Western New England Bancorp, Inc. - FORM 10-K

Attached files

file	filename
EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - Western New England Bancorp, Inc.	ex31-1.htm
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 THE CHIEF FINANCIAL OFFICER - Western New England Bancorp, Inc.	ex31-2.htm
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - Western New England Bancorp, Inc.	ex23-1.htm
EX-21.1 - SUBSIDIARIES OF THE REGISTRANT - Western New England Bancorp, Inc.	ex21-1.htm

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2016

Commission File No.: 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 01085

(Address of principal executive offices, including zip code)

(413) 568-1911

(Registrant’s telephone number, including area code)

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

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐ No ☒

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2016, was $141,144,750. This amount was based on the closing price as of June 30, 2016 on The NASDAQ Global Select Market for a share of the registrant’s common stock, which was $7.70 on June 30, 2016.

As of March 9, 2017, the registrant had 30,691,762 shares of common stock, $0.01 per value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement for the 2017 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

WESTERN NEW ENGLAND BANCORP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2016

TABLE OF CONTENTS

ITEM	PART I	PAGE

1	BUSINESS	2
1A	RISK FACTORS	29
1B	UNRESOLVED STAFF COMMENTS	33
2	PROPERTIES	33
3	LEGAL PROCEEDINGS	36
4	MINE SAFETY DISCLOSURES	36

	PART II

5	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	37
6	SELECTED FINANCIAL DATA	40
7	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	42
7A	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	57
8	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	57
9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	57
9A	CONTROLS AND PROCEDURES	57
9B	OTHER INFORMATION	59

	PART III

10	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	59
11	EXECUTIVE COMPENSATION	59
12	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS	59
13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	59
14	PRINCIPAL ACCOUNTING FEES AND SERVICES	59

	PART IV

15	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	59

FORWARD-LOOKING STATEMENTS

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

●

changes in the interest rate environment that reduce margins;

●

changes in the regulatory environment;

●

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

●

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

●

changes in business conditions and inflation;

●

changes in credit market conditions;

●

changes in the securities markets which affect investment management revenues;

●

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

●

changes in technology used in the banking business;

●

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

●

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

●

our controls and procedures may fail or be circumvented;

●

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

●

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

●

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

●

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

●

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

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

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

PART I

ITEM 1.

BUSINESS

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

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

Market Area. We operate 21 banking offices in Agawam, Chicopee, Feeding Hills, East Longmeadow, Holyoke, Ludlow, South Hadley, Southwick, Springfield, Ware, West Springfield and Westfield, Massachusetts and Granby and Enfield, Connecticut. Our banking offices in Granby and Enfield, Connecticut, which we opened in June 2013 and November 2014, respectively, are our first locations outside of western Massachusetts. In 2014, we relocated our middle market and commercial real estate lending team to offices in Springfield, Massachusetts. We also have 23 free-standing ATM locations in Chicopee, Holyoke, Southwick, Springfield, West Springfield and Westfield, Massachusetts and 22 traveling/seasonal ATMs. Our primary deposit gathering area is concentrated in the communities surrounding these locations and our primary lending area includes all of Hampden County and Hampshire County in western Massachusetts and Hartford and Tolland Counties in northern Connecticut. In addition, we provide online banking services through our website located at www.westfieldbank.com.

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

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

Personnel. As of December 31, 2016, we had 256 full-time employees and 54 part-time employees. The employees are not represented by a collective bargaining unit, and we consider our relationship with our employees to be excellent.

Lending Activities

Loan Portfolio Composition. Our loan portfolio primarily consists of commercial real estate loans, commercial and industrial loans, residential real estate loans, home equity loans and consumer loans. At December 31, 2016, we had total loans of $1.6 billion, of which 60.6% were adjustable rate loans and 39.4% were fixed rate loans. Commercial real estate loans and commercial and industrial loans totaled $720.7 million and $222.3 million, respectively. The remainder of our loans at December 31, 2016 consisted of residential real estate loans, home equity loans and consumer loans. Residential real estate and home equity loans outstanding at December 31, 2016 totaled $614.2 million. Consumer loans outstanding at December 31, 2016 were $4.4 million.

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

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

	At December 31,
	2016						2015						2014						2013						2012
				Percent of						Percent of						Percent of						Percent of						Percent of
	Amount			Total			Amount			Total			Amount			Total			Amount			Total			Amount			Total
	(Dollars in thousands)
Real estate loans:
Commercial	$	720,741			46.15	%	$	303,036			37.21	%	$	278,405			38.49	%	$	264,476			41.54	%	$	245,764			41.38	%
Residential		522,083			33.43			298,052			36.60			237,436			32.82			198,686			31.21			185,345			31.21
Home equity		92,083			5.90			43,512			5.34			40,305			5.57			35,371			5.56			34,352			5.78
Total real estate loans		1,334,907			85.48			644,600			79.15			556,146			76.88			498,533			78.31			465,461			78.37

Other loans
Commercial and industrial		222,286			14.23			168,256			20.66			165,728			22.91			135,555			21.29			126,052			21.22
Consumer, other		4,424			0.28			1,534			0.19			1,542			0.21			2,572			0.40			2,431			0.41
Total other loans		226,710			14.52			169,790			20.85			167,270			23.12			138,127			21.69			128,483			21.63

Total loans		1,561,617			100.00	%		814,390			100.00	%		723,416			100.00	%		636,660			100.00	%		593,944			100.00	%

Unearned premiums and net deferred loan fees and costs, net		4,867						3,823						1,270						767						974
Allowance for loan losses		(10,068	)					(8,840	)					(7,948	)					(7,459	)					(7,794	)
Total loans, net	$	1,556,416					$	809,373					$	716,738					$	629,968					$	587,124

Loan Maturity and Repricing. The following table shows the repricing dates or contractual maturity dates as of December 31, 2016. The table does not reflect prepayments or scheduled principal amortization. Demand loans, loans having no stated maturity, and overdrafts are shown as due in within one year.

At December 31, 2016
	Commercial Real Estate			Residential			Home Equity			Commercial and Industrial			Consumer			Unallocated		Totals
(In thousands)
Amount due:
Within one year	$	113,924		$	33,987		$	68,671		$	111,998		$	640		$	—	$	329,220

After one year:
One to three years		111,076			50,452			561			27,772			693			—		190,554
Three to five years		222,805			47,679			2,406			43,791			881			—		317,562
Five to ten years		244,762			84,602			8,615			36,530			238			—		374,747
Ten to twenty years		20,929			54,468			11,681			1,040			1,034			—		89,152
Over twenty years		7,245			250,895			149			1,155			938			—		260,382
Total due after one year		606,817			488,096			23,412			110,288			3,784			—		1,232,397

Total amount due:		720,741			522,083			92,083			222,286			4,424			—		1,561,617

Net deferred loan origination fees and costs and unearned premiums		(165	)		4,266			323			406			37			—		4,867
Allowance for loan losses		(4,083	)		(2,433	)		(429	)		(3,085	)		(38	)		—		(10,068	)

Loans, net	$	716,493		$	523,916		$	91,977		$	219,607		$	4,423		$	—	$	1,556,416

The following table presents, as of December 31, 2016, the dollar amount of all loans contractually due or scheduled to reprice after December 31, 2017, and whether such loans have fixed interest rates or adjustable interest rates.

	Due After December 31, 2017
	Fixed		Adjustable		Total
	(In thousands)

Real estate loans:
Residential	$	324,697	$	163,399	$	488,096
Home equity		23,412		—		23,412
Commercial real estate		131,466		475,351		606,817
Total real estate loans		479,575		638,750		1,118,325

Other loans:
Commercial and industrial		104,145		6,143		110,288
Consumer		3,760		24		3,784
Total other loans		107,905		6,167		114,072

Total loans	$	587,480	$	644,917	$	1,232,397

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

	For the Years Ended December 31,
	2016			2015		2014
	(In thousands)
Loans:
Balance outstanding at beginning of year	$	814,390		$	723,416	$	636,660

Originations:
Real estate loans:
Residential		3,522			240		4,880
Home equity		23,093			15,189		15,089
Commercial		78,396			79,734		37,399
Total mortgage originations		105,011			95,163		57,368

Commercial and industrial loans		75,034			51,063		105,438
Consumer loans		871			1,404		1,491
Total originations		180,916			147,630		164,297
Purchase of one-to-four family mortgage loans		108,448			90,743		53,272
		289,364			238,373		217,569

Loans acquired from Chicopee Savings Bank at fair value		640,892			—		—

Less:
Principal repayments, unadvanced funds and other, net		183,384			147,016		129,727
Loan charge-offs (recoveries), net		(653	)		383		1,086
Loans transferred to other real estate owned		298			—		—
Total deductions		183,029			147,399		130,813
Ending balance	$	1,561,617		$	814,390	$	723,416

Commercial and Industrial Loans. We offer commercial and industrial loan products and services that are designed to give business owners borrowing opportunities for modernization, inventory, equipment, construction, consolidation, real estate, working capital, vehicle purchases and the financing of existing corporate debt. We offer business installment loans, vehicle and equipment financing, lines of credit, and other commercial loans. At December 31, 2016, our commercial and industrial loan portfolio consisted of 1,868 loans, totaling $222.3 million, or 14.2% of our total loans. Our commercial loan team includes thirteen commercial loan officers, six credit analysts and two portfolio managers. We may hire additional commercial loan officers on an as needed basis.

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

Our commercial and industrial loan portfolio does not have any significant loan concentration by type of property or borrower. The largest concentration of commercial and industrial loans to an industry was to retail trade which comprised approximately 14.2% of the commercial and industrial loan portfolio inclusive of commercial and industrial owner occupied real estate loans as of December 31, 2016. At December 31, 2016, our largest commercial and industrial loan relationship was $17.1 million to a college. The loan relationship is secured by business assets and owner occupied real estate. The loans to this borrower have performed to contractual terms.

Commercial and industrial loans generally have terms of seven years or less, however, on an occasional basis, may have terms of up to ten years. Among the $222.3 million we have in our commercial and industrial loan portfolio as of December 31, 2016, $101.0 million have adjustable interest rates and $121.3 million have fixed interest rates. Whenever possible, we seek to originate adjustable rate commercial and industrial loans. Borrower activity and market conditions, however, may influence whether we are able to originate adjustable rate loans rather than fixed rate loans. We generally require the personal guarantee of the business owner. Interest rates on commercial and industrial loans generally have higher yields than residential or commercial real estate loans.

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

Commercial Real Estate Loans. We originate commercial real estate loans to finance the purchase of real property, which generally consists of apartment buildings, business properties, multi-family investment properties and construction loans to developers of commercial and residential properties. In underwriting commercial real estate loans, consideration is given to the property’s historic cash flow, current and projected occupancy, location and physical condition. At December 31, 2016, our commercial real estate loan portfolio consisted of 1,024 loans, totaling $720.7 million, or 46.2% of total loans. Since 2012, commercial real estate loans have grown by $475.0 million, or 193.3%, from $245.8 million at December 31, 2012 to $720.7 million at December 31, 2016. Organic commercial real estate loan growth since 2012 was $116.9 million, or 47.6%.

The majority of the commercial real estate portfolio consists of loans which are collateralized by properties in the Pioneer Valley of Massachusetts and northern Connecticut. Our commercial real estate loan portfolio is diverse, and does not have any significant loan concentration by type of property or borrower. We generally lend up to a loan-to-value ratio of 80% on commercial properties. We, however, will lend up to a maximum of 85% loan-to-value ratio and will generally require a minimum debt coverage ratio of 1.15. Our largest non-owner occupied commercial real estate loan relationship was $14.6 million at December 31, 2016, which is secured by a commercial property located in Rhode Island. The loans to this borrower are performing.

We also offer construction loans to finance the construction of commercial properties located in our primary market area. At December 31, 2016, we had $88.9 million in commercial construction loans and commitments that are committed to refinance into permanent mortgages at the end of the construction period and $27.9 in commercial construction loans and commitments that are not committed to permanent financing at the end of the construction period.

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

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

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

In 2016, we purchased $108.4 million in residential loans from two New England-based banks as a means of supplementing our loan growth. While management has used residential loan growth to supplement the loan portfolio, the long-term strategy remains focused on commercial lending. At December 31, 2016, loans on one-to-four family residential properties, including home equity lines, accounted for $614.2 million, or 39.3% of our total loan portfolio.

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

Adjustable rate mortgage loans generally pose different credit risks than fixed rate loans, primarily because as interest rates rise, the borrower’s payments rise, increasing the potential for default. To date, we have not experienced difficulty with payments for these loans. At December 31, 2016, our residential real estate included $196.4 million in adjustable rate loans, or 12.6% of our total loan portfolio, and $325.7 million in fixed rate loans, or 20.9% of our total loan portfolio.

Our home equity loans totaled $92.1 million, or 5.9% of total loans at December 31, 2016. Home equity loans include $23.5 million in fixed rate loans, or 1.5% of total loans, and $68.6 million in adjustable rate loans, or 4.4% of total loans. These loans may be originated in amounts up to 85% current loan to value (CLTV) of the appraised value of the property securing the loan. The term to maturity on our home equity and home improvement loans may be up to 20 years.

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

We offer a variety of consumer loans to retail customers in the communities we serve. Examples of our consumer loans include automobile loans, secured passbook loans, credit lines tied to deposit accounts to provide overdraft protection, and unsecured personal loans. At December 31, 2016, the consumer loan portfolio totaled $4.4 million, or 0.3% of total loans. Our consumer lending will allow us to diversify our loan portfolio while continuing to meet the needs of the individuals and businesses that we serve.

Loans collateralized by rapidly depreciable assets such as automobiles or that are unsecured entail greater risks than residential real estate loans. In such cases, repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance, since there is a greater likelihood of damage, loss or depreciation of the underlying collateral. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. Further, collections on these loans are dependent on the borrower’s continuing financial stability and, therefore, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. There was no repossessed collateral relating to consumer loans at December 31, 2016. Finally, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans if a borrower defaults.

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

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

For loans that are $250,000 or under, an assessment of valuation will be performed by a qualified individual. The individual performing the assessment of valuation is independent from the loan production and will validate the evaluation methodology by supporting criteria. If the valuation assessment is over 70% loan to value (LTV) a full appraisal will be ordered by a licensed appraiser. For loan amounts over $250,000 a full appraisal is required by a licensed appraiser.

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

Our lending policies permit our lending and underwriting departments to review and approve commercial and industrial loans and commercial real estate loans up to $2.0 million. Any commercial and industrial or commercial real estate loan application that exceeds $2.0 million or that would result in the borrower’s total credit exposure with us to exceed $2.0 million, or whose approval requires an exception to our standard loan approval procedures, requires approval of the Executive Committee of the Board of Directors. An example of an exception to our standard loan approval procedures would be if a borrower was located outside our primary lending area. For loans requiring Board approval, management is responsible for presenting to the Board information about the creditworthiness of a borrower and the estimated value of the subject equipment or property. Generally, these determinations are based on financial statements, corporate and personal tax returns, as well as any other necessary information, including real estate and or equipment appraisals.

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

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

Asset Quality

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

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

The following table presents information regarding nonperforming mortgage, consumer and other loans, and foreclosed real estate as of the dates indicated. All loans where the payment is 90 days or more in arrears as of the closing date of each month are placed on nonaccrual status unless the loan is well secured and in the process of collection. At December 31, 2016, 2015 and 2014, nonperforming loans totaled $14.1 million, $8.1 million, and $8.8 million, respectively. In 2016, we acquired $6.4 million in nonperforming loans from Chicopee. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $535,000, $406,000 and $221,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

	At December 31,
	2016			2015			2014			2013			2012
	(Dollars in thousands)
Nonaccrual real estate loans:
Residential	$	5,744		$	1,470		$	1,323		$	712		$	939
Home equity		119			—			1			38			103
Commercial real estate		4,453			3,237			3,257			1,449			1,558
Total nonaccrual real estate loans		10,316			4,707			4,581			2,199			2,600
Other loans:
Commercial and industrial		3,714			3,363			4,233			386			409
Consumer		27			10			16			1			—
Total nonaccrual other loans		3,741			3,373			4,249			387			409
Total nonperforming loans		14,057			8,080			8,830			2,586			3,009
Foreclosed real estate, net		298			—			—			—			964
Total nonperforming assets ⁽¹⁾	$	14,355		$	8,080		$	8,830		$	2,586		$	3,973
Nonperforming loans to total loans		0.90	%		0.99	%		1.22	%		0.41	%		0.51	%
Nonperforming assets to total assets		0.69			0.60			0.67			0.20			0.31

⁽¹⁾ TDRs on accrual status not included above totaled $2.1 million, $495,000, $50,000, $14.5 million and $14.8 million at December 31, 2016, 2015, 2014, 2013, and 2012, respectively.

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

	At or for Years Ended December 31,
	2016			2015			2014			2013			2012
	(Dollars in thousands)
Balance at beginning of year	$	8,840		$	7,948		$	7,459		$	7,794		$	7,764

Charge-offs:
Residential		(115	)		(24	)		(31	)		(80	)		—
Commercial real estate		(170	)		—			(350	)		(20	)		(195	)
Home equity loans		(42	)		(34	)		—			—			(155	)
Commercial and industrial		—			(345	)		(787	)		(208	)		(391	)
Consumer		(159	)		(73	)		(55	)		(33	)		(27	)
Total charge-offs		(486	)		(476	)		(1,223	)		(341	)		(768	)

Recoveries:
Residential		9			4			1			1			3
Commercial real estate		1,065			—			—			155			78
Home equity loans		—			4			—			—			2
Commercial and industrial		25			51			121			84			7
Consumer		40			34			15			22			10
Total recoveries		1,139			93			137			262			100

Net recoveries (charge-offs)		653			(383	)		(1,086	)		(79	)		(668	)

Provision (credit) for loan losses		575			1,275			1,575			(256	)		698

Balance at end of year	$	10,068		$	8,840		$	7,948		$	7,459		$	7,794

Total loans receivable (1)	$	1,561,617		$	814,390		$	723,416		$	636,660		$	593,944

Average loans outstanding	$	1,013,611		$	766,548		$	683,064		$	604,732		$	573,642

Allowance for loan losses as a percent of total loans receivable		0.64	%		1.09	%		1.10	%		1.17	%		1.31	%

Net loans charged-off as a percent of average loans outstanding		(0.06	)		0.05			0.16			0.01			0.12

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

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

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

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

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

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

	December 31, 2016						December 31, 2015						December 31, 2014
	Specific		General		Total		Specific		General		Total		Specific		General		Total
	(In thousands)
Commercial real estate	$	—	$	4,083	$	4,083	$	—	$	3,856	$	3,856	$	—	$	3,705	$	3,705
Residential real estate:
Residential		—		2,433		2,433		—		2,122		2,122		—		1,755		1,755
Home Equity		—		429		429		—		309		309		—		298		298
Commercial and industrial		—		3,085		3,085		—		2,485		2,485		—		2,174		2,174
Consumer		—		38		38		—		22		22		—		15		15
Unallocated		—		—		—		—		46		46		—		1		1
Total	$	—	$	10,068	$	10,068	$	—	$	8,840	$	8,840	$	—	$	7,948	$	7,948

	December 31, 2013								December 31, 2012
	Specific		General			Total			Specific		General		Total
	(In thousands)
Commercial real estate	$	82	$	3,468		$	3,550		$	377	$	3,029	$	3,406
Residential real estate:
Residential		—		1,454			1,454			57		1,425		1,482
Home Equity		—		253			253			—		264		264
Commercial and industrial		15		2,176			2,191			104		2,063		2,167
Consumer		—		13			13			—		13		13
Unallocated		—		(2	)		(2	)		—		462		462
Total	$	97	$	7,362		$	7,459		$	538	$	7,256	$	7,794

In addition, the OCC, as an integral part of its examination process, periodically reviews our loan and foreclosed real estate portfolios and the related allowance for loan losses and valuation allowance for foreclosed real estate. The OCC may require us to adjust the allowance for loan losses or the valuation allowance for foreclosed real estate based on their judgment of information available to them at the time of their examination, thereby adversely affecting our results of operations. There were no adjustments recommended during 2016 or 2015.

