past Due
  Greater than
90 Days
Past Due
  Total Past
Due
  Past
Due
90 Days
or More
and Still
Accruing
  Loans on
Non-Accrual
    (In thousands)
September 30, 2016                        
Commercial real estate   $ 225     $ 29     $ 108     $ 362     $ —       $ 2,490  
Residential real estate:                                                
Residential     884       —         576       1,460       —         1,265  
Home equity     122       —         42       164       —         202  
Commercial and industrial     99       1       6       106       —         3,310  
Consumer     27       4       —         31       —         8  
Total   $ 1,357     $ 34     $ 732     $ 2,123     $ —       $ 7,275  
                                                 
December 31, 2015                                                
Commercial real estate   $ 348     $ 730     $ 20     $ 1,098     $ —       $ 3,237  
Residential real estate:                                                
Residential     638       —         908       1,546       —         1,470  
Home equity     230       124       —         354       —         —    
Commercial and industrial     127       649       445       1,221       —         3,363  
Consumer     30       —         —         30       —         10  
Total   $ 1,373     $ 1,503     $ 1,373     $ 4,249     $ —       $ 8,080  

 

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The following is a summary of impaired loans by class at September 30, 2016 and December 31, 2015:

            Three Months Ended   Nine Months Ended
    At September 30, 2016   September 30, 2016   September 30, 2016
    Recorded Investment   Unpaid Principal Balance   Average Recorded Investment   Interest Income Recognized   Average Recorded Investment   Interest Income Recognized
    (In thousands)
Impaired loans without a valuation allowance:                                                
Commercial real estate   $ 3,381     $ 4,220     $ 3,487     $ 17     $ 3,551     $ 49  
Residential real estate     467       672       515       —         482       —    
Commercial and industrial     3,113       4,345       3,356       —         3,434       —    
                                                 
Total impaired loans   $ 6,961     $ 9,237     $ 7,358     $ 17     $ 7,467     $ 49  

 

            Three Months Ended   Nine Months Ended
    At December 31, 2015   September 30, 2015   September 30, 2015
    Recorded Investment   Unpaid Principal Balance   Average Recorded Investment   Interest Income Recognized   Average Recorded Investment   Interest Income Recognized
    (In thousands)
Impaired loans without a valuation allowance:                    
Commercial real estate   $ 3,732     $ 4,403     $ 3,054     $ —       $ 3,068     $ —    
Residential real estate     399       543       345       —         306       —    
Commercial and industrial     3,363       4,408       3,758       —         4,000       —    
                                                 
Total impaired loans   $ 7,494     $ 9,354     $ 7,157     $ —       $ 7,374     $ —    

All interest income recognized for impaired loans during the three and nine months ended September 30, 2016 related to performing TDR loans and was recognized on the accrual basis.

No interest income was recognized for impaired loans on a cash-basis method during the three and nine months ended September 30, 2015.

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

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

Nonperforming TDRs are shown as nonperforming assets. No loans were modified as a TDR during the three months ended September 30, 2016. A substandard impaired loan relationship in the amount of $4.6 million was designated a TDR during the nine months ended September 30, 2016. The Bank entered into a forbearance agreement which offered an interest only period. Due to the borrower continuing to experience declining sales, the interest only period was extended during the second quarter of 2016, resulting in the TDR classification. The loans are on non-accrual and are current. The loans are measured for impairment quarterly and appropriate reserves/charge offs have been taken. One loan classified as a TDR was modified during the three months ended September 30, 2015.

    Three Months Ended   Nine Months Ended
    September 30, 2016   September 30, 2016
    Number of Contracts   Pre-Modification Outstanding Recorded Investment   Post-Modification Outstanding Recorded Investment   Number of Contracts   Pre-Modification Outstanding Recorded Investment   Post-Modification Outstanding Recorded Investment
    (Dollars in thousands)   (Dollars in thousands)
Troubled Debt Restructurings                        
Commercial Real Estate     —       $ —       $ —         1     $ 1,940     $ 1,940  
Commercial and Industrial     —         —         —         3       2,681       2,681  
Residential     —         —         —         2       161       161  
Total     —       $ —       $ —         6     $ 4,782     $ 4,782  

 

    Three Months Ended   Nine Months Ended
    September 30, 2015   September 30, 2015
    Number of Contracts   Pre-Modification Outstanding Recorded Investment   Post-Modification Outstanding Recorded Investment   Number of Contracts   Pre-Modification Outstanding Recorded Investment   Post-Modification Outstanding Recorded Investment
    (Dollars in thousands)   (Dollars in thousands)
Troubled Debt Restructurings                        
Commercial Real Estate     1     $ 488     $ 488       1     $ 488     $ 488  
Total     1     $ 488     $ 488        1     $ 488     $ 488  

A default occurs when a loan is 30 days or more past due. No TDRs defaulted within 12 months of restructuring during the three and nine months ended September 30, 2016 and 2015.

There were no charge-offs on TDRs during the three and nine months ended September 30, 2016. There were $64,000 and $346,000 in charge-offs on TDRs during the three and nine months ended September 30, 2015.

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Credit Quality Information

We utilize an eight-grade internal loan rating system for commercial real estate and commercial and industrial loans. Performing residential real estate, home equity and consumer loans are grouped with “Pass” rated loans. Nonperforming residential real estate, home equity and consumer loans are monitored individually for impairment and risk rated as “Substandard.”