For the year ended December 31, 2016, we recorded a provision of $575,000 to the allowance for loan losses based on our evaluation of the items discussed above. We believe that the allowance for loan losses adequately reflects the level of incurred losses in the current loan portfolio as of December 31, 2016.

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

	December 31, 2016							December 31, 2015							December 31, 2014
Loan Category	Amount of Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans			Amount of Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans			Amount of Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans
	(In thousands)
Commercial real estate	$	4,083	$	720,741		46.15	%	$	3,856	$	303,036		37.21	%	$	3,705	$	278,405		38.49	%
Real estate mortgage:
Residential		2,433		522,083		33.43			2,122		298,052		36.60			1,755		237,436		32.82
Home equity		429		92,083		5.90			309		43,512		5.34			298		40,305		5.57
Commercial loans		3,085		222,286		14.24			2,485		168,256		20.66			2,174		165,728		22.91
Consumer loans		38		4,424		0.28			22		1,534		0.19			15		1,542		0.21
Unallocated		—		—		0.00			46		—		0.00			1		—		0.00
Total allowances for loan losses	$	10,068	$	1,561,617		100.00	%	$	8,840	$	814,390		100.00	%	$	7,948	$	723,416		100.00	%

	December 31, 2013								December 31, 2012
	Amount of Allowance for Loan Losses			Loan Balances by Category		Percent of Loans in Each Category to Total Loans			Amount of Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans
	(In thousands)
Commercial real estate	$	3,550		$	264,476		41.54	%	$	3,406	$	245,764		41.38	%
Real estate mortgage:
Residential		1,454			198,686		31.21			1,482		185,345		31.21
Home equity		253			35,371		5.56			264		34,352		5.78
Commercial loans		2,191			135,555		21.29			2,167		126,052		21.22
Consumer loans		13			2,572		0.40			13		2,431		0.41
Unallocated		(2	)		—		0.00			462		—		0.00
Total allowances for loan losses	$	7,459		$	636,660		100.00	%	$	7,794	$	593,944		100.00	%

Potential Problem Loans. We have no potential problem loans not reported as impaired at December 31, 2016.

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

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

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

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

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

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

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

	At December 31,
	2016				2015				2014
	Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value
Available-for-sale:
Debt Securities:
Government-sponsored enterprise obligations	$	43,140	$	42,008	$	4,000	$	3,951	$	24,066	$	23,979
State and municipal bonds		4,117		4,008		2,794		2,801		16,472		17,034
Corporate bonds		50,255		50,317		21,176		21,136		25,711		26,223
Total debt securities		97,512		96,333		27,970		27,888		66,249		67,236

Mortgage-backed securities:
Government-sponsored mortgage-backed securities		184,127		180,136		138,186		135,959		139,637		139,213
U.S. government guaranteed mortgage-backed securities		17,753		17,350		11,030		10,903		1,591		1,586
Total mortgage-backed securities		201,880		197,486		149,216		146,862		141,228		140,799

Marketable equity securities:
Mutual funds		6,586		6,296		6,438		6,247		6,296		6,176
Common and preferred stock		—		—		1,309		1,593		1,309		1,539
Total marketable equity securities		6,586		6,296		7,747		7,840		7,605		7,715

Total available-for-sale securities	$	305,978	$	300,115	$	184,933	$	182,590	$	215,082	$	215,750

Held-to-maturity:
Debt Securities:
Government-sponsored enterprise obligations	$	—	$	—	$	30,146	$	29,928	$	43,477	$	42,882
State and municipal bonds		—		—		6,845		6,811		7,285		7,250
Corporate bonds		—		—		23,969		23,717		24,751		24,579
Total debt securities		—		—		60,960		60,456		75,513		74,711

Mortgage-backed securities:
Government-sponsored mortgage-backed securities		—		—		148,085		147,889		164,001		164,932
U.S. government guaranteed mortgage-backed securities		—		—		29,174		29,274		38,566		37,993
Total mortgage-backed securities		—		—		177,259		177,163		202,567		202,925

Total held-to-maturity securities	$	—	$	—	$	238,219	$	237,619	$	278,080	$	277,636

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

	At December 31,
	2016							2015							2014
	Amortized		Percent of			Fair		Amortized		Percent of			Fair		Amortized		Percent of			Fair
	Cost		Total			Value		Cost		Total			Value		Cost		Total			Value
	(In thousands)
Available-for-sale:
Government-sponsored residential mortgage-backed	$	184,127		91.21	%	$	180,136	$	138,186		42.32	%	$	135,959	$	139,637		40.62	%	$	139,213
U.S. government guaranteed residential mortgage-backed		17,753		8.79			17,350		11,030		3.38			10,903		1,591		0.46			1,586
Total available for sale		201,880		100.00			197,486		149,216		45.70			146,862		141,228		41.08			140,799

Held-to-maturity:
Government-sponsored residential mortgage-backed		—		—			—		148,085		45.36			147,889		164,001		47.70			164,932
U.S. government guaranteed residential mortgage-backed		—		—			—		29,174		8.94			29,274		38,566		11.22			37,993

Total held-to-maturity		—		—			—		177,259		54.30			177,163		202,567		58.92			202,925

Total	$	201,880		100.00	%	$	197,486	$	326,475		100.00	%	$	324,025	$	343,795		100.00	%	$	343,724

Securities Portfolio Maturities. The composition and maturities of the debt securities portfolio and the mortgage-backed securities portfolio at December 31, 2016 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or redemptions that may occur.

						More than One Year					More than Five Years
	One Year or Less					through Five Years					through Ten Years					More than Ten Years					Total Securities
			Weighted					Weighted					Weighted					Weighted							Weighted
	Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Fair		Average
	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Cost		Value		Yield
	(Dollars in thousands)
Debt securities available-for-sale:
Government-sponsored enterprise obligations	$	17,990		0.38	%	$	1,500		1.44	%	$	18,500		2.23	%	$	5,150		3.00	%	$	43,140	$	42,008		1.52	%
State and municipal bonds		280		3.75			725		3.76			1,510		3.86			1,602		2.91			4,117		4,008		3.46
Corporate bonds		—		—			24,505		2.72			25,750		3.08			—		—			50,255		50,317		2.91
Total debt securities available-for-sale		18,270		0.43			26,730		2.68			45,760		2.76			6,752		2.98			97,512		96,333		2.32

Mortgage-backed securities available for sale:
Government-sponsored residential mortgage-backed		—		—			21,877		1.00			17,415		1.00			144,835		2.40			184,127		180,136		2.36
U.S. government guaranteed residential mortgage-backed		—		—			—		—			—		—			17,753		2.27			17,753		17,350		2.27

Total mortgage-backed securities available-for-sale		—		—			21,877		1.00			17,415		1.00			162,588		2.38			201,880		197,486		2.35

Total available-for-sale	$	18,270		0.43	%	$	48,607		1.92	%	$	63,175		2.28	%	$	169,340		2.41	%	$	299,392	$	293,819		2.34	%

Sources of Funds

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

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

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

When we determine our deposit rates, we consider local competition, U.S. Treasury securities offerings and the rates charged on other sources of funds. Core deposits (defined as regular accounts, money market accounts, and interest-bearing and noninterest-bearing demand accounts) represented 62.3% of total deposits on December 31, 2016 and 56.1% on December 31, 2015. At December 31, 2016 and December 31, 2015, time deposits with remaining terms to maturity of less than one year amounted to $321.1 million and $240.7 million, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Net Interest and Dividend Income” for information relating to the average balances and costs of our deposit accounts for the years ended December 31, 2016, 2015 and 2014.

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

	At December 31,
	2016								2015								2014
	Amount		Percent			Weighted Average Rates			Amount		Percent			Weighted Average Rates			Amount		Percent			Weighted Average Rates
	(Dollars in thousands)

Demand deposits	$	303,993		20.03	%		—	%	$	157,844		17.54	%		—	%	$	136,186		16.33	%		—	%
Interest-bearing checking accounts		82,406		5.43			0.46			28,913		3.21			0.30			37,983		4.55			0.24
Regular accounts		121,262		7.99			0.11			75,225		8.35			0.11			74,970		8.99			0.10
Money market accounts		437,467		28.82			0.40			242,647		26.95			0.34			227,330		27.25			0.37
Total non-certificated accounts		945,128		62.26			0.24			504,629		56.05			0.20			476,469		57.12			0.21

Time certificates of deposit:
Due within the year		321,078		21.15			1.13			240,662		26.73			1.02			198,972		23.85			1.02
Over 1 year through 3 years		199,309		13.13			1.42			92,650		10.29			1.27			110,214		13.21			1.27
Over 3 years		52,556		3.46			1.64			62,422		6.93			1.81			48,563		5.82			1.72
Total certificated accounts		572,943		37.74			1.28			395,734		43.95			1.20			357,749		42.88			1.19

Total	$	1,518,071		100.00	%		0.63	%	$	900,363		100.00	%		0.64	%	$	834,218		100.00	%		0.63	%

Certificate of Deposit Maturities. At December 31, 2016, we had $133.8 million in time certificates of deposit with balances of $250,000 and over maturing as follows:

Maturity Period	Amount		Weighted Average Rate
		(In thousands)

3 months or less	$	12,907		0.97	%
Over 3 months through 6 months		28,986		1.11
Over 6 months through 12 months		43,853		1.33
Over 12 months		48,032		1.58
Total	$	133,778		1.34	%

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

	At December 31, 2016
	Period to Maturity
	Less than One Year		One to Two Years		Two to Three Years		More than Three Years		Total		Percent of Total
	(Dollars in thousands)

1.00% and under	$	72,793	$	15,809	$	7,315	$	3,204	$	99,121		17.30	%
1.01% to 2.00%		248,285		128,992		45,985		44,341		467,603		81.61
2.01% to 3.00%		—		—		1,208		5,011		6,219		1.09
Total	$	321,078	$	144,801	$	54,508	$	52,556	$	572,943		100.00	%

Short-term borrowings and long-term debt. We also use short-term borrowings and long-term debt as an additional source of funds to finance our lending and investing activities and to provide liquidity for daily operations. Short-term borrowings are made up of Federal Home Loan Bank of Boston (“FHLBB”) advances (including line of credit advances) with an original maturity of less than one year as well as customer repurchase agreements, which have an original maturity of one day. Short-term borrowings issued by the FHLBB were $155.0 million at December 31, 2016 and $93.8 million at December 31, 2015. We had an “Ideal Way” line of credit with the FHLBB for $9.5 million for the years ended December 31, 2016 and 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 under this line at December 31, 2016 and 2015, respectively.

Our repurchase agreements are with commercial customers. These agreements are linked to customers’ checking accounts. Excess funds are swept out of certain commercial checking accounts and into repurchase agreements where the customers can earn interest on their funds. At December 31, 2016 and 2015, such repurchase agreement borrowings totaled $17.4 million and $34.7 million, respectively. In addition, we have a $4.0 million line of credit with Bankers Bank Northeast (“BBN”) and a $50.0 million line of credit with PNC Bank, respectively, at an interest rate determined and reset by BBN and PNC on a daily basis. At December 31, 2016 and 2015, we had no advances outstanding under these lines. As part of our contract with BBN, we are required to maintain a reserve balance of $300,000 with BBN for our use of this line.

Long-term debt consists of FHLBB advances, securities sold under repurchase agreements and customer repurchase agreements with an original maturity of one year or more. At December 31, 2016, we had $124.8 million in long-term debt with the FHLBB and $0.0 million in long-term customer repurchase agreements. This compares to $147.4 million in FHLBB advances and $5.9 million in long-term customer repurchase agreements at December 31, 2015. During 2016, we prepaid FHLBB borrowings in the amount of $42.5 million with a weighted average rate of 2.29% and incurred a prepayment expense of $915,000.

Financial Services – In conjunction with our acquisition of Chicopee in October 2016, we retained a partnership with a third party registered broker dealer, Linsco/Private Ledger (“LPL”), while discontinuing our strategic alliance with our current service provider, Charter Oak, a division of MassMutual. Through LPL, we offer customers a range of non-deposit investment products, including mutual funds, debt, equity and government securities, retirement accounts, insurance products and fixed and variable annuities. We receive a portion of the commissions generated by LPL from sales to customers. For the year ended December 31, 2016, we received fees, net of expenses, of $47,000. For the years ended December 31, 2016, 2015 and 2014, we received fees of $78,000, $110,000 and $55,000, respectively, through our relationship with Charter Oak.

Supervision and Regulation

Western New England Bancorp and the Bank are subject to extensive regulation under federal and state laws. The regulatory framework applicable to savings and loan holding companies and their insured depository institution subsidiaries is intended to protect depositors, the federal deposit insurance fund (the “DIF”), consumers and the U.S. banking system. This system is not designed to protect investors in savings and loan holding companies, such as Western New England Bancorp.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

●

4.5% CET1 to risk-weighted assets;

●

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

●

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

●

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

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

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

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

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

Western New England Bancorp is in compliance with the targeted capital ratios under the Capital Rules at December 31, 2016. The Bank is subject to the Capital Rules on the same phase-in schedule as Western New England Bancorp. We believe that Western New England Bancorp and the Bank will remain in compliance with the targeted capital ratios as such requirements are phased in.

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

For purposes of PCA, to be: (i) well-capitalized, an insured depository institution must have a total risk based capital ratio of at least 10%, a Tier 1 risk based capital ratio of at least 8%, a CET1 risk based capital ratio of at least 6.5%, and a Tier 1 leverage ratio of at least 5%; (ii) adequately capitalized, an insured depository institution must have a total risk based capital ratio of at least 8%, a Tier 1 risk based capital ratio of at least 6%, a CET1 risk based capital ratio of at least 4.5%, and a Tier 1 leverage ratio of at least 4%; (iii) undercapitalized, an insured depository institution would have a total risk based capital ratio of less than 8%, a Tier 1 risk based capital ratio of less than 6%, a CET1 risk based capital ratio of less than 4.5%, and a Tier 1 leverage ratio of less than 4%; (iv) significantly undercapitalized, an insured depository institution would have a total risk based capital ratio of less than 6%, a Tier 1 risk based capital ratio of less than 4%, a CET1 risk based capital ratio of less than 3%, and a Tier 1 leverage ratio of less than 3%.; (v) critically undercapitalized, an insured depository institution would have a ratio of tangible equity to total assets that is less than or equal to 2%. As of December 31, 2016, the most recent notification from the OCC categorized the Bank as “well-capitalized” under the PCA framework.

Volcker Rule. Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, restricts the ability of banking entities, such as Western New England Bancorp, from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain types of funds (“Covered Funds”), subject to certain limited exceptions. The implementing regulation defines a Covered Fund to include certain investments such as collateralized loan obligation (“CLO”) and collateralized debt obligation securities. The regulation also provides, among other exemptions, an exemption for CLOs meeting certain requirements. Compliance with the Volcker Rule is generally required by July 21, 2017. Given the size and the scope of Western New England Bancorp’s activities, it does not believe that the implementation of the Volcker Rule will have a significant effect on its financial statements and it believes it will be compliant by July 2017.

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

Loans to One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single borrower or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2016, we were in compliance with these limitations on loans to one borrower.

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

●

specified liquid assets up to 20% of total assets;

●

goodwill and other intangible assets; and

●

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Federal Home Loan Bank System. The Bank is a member of the FHLBB, which is one of the regional Federal Home Loan Banks comprising the Federal Home Loan Bank System. Each Federal Home Loan Bank serves as a central credit facility primarily for its member institutions. The Bank, as a member of the FHLBB, is required to acquire and hold shares of capital stock in the FHLBB. Required percentages of stock ownership are subject to change by the FHLBB, and the Bank was in compliance with this requirement with an investment in FHLBB capital stock at December 31, 2016. If there are any developments that cause the value of our stock investment in the FHLBB to become impaired, we would be required to write down the value of our investment, which could affect our net income and shareholders’ equity.

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

Financial Privacy Laws. Federal law and certain state laws currently contain client privacy protection provisions. These provisions limit the ability of insured depository institutions and other financial institutions to disclose non-public information about consumers to affiliated companies and non-affiliated third parties. These rules require disclosure of privacy policies to clients and, in some circumstances, allow consumers to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of “opt out” or “opt in” authorizations. Pursuant to the Gramm-Leach-Bliley Act and certain state laws companies are required to notify clients of security breaches resulting in unauthorized access to their personal information.

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

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

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

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

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

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

Available Information

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

ITEM 1A.

RISK FACTORS

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

●

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

●

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

●

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

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

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

If a significant portion of any future unrealized losses in our portfolio of investment securities were to become other than temporarily impaired with credit losses, we would recognize a material charge to our earnings, and our capital ratios would be adversely impacted. As of December 31, 2016, the fair value of our securities portfolio was approximately $300.1 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of those securities. These factors include, but are not limited to, changes in interest rates, rating agency downgrades of the securities, defaults by the issuer or individual mortgagors with respect to the underlying securities, and instability in the credit markets. Any of the foregoing factors could cause an other-than-temporary impairment (“OTTI”) in future periods and result in realized losses.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

If the goodwill or other intangible assets recorded in connection with the Company’s acquisitions becomes impaired, it could have a negative impact on the Company’s profitability. Applicable accounting standards require that the acquisition method of accounting be used for all business combinations. Under this method, if the purchase price of an acquired entity exceeds the fair value of its net assets, the excess is carried on the acquirer’s balance sheet as goodwill. At December 31, 2016, we had $13.7 million of goodwill and $4.4 million of core deposit intangible on our balance sheet. We will evaluate goodwill for impairment at least annually or more frequently if events or changes in circumstances warrant such evaluation. Write-downs of the amount of impairment, if necessary, are to be charged to earnings in the period in which the impairment occurs. No impairment related to goodwill or core deposit intangibles was recorded for the year ended December 31, 2016. Future evaluations may result in findings of impairment and related write-downs, which could have a material adverse effect on our financial condition and results of operations.

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

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

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

Any future action by the U.S. Congress lowering the federal corporate income tax rate and/or eliminating the federal corporate alternative minimum tax could result in the reduction of the net deferred tax asset and a corresponding charge against earnings. The net deferred tax asset reported on the Company’s balance sheet represents the net amount of income taxes expected to be received upon the reversal of temporary differences between the bases of assets and liabilities as measured by enacted tax laws, and their bases as reported in the financial statements. As of December 31, 2016, the Company’s net deferred tax asset was computed using the federal statutory rate of 34%. The President of the United States and members of congress have announced plans to lower the federal corporate income tax rate from its current level of 34% and to eliminate the corporate alternative minimum tax. If these plans ultimately result in the enactment of new laws lowering the corporate income tax rate and/or eliminating the corporate alternative minimum tax, the Company’s net deferred tax asset would be re-measured. This would result in a reduction of the deferred tax asset in the period of the law change and a corresponding charge against earnings.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

We currently conduct our business through our twenty-one banking offices, twenty-two off-site ATMs and twenty-two seasonal/travelling ATMs. The following table sets forth certain information regarding our properties as of December 31, 2016. As of this date, the properties and leasehold improvements owned by us had an aggregate net book value of $20.9 million. We believe that our existing facilities are sufficient for our current needs.