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

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

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

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

Loans rated 7 are considered “Doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable and that a partial loss of principal is likely.

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

On an annual basis, or more often if needed, we formally review the ratings on all commercial real estate and commercial and industrial loans. Construction loans are reported within commercial real estate loans and total $41.4 million and $23.1 million at September 30, 2016 and December 31, 2015, respectively. We engage an independent third party to review a significant portion of loans within these segments on a semi-annual basis. We use the results of these reviews as part of our annual review process. In addition, management utilizes delinquency reports, the watch list and other loan reports to monitor credit quality in other segments.

The following table presents our loans by risk rating at September 30, 2016 and December 31, 2015:

    Commercial
Real Estate
  Residential
1-4 family
  Home
Equity
  Commercial
and
Industrial
  Consumer   Total
    (Dollars in thousands)
September 30, 2016                        
Loans rated 1 – 3   $ 327,781     $ 363,147     $ 50,403     $ 131,226     $ 1,363     $ 873,920  
Loans rated 4     24,489       —         —         15,204       7       39,700  
Loans rated 5     134       —         —         4,089       —         4,223  
Loans rated 6     5,348       1,265       202       17,915       8       24,738  
    $ 357,752     $ 364,412     $ 50,605     $ 168,434     $ 1,378     $ 942,581  
                                                 
December 31, 2015                                                
Loans rated 1 – 3   $ 269,124     $ 296,582     $ 43,512     $ 135,416     $ 1,524     $ 746,158  
Loans rated 4     27,053       —         —         16,060       —         43,113  
Loans rated 5     138       —         —         434       —         572  
Loans rated 6     6,721       1,470       —         16,346       10       24,547  
    $ 303,036     $ 298,052     $ 43,512     $ 168,256     $ 1,534     $ 814,390  

 

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7.   SHARE-BASED COMPENSATION

In May 2014, our shareholders approved a new stock-based compensation plan under which up to 516,000 shares of our common stock have been reserved for future grants of stock awards, including stock options and restricted stock, which may be granted to any officer, key employee or non-employee director of WNEB. Authorized but unissued shares are issued to awardees upon vesting of such awards. Any shares not issued because vesting requirements are not met will again be available for issuance under the plans.

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

In 2016, the Compensation Committee (the “Committee”) approved the long-term incentive program (the “LTI Plan”). The LTI Plan provides a periodic award that is both performance and retention based in that it is designed to recognize the executive’s responsibilities, reward demonstrated performance and leadership and to retain such executives. The objective of the LTI Plan is to align compensation for the named executive officers over a multi-year period directly with the interests of our shareholders by motivating and rewarding creation and preservation of long-term financial strength, shareholder value and relative shareholder return.

The Committee approved the 2016 LTI Plan with the following objectives:

Align executives with the Company’s shareholder interest;
increase Company executive stock ownership/holdings;
ensure sound risk management by providing a balanced view of performance and aligning reward with the time horizon of risk;
position the Company’s total compensation to be competitive with market for meeting performance goals;
motivate and reward long-term sustained performance; and
enable the Company to attract and retain talent needed to drive the Company’s success.

The LTI Plan includes eligible officers of the Company who are nominated by the Company’s Chief Executive Officer and approved by the Committee. The LTI Plan is triggered by the Company’s achievement of satisfactory safety and soundness results from its most recent regulatory examination. Stock grants made through the 2016 LTI plan will be a combination of 50% time-vested restricted stock and 50% performance-based restricted stock. The target opportunity provided through the LTI plan is $60,000 for the CEO and $30,000 for the remaining participants. Time-based restricted stock will vest ratably (1/3 per year) over a three-year period while the performance-based restricted stock will be vested at the end of the three-year performance period.

For the performance shares, the primary performance metric for 2016 awards is return on equity. Performance shares will be earned based upon how the Company performs relative to threshold and target absolute goals (i.e. Company-specific, not relative to a peer index) over the three-year performance period. The threshold amount for the performance period will be a return on equity of 5.85% and a target amount of 6.32%. Participants will be able to earn between 50% (for threshold performance) and 100% of the target amount for the performance shares but will not earn additional shares if performance exceeds target performance. The cap on potential earnings was implemented in 2016 in order to maintain the overall expense of the program at a certain level based upon our budget.

In May 2016, 62,740 shares were granted under the LTI Plan. Of this total, 36,543 shares are retention-based and vest ratably over a three year period. The remaining 26,197 shares granted are performance based and are subject to the achievement of the 2016 LTI performance metric before vesting is realized after a three year period. The fair market value of shares awarded, based on the market price at the date of grant, is recorded as unearned compensation and amortized over the applicable vesting period. Shares granted under performance-based conditions are monitored on a quarterly basis in order to compare actual results to the performance metric established, with any necessary adjustments being recognized through share-based compensation expense and unearned compensation. At September 30, 2016, an additional 404,700 shares were available for future grants under this plan.