Location	Ownership	Year Opened	Year of Lease or License Expiration

Main Office:
141 Elm St.	Owned	1964	N/A
Westfield, MA

Loan Center:
9-13 Chapel St.	Leased	2015	2020
Westfield, MA

Training and Conference Center:
136 Elm St.	Leased	2011	2018
Westfield, MA

Commercial Lending & Middle Market:
1500 Main St.	Leased	2014	2019
Springfield, MA

Commercial Lending/Credit Admin and Training Center:
219/229 Exchange Street	Owned	2009/1998	N/A
Chicopee, MA

Branch Offices:
206 Park St.	Owned	1957	N/A
West Springfield, MA

655 Main St.	Owned	1968	N/A
Agawam, MA

26 Arnold St.	Owned	1976	N/A
Westfield, MA

300 Southampton Rd.	Owned	1987	N/A
Westfield, MA

462 College Highway	Owned	1990	N/A
Southwick, MA

382 North Main St.	Leased	1997	2022
E. Longmeadow, MA

1500 Main St.	Leased	2006	2018
Springfield, MA

1642 Northampton St.	Owned	2001	N/A
Holyoke, MA

560 East Main St.	Owned	2007	N/A
Westfield, MA

237 South Westfield St.	Leased	2009	2038
Feeding Hill, MA

10 Hartford Avenue	Leased	2013	2018
Granby, CT

47 Palomba Drive	Leased	2014	2024
Enfield, CT

39 Morgan Road	Owned	2005	N/A
West Springfield, MA

70 Center Street	Owned	1973	N/A
Chicopee, MA

569 East Street	Owned	1976	N/A
Chicopee, MA

599 Memorial Drive	Leased	1977	2027
Chicopee, MA

435 Burnett Road	Owned	1990	N/A
Chicopee, MA

477A Center Street	Leased	2002	2022
Ludlow, MA

350 Palmer Road	Leased	2009	2027
Ware, MA

32 Willamansett Street	Leased	2008	2027 (1)
South Hadley, MA

(1) This lease is for the land only, the building is owned by Westfield Bank.

ATMs:
516 Carew Street	Tenant at will	2002	N/A
Springfield, MA

1000 State Street	Tenant at will	2003	N/A
Springfield, MA

788 Memorial Avenue	Leased	2006	2020
West Springfield, MA

2620 Westfield Street	Leased	2006	2020
West Springfield, MA

98 Southwick Road	Leased	2006	2026
Westfield, MA

115 West Silver Street	Tenant at will	2005	N/A
Westfield, MA

1342 Liberty Street	Owned	2001	N/A
Springfield, MA

98 Lower Westfield Road	Leased	2010	2020
Holyoke, MA

Westfield State University
577 Western Avenue

Westfield, MA
Woodward Center	Leased	2010	2020
Wilson Hall	Leased	2010	2020
Ely Hall	Leased	2010	2020

214 College Highway	Leased	2010	2020
Southwick, MA

705 Memorial Drive	Leased	2013	At will
Chicopee, MA

291 Springfield Street	Owned	2015	N/A
Chicopee, MA

Big E ATM
1305 Memorial Avenue
West Springfield, MA
Better Living Center	Owned	2011	N/A
Better Living Center	Owned	2011	N/A
Better Living Center (Door 6)	Owned	2011	N/A
Big E Coliseum	Owned	2015	N/A
Big E Young Building	Owned	2011	N/A
Big E Mallory Complex	Owned	2011	N/A

627 Randall Road	Owned	2015	N/A
Ludlow, MA

701 Center Street	Owned	2015	N/A
Chicopee, MA

ITEM 3.

LEGAL PROCEEDINGS

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

ITEM 4.

MINE SAFETY DISCLOSURES

none.

PART II

ITEM 5.

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

Market Information

Our common stock is currently listed on The NASDAQ Stock Market under the symbol “WNEB.” Prior to August 21, 2007, we were listed on the American Stock Exchange. At December 31, 2016, there were 30,380,211 shares of common stock issued and outstanding, and there were approximately 2,296 shareholders of record.

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

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

	Price Per Share		Cash Dividends Declared
2015	High ($)	Low ($)	($)
Fourth Quarter ended December 31, 2015	8.49	7.30	0.03
Third Quarter ended September 30, 2015	7.82	7.06	0.03
Second Quarter ended June 30, 2015	8.02	7.12	0.03
First Quarter ended March 31, 2015	7.74	7.05	0.03

Dividend Policy

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

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

Recent Sales of Unregistered Securities

There were no sales by us of unregistered securities during the year ended December 31, 2016.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table sets forth information with respect to purchases made by us of our common stock during the three months ended December 31, 2016.

Period	Total Number of Shares Purchased			Average Price Paid per Share ($)		Total Number of Shares Purchased as Part of Publicly Announced Programs		Maximum Number of Shares that May Yet Be Purchased Under the Program
October 1 - 31, 2016		—			—		—		484,668	(1)
November 1 - 30, 2016		—			—		—		484,668
December 1 - 31, 2016		201,296	(2)		9.11		198,816		285,852
Total		201,296			9.11		198,816		285,852

(1)

On June 24, 2015, the Board of Directors announced a renewal of the repurchase program under which the Company may purchase up to 711,733 shares of its outstanding common stock, to be affected via a combination of Rule 10b5-1 plans and discretionary share repurchases. This plan began July 24, 2015 and as of December 31, 2016, there were 285,852 shares remaining to be purchased under the repurchase program.

(2)

Number includes repurchase of 2,480 shares related to tax obligations for shares of restricted stock that vested on December 31, 2016 under our 2007 Recognition and Retention Plan. These repurchases were reported by each reporting person on January 6, 2017.

Performance Graph

The following graph compares our total cumulative shareholder return by an investor who invested $100.00 on December 31, 2011 to December 31, 2016, to the total return by an investor who invested $100.00 in each of the Russell 2000 Index and the NASDAQ Bank Index for the same period.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

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

NASDAQ Bank Index

(LINE GRAPH)

		*Period Ending*
*Index*	12/31/11	12/31/12	12/31/13	12/31/14	12/31/15	12/31/16
Western New England Bancorp, Inc.	100.00	104.23	111.89	113.34	131.78	148.97
Russell 2000	100.00	116.35	161.52	169.43	161.95	196.45
NASDAQ Bank	100.00	118.69	168.21	176.48	192.08	265.02

ITEM 6.

SELECTED FINANCIAL DATA

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

	At December 31,
		2016⁽¹⁾		2015		2014		2013		2012
	(In thousands)
Selected Financial Condition Data:
Total assets	$	2,076,018	$	1,339,930	$	1,320,096	$	1,276,841	$	1,301,462
Loans, net ⁽²⁾		1,556,416		809,373		716,738		629,968		587,124
Securities available-for-sale		300,115		182,590		215,750		243,204		621,507
Securities held to maturity ⁽³⁾⁽⁴⁾		—		238,219		278,080		295,013		—
Deposits		1,518,071		900,363		834,218		817,112		753,413
Short-term borrowings		172,351		128,407		93,997		48,197		69,934
Long-term debt		124,836		153,358		232,479		248,377		278,861
Total shareholders’ equity		238,396		139,466		142,543		154,144		189,187
Allowance for loan losses		10,068		8,840		7,948		7,459		7,794
Nonperforming loans		14,057		8,080		8,830		2,586		3,009

	For the Years Ended December 31,
		2016⁽¹⁾		2015		2014		2013			2012
	(In thousands, except per share data)
Selected Operating Data:
Interest and dividend income	$	48,598	$	42,476	$	40,991	$	41,031		$	43,104
Interest expense		11,285		10,794		9,923		10,290			12,663
Net interest and dividend income		37,313		31,682		31,068		30,741			30,441
Provision for loan losses		575		1,275		1,575		(256	)		698
Net interest and dividend income after provision for loan losses		36,738		30,407		29,493		30,997			29,743
Total noninterest income		5,971		4,865		4,460		4,272			5,990
Total noninterest expense		35,306		27,433		25,909		26,642			27,223
Income before income taxes		7,403		7,839		8,044		8,627			8,510
Income taxes		2,569		2,124		1,882		1,871			2,256
Net income	$	4,834	$	5,715	$	6,162	$	6,756		$	6,254

Basic earnings per share	$	0.25	$	0.33	$	0.34	$	0.34		$	0.26
Diluted earnings per share	$	0.24	$	0.33	$	0.34	$	0.34		$	0.26

Dividends per share paid	$	0.12	$	0.12	$	0.21	$	0.29		$	0.44

(1)

Reflects the acquisition of Chicopee during 2016.

(2)

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

(3)

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

(4)

During 2016, securities with an amortized cost of $136.8 million were reclassified from held-to-maturity to available-for-sale.

	At or for the Years Ended December 31,
		2016⁽¹⁾		2015		2014		2013		2012

Selected Financial Ratios and Other Data ⁽²⁾
Performance Ratios:
Return on average assets		0.32	%	0.42	%	0.48	%	0.53	%	0.48	%
Return on average equity		2.95		4.10		4.18		4.04		2.97
Average equity to average assets		11.02		10.35		11.42		13.02		16.17
Equity to total assets at end of year		11.48		10.41		10.80		12.07		14.54
Interest rate spread		2.49		2.35		2.42		2.39		2.24
Net interest margin ⁽³⁾		2.70		2.53		2.60		2.58		2.53
Average interest-earning assets to average interest-earning liabilities		125.21		121.47		121.90		122.92		126.80
Total noninterest expense to average assets		2.37		2.04		2.01		2.07		2.09
Efficiency ratio ⁽⁴⁾		67.40		75.49		73.59		76.79		78.81
Dividend payout ratio		0.50		0.36		0.62		0.85		1.69
Regulatory Capital Ratios:
Total risk-based capital		15.10		17.20		18.68		21.17		25.41
Tier 1 risk-based capital		14.47		16.23		17.73		20.21		24.33
Common equity tier 1 capital		14.47		16.23		—		—		—
Tier 1 leverage capital		12.19		11.16		11.30		12.28		13.91
Asset Quality Ratios:
Nonperforming loans to total loans		0.90		0.99		1.22		0.41		0.51
Nonperforming assets to total assets		0.69		0.60		0.67		0.20		0.31
Allowance for loan losses to total loans		0.64		1.09		1.10		1.17		1.31
Allowance for loan losses to nonperforming assets		0.70		1.09		0.90		2.88		1.96
Number of:
Banking offices		21		13		13		12		11
Full-time equivalent employees		273		189		183		191		199

(1) Reflects the acquisition of Chicopee during 2016.

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

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

(4) The efficiency ratio represents the ratio of operating expenses excluding merger related charges divided by the sum of net interest and dividend income and noninterest income, excluding gain and loss on sale of securities, income on bank-owned life insurance death benefit and loss on prepayment of borrowings.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

●

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

●

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

●

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

●

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

You should read the following financial results for the year ended December 31, 2016 in the context of this strategy.

●

Net income was $4.8 million, or $0.24 per diluted share, for the year ended December 31, 2016, compared to $5.7 million, or $0.33 per diluted share, for the same period in 2015. The results for the year ended December 31, 2016 showed increases in net interest and dividend income and noninterest income, however, these were partially offset by an increase in noninterest expense primarily due to $4.1 million in merger expenses related to the acquisition of Chicopee.

●

We had provision for loan loss expense of $575,000 for the year ended December 31, 2016, compared to $1.3 million for the year ended December 31, 2015. The allowance was $10.1 million for December 31, 2016 and $8.8 million for December 31, 2015, or 0.64% and 1.09% of total loans, respectively. The 2016 allowance as a percentage of loans was impacted by the addition of $640.9 million in loans acquired from Chicopee that were recorded at fair value on October 21, 2016 and required no further allowance subsequent to the acquisition.

●

Net interest and dividend income increased $5.6 million to $37.3 million for the year ended December 31, 2016, compared to $31.7 million for the year ended December 31, 2015 primarily due to a $6.1 million increase in interest income resulting from a $247.1 million increase in the average balance of loans from the comparable 2015 period resulting from the acquisition of Chicopee on October 21, 2016. Noninterest income increased $1.1 million to $6.0 million for the year ended December 31, 2016, compared to $4.9 million for the same period in 2015 primarily driven by an increase in service charges and fee income.

●

Noninterest expense increased $7.9 million to $35.3 million at December 31, 2016, compared to $27.4 million at December 31, 2015. The increase in noninterest expense for the year ended December 31, 2016 was primarily due to $4.1 million in merger expenses related to the acquisition of Chicopee as well as increases in cost for the integration and operation of the Chicopee branch network, which management expects to have cost savings associated with this integration to be fully-phased in during the first half of 2017.

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

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

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

Our general policy regarding recognition of interest on loans is to discontinue the accrual of interest when principal or interest payments are delinquent 90 days or more, or earlier if the loan is considered impaired. Any unpaid amounts previously accrued on these loans are reversed from income. Subsequent cash receipts are applied to the outstanding principal balance or to interest income if, in the judgment of management, collection of the principal balance is not in question. Loans are returned to accrual status when they become current as to both principal and interest and when subsequent performance reduces the concern as to the collectability of principal and interest. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income over the estimated average lives of the related loans.

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

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

Average Balance Sheet and Analysis of Net Interest and Dividend Income

The following table sets forth information relating to our financial condition and net interest and dividend income for the years ended December 31, 2016, 2015 and 2014 and reflects the average yield on assets and average cost of liabilities for the years indicated. The yields and costs were derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the years shown. Average balances were derived from actual daily balances over the years indicated. Interest income includes fees earned from making changes in loan rates or terms, and fees earned when commercial real estate loans were prepaid or refinanced.

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

									For the Years Ended December 31,
	2016								2015								2014
	Average					Avg Yield/			Average					Avg Yield/			Average					Avg Yield/
	Balance		Interest			Cost			Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans(1)(2)	$	1,013,611	$	40,422			3.99	%	$	766,548	$	30,646			4.00	%	$	683,064	$	27,989			4.10	%
Securities(2)		326,011		7,811			2.40			472,616		11,832			2.50			504,532		13,299			2.64
Other investments - at cost		15,207		550			3.62			16,509		396			2.40			16,597		246			1.48
Short-term investments(3)		40,552		115			0.28			12,067		18			0.15			13,749		13			0.09
Total interest-earning assets		1,395,381		48,898			3.50			1,267,740		42,892			3.38			1,217,942		41,547			3.41
Total noninterest-earning assets		93,611								78,938								73,334

Total assets	$	1,488,992							$	1,346,678							$	1,291,276

LIABILITIES AND EQUITY:
Interest-bearing liabilities
Interest-bearing checking	$	42,387		147			0.35		$	34,351		79			0.23		$	40,412		99			0.24
Savings accounts		85,204		94			0.11			75,691		79			0.10			79,086		80			0.10
Money market accounts		299,730		1,201			0.40			237,782		830			0.35			221,391		846			0.38
Time certificates of deposit		426,213		5,139			1.21			390,155		4,583			1.17			343,190		4,152			1.21
Total interest-bearing deposits		853,534		6,581						737,979		5,571						684,079		5,177
Short-term borrowings and long-term debt		260,890		4,704			1.80			305,646		5,223			1.71			315,089		4,746			1.51
Interest-bearing liabilities		1,114,424		11,285			1.01			1,043,625		10,794			1.03			999,168		9,923			0.99
Noninterest-bearing deposits		193,953								145,519								132,923
Other noninterest-bearing liabilities		16,544								18,098								11,692
Total noninterest-bearing liabilities		210,497								163,617								144,615

Total liabilities		1,324,921								1,207,242								1,143,783
Total equity		164,072								139,436								147,493
Total liabilities and equity	$	1,488,993							$	1,346,678							$	1,291,276
Less: Tax-equivalent adjustment(2)				(300	)							(416	)							(556	)
Net interest and dividend income			$	37,313							$	31,682							$	31,068
Net interest rate spread(4)							2.49	%							2.35	%							2.42	%
Net interest margin(5)							2.70	%							2.53	%							2.60	%
Ratio of average interest-earning assets to average interest-bearing liabilities							125.21								121.47								121.90

(1)

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

(2)

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

(3)

Short-term investments include federal funds sold.

(4)

Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(5)

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

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

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

	Year Ended December 31, 2016 Compared to Year Ended December 31, 2015									Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Net			Volume			Rate			Net
Interest-earning assets	(In thousands)									(In thousands)
Loans (1)	$	9,877		$	(101	)	$	9,776		$	3,421		$	(764	)	$	2,657
Investment securities (1)		(3,670	)		(351	)		(4,021	)		(841	)		(626	)		(1,467	)
Other investments - at cost		(31	)		185			154			(1	)		151			150
Short-term investments		42			55			97			(2	)		7			5
Total interest-earning assets		6,218			(212	)		6,006			2,577			(1,232	)		1,345

Interest-bearing liabilities
Interest-bearing accounts		18			50			68			(15	)		(5	)		(20	)
Savings accounts		10			5			15			(3	)		2			(1	)
Money market accounts		216			155			371			63			(79	)		(16	)
Time deposits		424			132			556			568			(137	)		431
Short-term borrowing and long-term debt		(765	)		246			(519	)		(142	)		619			477
Total interest-bearing liabilities		(97	)		588			491			471			400			871
Change in net interest and dividend income	$	6,315		$	(800	)	$	5,515		$	2,106		$	(1,632	)	$	474

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

Comparison of Financial Condition at December 31, 2016 and December 31, 2015

Total assets increased $736.1 million to $2.1 billion at December 31, 2016 due to the acquisition of Chicopee on October 21, 2016. Net loans increased by $747.0 million to $1.6 billion at December 31, 2016 from $809.4 million at December 31, 2015, primarily due to net loans of $640.9 million acquired from Chicopee at December 31, 2016. The increase in loans was partially offset by a $119.7 million decrease in the securities portfolio to $316.2 million at December 31, 2016. The decrease in securities from December 2015 was primarily due to the sales of securities to fund loan growth.

Net loans increased by $747.0 million to $1.6 billion at December 31, 2016 from $809.4 million at December 31, 2015. The increase in net loans was primarily the result of increases in commercial real estate loans, residential real estate loans and commercial and industrial loans. Commercial real estate loans increased $417.7 million to $720.7 million at December 31, 2016 from $303.0 million at December 31, 2015. Non-owner occupied commercial real estate loans totaled $374.7 million at December 31, 2016 and $189.2 million at December 31, 2015, while owner occupied commercial real estate loans totaled $346.0 million at December 31, 2016 and $113.8 million at December 31, 2015.

Residential real estate and home equity loans increased $272.6 million to $614.2 million at December 31, 2016 from $341.6 million at December 31, 2015. We purchased $108.4 million in residential loans from New England-based banks as a means of supplementing our loan growth.

Commercial and industrial loans increased $54.0 million to $222.3 million at December 31, 2015 from $168.3 million at December 31, 2015. The growth in commercial and industrial loans was the result of new loans acquired from Chicopee as well as originations and customers increasing balances on their lines of credit, which were both partially offset by normal loan payments and payoffs.

Securities decreased $119.7 million to $316.2 million at December 31, 2016 from $435.9 million at December 31, 2015. The securities portfolio is primarily comprised of mortgage-backed securities, which totaled $197.5 million at December 31, 2016 and $324.1 million at December 31, 2015, the majority of which were issued by government-sponsored enterprises such as the Federal National Mortgage Association. There were no privately issued mortgage-backed securities in the portfolio at December 31, 2016 and 2015.

Debt securities issued by government-sponsored enterprises were $42.0 million at December 31, 2016 and $34.1 million at December 31, 2015. Securities issued by government-sponsored enterprises include bonds issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Corporate bonds totaled $50.3 million and $45.1 million at December 31, 2016 and 2015, respectively. The securities portfolio includes investment-grade corporate bonds which help to diversify our securities portfolio while also increasing the average yield on the portfolio. We also invest in municipal bonds primarily issued by cities and towns in Massachusetts that are rated as investment grade by Moody’s, Standard & Poor’s or Fitch, and the majority of which are also independently insured. Municipal bonds were $4.0 million at December 31, 2016 and $9.6 million at December 31, 2015. In addition, we have investments in FHLBB stock, common stock and mutual funds that invest only in securities allowed by the OCC. During the first quarter of 2016, the Company transferred its held-to-maturity portfolio of $232.8 million to available-for-sale, and subsequently sold $136.8 million in securities available-for-sale. As a result of this transfer, the Company has tainted their held-to-maturity portfolio and is prohibited from classifying future purchases as held-to-maturity.

Total deposits increased $617.7 million to $1.5 billion at December 31, 2016, compared to $900.4 million at December 31, 2015. Checking accounts increased $199.6 million to $386.4 million at December 31, 2016 from $186.8 million at December 31, 2015. Money market accounts increased $194.8 million to $437.5 million at December 31, 2016 from $242.6 million at December 31, 2015. Time deposits increased $177.2 million to $572.9 million at December 31, 2016 from $395.7 million at December 31, 2015. Regular savings accounts increased $46.1 million to $121.2 million at December 31, 2016 from $75.2 million at December 31, 2015. The increases were primarily driven by the acquisition of $545.7 million in deposits from Chicopee recorded at fair value as of the date of merger.

Short-term borrowings increased $44.0 million to $172.4 million at December 31, 2016 from $128.4 million at December 31, 2015. Short-term borrowings are made up of FHLBB advances with an original maturity of less than one year as well as customer repurchase agreements, which have an original maturity of one day. Short-term borrowings from the FHLBB were $155.0 million and $93.8 million at December 31, 2016 and 2015, respectively. Customer repurchase agreements decreased $17.3 million to $17.4 million at December 31, 2016 from $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 United States government or government-sponsored enterprises. This transaction settles immediately on a same day basis in immediately available funds. Interest paid is commensurate with other products of equal interest and credit risk.

Long-term debt consists of FHLBB advances and customer repurchase agreements with an original maturity of one year or more. At December 31, 2016, we had $124.8 million in long-term debt with the FHLBB and no customer repurchase agreements. This compares to $147.4 million in FHLBB advances and $5.9 million in customer repurchase agreements at December 31, 2015. During 2016, we prepaid $42.5 million in FHLBB borrowings with a weighted average rate of 2.29% and incurred a prepayment expense of $915,000. Offsetting these prepayments were $63.3 million in FHLBB advances acquired from Chicopee.

At December 31, 2016 and 2015, we had forward starting interest rate swap contracts with a combined notional value of $75.0 million and $107.5 million, respectively. The swap contracts had start dates through the third quarter 2016 and have durations ranging from four to six years. This hedge strategy converts the variable rate of interest on certain FHLB advances to fixed interest rates, thereby protecting us from floating interest rate variability. On a stand-alone basis, the interest rate swaps introduce potential future volatility in tangible book value and accumulated other comprehensive income (“AOCI”). 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.

Shareholders’ equity was $238.4 million and $139.5 million, which represented 11.5% and 10.4% of total assets at December 31, 2016 and December 31, 2015, respectively. The increase in shareholders’ equity during the year ended December 31, 2016 reflects the acquisition of Chicopee totaling $97.0 million, net of the retirement of reciprocal stock ownership and Chicopee’s ESOP, the exercise of 331,628 options for $2.0 million, and net income of $4.8 million. These increases were offset by $1.7 million in other comprehensive loss, a decrease of $1.8 million for the repurchase of 201,296 shares of common stock at an average cost of $9.11, and the payment of regular dividends of $2.4 million for the year ended December 31, 2016.

Comparison of Operating Results for Years Ended December 31, 2016 and 2015

General. Net income for the year ended December 31, 2016 was $4.8 million, or $0.24 per diluted share, compared to $5.7 million, or $0.33 per diluted share, for the same period in 2015. Contributing to the lower net income for the year ended December 31, 2016 were $4.1 million in pretax costs associated with the Chicopee acquisition.

Interest and Dividend Income. Total interest and dividend income increased $6.1 million to $48.6 million for the year ended December 31, 2016 compared to $42.5 million for the same period in 2015.

The increase in interest and dividend income was primarily the result of an increase in the average interest-earning balance of our loan portfolio resulting from the acquisition of loans from Chicopee on October 21, 2016 as well as executing on our strategy to improve the balance sheet mix by decreasing securities while increasing loan growth. At December 31, 2016, the average balance of loans increased $247.1 million to $1.0 billion, while the average balance of securities decreased $146.6 million to $326.0 million. The balance of interest-earning assets increased $127.6 million to $1.4 billion for the year ended December 31, 2016, compared to $1.3 billion for the same period in 2015. The average yield on interest-earning assets, on a tax-equivalent basis, increased 12 basis points to 3.50% for the year ended December 31, 2016 from 3.38% for the same period in 2015.

Interest income on loans increased $9.7 million to $40.2 million for the year ended December 31, 2016 from $30.5 million for the year ended December 31, 2015. The tax-equivalent yield on loans decreased 1 basis point from 4.00% for the year 2015 to 3.99% for the same period in 2016. The increase in interest income on loans for the year ended December 31, 2016 was due to the average balance of loans increasing $247.1 million primarily resulting from the acquisition of Chicopee.

Interest income on securities decreased $3.8 million to $7.7 million for the year ended December 31, 2016 from $11.5 million for the year ended December 31, 2015. The tax-equivalent yield on securities decreased 10 basis points from 2.50% for the year 2015 to 2.40% for the same period in 2016. The decrease in interest income and tax-equivalent yield on securities for the year ended December 31, 2016 was primarily due to the average balance of securities decreasing $146.6 million in executing our strategy to improve the balance sheet mix by reinvesting cash flows from securities sales and pay downs into loans.

Interest Expense. Interest expense for the year ended December 31, 2016 increased $491,000 to $11.3 million from $10.8 million for the comparable 2015 period. The average cost of interest-bearing liabilities decreased 2 basis points to 1.01% for the year ended December 31, 2016 from 1.03% in 2015. The change in the cost of interest-bearing liabilities was due to an increase in the average volume of and rate on interest-bearing deposits along with a decrease in the average balance of short-term borrowings and long-term debt which helped offset an increase in the average rate on the same. The average balance of interest-bearing deposits increased $115.5 million to $853.5 million at December 31, 2016 from $738.0 million for the comparable 2015 period. Interest expense on interest-bearing deposits increased $1.0 million to $6.6 million for the year ended December 31, 2016 from $5.6 million for the comparable 2015 period. The average volume of time deposits increased $36.1 million to $426.2 million while the average rate on time deposits increased 4 basis points to 1.21% for the year ended December 31, 2016, from 1.17%, resulting in a $556,000 increase to interest expense. In addition, the average balance of short-term borrowings and long-term debt decreased $44.8 million to $260.9 million for the year ended December 31, 2016. Management prepaid $42.5 million in FHLBB borrowings with a rate of 2.29% during the first quarter 2016. While the average cost of short-term borrowings and long-term debt increased 9 basis points to 1.80% for the year ended December 31, 2016 from 1.71% for the year ended December 31, 2015, primarily due to the conversion of variable rates of interest on certain FHLBB advances to fixed interest rates in conjunction with our interest rate swaps, the decrease in volume helped to reduce interest expense on short-term borrowings and long-term debt $519,000 to $4.7 million for the year ended December 31, 2016.

Net Interest and Dividend Income. Net interest and dividend income increased $5.6 million to $37.3 million for the year ended December 31, 2016 as compared to $31.7 million for same period in 2015. The net interest margin, on a tax-equivalent basis, was 2.70% and 2.53% for the years ended December 31, 2016 and 2015, respectively. The increase in net interest income was primarily driven by an increase in the volume of our average interest-earnings assets, which was partially offset by an increase in the average volume of and cost of interest-bearing liabilities.

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

The amount that we provided for loan losses during the year ended December 31, 2016 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio, described in detail below, include increases in the balances of commercial real estate loans, residential real estate loans, commercial and industrial loans offset by net recoveries for the year ended December 31, 2016. After evaluating these factors, we recorded a provision for loan losses of $575,000 for the year ended December 31, 2016, compared to $1.3 million for the same period in 2015. The allowance was $10.1 million at December 31, 2016 and $8.8 million at December 31, 2015, respectively. The allowance for loan losses as a percentage of total loans was 0.64% and 1.08% at December 31, 2016 and 2015, respectively. The 2016 allowance does not include the $640.9 million in loans acquired from Chicopee that were recorded at fair value on October 21, 2016 and required no further allowance subsequent to the acquisition.

Apart from the Chicopee acquisition, there was organic growth across our loan categories. Commercial real estate loans increased $27.6 million to $330.6 million at December 31, 2016 from $303.0 million at December 31, 2015. Residential real estate and home equity loans increased $63.0 million to $361.1 million at December 31, 2016. Commercial and industrial loans increased $10.5 million to $178.8 million. We consider residential real estate loans to contain less credit risk and market risk than commercial and industrial loans and commercial real estate.

Net recoveries were $653,000 for the year ended December 31, 2016. This comprised recoveries of $1.1 million primarily on one commercial real estate loan previously charged-off in 2010, offset by charge-offs of $486,000. Net charge-offs were $383,000 for the year ended December 31, 2015. This comprised charge-offs of $476,000 for the year ended December 31, 2015, offset by recoveries of $93,000.

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

Noninterest Income. Noninterest income increased $1.1 million to $6.0 million for the year ended December 31, 2016 compared to $4.9 million for the same period in 2015.

The primary reason for the increase in noninterest income was due to an increase in service charges and fees, which increased $1.1 million to $4.2 million for the year ended December 31, 2016 from $3.1 million for the year ended December 31, 2015. Fees collected from insufficient funds, overdraft and card-based transactions increased $733,000 for the year ended December 31, 2016, primarily due to the acquisition of Chicopee.

Net gains on the sales of securities were $1.1 million and $1.5 million for the years ended December 31, 2016 and 2015, respectively. The net gains for the years ended December 31, 2016 and 2015 were primarily the result of management selling securities to fund loan growth and decrease the expected duration of the portfolio. For the years ended December 31, 2016 and 2015, we also prepaid FHLBB advances and a repurchase agreement and incurred prepayment expenses of $915,000 and $1.3 million, respectively. These FHLBB advances were in the amount of $42.5 million with a weighted average rate of 2.29% in 2016 and $29.0 million with a weighted average rate of 2.87% in 2015. The repurchase agreement prepaid in 2015 was in the amount of $10.0 million with a rate of 2.65%.

Noninterest Expense. Noninterest expense increased $7.9 million to $35.3 million for the year ended December 31, 2016, from $27.4 million for the same period in 2015. The increase in noninterest expense for the year ended December 31, 2016 was primarily due to $4.1 million in merger expenses related to the acquisition of Chicopee as well as increases in cost for the integration and operation of the Chicopee branch network, which management expects the cost savings associated with these to be fully-phased in during the first half of 2017. Salaries and benefits increased $2.2 million for the year ended December 31, 2016, mainly the result of the additional cost of staff expenses retained to assist through the core system conversion in December of 2016.

Income Taxes. The provision for income taxes was $2.6 million and $2.1 million for the years ended December 31, 2016 and 2015, respectively. The effective tax rate was 34.7% for the year ended December 31, 2016 and 27.1% for the same period in 2015. The effective tax rate for 2016 was impacted by nondeductible merger expenses associated with the Chicopee merger, which resulted in an increase of 8.3% in the effective rate for the year ended December 31, 2016.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, deposit withdrawals and operating expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investment securities and funds provided by our operations. We also can borrow funds from the FHLBB based on eligible collateral of loans and securities. Outstanding borrowings from the FHLBB were $279.8 million at December 31, 2016, and $241.2 million at December 31, 2015. At December 31, 2015, we had $13.6 million in available borrowing capacity with the FHLBB. We have the ability to increase our borrowing capacity with the FHLBB by pledging investment securities or loans. In addition, we have a $4.0 million line of credit with BBN at an interest rate determined and reset by BBN on a daily basis. At December 31, 2016 and 2015, we did not have an outstanding balance under this line. As part of our contract with BBN, we are required to maintain a reserve balance of $300,000 with BBN for our use of this line. In addition, we may enter into reverse repurchase agreements with approved broker-dealers. Reverse repurchase agreements are agreements that allow us to borrow money using our securities as collateral.

We also have outstanding at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. We are also obligated under agreements with the FHLBB to repay borrowed funds and are obligated under leases for certain of our branches and equipment. A summary of lease obligations, borrowings and credit commitments at December 31, 2016 follows:

	Within 1 Year		After 1 Year But Within 3 Years		After 3 Year But Within 5 Years		After 5 Years		Total
	(Dollars in thousands)
Lease Obligations
Operating lease obligations⁽¹⁾	$	1,162	$	2,113	$	1,794	$	8,727	$	13,796

Borrowings and Debt
Federal Home Loan Bank		170,298		82,077		21,821		5,640		279,836
Securities sold under agreements to repurchase		17,351		—		—		—		17,351
Total borrowings and debt		187,649		82,077		21,821		5,640		297,187

Credit Commitments
Available lines of credit		160,471		8		237		56,477		217,193
Other loan commitments		57,845		17,101		1,067		973		76,986
Letters of credit		6,443		392		—		255		7,090
Total credit commitments		224,759		17,501		1,304		57,705		301,269

Other Obligations
Vendor Contracts		2,712		5,288		5,288		8,373		21,661

Total Obligations	$	416,282	$	106,979	$	30,207	$	80,445	$	633,913

⁽¹⁾

Payments are for the lease of real property

Maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of securities and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds.

Our primary investing activities are the origination of commercial real estate, commercial and industrial and consumer loans, and the purchase of mortgage-backed and other investment securities. During the year ended December 31, 2016, we originated loans of $180.9 million, compared to $147.6 million in 2015. Prior to the acquisition of Chicopee in 2016, we referred our residential real estate borrowers to a third-party mortgage company and substantially all of our residential real estate loans were underwritten, originated and serviced by a third-party mortgage company. Subsequent to the acquisition of Chicopee, we began to process and underwrite substantially all of our originations internally through our Loan Center. Residential real estate borrowers submit applications to us and the loan is closed in our name and is booked directly into our portfolio. Purchases of securities totaled $87.2 million for the year ended December 31, 2016 and $143.7 million for the year ended December 31, 2016. At December 31, 2016, we had loan commitments and letters of credit to borrowers of approximately $84.1 million, and available home equity and unadvanced lines of credit of approximately $217.2 million.

Deposit flows are affected by the level of interest rates, by the interest rates and products offered by competitors and by other factors. Total deposits increased $617.7 million and $66.1 million during the years ended December 31, 2016 and 2015, respectively. Time deposit accounts scheduled to mature within one year were $321.1 million at December 31, 2016. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of these certificates of deposit will remain on deposit. We monitor our liquidity position frequently and anticipate that it will have sufficient funds to meet our current funding commitments.

At December 31, 2016, Western New England Bancorp and the Bank exceeded each of the applicable regulatory capital requirements (See Note 12, Regulatory Capital, to our consolidated financial statements for further information on our regulatory requirements).

We do not anticipate any material capital expenditures during calendar year 2017, nor do we have any balloon or other payments due on any long-term obligations or any off-balance sheet items other than the commitments and unused lines of credit noted above.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, other than noted above and in Note 10, Derivatives and Hedging Activity, to our consolidated financial statements, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Management of Market Risk

As a financial institution, our primary market risk is interest rate risk since substantially all transactions are denominated in U.S. dollars with no direct foreign exchange or changes in commodity price exposure. Fluctuations in interest rates will affect both our level of income and expense on a large portion of our assets and liabilities. Fluctuations in interest rates will also affect the market value of all interest-earning assets.

The primary goal of our interest rate management strategy is to limit fluctuations in net interest income as interest rates vary up or down and control variations in the market value of assets, liabilities and net worth as interest rates vary. We seek to coordinate asset and liability decisions so that, under changing interest rate scenarios, net interest income will remain within an acceptable range.

To achieve the objectives of managing interest rate risk, the Asset and Liability Management Committee meets periodically to discuss and monitor the market interest rate environment relative to interest rates that are offered on our products. The Asset and Liability Management Committee presents quarterly reports to our Board of Directors at their regular meetings.

Our primary source of funds has been deposits, consisting primarily of time deposits, money market accounts, savings accounts, demand accounts and interest bearing checking accounts, which have shorter terms to maturity than the loan portfolio. Several strategies have been employed to manage the interest rate risk inherent in the asset/liability mix, including but not limited to:

●

maintaining the diversity of our existing loan portfolio through a balanced approach of growing the residential mortgages, primarily by purchasing loans from New England-based banks as a means of supplementing our loan growth, and commercial loans and commercial real estate loan originations, which typically have variable rates and shorter terms than residential mortgages;

●

emphasizing investments with an expected average duration of five years or less; and

●

using interest rate swaps to manage the interest rate position of the balance sheet.

In 2016, cash flows from investment securities were used to fund increases the residential loan portfolio, which generated higher yields than investments in a low rate environment. However management has continued its emphasis on growing commercial loans has which have variable rates and shorter maturities than residential loans. Moreover, the actual amount of time before loans are repaid can be significantly affected by changes in market interest rates. Prepayment rates will also vary due to a number of other factors, including the regional economy in the area where the loans were originated, seasonal factors, demographic variables and the assumability of the loans. However, the major factors affecting prepayment rates are prevailing interest rates, related financing opportunities and competition. We monitor interest rate sensitivity so that we can adjust our asset and liability mix in a timely manner and minimize the negative effects of changing rates.

Each of our sources of liquidity is vulnerable to various uncertainties beyond our control. Scheduled loan and security payments are a relatively stable source of funds, while loan and security prepayments and calls, and deposit flows vary widely in reaction to market conditions, primarily prevailing interest rates. Asset sales are influenced by pledging activities, general market interest rates and unforeseen market conditions. Our financial condition is affected by our ability to borrow at attractive rates, retain deposits at market rates and other market conditions. We consider our sources of liquidity to be adequate to meet expected funding needs and also to be responsive to changing interest rate markets.