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Our stock award plan activity for the nine months ended September 30, 2016 and 2015 is summarized below:

    Unvested Stock Awards Outstanding
    Shares   Weighted Average Grant Date Fair Value
Outstanding at December 31, 2015     54,160     $ 7.28  
Shares granted     62,740       7.73  
Shares vested     (11,200 )     7.18  
Outstanding at September 30, 2016     105,700     $ 7.56  
                 
Outstanding at December 31, 2014     13,000     $ 8.07  
Shares granted     48,560       7.18  
Outstanding at September 30, 2015     61,560     $ 7.37  

8.   SHORT-TERM BORROWINGS AND LONG-TERM DEBT

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

Short-term borrowings are made up of FHLBB advances with an original maturity of less than one year, a line of credit with the FHLBB and customer repurchase agreements, which have an original maturity of one day. Short-term borrowings issued by the FHLBB were $155.0 million and $93.8 million at September 30, 2016 and December 31, 2015, respectively. Customer repurchase agreements were $25.3 million at September 30, 2016 and $34.7 million at December 31, 2015. A customer repurchase agreement is an agreement by us to sell to and repurchase from the customer an interest in specific securities issued by or guaranteed by the U.S. government. This transaction settles immediately on a same day basis in immediately available funds. Interest paid is commensurate with other products of equal interest and credit risk. We have an “Ideal Way” line of credit with the FHLBB for $9.5 million at September 30, 2016 and December 31, 2015. Interest on this line of credit is payable at a rate determined and reset by the FHLBB on a daily basis. The outstanding principal is due daily, but the portion not repaid will be automatically renewed. There were no advances outstanding on the line of credit as of September 30, 2016 or December 31, 2015. In addition, we have lines of credit of $4.0 million and $50.0 million with Bankers Bank Northeast (“BBN”) and PNC Bank, respectively. The interest rates on these lines are determined and reset on a daily basis by each respective bank. There were no advances outstanding under these lines of credit at September 30, 2016 or December 31, 2015.  As part of our contract with BBN, we are required to maintain a reserve balance of $300,000 with BBN for our use of this line of credit.

Long-term debt consists of FHLBB advances with an original maturity of one year or more and customer repurchase agreements linked to deposit accounts with no stated maturity. At September 30, 2016, we had $71.1 million in long-term debt with the FHLBB. This compares to $147.4 million in long-term debt with FHLBB advances at December 31, 2015. There were no long-term customer repurchase agreements at September 30, 2016 while long-term customer repurchase agreements were $5.9 million at December 31, 2015.

Customer repurchase agreements are collateralized by mortgage backed securities with a fair value of $62.3 million and $63.5 million, at September 30, 2016 and December 31, 2015, and government-sponsored enterprise obligations with a fair value of $6.5 million at December 31, 2015. There were no government-sponsored enterprise obligations pledged to collateralized repurchase agreements at September 30, 2016. The securities collateralizing repurchase agreements are subject to fluctuations in fair value. We monitor the fair value of the collateral on a periodic basis, and would pledge additional collateral if necessary based on changes in fair value of collateral or the balances of the repurchase agreements.

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

9.   PENSION BENEFITS

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

  Three Months Ended   Nine Months Ended,
  September 30,   September 30,
    2016   2015   2016   2015
  (In thousands)
Service cost   $ 283     $ 306     $ 854     $ 920  
Interest cost     240       226       719       677  
Expected return on assets     (275 )     (284 )     (823 )     (851 )
Actuarial loss     24       32       71       94  
Net periodic pension cost   $ 272     $ 280     $ 821     $ 840  

 

We maintain a pension plan for our eligible employees. We plan to contribute to the pension plan the amount required to meet the minimum funding standards under Section 412 of the Internal Revenue Code of 1986, as amended. Additional contributions will be made as deemed appropriate by management in conjunction with the pension plan’s actuaries. We have not yet determined how much we expect to contribute to our pension plan in 2016. No contributions have been made to the plan for the nine months ended September 30, 2016. The pension plan assets are invested in group annuity contracts with the Principal Financial Group, who also acts as third-party administrator for our 401(k) and ESOP plans.

10.  DERIVATIVES AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of our assets and liabilities and the use of derivative financial instruments. Specifically, we entered into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally related to certain variable rate loan assets and variable rate borrowings.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest income and expense and to manage our exposure to interest rate movements. To accomplish this objective, we entered into interest rate swaps in September 2013 as part of our interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for our making fixed payments.

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The following table presents information about our cash flow hedges at September 30, 2016 and December 31, 2015: 

September 30, 2016   Notional   Weighted
Average
  Weighted Average Rate   Estimated
Fair
    Amount   Maturity   Receive   Pay   Value
    (In thousands)   (In years)           (In thousands)
Interest rate swaps on short-term FHLBB borrowings   $ 75,000       3.6       0.76 %     2.46 %   $ (5,195 )

 

December 31, 2015   Notional   Weighted
Average
  Weighted Average Rate   Estimated
Fair
    Amount   Maturity   Receive   Pay   Value
    (In thousands)   (In years)           (In thousands)
Interest rate swaps on short-term FHLBB borrowings   $ 40,000       2.3       0.32 %     1.52 %   $ (330 )
Forward starting interest rate swaps on short-term FHLBB borrowings     67,500       6.5       —         3.42 %     (5,734 )
Total cash flow hedges   $ 107,500       4.9                     $ (6,064 )

These amounts are included in other liabilities on the accompanying consolidated balance sheet.

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

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. We assess the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. We did not recognize any hedge ineffectiveness in earnings during the three months ended September 30, 2016 or 2015.