Net Interest and Dividend Income Simulation. We use a simulation model to monitor net interest income at risk under different interest rate environments using a static balance sheet, in which balances remain constant and principal cash flows are reinvested into similar balance sheet categories. We measure sensitivity primarily by evaluating the impact of ramped interest rate changes on net interest income compared to modeled net interest income if rates remain unchanged. The changes in interest income and interest expense due to changes in interest rates reflect the repricing characteristics of our interest-earning assets and interest-bearing liabilities.

The table below sets forth as of December 31, 2016 the estimated changes in net interest and dividend income for the following 12 month period resulting from parallel rate movements up 200 basis points and down 100 basis points ramped over one year compared to rates remaining unchanged.

For the Year Ending December 31, 2017
Changes in Interest Rates (Basis Points)		Net Interest and Dividend Income		% Change
(Dollars in thousands)
	200		53,815		-3.36	%
	0		55,686		0.0	%
	-100		54,055		-2.93	%

The repricing and/or new rates of assets and liabilities moved in tandem with market rates. However, in certain deposit products, the use of data from a historical analysis indicated that the rates on these products would move only a fraction of the rate change amount. Pertinent data from each loan account, deposit account and investment security was used to calculate future cash flows. The data included such items as maturity date, payment amount, next repricing date, repricing frequency, repricing index, repricing spread, caps and floors. Prepayment speed assumptions were based upon the difference between the account rate and the current market rate. We also evaluate changes interest rate sensitivity under various scenarios including but not limited to nonparallel shifts in the yield curve, variances in prepayment speeds and variances to correlations of instrument rates to market indexes.

The income simulation analysis was based upon a variety of assumptions. These assumptions include but are not limited to asset mix, prepayment speeds, the timing and level of interest rates, and the shape of the yield curve. As market conditions vary from the assumptions in the income simulation analysis, actual results will differ. As a result, the income simulation analysis does not serve as a forecast of net interest income, nor do the calculations represent any actions that management may undertake in response to changes in interest rates.

Recent Accounting Pronouncements

Refer to Note 1 to our consolidated financial statements for a summary of the recent accounting pronouncements.

Impact of Inflation and Changing Prices

Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than do the effects of inflation.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Management of Market Risk,” for a discussion of quantitative and qualitative disclosures about market risk.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements and the accompanying notes may be found on pages F-1 through F-52 of this report.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Management, including our President and Chief Executive Officer and Chief Financial Officer and Treasurer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer and Treasurer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act (i) is recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management including the Chief Executive Officer and Chief Financial Officer and Treasurer, as appropriate to allow timely discussion regarding required disclosure.

Management Report on Internal Control Over Financial Reporting

Our management, including our President and Chief Executive Officer and Chief Financial Officer and Treasurer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2016.

There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

Attestation Report of the Registered Public Accounting Firm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Western New England Bancorp, Inc.

We have audited Western New England Bancorp and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management of Western New England Bancorp is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Western New England Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the December 31, 2016 consolidated financial statements of Western New England Bancorp and our report dated March 15, 2017 expressed an unqualified opinion thereon.

/s/ WOLF & COMPANY, P.C.

Boston, Massachusetts

March 15, 2017

ITEM 9B.

OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following information included in the Proxy Statement is incorporated herein by reference: “Information About Our Board of Directors,” “Information About Our Executive Officers,” “Information About the Board of Directors and Corporate Governance,” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

ITEM 11.

EXECUTIVE COMPENSATION

The following information included in the Proxy Statement is incorporated herein by reference: “Compensation Committee Interlocks,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” and “Executive and Director Compensation Tables.”

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

The following information included in the Proxy Statement is incorporated herein by reference: “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized For Issuance Under Equity Compensation Plans.”

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The following information included in the Proxy Statement is incorporated herein by reference: “Transactions with Related Persons” and “Board of Directors Independence.”

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

The following information included in the Proxy Statement is incorporated herein by reference: “Independent Registered Public Accounting Firm Fees and Services.”

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)

Financial Statements

Reference is made to our consolidated financial statements and accompanying notes included in Item 8 of Part II hereof.

(a)(2)

Financial Statement Schedules

Consolidated financial statement schedules have been omitted because the required information is not present, or not present in amounts sufficient to require submission of the schedules, or because the required information is provided in the consolidated financial statements or notes thereto.

(a)(3)

Exhibits

The exhibits required to be filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index attached hereto and are incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 15, 2017.

	WESTERN NEW ENGLAND BANCORP, INC.

	By:	/s/ James C. Hagan
		James C. Hagan
		Chief Executive Officer and President
		(Principal Executive Officer)

	By:	/s/ Leo R. Sagan, Jr.
		Leo R. Sagan, Jr.
		Chief Financial Officer and Treasurer
		(Principal Financial Officer and Principal Accounting Officer)

POWER OF ATTORNEY

Each person whose individual signature appears below hereby authorizes and appoints James C. Hagan and Leo R. Sagan, Jr., and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 15, 2017.

Name		Title

/s/ James C. Hagan		Chief Executive Officer, President and Director (Principal Executive Officer)
James C. Hagan

/s/ Leo R. Sagan, Jr.		Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)
Leo R. Sagan, Jr.

/s/ Donald A. Williams		Chairman of the Board
Donald A. Williams

/s/ William J. Wagner		Co-Chairman of the Board
William J. Wagner

/s/ Laura Benoit		Director
Laura Benoit

/s/ Donna J. Damon		Director
Donna J. Damon

/s/ Gary G. Fitzgerald		Director
Gary G. Fitzgerald

/s/ William D. Masse		Director
William D. Masse

/s/ Lisa G. McMahon		Director
Lisa G. McMahon

/s/ Gregg F. Orlen		Director
Gregg F. Orlen

/s/ Paul C. Picknelly		Director
Paul C. Picknelly

/s/ Steven G. Richter		Director
Steven G. Richter

Name		Title

/s/ Philip R. Smith		Director
Philip R. Smith

/s/ Kevin M. Sweeney		Director
Kevin M. Sweeney

/s/ Christos A. Tapases		Director
Christos A. Tapases

EXHIBIT INDEX

3.1	Restated Articles of Organization of Western New England Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of the Form 8-K filed with the SEC on October 26, 2016).

3.3	Amended and Restated Bylaws of Western New England Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of the Form 8-K filed with the SEC on February 2, 2017).

4.1	Form of Stock Certificate of Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-1 (No. 333-137024) filed with the SEC on August 31, 2006).

10.1*	Form of Employee Stock Ownership Plan of Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 10.1 of the Form 10-Q filed with the SEC on November 8, 2011).

10.2*	Form of Director’s Deferred Compensation Plan (incorporated by reference to Exhibit 10.7 of the Form 8-K filed with the SEC on December 22, 2005).

10.3*	The 401(k) Plan adopted by Westfield Bank (incorporated herein by reference to Exhibit 4.1 of the Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 (No. 333-73132) filed with the SEC on April 28, 2006).

10.4*	Amendment to the 401(k) Plan adopted by Westfield Bank (incorporated by reference to Exhibit 10.11 of the Form 8-K filed with the SEC on July 13, 2006).

10.5*	Amended and Restated Benefit Restoration Plan of Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 10.5 of the Form 8-K filed with the SEC on October 29, 2007).

10.6*	Form of Amended and Restated Deferred Compensation Agreement with Donald A. Williams (incorporated by reference to Exhibit 10.10 of the Form 8-K filed with the SEC on December 22, 2005).

10.7*	Amended and Restated Employment Agreement between James C. Hagan and Westfield Bank (incorporated by reference to Exhibit 10.9 of the Form 8-K filed with the SEC on January 5, 2009).

10.8*	Amended and Restated Employment Agreement between James C. Hagan and Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 10.12 of the Form 8-K filed with the SEC on January 5, 2009).

10.9	Agreement between Westfield Bank and Village Mortgage Company (incorporated by reference to Exhibit 10.17 of Amendment No. 1 of the Registration Statement No. 333-137024 on Form S-1 filed with the SEC on August 31, 2006).

10.10*	Employment Agreement between Leo R. Sagan, Jr. and Westfield Bank (incorporated by reference to Exhibit 10.15 of the Form 8-K filed with the SEC on January 5, 2009).

10.11*	Employment Agreement between Leo R. Sagan, Jr. and Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 10.16 of the Form 8-K filed with the SEC on January 5, 2009).

10.12*	Employment Agreement between Gerald P. Ciejka and Westfield Bank (incorporated by reference to Exhibit 10.17 of the Form 8-K filed with the SEC on January 5, 2009).

10.13*	Employment Agreement between Gerald P. Ciejka and Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 10.18 of the Form 8-K filed with the SEC on January 5, 2009).

10.14*	Employment Agreement between Allen J. Miles, III and Westfield Bank (incorporated by reference to Exhibit 10.19 of the Form 8-K filed with the SEC on January 5, 2009).

10.15*	Employment Agreement between Allen J. Miles, III and Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 10.20 of the Form 8-K filed with the SEC on January 5, 2009).

10.16*	Employment Agreement between William J. Wagner and Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 10.2 of the Registration Statement on Form S-4 (No. 333-212221) filed with the SEC on June 24, 2016).

10.17*	Employment Agreement between William J. Wagner and Westfield Bank (incorporated by reference to Exhibit 10.3 of the Registration Statement on Form S-4 (No. 333-212221) filed with the SEC on June 24, 2016).

10.18*	2002 Stock Option Plan (incorporated by reference to Appendix B of the Schedule 14A filed with the SEC on May 24, 2002).

10.19*	Amendment to the 2002 Stock Option Plan (incorporated by reference to Appendix A of the Schedule 14A filed with the SEC on April 25, 2003).

10.20*	2002 Recognition and Retention Plan (incorporated by reference to Appendix C of the Schedule 14A filed with the SEC on May 24, 2002).

10.21*	Amendment to the 2002 Recognition and Retention Plan (incorporated by reference to Appendix B of the Schedule 14A filed with the SEC on April 25, 2003).

10.22*	2007 Stock Option Plan (incorporated by reference to Appendix A of the Schedule 14A filed with the SEC on June 18, 2007).

10.23*	Amendment to the 2007 Stock Option Plan (incorporated by reference to Appendix B of the Schedule 14A filed with the SEC on April 14, 2008).

10.24*	2007 Recognition and Retention Plan (incorporated by reference to Appendix B of the Schedule 14A filed with the SEC on June 18, 2007).

10.25*	Amendment to the 2007 Recognition and Retention Plan (incorporated by reference to Appendix C of the Schedule 14A filed with the SEC on April 14, 2008).

10.26*	2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on May 19, 2014).

10.27*	Chicopee Bancorp, Inc. 2007 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8 (No. 333-214261) filed with the SEC on October 26, 2016).

21.1	Subsidiaries of Western New England Bancorp, Inc.

23.1†	Consent of Wolf & Company, P.C.

31.1†	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2†	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1†	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2†	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101**	Financial statements from the annual report on Form 10-K of Western New England Bancorp, Inc. for the year ended December 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Shareholders’ Equity and Comprehensive Income, (iv) the Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.

†

Filed herewith.

Management contract or compensatory plan or arrangement.

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

REPORT oF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Western New England Bancorp, Inc.

We have audited the accompanying consolidated balance sheets of Western New England Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Western New England Bancorp, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report, dated March 15, 2017, expressed an unqualified opinion thereon.

/s/ WOLF & COMPANY, P.C.

Boston, Massachusetts

March 15, 2017

F-1

WESTERN NEW ENGLAND BANCORP, INC., AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

	December 31, 2016			December 31, 2015
ASSETS
CASH AND DUE FROM BANKS	$	23,297		$	9,891
FEDERAL FUNDS SOLD		4,388			100
INTEREST-BEARING DEPOSITS AND OTHER SHORT-TERM INVESTMENTS		42,549			3,712
CASH AND CASH EQUIVALENTS		70,234			13,703

SECURITIES AVAILABLE-FOR-SALE – AT FAIR VALUE		300,115			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		16,124			15,074
LOANS - Net of allowance for loan losses of $10,068 and $8,840 at December 31, 2016 and December 31, 2015, respectively		1,556,416			809,373
PREMISES AND EQUIPMENT, Net		20,885			13,564
ACCRUED INTEREST RECEIVABLE		5,782			3,878
BANK-OWNED LIFE INSURANCE		66,938			50,230
DEFERRED TAX ASSET, Net		16,159			10,881
GOODWILL		13,747			—
CORE DEPOSIT INTANGIBLE		4,438			—
OTHER REAL ESTATE OWNED		298			—
OTHER ASSETS		4,882			2,418
TOTAL ASSETS	$	2,076,018		$	1,339,930

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
DEPOSITS :
Noninterest-bearing	$	303,993		$	157,844
Interest-bearing		1,214,078			742,519
Total deposits		1,518,071			900,363

SHORT-TERM BORROWINGS		172,351			128,407
LONG-TERM DEBT		124,836			153,358
SECURITIES PENDING SETTLEMENT		455			—
OTHER LIABILITIES		21,909			18,336
TOTAL LIABILITIES		1,837,622			1,200,464

SHAREHOLDERS’ EQUITY:
Preferred stock - $0.01 par value, 5,000,000 shares authorized, none outstanding at December 31, 2016 and December 31, 2015		—			—
Common stock - $0.01 par value, 75,000,000 shares authorized, 30,380,231 shares issued and outstanding at December 31, 2016; 18,267,747 shares issued and outstanding at December 31, 2015		304			183
Additional paid-in capital		205,996			108,210
Unearned compensation - ESOP		(6,418	)		(6,952	)
Unearned compensation - Equity Incentive Plan		(536	)		(313	)
Retained earnings		51,711			49,316
Accumulated other comprehensive loss		(12,661	)		(10,978	)
Total shareholders’ equity		238,396			139,466
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,076,018		$	1,339,930

See accompanying notes to consolidated financial statements.

F-2

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

	Years Ended December 31,
	2016			2015			2014
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans	$	32,562		$	23,769		$	21,953
Commercial and industrial loans		7,431			6,594			5,749
Consumer loans		205			158			141
Debt securities, taxable		7,387			10,777			11,880
Debt securities, tax-exempt		168			602			833
Equity securities		180			162			176
Other investments		550			396			246
Federal funds sold, interest-bearing deposits and other short-term investments		115			18			13
Total interest and dividend income		48,598			42,476			40,991
INTEREST EXPENSE:
Deposits		6,581			5,571			5,177
Long-term debt		2,266			4,133			4,326
Short-term borrowings		2,438			1,090			420
Total interest expense		11,285			10,794			9,923
Net interest and dividend income		37,313			31,682			31,068
PROVISION FOR LOAN LOSSES		575			1,275			1,575
Net interest and dividend income after provision for loan losses		36,738			30,407			29,493

NONINTEREST INCOME (LOSS):
Service charges and fees		4,181			3,132			2,617
Income from bank-owned life insurance		1,558			1,527			1,523
Loss on prepayment of borrowings		(915	)		(1,300	)		—
Gain on sales of securities, net		1,139			1,506			320
Other income		8			—			—
Total noninterest income		5,971			4,865			4,460
NONINTEREST EXPENSE:
Salaries and employees benefits		17,643			15,410			14,709
Occupancy		3,617			3,239			3,076
Computer operations		2,845			2,361			2,341
Professional fees		2,177			2,178			1,936
FDIC insurance assessment		716			800			713
Merger related expenses		4,051			—			—
Other expenses		4,257			3,445			3,134
Total noninterest expense		35,306			27,433			25,909
INCOME BEFORE INCOME TAXES		7,403			7,839			8,044
INCOME TAX PROVISION		2,569			2,124			1,882
NET INCOME	$	4,834		$	5,715		$	6,162

EARNINGS PER COMMON SHARE:
Basic earnings per share	$	0.25		$	0.33		$	0.34
Weighted average shares outstanding		19,707,948			17,497,620			18,183,739
Diluted earnings per share	$	0.24		$	0.33		$	0.34
Weighted average diluted shares outstanding		19,803,744			17,497,620			18,183,739

See accompanying notes to consolidated financial statements.

F-3

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

	Years Ended December 31,
	2016			2015			2014

Net income	$	4,834		$	5,715		$	6,162

Other comprehensive income (loss):
Securities available for sale:
Unrealized holding (losses) gains		(2,381	)		(1,505	)		3,398
Reclassification adjustment for net gains realized in income ⁽¹⁾		(1,139	)		(1,506	)		(320	)
Amortization of net unrealized (gain) loss on held-to-maturity securities ⁽²⁾		26			(527	)		(55	)
Amortization of net unrealized loss upon transfer of held-to-maturity to available for sale ⁽³⁾		2,288			—			—
Net unrealized (losses) gains		(1,206	)		(3,538	)		3,023
Tax effect		413			1,220			(1,045	)
Net-of-tax amount		(793	)		(2,318	)		1,978

Derivative instruments:
Change in fair value of derivatives used for cash flow hedges		(1,126	)		(3,337	)		(7,684	)
Reclassification adjustment for loss realized in interest expense ⁽⁴⁾		619			519			190
Reclassification adjustment for termination fee realized in interest expense ⁽⁵⁾		956			223			—
Net adjustments pertaining to derivative instruments		449			(2,595	)		(7,494	)
Tax effect		(152	)		882			2,548
Net-of-tax amount		297			(1,713	)		(4,946	)

Defined benefit pension plans:
Gains (losses) arising during the period		(1,906	)		674			(2,312	)
Reclassification adjustments⁽⁶⁾:
Actuarial loss		109			125			—
Transition asset		—			—			(10	)
Net adjustments pertaining to defined benefit plans		(1,797	)		799			(2,322	)
Tax effect		610			(271	)		790
Net-of-tax amount		(1,187	)		528			(1,532	)

Other comprehensive loss		(1,683	)		(3,503	)		(4,500	)

Comprehensive income	$	3,151		$	2,212		$	1,662

(1) Gains 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 $387,000, $517,000 and $109,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

(2) Amortization of net unrealized 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 $(9,000), $182,000 and $18,000 for the years ended December 31, 2016, 2015 and 2014, 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 year ended December 31, 2016.

(4) Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term debt. Income tax effects associated with the reclassification adjustments were $210,000, $176,000 and $65,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

(5) Termination fee on derivative instruments is recognized as a component of interest expense on short-term debt. Income tax effects associated with the reclassification adjustments were $325,000 and $76,000 for the years ended December 31, 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 effects associated with the reclassification adjustments were $(611,000), $43,000 and $(3,000) for the years ended December 31, 2016, 2015 and 2014, respectively.

See accompanying notes to consolidated financial statements.