We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of six years (excluding forecasted payment of variable interest on existing financial instruments).

Amounts reported in accumulated other comprehensive loss related to these derivatives will be reclassified to interest expense as interest payments are made on our rate sensitive assets/liabilities. The amount reclassified from accumulated comprehensive income into income for the effective portion of interest rate swaps was $397,000 and $209,000 during the three months ended September 30, 2016 and 2015, respectively. The amount reclassified from accumulated comprehensive income into income for the effective portion of interest rate swaps was $1.0 million and $515,000 during the nine months ended September 30, 2016 and 2015, respectively. During the three and nine months ended September 30, 2016 and 2015, no gains or losses were reclassified from accumulated other comprehensive loss into income for ineffectiveness on cash flow hedges.

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The table below presents the pre-tax net gains (losses) of our cash flow hedges for the periods indicated.

 

    Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
    Three Months Ended September 30,   Nine Months Ended September 30,
    2016   2015   2016   2015
    (In thousands)
Interest rate swaps   $ 417     $ (3,089 )   $ (2,863 )   $ (4,366 )

Credit-risk-related Contingent Features

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

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

As of September 30, 2016, the termination value of derivatives in a net liability position related to these agreements, which includes accrued interest but excludes any adjustment for nonperformance risk, was $5.2 million. As of September 30, 2016, we have minimum collateral posting thresholds with certain of our derivative counterparties and have a mortgage-backed security with a fair value of $4.6 million and $1.1 million of cash posted as collateral against our obligations under these agreements. If we had breached any of these provisions at September 30, 2016, we could have been required to settle our obligations under the agreements at the termination value.

11.  FAIR VALUE OF ASSETS AND LIABILITIES

Determination of Fair Value

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for our various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Fair Value Hierarchy - We group our assets and liabilities that are measured at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value.

Level 1 – Valuation is based on quoted prices in active markets for identical assets. Level 1 assets generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets.

Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. Level 3 assets include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Methods and assumptions for valuing our financial instruments are set forth below. Estimated fair values are calculated based on the value without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications or estimated transaction cost.

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

Securities – Fair value of securities are primarily measured using unadjusted information from an independent pricing service. The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. These securities include marketable equity securities. All other securities are measured at fair value in Level 2 and are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

Federal Home Loan Bank and other restricted stock - These investments are carried at cost which is their estimated redemption value.

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

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

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

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

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

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

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

    September 30, 2016
    Level 1   Level 2   Level 3   Total
Assets:   (In thousands)
Government-sponsored residential mortgage-backed securities   $ —       $ 185,480     $ —       $ 185,480  
U.S. Government guaranteed residential mortgage-backed securities     —         18,770       —         18,770  
Corporate bonds     —         53,744       —         53,744  
State and municipal bonds     —         4,318       —         4,318  
Government-sponsored enterprise obligations     —         25,150       —         25,150  
Mutual funds     6,416       —         —         6,416  
Common and preferred stock     1,699       —         —         1,699  
Total assets   $ 8,115     $ 287,462     $ —       $ 295,577  
                                 
Liabilities:                                
Interest rate swaps   $ —       $ 5,195     $ —       $ 5,195  

 

 

 

    December 31, 2015
    Level 1   Level 2   Level 3   Total
Assets:   (In thousands)
Government-sponsored mortgage-backed securities   $ —       $ 135,959     $ —       $ 135,959  
U.S. Government guaranteed mortgage-backed securities     —         10,903       —         10,903  
Corporate bonds     —         21,136       —         21,136  
State and municipal bonds     —         2,801       —         2,801  
Government-sponsored enterprise obligations     —         3,951       —         3,951  
Mutual funds     6,247       —         —         6,247  
Common and preferred stock     1,593       —         —         1,593  
Total assets   $ 7,840     $ 174,750     $ —       $ 182,590  
                                 
Liabilities:                                
Interest rate swaps   $ —       $ 6,064     $ —       $ 6,064  

Also, we may be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related assets at September 30, 2016 and 2015. Total losses represent the change in carrying value as a result of fair value adjustments related to assets still held at September 30, 2016 and 2015.

    At   Three Months Ended   Nine Months Ended
    September 30, 2016   September 30, 2016   September 30, 2016
                Total   Total
    Level 1   Level 2   Level 3   Gains (Losses)   Gains (Losses)
    (In thousands)        
Impaired Loans   $ —       $ —       $ 2,059     $ —       $ (220 )
Total Assets   $ —       $ —       $ 2,059     $ —       $ (220 )

 

    At   Three Months Ended   Nine Months Ended
    September 30, 2015   September 30, 2015   September 30, 2015
                Total   Total
    Level 1   Level 2   Level 3   Gains (Losses)   Gains (Losses)
    (In thousands)        
Impaired Loans   $ —       $ —       $ 234     $ (64 )   $ (346 )
Total Assets   $ —       $ —       $ 234     $ (64 )   $ (346 )

 

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The amount of impaired loans represents the carrying value and related write-down and valuation allowance of impaired loans for which adjustments are based on the estimated fair value of the underlying collateral. The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on real estate appraisals performed by independent licensed or certified appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Management will discount appraisals as deemed necessary based on the date of the appraisal and new information deemed relevant to the valuation. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. The resulting losses were recognized in earnings through the provision for loan losses. Impaired loans with adjustments resulting from discounted cash flows or without a specific reserve are not included in this disclosure.

There were no transfers to or from Level 1 and 2 during the three and nine months ended September 30, 2016 and 2015. We did not measure any liabilities at fair value on a non-recurring basis on the consolidated balance sheets.

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

 

    September 30, 2016
    Carrying
Value
  Fair Value
        Level 1   Level 2   Level 3   Total
    (In thousands)
Assets:                    
Cash and cash equivalents   $ 50,803     $ 50,803     $ —       $ —       $ 50,803  
Securities available for sale     295,577       8,115       287,462       —         295,577  
Federal Home Loan Bank of Boston and other restricted stock     12,194       —         —         12,194       12,194  
Loans - net     937,693       —         —         931,545       931,545  
Accrued interest receivable     3,578       —         —         3,578       3,578  
                                         
Liabilities:                                        
Deposits     962,558       —         —         965,465       965,465  
Short-term borrowings     180,273       —         180,296       —         180,296  
Long-term debt     71,165       —         72,658       —         72,658  
Accrued interest payable     328       —         —         328       328  
Derivative liabilities     5,195       —         5,195       —         5,195  

 

    December 31, 2015
    Carrying
Value
  Fair Value
        Level 1   Level 2   Level 3   Total
    (In thousands)
Assets:                    
Cash and cash equivalents   $ 13,703     $ 13,703     $ —       $ —       $ 13,703  
Securities available for sale     182,590       7,840       174,750       —         182,590  
Securities held to maturity     238,219       —         237,619       —         237,619  
Federal Home Loan Bank of Boston and other restricted stock     15,074       —         —         15,074       15,074  
Loans - net     809,373       —         —         797,596       797,596  
Accrued interest receivable     3,878       —         —         3,878       3,878  
Derivative assets     —         —         —         —         —    
                                         
Liabilities:                                        
Deposits     900,363       —         —         901,400       901,400  
Short-term borrowings     128,407       —         128,407       —         128,407  
Long-term debt     153,358       —         155,433       —         155,433  
Accrued interest payable     446       —         —         446       446  
Derivative liabilities     6,064       —         6,064       —         6,064  

 

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12.  RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this Update create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for annual reporting periods, including interim periods, beginning after December 15, 2017. Early application is permitted, but only for annual reporting periods beginning after December 31, 2016. We do not expect the application of this guidance to have a material impact on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall, (Subtopic 825-10). The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Targeted improvements to generally accepted accounting principles include the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income and the elimination of the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We do not expect the application of this guidance to have a material impact on our consolidated financial statements.

In February of 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the requirements in Topic 840, Leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. The amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in this Update is permitted for all entities. Management is currently evaluating the impact to the consolidated financial statements of adopting this Update.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718).  This Update was issued as part of the FASB’s simplification initiative.  The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  In addition, amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment.  The amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Early adoption is permitted for any entity in any interim or annual period.  Management is currently evaluating the impact to the consolidated financial statements of adopting this Update.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Entities will now use forward-looking information to better form their credit loss estimates.  The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements.  This ASU is effective for fiscal years beginning after December 15, 2019, and for interim periods within that fiscal years.  Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Management is currently evaluating the impact of adopting this ASU on the consolidated financial statements.

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In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. This Update provides guidance on eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other Debt Instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial Interests in securitization transactions; separately identifiable cash flows and application of the predominance principle. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We do not expect the application of this guidance to have a material impact on our consolidated financial statements.

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

Overview

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

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

  • grow our commercial and industrial and commercial real estate loan portfolios by targeting businesses in our primary market 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
  • supplement the commercial focus, grow the residential loan portfolio to diversify risk and deepen customer relationships.

You should read the following financial results for the three and nine months ended September 30, 2016 in the context of this strategy.

Net income was $628,000, or $0.04 per diluted share, for the three months ended September 30, 2016, compared to $1.6 million, or $0.09 per diluted share, for the same period in 2015. For the nine months ended September 30, 2016, net income was $3.0 million, or $0.17 per diluted share, as compared to net income of $4.3 million, or $0.25 per diluted share, for the same period in 2015. Both the 2016 periods were impacted by expenses of $830,000 and $1.9 million related to our merger with Chicopee.
The provision for loan losses was $375,000 and $150,000 for the three months ended September 30, 2016 and 2015, respectively, and $400,000 and $800,000 for the nine months ended September 30, 2016 and 2015, respectively. The lower provisions for the nine months ended September 30, 2016 were primarily the result of $1.0 million in recoveries on a single commercial real estate loan during the nine months ended September 30, 2016.
Net interest income was $8.3 million and $8.2 million for the three months ended September 30, 2016 and 2015, respectively. The net interest margin, on a tax-equivalent basis, was 2.65% for the three months ended September 30, 2016, compared to 2.53% for the same period in 2015. Net interest income was $24.6 million and $23.5 million for the nine months ended September 30, 2016 and 2015, respectively. The net interest margin, on a tax-equivalent basis, was 2.62% and 2.52% for the nine months ended September 30, 2016 and 2015, respectively. The increase in net interest income for the three and nine months ended September 30, 2016 was due to an increase in the yield on average interest-earnings assets and a decrease in the average volume of interest-bearing liabilities with a stable cost of interest-bearing liabilities.
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CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with U.S. GAAP and practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ from those estimates.