F-4

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(Dollars in thousands, except share data)

	Common Stock												Unearned						Accumulated
	Shares			Par Value			Additional Paid-in Capital			Unearned Compensation- ESOP			Compensation- Equity Incentive Plan			Retained Earnings			Other Comprehensive Income (Loss)			Total
BALANCE AT DECEMBER 31, 2013		20,140,669		$	201		$	121,860		$	(8,003	)	$	(187	)	$	43,248		$	(2,975	)	$	154,144
Comprehensive income (loss)		—			—			—			—			—			6,162			(4,500	)		1,662
Common stock held by ESOP committed to be released (79,345 shares)		—			—			42			534			—			—			—			576
Share-based compensation - equity incentive plan		—			—			—			—			92			—			—			92
Excess tax shortfall from equity incentive plan		—			—			(1	)		—			—			—			—			(1	)
Common stock repurchased		(1,405,878	)		(14	)		(10,205	)		—			—			—			—			(10,219	)
Return of dividends issued in connection with equity incentive plan		—			—			—			—			—			121			—			121
Cash dividends declared and paid ($0.21 per share)		—			—			—			—			—			(3,832	)		—			(3,832	)
BALANCE AT DECEMBER 31, 2014		18,734,791		$	187		$	111,696		$	(7,469	)	$	(95	)	$	45,699		$	(7,475	)	$	142,543
Comprehensive income (loss)		—			—			—			—			—			5,715			(3,503	)		2,212
Common stock held by ESOP committed to be released (76,888 shares)		—			—			65			517			—			—			—			582
Share-based compensation - equity incentive plan		—			—			—			—			131			—			—			131
Excess tax benefit from equity incentive plan		—			—			2			—			—			—			—			2
Common stock repurchased		(515,604	)		(5	)		(3,901	)		—			—			—			—			(3,906	)
Issuance of common stock in connection with equity incentive plan		48,560			1			348			—			(349	)		—			—			—
Cash dividends declared and paid ($0.12 per share)		—			—			—			—			—			(2,098	)		—			(2,098	)
BALANCE AT DECEMBER 31, 2015		18,267,747		$	183		$	108,210		$	(6,952	)	$	(313	)	$	49,316		$	(10,978	)	$	139,466
Comprehensive income (loss)		—			—			—			—			—			4,834			(1,683	)		3,151
Common stock held by ESOP committed to be released (79,082 shares)		—			—			96			534			—			—			—			630
Share-based compensation - equity incentive plan		—			—			—			—			262			—			—			262
Excess tax benefit from equity incentive plan		—			—			12			—			—			—			—			12
Acquisition of Chicopee Bancorp		12,469,334			125			98,386			—			—			—			—			98,511
Retirement of Chicopee Bancorp ESOP		(519,922	)		(5	)		(4,102	)		—			—			—			—			(4,107	)
Premium to equity for rollover of Chicopee Bancorp options		—			—			2,864			—			—			—			—			2,864
Retirement of WNEB stock previously owned by Chicopee Bancorp		(30,000	)		—			(236	)		—			—			—			—			(236	)
Common stock repurchased		(201,296	)		(2	)		(1,831	)		—			—			—			—			(1,833	)
Issuance of common stock in connection with stock option exercises		331,628			2			1,969			—			—			—			—			1,971
Issuance of common stock in connection with equity incentive plan		62,740			1			484			—			(485	)		—			—			—
Excess tax benefits in connection with stock option exercises		—			—			144			—			—			—			—			144
Cash dividends declared and paid ($0.12 per share)		—			—			—			—			—			(2,439	)		—			(2,439	)
BALANCE AT DECEMBER 31, 2016		30,380,231		$	304		$	205,996		$	(6,418	)	$	(536	)	$	51,711		$	(12,661	)	$	238,396

See accompanying notes to consolidated financial statements

F-5

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	Years Ended December 31,
	2016			2015			2014
OPERATING ACTIVITIES:
Net income	$	4,834		$	5,715		$	6,162
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		575			1,275			1,575
Depreciation and amortization of premises and equipment		1,429			1,315			1,189
Amortization of core deposit intangible		73			—			—
Net amortization of premiums and discounts on securities and mortgage loans		3,447			4,670			4,263
Net amortization of premiums on modified debt		60			383			610
Share-based compensation expense		262			131			92
ESOP expense		630			582			576
Excess tax (benefits) expense from equity incentive plan		(12	)		(2	)		1
Excess tax benefits in connection with stock option exercises		(144	)		—			—
Net gains on sales of securities		(1,139	)		(1,506	)		(320	)
Loss on prepayment of borrowings		915			1,300			—
Deferred income tax expense (benefit)		274			(231	)		(193	)
Income from bank-owned life insurance		(1,558	)		(1,527	)		(1,523	)
Changes in assets and liabilities:
Accrued interest receivable		(464	)		335			(12	)
Other assets		(1,564	)		(56	)		(150	)
Other liabilities		(6,494	)		(308	)		77
Net cash provided by operating activities		1,124			12,076			12,347
INVESTING ACTIVITIES:
Securities, held-to-maturity:
Purchases		—			(2,620	)		—
Proceeds from calls, maturities, and principal collections		6,836			39,372			14,433
Securities, available-for-sale:
Purchases		(87,246	)		(141,074	)		(66,784	)
Proceeds from sales		136,829			134,437			71,738
Proceeds from calls, maturities, and principal collections		59,112			36,298			24,135
Purchase of residential mortgages		(108,448	)		(90,743	)		(53,272	)
Loan originations and principal payments, net		1,313			(3,261	)		(34,522	)
Net cash acquired from acquisition of Chicopee Bancorp		23,808			—			—
Redemption (purchase) of Federal Home Loan Bank of Boston stock		3,126			(140	)		697
Purchases of premises and equipment		(1,487	)		(3,220	)		(1,937	)
Proceeds from sale of premises and equipment		20			44			40
Net cash provided by (used in) investing activities		33,863			(30,907	)		(45,472	)
FINANCING ACTIVITIES:
Net increase in deposits		72,039			66,145			17,106
Net change in short-term borrowings		38,944			34,410			45,800
Repayment of long-term debt		(89,933	)		(80,950	)		(21,650	)
Proceeds from long-term debt		2,184			146			5,142
Return of dividends issued in connection with equity incentive plan		—			—			121
Cash dividends paid		(2,439	)		(2,098	)		(3,832	)
Common stock repurchased		(1,378	)		(3,906	)		(10,518	)
Issuance of common stock in connection with stock option exercises		1,971			—			—
Excess tax benefits (expense) from equity incentive plan		12			2			(1	)
Excess tax benefits in connection with stock option exercises		144			—			—
Net cash provided by financing activities		21,544			13,749			32,168

NET CHANGE IN CASH AND CASH EQUIVALENTS:		56,531			(5,082	)		(957	)
Beginning of year		13,703			18,785			19,742
End of year	$	70,234		$	13,703		$	18,785

Supplemental cashflow information:
Securities reclassified from held-to-maturity to available-for-sale	$	(232,817	)	$	—		$	—
Securities reclassified to loan portfolio		—			—			606
Net cash due to broker for common stock repurchased		455			—			—
Loans transferred to other real estate owned		298			—			—

In connection with the purchase acquisition detailed in Note 22 to the audited consolidated financial statements:
Fair value of non-cash assets acquired	$	674,529		$	—		$	—
Goodwill and core deposit intangibles		18,258			—			—
Fair value of liabilities assumed		617,803			—			—
Value of common shares issued		98,792			—			—

See the accompanying notes to consolidated financial statements

F-6

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Basis of Presentation – Western New England Bancorp, Inc. (“Western New England Bancorp,” “WNEB,” the “Company,” “we” or “us”) is a Massachusetts-chartered stock holding company for Westfield Bank, a federally chartered stock savings bank (the “Bank”).

The Bank’s deposits are insured to the limits specified by the Federal Deposit Insurance Corporation (“FDIC”). The Bank operates 21 banking offices in western Massachusetts and Granby and Enfield, Connecticut, and its primary sources of revenue are earnings on loans to small and middle-market businesses and to residential property homeowners and income from securities.

Elm Street Securities Corporation, a Massachusetts-chartered corporation, was formed by us for the primary purpose of holding qualified securities. In February 2007, we formed WFD Securities, Inc., a Massachusetts-chartered corporation, for the primary purpose of holding qualified securities. In October 2009, we formed WB Real Estate Holdings, LLC, a Massachusetts-chartered limited liability company, for the primary purpose of holding real property acquired as security for debts previously contracted by the Bank. On October 21, 2016, we acquired Chicopee Bancorp, Inc. (“Chicopee”), the holding company for Chicopee Savings Bank. The acquisition added eight full-service banking offices located in western Massachusetts. See Note 22 - Acquisition of Chicopee Bancorp, Inc. for additional details. In conjunction with the acquisition of Chicopee, we acquired CSB Colts, Inc., a Massachusetts-chartered corporation, formed for the primary purpose of holding qualified securities.

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

Estimates - The preparation of 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 and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses for each. 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.

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

Cash and Cash Equivalents - We define cash on hand, cash due from banks, federal funds sold and interest-bearing deposits having an original maturity of 90 days or less as cash and cash equivalents. We are required to maintain a reserve balance with Bankers Bank Northeast (“BBN”) as part of our coin and currency contract and line of credit with BBN. The required reserve amounted to $425,000 and $690,000 at December 31, 2016 and 2015, respectively.

Securities and Mortgage-Backed Securities - Debt securities, including mortgage-backed securities, which management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at amortized cost. Securities, including mortgage-backed securities, which have been identified as assets for which there is not a positive intent to hold to maturity are classified as available for sale and are carried at fair value with unrealized gains and losses, net of income taxes, reported as a separate component of comprehensive income (loss). We do not acquire securities and mortgage-backed securities for purposes of engaging in trading activities.

F-7

Realized gains and losses on sales of securities and mortgage-backed securities are computed using the specific identification method and are included in noninterest income on the trade date. The amortization of premiums and accretion of discounts is determined by using the level yield method to the maturity date.

Derivatives - We enter into interest rate swap agreements as part of our interest-rate risk management strategy for certain assets and liabilities and not for speculative purposes. Based on our intended use for interest rate swaps, these are hedging instruments subject to hedge accounting provisions. Cash flow hedges are recorded at fair value in other assets or liabilities within our balance sheets. Changes in the fair value of these cash flow hedges are initially recorded in accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any hedge ineffectiveness assessed as part of our quarterly analysis is recorded directly to earnings. We would discontinue hedge accounting if the derivative was not expected to be or ceased to be highly effective as a hedge, and record changes in fair value of the derivative in earnings.

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

Fair Value Hierarchy - We group our assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities 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 and 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 and liabilities.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. 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.

Transfers between levels are recognized at the end of a reporting period, if applicable.

Federal Home Loan Bank of Boston Stock - The Bank, as a member of the Federal Home Loan Bank of Boston (“FHLBB”) system, is required to maintain an investment in capital stock of the FHLBB. Based on the redemption provisions of the FHLBB, the stock has no quoted market value and is carried at cost. At its discretion, the FHLBB may declare dividends on the stock. Management reviews for impairment based on the ultimate recoverability of the cost basis in the FHLBB stock. As of December 31, 2016, no impairment has been recognized.

Loans Held for Sale- Loans originated and intended for sale in the secondary market are carried at the lower of amortized cost or fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold on the trade date and reported within noninterest income on the accompanying consolidated statements of income.

F-8

Loans Receivable- Loans are recorded at the principal amount outstanding, adjusted for charge-offs, unearned premiums, discounts 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 collectible. 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 when subsequent performance reduces the concern as to the collectability of principal and interest. Loan fees, discounts and premiums on purchased loans, 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.

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

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

General component

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, commercial and industrial, and consumer. Residential real estate loans include classes for residential and home equity. 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; internal credit ratings; effects of changes in risk selection; 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 2016.

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:

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.

Residential real estate –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. We require private mortgage insurance for all loans originated with a loan-to-value ratio greater than 80 percent and do not grant subprime 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, decreased consumer spending, changes in technology and government spending are examples of what will have an effect on the credit quality in this segment.

F-9

Consumer loans – Loans in this segment are both secured and 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 nonperforming or 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 all of the 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.

While we use our best judgment and information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

We also maintain a reserve for unfunded credit commitments to provide for the risk of loss inherent in these arrangements. This reserve is determined using a methodology similar to the analysis of the allowance for loan losses, taking into consideration probabilities of future funding requirements. This reserve for unfunded commitments is included in other liabilities and was $60,000 at December 31, 2016 and 2015.

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 reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

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

F-10

Bank-owned Life Insurance – Bank-owned life insurance policies are reflected on the consolidated balance sheets at cash surrender value. Changes in the net cash surrender value of the policies, as well as insurance proceeds received, are reflected in noninterest income on the consolidated statements of income and are not subject to income taxes.

Transfers and Servicing of Financial Assets – Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from us, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) we do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Premises and Equipment – Land is carried at cost. Buildings, furniture and equipment are stated at cost, less accumulated depreciation and amortization, computed on the straight-line method over the estimated useful lives of the assets, or the expected lease term, if shorter. Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured. The estimated useful lives of the assets are as follows:

	Years

Buildings	39
Leasehold Improvements	5-20
Furniture and Equipment	3-7

The cost of maintenance and repairs is charged to expense when incurred. Major expenditures for betterments are capitalized and depreciated.

Other Real Estate Owned - Other real estate owned (“OREO”) represents property acquired through foreclosure or deeded to us in lieu of foreclosure. OREO is initially recorded at the estimated fair value of the real estate acquired, net of estimated selling costs, establishing a new cost basis. Initial write-downs are charged to the allowance for loan losses at the time the loan is transferred to OREO. Subsequent valuations are periodically performed by management and the carrying value is adjusted by a charge to expense to reflect any subsequent declines in the estimated fair value. Operating costs associated with OREO are expensed as incurred.

Servicing – The Company services mortgage loans for others. Mortgage servicing assets are recognized as separate assets at fair value when rights are acquired through purchase or retained through the sale of financial assets. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into service charges and fee income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to the amortized cost. Impairment is determined by stratifying rights by predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that the fair value is less than the capitalized amount for the stratum. Changes in the valuation allowance are reported in service charges and fee income.

Servicing fee income is recorded for fees earned for servicing loans, which is included in service charges and fee income. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned.

Impairment of Long-lived Assets – Long-lived assets, including premises and equipment and certain identifiable intangible assets that are held and used by the Company, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment is indicated by that review, the asset is written down to its estimated fair value through a charge to earnings.

F-11

Goodwill is measured as the excess of the cost of a business combination over the sum of the amounts assigned to identifiable intangible assets acquired less liabilities assumed. Goodwill is not amortized but rather assessed for impairment annually or more frequently if circumstances warrant.

Management has the option of first assessing qualitative factors, such as events and circumstances, to determine whether it is more likely than not, meaning a likelihood of more than 50%, the value of a reporting unit is less than its carrying amount. If, after considering all relevant events and circumstances, management determines it is not more likely than not the fair value of a reporting unit is less than its carrying amount, then performing an impairment test is unnecessary. For the year ended December 31, 2016, management determined that it was not more likely than not the fair value of the reporting unit (the consolidated Company, in our case) was less than its carrying amount. If management had determined otherwise, the two-step process would have been completed to determine the impairment and necessary write-down of goodwill.

Retirement Plans and Employee Benefits - We provide a defined benefit pension plan for eligible employees in conjunction with a third-party provider. The compensation cost of an employee’s pension benefit is recognized on the projected unit credit method over the employee’s approximate service period. The aggregate cost method is utilized for funding purposes. Employees are also eligible to participate in a 401(k) plan through third-party provider. We make matching contributions to this plan at 50% of up to 6% of the employees’ eligible compensation.

Share-based Compensation Plans – We measure and recognize compensation cost relating to share-based payment transactions based on the grant-date fair value of the equity instruments issued. Share-based compensation is recognized over the period the employee is required to provide services for the award. Reductions in compensation expense associated with forfeited options are estimated at the date of grant, and this estimated forfeiture rate is adjusted based on actual forfeiture experience. We use a binomial option-pricing model to determine the fair value of the stock options granted.

Employee Stock Ownership Plan – Compensation expense for the Employee Stock Ownership Plan (“ESOP”) is recorded at an amount equal to the shares allocated by the ESOP multiplied by the average fair market value of the shares during the period. We recognize compensation expense ratably over the year based upon our estimate of the number of shares expected to be allocated by the ESOP. Unearned compensation applicable to the ESOP is reflected as a reduction of shareholders’ equity in the consolidated balance sheets. The difference between the average fair market value and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in capital.

Advertising Costs – Advertising costs are expensed as incurred.

Income Taxes - We use the asset and liability method for income tax accounting, whereby, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance related to deferred tax assets is established when, in the judgment of management, it is more likely than not that all or a portion of such deferred tax assets will not be realized based on the available evidence including historical and projected taxable income. We do not have any uncertain tax positions at December 31, 2016 which require accrual or disclosure. We record interest and penalties as part of income tax expense. No interest or penalties were recorded during the years ended December 31, 2016, 2015, or 2014.

Earnings per Share - Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. If rights to dividends on unvested awards are non-forfeitable, these unvested awards are considered outstanding in the computation of basic earnings per share. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by us relate solely to stock options and are determined using the treasury stock method. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations.

F-12

Earnings per common share have been computed based on the following:

	Years Ended December 31,
	2016			2015			2014
	(In thousands, except per share data)

Net income applicable to common stock	$	4,834		$	5,715		$	6,162

Average number of common shares issued		20,659			18,509			19,274
Less: Average unallocated ESOP Shares		(935	)		(1,011	)		(1,090	)
Less: Average unvested equity incentive plan shares		(16	)		—			—

Average number of common shares outstanding used to calculate basic earnings per common share		19,708			17,498			18,184

Effect of dilutive equity incentive plan		3			—			—
Effect of dilutive stock options		93			—			—

Average number of common shares outstanding used to calculate diluted earnings per common share		19,804			17,498			18,184

Basic earnings per share	$	0.25		$	0.33		$	0.34

Diluted earnings per share	$	0.24		$	0.33		$	0.34

Antidilutive Shares ⁽¹⁾		—			—			—

⁽¹⁾ Shares outstanding but not included in the computation of earnings per share because they were antidilutive, meaning the exercise price of such options exceeded the market value of the Company’s common stock.

F-13

Comprehensive Income (Loss)

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

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

	December 31, 2016			December 31, 2015
	(In thousands)
Net unrealized gains (losses) on securities available-for-sale	$	(5,863	)	$	(2,343	)
Tax effect		2,024			812
Net-of-tax amount		(3,839	)		(1,531	)

Net unamortized 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		(3,152	)		(6,064	)
Termination fee		(4,733	)		(2,270	)
Total derivatives		(7,885	)		(8,334	)
Tax effect		2,681			2,833
Net-of-tax amount		(5,204	)		(5,501	)

Unrecognized deferred loss pertaining to defined benefit plan		(5,482	)		(3,685	)
Tax effect		1,864			1,254
Net-of-tax amount		(3,618	)		(2,431	)

Accumulated other comprehensive loss	$	(12,661	)	$	(10,978	)

The following table presents changes in accumulated other comprehensive loss for the years ended December 31, 2016 and 2015 by component:

	Securities			Derivatives			Defined Benefit Pension Plans			Accumulated Other Comprehensive Loss
	(In thousands)
Balance at December 31, 2014	$	(728	)	$	(3,788	)	$	(2,959	)	$	(7,475	)
Current-period other comprehensive (loss) income		(2,318	)		(1,713	)		528			(3,503	)
Balance at December 31, 2015	$	(3,046	)	$	(5,501	)	$	(2,431	)	$	(10,978	)

Balance at December 31, 2015	$	(3,046	)	$	(5,501	)	$	(2,431	)	$	(10,978	)
Current-period other comprehensive (loss) income		(793	)		297			(1,187	)		(1,683	)
Balance at December 31, 2016	$	(3,839	)	$	(5,204	)	$	(3,618	)	$	(12,661	)

With regard to defined benefit plans, an actuarial loss of $198,000 is expected to be recognized as a component of net periodic pension cost for the year ending December 31, 2017.

F-14

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: Improvements to Employee Share-Based Payment Accounting (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.