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. There have been no material changes to our critical accounting policies during the three and nine months ended September 30, 2016. For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the accompanying unaudited consolidated financial statements and Note 1 of the consolidated financial statements included in our 2015 Annual Report.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2016 AND DECEMBER 31, 2015

Total assets were $1.4 billion at September 30, 2016 and $1.3 billion at December 31, 2015. Securities decreased $128.1 million to $307.8 million at September 30, 2016 from $435.9 million at December 31, 2015 primarily due to sales of securities to fund loan growth. During the first quarter of 2016, we transferred our securities classified as held to maturity into available-for-sale and subsequently sold $136.8 million in securities available-for-sale. Market conditions allowed for us to take advantage of opportunities to further reduce our securities portfolio along with our borrowings.

Total loans increased by $129.4 million to $947.6 million at September 30, 2016 from $818.2 million at December 31, 2015.

Residential loans increased $73.4 million to $415.0 million at September 30, 2016 from $341.6 million at December 31, 2015. We purchased $107.6 million in residential loans from two New England-based banks as a means of supplementing our residential loan portfolio. While management uses residential loan growth to supplement the loan portfolio, the long-term strategy remains focused on commercial lending.

Commercial real estate loans increased $54.8 million to $357.8 million at September 30, 2016 from $303.0 at December 31, 2015. Non-owner occupied commercial real estate loans increased $42.6 million to $231.8 million at September 30, 2016 from $189.2 million at December 31, 2015, while owner occupied commercial real estate loans increased $12.1 million to $125.9 million at September 30, 2016 from $113.8 million at December 31, 2015. Commercial and industrial loans increased $178,000 to $168.4 million at September 30, 2016 from $168.3 million at December 31, 2015.

All loans where the interest payment is 90 days or more in arrears as of the closing date of each month are placed on nonaccrual status. Nonperforming loans were $7.3 million at September 30, 2016 and $8.1 million at December 31, 2015. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $371,000 and $293,000 for the nine months ended September 30, 2016 and 2015, respectively. At September 30, 2016 and December 31, 2015, there was no real estate in foreclosure. At September 30, 2016 and December 31, 2015, our nonperforming loans to total loans were 0.77% and 0.99%, respectively, while our nonperforming assets to total assets were 0.53% and 0.60%, respectively. A summary of our nonaccrual and past due loans by class are listed in Note 6 of the accompanying unaudited consolidated financial statements.

Total deposits increased $62.2 million to $962.6 million at September 30, 2016 from $900.4 million at December 31, 2015. The increase in deposits was due to a $52.5 million increase in money market accounts, which were $295.1 million and $242.6 million at September 30, 2016 and December 31, 2015, respectively. Checking accounts increased $34.3 million to $221.1 million at September 30, 2016 from $186.8 million at December 31, 2015. Included in the checking account growth for the nine month period ended September 30, 2016 is $11.5 million that was temporarily on deposit at the end of the third quarter 2016 and will be used for other business purposes in the fourth quarter 2016. These increases were partially offset by a $21.0 million decrease in time deposits, primarily due to a $26.8 million decrease in brokered and listing service deposits, as management continues to lessen its reliance on wholesale funding.

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Borrowings decreased $30.4 million to $251.4 million at September 30, 2016 from $281.8 million at December 31, 2015. Long-term debt decreased $82.2 million to $71.2 million at September 30, 2016 from $153.4 million at December 31, 2015. We prepaid $42.5 million in FHLBB borrowings with a weighted average rate of 2.29% and incurred a prepayment expense of $915,000 for the first quarter 2016. In addition, we utilized cash on hand to pay off maturing advances in the amount of $38.0 million. Short-term borrowings increased $51.9 million to $180.3 million at September 30, 2016 from $128.4 million at December 31, 2015 primarily due to an increase in short-term FHLBB funding. Our short-term borrowings and long-term debt are discussed in Note 8 of the accompanying consolidated financial statements.

Shareholders’ equity was $145.2 million and $139.5 million, which represented 10.5% and 10.4% of total assets at September 30, 2016 and December 31, 2015, respectively. The increase in shareholders’ equity during the nine months ended September 30, 2016 reflects other comprehensive income of $3.7 million primarily due to changes in the market value of our securities portfolio and net income of $3.0 million for the nine months ended September 30, 2016. This was partially offset by the payment of regular dividends of $1.6 million for the nine months ended September 30, 2016.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016 AND SEPTEMBER 30, 2015

General

Net income was $628,000, or $0.04 per diluted share, for the quarter ended September 30, 2016, compared to $1.6 million, or $0.09 per diluted share, for the same period in 2015. Net interest income was $8.3 million and $8.2 million for the three months ended September 30, 2016 and 2015, respectively.

Net Interest and Dividend Income

The following tables set forth the information relating to our average balance and net interest income for the three months ended September 30, 2016 and 2015, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned from making changes in loan rates and terms and fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.

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    Three Months Ended September 30,
    2016   2015
    Average       Avg Yield/   Average       Avg Yield/
    Balance   Interest   Cost   Balance   Interest   Cost
    (Dollars in thousands)
ASSETS:                        
Interest-earning assets                                                
Loans(1)(2)   $ 932,140     $ 9,168       3.93 %   $ 788,637     $ 7,879       4.00 %
Securities(2)     296,406       1,709       2.31       481,360       3,068       2.55  
Other investments - at cost     12,728       130       4.09       16,963       126       2.97  
Short-term investments(3)     17,380       14       0.32       7,704       2       0.10  
Total interest-earning assets     1,258,654       11,021       3.50       1,294,664       11,075       3.42  
Total noninterest-earning assets     79,032                       76,614                  
                                                 
Total assets   $ 1,337,686                     $ 1,371,278                  
                                                 
LIABILITIES AND EQUITY:                                                
Interest-bearing liabilities                                                
Interest-bearing accounts   $ 31,194       24       0.31     $ 34,725       20       0.23  
Savings accounts     75,566       20       0.11       75,943       20       0.11  
Money market accounts     278,257       293       0.42       239,112       198       0.33  
Time certificates of deposit     383,288       1,245       1.30       398,238       1,176       1.18  
Total interest-bearing deposits     768,305       1,582               748,018       1,414          
Short-term borrowings and long-term debt     229,718       1,067       1.86       320,712       1,400       1.75  
Interest-bearing liabilities     998,023       2,649       1.06       1,068,730       2,814       1.05  
Noninterest-bearing deposits     177,802                       149,626                  
Other noninterest-bearing liabilities     16,261                       16,755                  
Total noninterest-bearing liabilities     194,063                       166,381                  
                                                 
Total liabilities     1,192,086                       1,235,111                  
Total equity     145,601                       136,167                  
Total liabilities and equity   $ 1,337,687                     $ 1,371,278                  
Less: Tax-equivalent adjustment(2)             (44 )                     (101 )        
Net interest and dividend income           $ 8,328                     $ 8,160          
Net interest rate spread(4)                     2.44 %                     2.37 %
Net interest margin(5)                     2.65 %                     2.53 %
Ratio of average interest-earning assets to average interest-bearing liabilities                     126.11                       121.14  

________________________

(1) Loans, including non-accrual loans, are net of deferred loan origination costs, and unadvanced funds.
(2) Securities and loan 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 net 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.
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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 income and interest expense during the periods indicated. Information is provided in each category with respect to:

  • interest income changes attributable to changes in volume (changes in volume multiplied by prior rate);
  • interest income changes attributable to changes in rate (changes in rate multiplied by current volume); and
  • 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.

    Three Months Ended September 30, 2016 compared to
Three Months Ended September 30, 2015
    Increase (Decrease) Due to    
    Volume   Rate   Net
Interest-earning assets   (Dollars in thousands)
Loans (1)   $ 1,434     $ (145 )   $ 1,289  
Investment securities (1)     (1,179 )     (180 )     (1,359 )
Other investments - at cost     (31 )     35       4  
Short-term investments     3       9       12  
Total interest-earning assets     227       (281 )     (54 )
                         
Interest-bearing liabilities                        
NOW accounts     (2 )     6       4  
Savings accounts     —         —         —    
Money market accounts     32       63       95  
Time deposits     (44 )     113       69  
Short-term borrowing and long-term debt     (397 )     64       (333 )
Total interest-bearing liabilities     (411 )     246       (165 )
Change in net interest and dividend income   $ 638     $ (527 )   $ 111  

__________________________

(1) Securities, loan income and change in net interest and dividend 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.

The net interest margin, on a tax-equivalent basis, was 2.65% for the three months ended September 30, 2016, compared to 2.53% for the same period in 2015.

The increase in net interest income was primarily driven by a favorable shift in asset mix out of securities and into loans, along with a decrease in the average volume of interest-bearing liabilities. The average yield on interest-earning assets increased 8 basis points to 3.50% for the three months ended September 30, 2016, compared to 3.42% for the same period in 2015. This was primarily driven by a $143.5 million increase in the average balance of loans to $932.1 million for the three months ended September 30, 2016, from $788.6 million in the comparable 2015 period. In addition, the average balance of securities decreased $185.0 million to $296.4 million for the three months ended September 30, 2016 from $481.4 million for the three months ended September 30, 2015. Interest and dividend income was flat at $11.0 million for the three months ended September 30, 2016 and 2015, respectively.

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Interest expense decreased $165,000 to $2.6 million for the three months ended September 30, 2016 from $2.8 million for the same period in 2015. The decrease in the cost of interest-bearing liabilities was primarily due to a decrease in the volume of short-term borrowings and long-term debt. The average balance of short-term borrowings and long-term debt decreased $91.0 million to $229.7 million for the three months ended September 30, 2016, compared to $320.7 million for the comparable 2015 period. In the third quarter of 2015 and the first quarter of 2016, management prepaid long-term debt totaling $61.5 million with a weighted average rate of 2.49% in order to eliminate higher cost borrowings. The average cost of interest-bearing liabilities increased 1 basis point to 1.06% for the three months ended September 30, 2016 from 1.05% for the same period in 2015. This was primarily due to an increase in the average cost of time deposit and money market accounts for the three months ended September 30, 2016.