On June 16, 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. 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.

F-15

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.

F-16

2. SECURITIES

Securities available-for-sale are summarized as follows:

	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)

Available-for-sale securities:
Government-sponsored mortgage-backed securities	$	184,127	$	33	$	(4,024	)	$	180,136
U.S. government guaranteed mortgage-backed securities		17,753		—		(403	)		17,350
Corporate bonds		50,255		265		(203	)		50,317
State and municipal bonds		4,117		13		(122	)		4,008
Government-sponsored enterprise obligations		43,140		—		(1,132	)		42,008
Mutual funds		6,586		—		(290	)		6,296
Total available-for-sale securities	$	305,978	$	311	$	(6,174	)	$	300,115

	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

Our repurchase agreements are collateralized by government-sponsored enterprise obligations and certain mortgage-backed securities (see Note 7).

F-17

The amortized cost and fair value of securities at December 31, 2016, by final maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or repay obligations and mortgage-backed securities amortize monthly.

	December 31, 2016
	Amortized Cost		Fair Value
	(In thousands)
Mortgage-backed securities:
Due after one year through five years	$	21,877	$	21,647
Due after five years through ten years		17,415		17,176
Due after ten years		162,588		158,663
Total	$	201,880	$	197,486

Debt securities:
Due in one year or less	$	18,270	$	18,262
Due after one year through five years		26,730		26,846
Due after five years through ten years		45,760		44,831
Due after ten years		6,752		6,394
Total	$	97,512	$	96,333

Gross realized gains and losses on sales of securities for the years ended December 31, 2016, 2015 and 2014 are as follows:

	Years Ended December 31,
	2016			2015			2014
	(In thousands)

Gross gains realized	$	1,976		$	1,638		$	801
Gross losses realized		(837	)		(132	)		(481	)
Net gain realized	$	1,139		$	1,506		$	320

Proceeds from the sales of securities available-for-sale amounted to $136.8 million, $134.4 million and $71.7 million for the years ended December 31, 2016, 2015 and 2014, respectively.

During the first quarter of 2016, the Company transferred its held-to-maturity portfolio of $232.8 million to available-for-sale, and subsequently sold $136.8 million in securities available-for-sale. As a result of this transfer, the Company has tainted their held-to-maturity portfolio and is prohibited from classifying future purchases as held-to-maturity.

F-18

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

	December 31, 2016
	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	$	3,016	$	147,691	$	1,008	$	27,303
U.S. government guaranteed mortgage-backed securities		192		12,536		211		4,814
Corporate bonds		203		18,481		—		—
State and municipal bonds		95		1,507		27		305
Government-sponsored enterprise obligations		1,132		42,008		—		—
Mutual funds		79		3,429		211		2,867

Total available-for-sale	$	4,717	$	225,652	$	1,457	$	35,289

	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

F-19

	December 31, 2016
	Less Than Twelve Months									Over Twelve Months
	Number of Securities		Amortized Cost Basis		Gross Unrealized Loss		Depreciation from Amortized Cost Basis (%)			Number of Securities		Amortized Cost Basis		Gross Unrealized Loss		Depreciation from Amortized Cost Basis (%)
	(Dollars in thousands)

Government-sponsored mortgage-backed securities		56	$	150,707	$	3,016		2.0	%		10	$	28,311	$	1,008		3.6	%
U.S. government guaranteed mortgage-backed securities		4		12,728		192		1.5			2		5,025		211		4.2
Government-sponsored enterprise obligations		11		43,140		1,132		2.6			0		—		—		—
Corporate bonds		5		18,684		203		1.1			0		—		—		—
State and municipal bonds		3		1,602		95		5.9			1		332		27		8.1
Mutual funds		1		3,508		79		2.3			2		3,078		211		6.9
			$	230,369	$	4,717						$	36,746	$	1,457

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 bases, no declines are deemed to be other-than-temporary.

LOANS

Loans consisted of the following amounts:	December 31,
	2016			2015
	(In thousands)
Commercial real estate	$	720,741		$	303,036
Residential real estate:
Residential		522,083			298,052
Home equity		92,083			43,512
Commercial and industrial		222,286			168,256
Consumer		4,424			1,534
Total loans		1,561,617			814,390
Unearned premiums and deferred loan fees and costs, net		4,867			3,823
Allowance for loan losses		(10,068	)		(8,840	)
	$	1,556,416		$	809,373

During 2016 and 2015, we purchased residential real estate loans aggregating $108.4 million and $90.7 million, respectively. These purchased loans are subject to underwriting standards that are consistent with our originated loans and we consider the risk attributes to be similar to originated loans.

We have transferred a portion of our originated commercial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in our accompanying 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 December 31, 2016 and 2015, we serviced commercial loans for participants aggregating $42.6 million and $19.5 million, respectively.

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balances of these loans totaled $75.2 million and $1.0 million at December 31, 2016 and 2015, respectively, with the increase resulting from the acquisition of Chicopee’s mortgage servicing portfolio. Net service fee income of $12,500, $4,000 and $4,000 was recorded for the years ended December 31, 2016, 2015 and 2014, respectively, and is included in service charges and fees on the consolidated statements of income.

F-20

Residential real estate mortgages are originated by the Bank both for its portfolio and for sale into the secondary market. The Bank may sell its loans to institutional investors such as the Federal Home Loan Mortgage Corporation. Under loan sale and servicing agreements with the investor, the Bank generally continues to service the residential real estate mortgages. The Bank pays the investor an agreed upon rate on the loan, which is less than the interest rate received from the borrower. The Bank retains the difference as a fee for servicing the residential real estate mortgages. The Bank capitalizes mortgage servicing rights at their fair value upon sale of the related loans, amortizes the asset over the estimated life of the serviced loan, and periodically assesses the asset for impairment. The significant assumptions used by a third party to estimate the fair value of capitalized servicing rights at December 31, 2016, include weighted average prepayment speed for the portfolio using the Public Securities Association Standard Prepayment Model (203 PSA), weighted average internal rate of return (9.05%), weighted average servicing fee (0.2501)%, and net cost to service loans ($51.67 per loan). The estimated fair value of capitalized servicing rights may vary significantly in subsequent periods primarily due to changing market interest rates, and their effect on prepayment speeds and discount rates.

A summary of the activity in the balances of mortgage servicing rights follows:

	Year Ended December 31, 2016
		(In thousands)

Balance at the beginning of year:	$	—
Capitalized mortgage servicing rights		502
Amortization		37
Balance at the end of year	$	465
Fair value at the end of year	$	628

Prior to the acquisition of Chicopee in 2016, mortgage servicing rights were not material to the consolidated financial statements, and therefore, were not recorded.

F-21

An analysis of changes in the allowance for loan losses by segment for the years ended December 31, 2016, 2015 and 2014 is as follows:

	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer			Unallocated			Total
	(In thousands)
Balance at December 31, 2013	$	3,550		$	1,707		$	2,191		$	13		$	(2	)	$	7,459
Provision		505			376			649			42			3			1,575
Charge-offs		(350	)		(31	)		(787	)		(55	)		—			(1,223	)
Recoveries		—			1			121			15			—			137
Balance at December 31, 2014	$	3,705		$	2,053		$	2,174		$	15		$	1		$	7,948
Provision		151			428			605			46			45			1,275
Charge-offs		—			(58	)		(345	)		(73	)		—			(476	)
Recoveries		—			8			51			34			—			93
Balance at December 31, 2015	$	3,856		$	2,431		$	2,485		$	22		$	46		$	8,840
Provision (credit)		(668	)		579			575			135			(46	)		575
Charge-offs		(170	)		(157	)		—			(159	)		—			(486	)
Recoveries		1,065			9			25			40			—			1,139
Balance at December 31, 2016	$	4,083		$	2,862		$	3,085		$	38		$	—		$	10,068

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

	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer		Unallocated		Total
	(In thousands)
December 31, 2016
Amount of allowance for loans individually evaluated and deemed impaired	$	—	$	—	$	—	$	—	$	—	$	—
Amount of allowance for loans collectively or individually evaluated and not deemed impaired		4,083		2,862		3,085		38		—		10,068
Allowance for loans acquired with deteriorated credit quality		—		—		—		—		—		—
Total allowance for loan losses		4,083		2,862		3,085		38		—		10,068

Loans individually evaluated and deemed impaired		3,335		452		3,042		—		—		6,829
Loans collectively or individually evaluated and not deemed impaired		701,766		609,107		217,972		4,424		—		1,533,269
Amount of loans acquired with deteriorated credit quality		15,640		4,607		1,272		—		—		21,519
Total loans	$	720,741	$	614,166	$	222,286	$	4,424	$	—	$	1,561,617

December 31, 2015
Amount of allowance for loans individually evaluated and deemed impaired	$	—	$	—	$	—	$	—	$	—	$	—
Amount of allowance for loans collectively or individually evaluated 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

F-22

The following is a summary of past due and nonaccrual loans by class at December 31, 2016 and 2015:

	30 – 59 Days Past Due		60 – 89 Days Past Due		Past Due 90 Days or More		Total Past Due		Past Due 90 Days or More and Still Accruing		Loans on Non-Accrual
	(In thousands)
December 31, 2016
Commercial real estate	$	302	$	555	$	137	$	994	$	—	$	2,740
Residential real estate:
Residential		791		262		689		1,742		—		1,658
Home equity		208		36		—		244		—		37
Commercial and industrial		326		32		—		358		—		3,214
Consumer		27		9		7		43		—		14
Total legacy loans		1,654		894		833		3,381		—		7,663

Loans acquired from Chicopee Savings Bank		3,854		1,907		551		6,312		—		6,394
Total past due loans	$	5,508	$	2,801	$	1,384	$	9,693	$	—	$	14,057

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

The following is a summary of impaired loans by class:

	Impaired Loans ⁽¹⁾
							Year Ended
	At December 31, 2016						December 31, 2016

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(In thousands)

Commercial real estate	$	18,975	$	21,330	$	—	$	5,458	$	191
Residential real estate		5,059		5,676		—		1,052		7
Commercial and industrial		4,314		11,049		—		3,504		40
Total impaired loans	$	28,348	$	38,055	$	—	$	10,014	$	238

(1) Includes loans acquired with deteriorated credit quality.

F-23

	Impaired Loans
							Year Ended
	At December 31, 2015						December 31, 2015

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(In thousands)

Commercial real estate	$	3,732	$	4,403	$	—	$	3,332	$	27
Residential real estate		399		543		—		330		—
Commercial and industrial		3,363		4,408		—		3,671		—
Total impaired loans	$	7,494	$	9,354	$	—	$	7,333	$	27

No interest income was recognized for impaired loans on a cash-basis method during the years ended December 31, 2016 or 2015. Interest income recognized during the year ended December 31, 2016 and 2015 related to TDRs.

We may periodically agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a 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 a specific allowance or a charge-off to the allowance. Nonperforming TDRs are shown as nonperforming assets.

The following table summarizes TDRs at the dates indicated:

	Year Ended						Year Ended
	December 31, 2016						December 31, 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		2	$	1,946	$	1,946		1	$	478	$	478
Commercial and Industrial		3		2,899		2,899		—		—		—
Residential		4		555		555		—		—		—
Total		9	$	5,400	$	5,400		1	$	478	$	478

F-24

A substandard impaired loan relationship in the amount of $4.6 million was designated a TDR during the year ended December 31, 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. There were no significant loans modified in the TDRs during the year ended December 31, 2015.

No TDRs defaulted (defined as 30 days or more past due) within 12 months of restructuring during the years ended December 31, 2015. Upon our merger with Chicopee, we acquired 3 TDR loans totaling $440,000 that subsequently defaulted within the year of restructuring.

As of December 31, 2016, we have not committed to lend any additional funds for loans that are classified as impaired. There were no charge-offs on TDRs during the year ended December 31, 2016. There were $345,857 in charge-offs on TDRs during the year ended December 31, 2015.

Loans Acquired with Deteriorated Credit Quality

The following is a summary of loans acquired with evidence of credit deterioration from Chicopee as of December 31, 2016.

	Contractual Required Payments Receivable			Cash Expected To Be Collected			Non- Accretable Discount			Accretable Yield			Loans Receivable
	(In thousands)
Balance at acquisition date of
October 21, 2016	$	38,590		$	30,091		$	8,499		$	7,723		$	22,368
Collections		(753	)		(753	)		—			(206	)		(547	)
Transferred to OREO		(400	)		(298	)		(102	)		4			(302	)
Balance at December 31, 2016	$	37,437		$	29,040		$	8,397		$	7,521		$	21,519

F-25

Credit Quality Information

We use 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 $88.9 million and $23.1 million at December 31, 2016 and 2015, respectively. We engage an independent third party to review a significant portion of loans within these segments on at least an 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 December 31, 2016 and December 31, 2015:

	Commercial Real Estate		Residential 1-4 family		Home Equity		Commercial and Industrial		Consumer		Total
	(Dollars in thousands)
December 31, 2016
Loans rated 1 – 3	$	673,957	$	516,339	$	91,964	$	180,675	$	4,391	$	1,467,326
Loans rated 4		24,207		—		—		16,621		6		40,834
Loans rated 5		14,068		—		—		6,727		—		20,795
Loans rated 6		6,604		5,744		119		15,379		27		27,873
Loans rated 7		1,905		—		—		2,884		—		4,789
	$	720,741	$	522,083	$	92,083	$	222,286	$	4,424	$	1,561,617

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

F-26

PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

	December 31,
	2016			2015
	(In thousands)

Land	$	5,651		$	4,121
Buildings		19,191			13,738
Leasehold improvements		2,220			2,209
Furniture and equipment		14,090			12,334
Total		41,152			32,402

Accumulated depreciation and amortization		(20,267	)		(18,838	)

Premises and equipment, net	$	20,885		$	13,564

Depreciation and amortization expense for the years ended December 31, 2016, 2015 and 2014 amounted to $1.4 million, $1.3 million and $1.2 million, respectively. Estimates of the fair value of bank premises acquired based upon current information are still being evaluated by management and are not yet completed and may result in a change to the provisional fair values of bank premises acquired and goodwill upon completion.

GOODWILL AND OTHER INTANGIBLES

Goodwill

Goodwill for the year ended December 31, 2016 is summarized as follows:

	Year Ended December 31, 2016
		(In thousands)
Balance at beginning of the year	$	—
Acquisition of Chicopee		13,747
Balance at end of year	$	13,747

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

Core Deposit Intangibles

In connection with the assumption of $545.7 million of deposit liabilities from the Chicopee acquisition in October 2016, of which $345.2 million were core deposits, the Bank recorded a core deposit intangible of $4.5 million. The resulting core deposit intangible is amortized over twelve years using the straight-line method. Core deposit intangibles are summarized as follows:

	Year Ended December 31, 2016
		(In thousands)
Core deposit intangible	$	4,511
Accumulated amortization		73
Core deposit intangible, net	$	4,438

Amortization expense was $73,000 for the year ended December 31, 2016. At December 31, 2016, future amortization of the core deposit intangible totals $376,000 for each of the next five years and $2.6 million thereafter.

F-27

DEPOSITS

Deposit accounts by type are summarized as follows:

	At December 31,
	2016		2015
	Amount		Amount
	(Dollars in thousands)
Demand and interest-bearing:
Interest-bearing accounts	$	82,406	$	28,913
Demand deposits		303,993		157,844

Savings:
Regular accounts		121,262		75,225
Money market accounts		437,467		242,647

Time certificates of deposit		572,943		395,734

Total deposits	$	1,518,071	$	900,363

Time deposits of $250,000 or more totaled $133.8 million at December 31, 2016. Interest expense on time deposits of $250,000 or more totaled $1.0 million for the year ended December 31, 2016.

At December 31, 2016, the scheduled maturities of time certificates of deposit are as follows:

Year Ending December 31,	Amount
		(In thousands)

2017	$	321,078
2018		144,801
2019		54,508
2020		32,047
2021		20,509
	$	572,943

Interest expense on deposits for the years ended December 31, 2016, 2015 and 2014 is summarized as follows:

	Years Ended December 31,
	2016		2015		2014
	(In thousands)
Regular	$	89	$	79	$	80
Money market		1,201		830		846
Time		5,144		4,583		4,152
Interest-bearing demand		147		79		99
	$	6,581	$	5,571	$	5,177

Cash paid for interest on deposits totaled $6.6 million, $5.6 million and $5.2 million for years ended December 31, 2016, 2015 and 2014, respectively.

F-28

SHORT-TERM BORROWINGS

FHLBB Advances – We have an “Ideal Way” line of credit with the FHLBB for $9.5 million for the years ended December 31, 2016 and 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. At December 31, 2016 and 2015, there were no advances outstanding under this line.

FHLBB advances, including line of credit advances, with an original maturity of less than one year, amounted to $155.0 million and $93.8 million at December 31, 2016 and 2015, respectively, at a weighted average rate of 0.78% and 0.44%, respectively.

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

BBN Advances – We have a $4.0 million line of credit with BBN at an interest rate determined and reset by BBN on a daily basis. There were no advances outstanding under this line at December 31, 2016 and 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.

PNC Advances – We have a $50.0 million line of credit with PNC Bank at an interest rate determined and reset by PNC on a daily basis. There were no advances outstanding under the line at December 31, 2016 and 2015.

Customer Repurchase Agreements – The following table summarizes information regarding repurchase agreements:

	Years Ended
	December 31,
	2016			2015
	(Dollars in thousands)
Balance outstanding at end of year	$	17,351		$	34,657
Maximum amount outstanding during year		50,124			48,582
Average amount outstanding during year		28,130			38,883
Weighted average interest rate at end of year		0.14	%		0.20	%
Amortized cost of collateral pledged at end of year		80,106			67,440
Fair value of collateral pledged at end of year		82,218			69,948

Our repurchase agreements are collateralized by government-sponsored enterprise obligations with a fair value of $24.6 million and $6.5 million, and certain mortgage-backed securities with a fair value of $57.6 million and $63.5 million, at December 31, 2016 and 2015, respectively. The weighted average interest rate on the pledged collateral was 2.62% and 3.64% at December 31, 2016 and 2015, respectively. 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.

Cash paid for interest on short-term borrowings totaled $2.4 million, $1.1 million and $414,000 for years ended December 31, 2016, 2015 and 2014, respectively.

F-29

LONG-TERM DEBT

FHLBB Advances – The following advances are collateralized by a blanket lien on our residential real estate loans and our eligible commercial real estate loans.

	Amount				Weighted Average Rate
	2016		2015		2016			2015
	(In thousands)
Fixed-rate advances maturing:
2016	$	—	$	24,940		—	%		1.3	%
2017		15,298		47,500		2.7			2.4
2018		28,789		20,000		1.9			2.0
2019		31,288		16,000		2.1			2.5
2020		16,782		7,000		1.7			1.8
2021		5,039		—		1.2			—
2022		4,804		—		1.9			—
2024		836		—		2.6			—
		102,836		115,440		2.0	%		2.1	%
Variable-rate advances maturing:
2016		—		10,000					1.7
2018		22,000		22,000		2.1			2.1
		22,000		32,000		2.1			2.0

Total advances	$	124,836	$	147,440		2.0	%		2.1	%

At December 31, 2015, securities pledged as collateral to the FHLB had a carrying value of $212.3 million. There were no securities pledged as collateral to the FHLB at December 31, 2016.