Provision for Loan Losses

The amount that we provided for loan losses during the three months ended September 30, 2016 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio for the three months ended September 30, 2016, described in detail below, include an increase in residential real estate loans, commercial real estate loans and commercial and industrial loans. After evaluating these factors, we recorded a provision of $375,000 for loan losses for the three months ended September 30, 2016, compared to $150,000 for the same period in 2015. The allowance was $9.9 million and $9.6 million and 1.05% and 1.06% of total loans at September 30, 2016 and June 30, 2016, respectively.

Residential loans increased $20.9 million to $415.0 million at September 30, 2016 from $394.1 million at June 30, 2016. We consider residential real estate loans to contain less credit risk and market risk than both commercial and industrial and commercial real estate loans. Commercial real estate loans increased $19.0 million to $357.8 million at September 30, 2016 from $338.8 million at June 30, 2016. Non-owner occupied commercial real estate loans increased $15.4 million to $231.8 million at September 30, 2016 from $216.4 million at June 30, 2016, while owner occupied commercial real estate loans increased $3.5 million to $125.9 million at September 30, 2016 from $122.4 million at June 30, 2016. Commercial and industrial loans increased $1.2 million to $168.4 million at September 30, 2016 from $167.2 million at June 30, 2016.

Net charge-offs were $18,000 for the three months ended September 30, 2016. This comprised charge-offs of $86,000 for the three months ended September 30, 2016, offset by recoveries of $68,000.

Net charge-offs were $73,000 for the three months ended September 30, 2015. This comprised charge-offs of $85,000 for the three months ended September 30, 2015, offset by recoveries of $12,000.

Although we believe that we have established and maintained the allowance for loan losses at adequate 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 $175,000 to $1.3 million for the three months ended September 30, 2016, compared to $1.1 million for the same period in 2015. Service charges and fees increased $164,000 to $953,000 at September 30, 2016 from $789,000 at September 30, 2015. Net gains on the sales of securities were $414,000 for the three months ended September 30, 2015, compared to $1,000 for the same period in 2016. During the three months ended September 30, 2015, we incurred a prepayment expense of $429,000 on the prepayment of $19.0 million in FHLBB borrowings. There were no prepayments of FHLBB borrowings during the comparable 2016 period.

Noninterest Expense

Noninterest expense increased $1.3 million to $8.2 million for the three months ended September 30, 2016 from $6.9 million for the same period in 2015. The increase for the 2016 period was primarily due to $830,000 in merger related expenses incurred in conjunction with the Chicopee merger. Salaries and benefits expense increased $211,000 to $4.1 million for the three months ended September 30, 2016, compared to $3.9 million for the same period in 2015 primarily due to normal increases in this area.

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Income Taxes

For the three months ended September 30, 2016, we had a tax provision of $423,000 as compared to $680,000 for the same period in 2015. The effective tax rate was 40.2% for the three months ended September 30, 2016 and 29.7% for the same period in 2015. The change in effective tax rate reflects estimates for non-deductible merger expenses as well as lower forecasted levels of tax-advantaged income such as BOLI and lower levels of tax-exempt municipal obligations.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND SEPTEMBER 30, 2015

General

Net income was $3.0 million, or $0.17 per diluted share, for the nine months ended September 30, 2016, compared to $4.3 million, or $0.25 per diluted share, for the same period in 2015. Net interest income was $24.6 million and $23.5 million for the nine months ended September 30, 2016 and 2015, respectively.

Net Interest and Dividend Income

The following tables set forth the information relating to our average balance and net interest income for the nine months ended September 30, 2016 and 2015, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned from making changes in loan rates and terms and fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.

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    Nine Months Ended September 30,
    2016   2015
    Average       Avg Yield/   Average       Avg Yield/
    Balance   Interest   Cost   Balance   Interest   Cost
    (Dollars in thousands)
ASSETS:                        
Interest-earning assets                        
Loans(1)(2)   $ 875,325     $ 26,118       3.98 %   $ 753,077     $ 22,542       3.99 %
Securities(2)     334,938       6,062       2.41       487,122       9,177       2.51  
Other investments - at cost     14,703       398       3.61       16,555       263       2.12  
Short-term investments(3)     33,457       67       0.27       11,531       13       0.15  
Total interest-earning assets     1,258,423       32,645       3.46       1,268,285       31,995       3.36  
Total noninterest-earning assets     77,626                       78,288                  
                                                 
Total assets   $ 1,336,049                     $ 1,346,573                  
                                                 
LIABILITIES AND EQUITY:                                                
Interest-bearing liabilities                                                
Interest-bearing accounts   $ 31,353       64       0.27     $ 36,240       61       0.22  
Savings accounts     76,381       63       0.11       75,780       59       0.10  
Money market accounts     264,354       785       0.40       236,305       627       0.35  
Time certificates of deposit     391,793       3,677       1.25       385,881       3,388       1.17  
Total interest-bearing deposits     763,881       4,589               734,206       4,135          
Short-term borrowings and long-term debt     250,462       3,329       1.77       312,373       3,992       1.70  
Interest-bearing liabilities     1,014,343       7,918       1.04       1,046,579       8,127       1.04  
Noninterest-bearing deposits     165,156                       142,671                  
Other noninterest-bearing liabilities     15,273                       17,797                  
Total noninterest-bearing liabilities     180,429                       160,468                  
                                                 
Total liabilities     1,194,772                       1,207,047                  
Total equity     141,277                       139,526                  
Total liabilities and equity   $ 1,336,049                     $ 1,346,573