Customer Repurchase Agreements - At December 31, 2015, we had one long-term customer repurchase agreement for $5.9 million with a rate of 2.5% and a final maturity in 2016. There were no long-term customer repurchase agreements at December 31, 2016.

Cash paid for interest on long-term debt totaled $2.3 million, $4.1 million, and $4.3 million for years ended December 31, 2016, 2015 and 2014, respectively.

During 2016, we prepaid FHLBB borrowings in the amount of $42.5 million with a weighted average rate of 2.29% and incurred a prepayment expense of $915,000.

STOCK PLANS AND EMPLOYEE STOCK OWNERSHIP PLAN

Stock Options – Under the terms of the Chicopee merger agreement dated October 21, 2016, each option to purchase shares of Chicopee common stock issued by Chicopee and outstanding at the effective time of the merger pursuant to the Chicopee 2007 Equity Incentive Plan fully vested and converted into an option to purchase shares of WNEB common stock on the same terms and conditions as were applicable before the merger, except (1) the number of shares of WNEB common stock subject to the new option was adjusted to be equal to the product of the number of shares of Chicopee common stock subject to the existing option and the exchange ratio (rounding fractional shares to the nearest whole share) and (2) the exercise price per share of WNEB common stock under the new option was adjusted to be equal to the exercise price per share of Chicopee common stock of the existing option divided by the exchange ratio (rounded to the nearest whole cent).

F-30

A summary of the status of our stock options at December 31, 2016 is presented below:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)

Outstanding at December 31, 2015		—		$	—		—	$	—
Converted options upon merger		1,510,527			6.00		2.02		2,866
Exercised		(331,628	)		5.96		1.49		1,016
Outstanding at December 31, 2016		1,178,899		$	6.01		1.98	$	3,930

Exercisable at December 31, 2016		1,178,899		$	6.01		1.98	$	3,930

Cash received for options exercised during the year ended December 31, 2016 was $2.0 million.

Restricted Stock Awards – During 2007, we adopted an equity incentive plan under which 624,041 shares were reserved for issuance as restricted stock awards to directors and employees, all of which are currently issued, outstanding and fully vested as of December 31, 2016. Shares awarded vested ratably over five years. The fair market value of shares awarded, based on the market price at the date of grant, was recorded as unearned compensation and amortized over the applicable vesting period.

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

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

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

The LTI Plan includes eligible officers of the Company who are nominated by the Company’s Chief Executive Officer and approved by the Committee. The LTI Plan is triggered by the Company’s achievement of satisfactory safety and soundness results from its most recent regulatory examination. Stock grants made through the 2016 LTI plan will be a combination of 50% time-vested restricted stock and 50% performance-based restricted stock.

In May 2016, 62,740 shares were granted under the LTI Plan. Of this total, 36,543 shares are retention-based, with 10,352 vesting in one year and 26,191 vesting ratably over a three year period. The remaining 26,197 shares granted are performance based and are subject to the achievement of the 2016 LTI performance metric before vesting is realized after a three year period. 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 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 December 31, 2016, an additional 404,700 shares were available for future grants under this plan.

F-31

A summary of the status of unvested restricted stock awards at December 31, 2016 is presented below:

	Shares			Weighted Average Grant Date Fair Value

Balance at December 31, 2015		54,160		$	7.28
Shares granted		62,740			7.73
Shares vested		(25,529	)		7.58
Balance at December 31, 2016		91,371		$	7.51

The aggregate fair value of restricted stock vested during 2016 was $213,944. We recorded total expense for restricted stock awards of $262,000, $131,000 and $92,000 for the years ended December 31, 2016, 2015, and 2014, respectively. Tax benefits related to equity incentive plan expense were $89,000, $44,000 and $31,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Unrecognized compensation cost for stock awards was $536,000 at December 31, 2016 with a remaining term of 2.07 years.

Employee Stock Ownership Plan - We established an ESOP for the benefit of each employee that has reached the age of 21 and has completed at least 1,000 hours of service in the previous 12-month period. In January 2002, as part of the initial stock conversion, we provided a loan to the ESOP Trust which was used to purchase 8%, or 1,305,359 shares, of the common stock sold in the initial public offering.

In January 2007, as part of the second-step stock conversion, we provided an additional loan to the ESOP Trust which was used to purchase 4.0%, or 736,000 shares, of the 18,400,000 shares of common stock sold in the offering. The 2002 and 2007 loans bear interest equal to 8.0% and provide for annual payments of interest and principal.

At December 31, 2016, the remaining principal balances are payable as follows:

Year Ending
December 31,		Amount
(In thousands)
	2017	$	447
	2018		447
	2019		447
	2020		447
	2021		447
	Thereafter		5,631
		$	7,866

We have committed to make contributions to the ESOP sufficient to support the debt service of the loans. The loans are secured by the shares purchased, which are held in a suspense account for allocation among the participants as the loans are paid. Total compensation expense applicable to the ESOP amounted to $630,000, $582,000 and $576,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

F-32

Shares held by the ESOP include the following at December 31, 2016 and 2015:

	2016	2015
Allocated	832,308	776,517
Committed to be allocated	79,082	76,888
Unallocated	884,781	963,863
Total	1,796,171	1,817,268

Cash dividends declared and received on allocated shares are allocated to participants and charged to retained earnings. Cash dividends declared and received on unallocated shares are held in suspense and are applied to repay the outstanding debt of the ESOP. The fair value of unallocated shares was $8.5 million and $8.1 million at December 31, 2016 and 2015, respectively. ESOP shares are considered outstanding for earnings per share calculations when they are committed to be allocated. Unallocated ESOP shares are excluded from earnings per share calculations. The cost of unearned shares to be allocated to ESOP participants for future services not yet performed is reflected as a reduction of shareholders’ equity.

10. RETIREMENT PLANS AND EMPLOYEE BENEFITS

Pension Plan - We provide a defined benefit pension plan for eligible employees (the “Plan”). Employees must work a minimum of 1,000 hours per year to be eligible for the Plan. Eligible employees become vested in the Plan after five years of service. On September 30, 2016, we effected a soft freeze on the Plan and therefore no new participants will be included in the Plan after such effective date.

The following table provides information for the Plan at or for the years ended December 31:


	Years Ended December 31,
	2016			2015			2014
	(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year	$	22,458		$	23,634		$	19,039
Service cost		1,130			1,234			1,000
Interest		959			902			824
Actuarial (gain) loss		1,846			(2,040	)		3,085
Benefits paid		(574	)		(1,272	)		(314	)
Benefit obligation at end of year		25,819			22,458			23,634

Change in plan assets:
Fair value of plan assets at beginning of year		15,233			15,947			13,811
Actual return (loss) on plan assets		1,039			(242	)		1,725
Employer contribution		800			800			725
Benefits paid		(574	)		(1,272	)		(314	)
Fair value of plan assets at end of year		16,498			15,233			15,947

Funded status and accrued benefit at end of year	$	(9,321	)	$	(7,225	)	$	(7,687	)

Accumulated benefit obligation at end of year	$	19,027		$	16,885		$	16,423

The following actuarial assumptions were used in determining the pension benefit obligation:

	December 31,
	2016			2015
Discount rate		4.15	%		4.35	%
Rate of compensation increase		4.00			4.00

F-33

Net pension cost includes the following components for the years ended December 31:

	2016			2015			2014
		(In thousands)
Service cost	$	1,130		$	1,234		$	1,000
Interest cost		959			902			824
Expected return on assets		(1,097	)		(1,134	)		(959	)
Amortization of transition asset		—			—			(10	)
Amortization of actuarial loss		102			118			—

Net periodic pension cost	$	1,094		$	1,120		$	855

The following actuarial assumptions were used in determining the service costs for the years ended December 31:

	2016			2015			2014
Discount rate		4.35	%		4.00	%		5.00	%
Expected return on plan assets		7.50			7.50			7.50
Rate of compensation increase		4.00			4.00			4.00

The fair value of major categories of our pension plan assets are summarized below:

	December 31, 2016
Plan Assets	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
Large U.S. equity	$	—	$	4,346	$	—	$	4,346
Small/mid U.S. equity		—		782		—		782
International equity		—		1,730		—		1,730
Balanced/asset allocation		—		332		—		332
Fixed income		—		9,308		—		9,308
	$	—	$	16,498	$	—	$	16,498

	December 31, 2015
Plan Assets	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
Large U.S. equity	$	—	$	3,962	$	—	$	3,962
Small/mid U.S. equity		—		926		—		926
International equity		—		1,495		—		1,495
Balanced/asset allocation		—		741		—		741
Fixed income		—		8,109		—		8,109
	$	—	$	15,233	$	—	$	15,233

Plan assets are all 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.

The asset or liability fair value measurement level within fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The plan reports bonds and other obligations, short-term investments and equity securities at fair value based on published quotations. Collective funds are valued in accordance with valuations provided by such Funds, which generally value marketable equity securities at the last reported sales price on the valuation date and other investments at fair value, as determined by each Fund’s manager.

F-34

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future values. Furthermore, although management believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The defined benefit plan offers a mixture of fixed income, equity and real assets as the underlying investment structure for its retirement structure for the pension plan. The target allocation mix for the pension plan for 2016 was an equity-based investment deployment of 43% of total portfolio assets based on advice received from an external advisory firm with confirmation by the Bank’s Investment Committee. The remainder of the portfolio is allocated to fixed income at 57% of total assets. The investment objective is to diversify investments across a spectrum of investment types to limit risks from large market swings and to provide anticipated stabilized investment returns. Trustees of the Plan select investment managers for the portfolio and a second investment advisory firm is retained to provide allocation analysis. The overall investment objective is to diversify equity investments across a spectrum of types, small cap, large cap and international, along with investment styles such as growth and value.

We estimate that the benefits to be paid from the pension plan for years ended December 31 are as follows:


Year	Benefit Payments to Participants
	(In thousands)

2017	$	622
2018		1,235
2019		1,077
2020		1,045
2021		1,184
In aggregate for 2022 – 2026		13,965

We have not yet determined the amount of the contribution we expect to make to the plan during the fiscal year ending December 31, 2017.

401(k) - Employees are eligible to participate in a 401(k) plan. We make a matching contribution of 50% with respect to the first 6% of each participant’s annual earnings contributed to the plan. Our contributions to the plan were $242,000, $224,000 and $236,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

11. 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 borrowings.

F-35

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of our derivative financial instruments designated as hedging instruments as well as our classification on the balance sheet as of December 31, 2016.

December 31, 2016	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(In thousands)

Interest rate swaps	Other Assets	$	—	Other Liabilities	$	3,152
Total derivatives designated as hedging instruments		$	—		$	3,152

December 31, 2015	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(In thousands)

Interest rate swaps	Other Assets	$	—	Other Liabilities	$	6,064
Total derivatives designated as hedging instruments		$	—		$	6,064

At December 31, 2016 and 2015, all derivatives were designated as hedging instruments.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest income and expense and to manage our exposure to interest rate movements. To accomplish this objective, we entered into interest rate swaps 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.

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

December 31, 2016	Notional		Weighted Average		Weighted Average Rate						Estimated Fair
	Amount		Maturity		Receive			Pay			Value
	(In thousands)		(In years)								(In thousands)
Interest rate swaps on FHLBB borrowings	$	75,000		3.4		0.92	%		2.46	%	$	(3,152	)
Total cash flow hedges	$	75,000		3.4							$	(3,152	)

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

During 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.

F-36

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. 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 in 2016 or 2015.

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

The table below presents the pre-tax net loss of our cash flow hedges for the periods indicated.

	Amount of Loss Recognized in OCI on Derivative (Effective Portion)
	Years Ended December 31,
	2016			2015			2014
	(In thousands)
Interest rate swaps	$	(1,126	)	$	(3,337	)	$	(7,684	)

Amounts reported in accumulated other comprehensive loss related to these derivatives are reclassified to interest expense as interest payments are made on our designated rate sensitive liabilities. During the years ended December 31, 2016, 2015 and 2014, we reclassified $1.6 million, $742,000 and $190,000 into interest expense, respectively. During the next 12 months, we estimate that $2.1 million will be reclassified as an increase in interest expense. During the years ended December 31, 2016, 2015 and 2014, no gains or losses were reclassified from accumulated other comprehensive loss into income for ineffectiveness on cash flow hedges.

Credit-risk-related Contingent Features

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

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

At December 31, 2016 and 2015, we had a net liability position of $3.2 million and $6.2 million with our counterparties, respectively. As of December 31, 2016, we had minimum collateral posting thresholds with certain of our derivative counterparties and had a mortgage-backed security with a fair value of $4.5 million posted as collateral against our obligations under these agreements. If we had breached any of these provisions at December 31, 2016, we could have been required to settle our obligations under the agreements at the termination value.

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12.

REGULATORY CAPITAL

The Bank is subject to various regulatory capital requirements administered by the Office of Comptroller of the Currency (the “OCC”). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to savings and loan holding companies.

Effective January 1, 2015, federal banking regulations changed with regard to minimum capital requirements for community banking institutions. The regulations require a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6% and a minimum leverage ratio of 4% for all banking organizations. Additionally, community banking institutions must maintain a capital conservation buffer of common equity Tier 1 capital, Tier 1 capital or Total capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonuses. The capital conservation buffer will be phased in over three years, beginning on January 1, 2016, with an initial phase-in amount of 0.625%. Also, certain new deductions from and adjustments to regulatory capital will be phased in over several years. Management believes that the Company’s capital levels will remain characterized as “well-capitalized” throughout the phase in periods. Western New England Bancorp’s and the Bank’s capital ratios as of December 31, 2016 and 2015 are set forth in the following table.

As of December 31, 2016, the most recent notification from the OCC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, Tier 1 risk based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

	Actual					Minimum For Capital Adequacy Purpose					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
December 31, 2016
Total Capital (to Risk Weighted Assets):
Consolidated	$	245,389		15.10	%	$	130,037		8.00	%		N/A		N/A
Bank		237,626		14.64			129,879		8.00		$	162,349		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		235,261		14.47			97,528		6.00			N/A		N/A
Bank		227,498		14.01			97,409		6.00			129,879		8.00
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated		235,261		14.47			73,146		4.50			N/A		N/A
Bank		227,498		14.01			73,057		4.50			105,527		6.50
Tier 1 Leverage Ratio (to Adjusted Average Assets):
Consolidated		235,261		12.19			77,187		4.00			N/A		N/A
Bank		227,498		11.86			76,745		4.00			95,931		5.00

December 31, 2015
Total Capital (to Risk Weighted Assets):
Consolidated	$	159,386	17.20	%	$	74,136	8.00	%		N/A	N/A
Bank		151,327	16.36			74,006	8.00		$	92,508	10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		150,444	16.23			55,602	6.00			N/A	N/A
Bank		142,427	15.40			55,505	6.00			74,006	8.00
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated		150,444	16.23			41,702	4.50			N/A	N/A
Bank		142,427	15.40			41,629	4.50			60,130	6.50
Tier 1 Leverage Ratio (to Adjusted Average Assets):
Consolidated		150,444	11.16			53,876	4.00			N/A	N/A
Bank		142,427	10.58			53,871	4.00			67,339	5.00

F-38

The following is a reconciliation of our GAAP capital to regulatory Tier 1, Common Equity Tier 1 and total capital:

	December 31,
	2016			2015
	(In thousands)
Consolidated GAAP capital	$	238,396		$	139,466
Net unrealized losses on available-for-sale securities, net of tax		3,839			3,046
Unrealized loss on defined benefit pension plan, net of tax		3,618			2,431
Accumulated net loss on cash flow hedges, net of tax		5,204			5,501
Unrealized loss on certain available-for-sale equity securities		(191	)		—
Disallowed deferred tax assets		(155	)		—
Goodwill		(13,747	)		—
Intangible assets, net of associated deferred tax liabilities		(1,599	)		—
Additional tier 1 capital deductions		(104	)		—
Tier 1 and Common Equity Tier 1 capital		235,261			150,444

Unrealized gains on certain available-for-sale equity securities		—			42
Allowance for loan losses and unfunded loan commitments		10,128			8,900

Total regulatory capital	$	245,389		$	159,386

On March 13, 2014, the Board of Directors authorized the commencement of our current stock repurchase program, authorizing the repurchase of up to 1,970,000 shares, or 10% of our outstanding shares of common stock. On June 24, 2015, the Board of Directors announced a renewal of the repurchase program under which the Company may purchase up to 711,733 shares of its outstanding common stock, to be affected via a combination of Rule 10b5-1 plans and discretionary share repurchases. This plan began July 24, 2015 and as of December 31, 2016, there were 484,668 shares remaining to be purchased under the new repurchase program.

We are subject to dividend restrictions imposed by various regulators, including a limitation on the total of all dividends that the Bank may pay to the Company in any calendar year, to an amount that shall not exceed the Bank’s net income for the current year, plus its net income retained for the two previous years, without regulatory approval. At December 31, 2016 and 2015, the Bank had no retained earnings available for payment of dividends without prior regulatory approval. In addition, the Bank may not declare or pay dividends on, and we may not repurchase, any of our shares of common stock if the effect thereof would cause shareholders’ equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration, payment or repurchase would otherwise violate regulatory requirements. The Bank will be prohibited from paying cash dividends to the Company to the extent that any such payment would reduce the Bank’s capital below required capital levels. Accordingly, $129.9 million and $74.0 million of our equity in the net assets of the Bank was restricted at December 31, 2016 and 2015, respectively.

The only funds available for the payment of dividends on our capital stock will be cash and cash equivalents held by us, dividends paid from the Bank to us, and borrowings.

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13.

INCOME TAXES

Income taxes consist of the following:

	Years Ended December 31,
	2016		2015			2014
			(In thousands)

Current tax provision:
Federal	$	1,925	$	2,036		$	1,854
State		370		319			221
Total		2,295		2,355			2,075

Deferred tax (benefit) provision:
Federal		262		(203	)		(172	)
State		10		(82	)		(52	)
Change in valuation reserve		2		54			31
Total		274		(231	)		(193	)

Total	$	2,569	$	2,124		$	1,882

The reasons for the differences between the statutory federal income tax rate and the effective rates are summarized below:

	Years Ended December 31,
	2016			2015			2014

Statutory federal income tax rate		34.0	%		34.0	%		34.0	%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit		3.4			1.6			1.2
Tax exempt income		(2.6	)		(3.2	)		(4.1	)
Bank-owned life insurance (BOLI)		(7.2	)		(6.6	)		(6.4	)
Nondeductible merger expenses		8.3			—			—
Change in valuation reserve		—			0.7			0.4
Other, net		(1.2	)		0.6			(1.7	)
Effective tax rate		34.7	%		27.1	%		23.4	%

Cash paid for income taxes for the years ended December 31, 2016, 2015 and 2014 was $2.6 million, $2.4 million and $2.0 million, respectively.

F-40

The tax effects of each item that gives rise to deferred taxes are as follows:

	December 31,
	2016			2015
	(In thousands)

Deferred tax assets:
Allowance for loan losses	$	4,021		$	3,531
Net unrealized loss on derivative and hedging activity		2,681			2,833
Employee benefit and share-based compensation plans		3,220			2,682
Defined benefit plan		1,864			1,254
Net unamortized loss on securities transferred from available for sale to held to maturity		—			799
Net unrealized loss on securities available for sale		2,024			812
Other-than-temporary impairment write-down		129			129
Purchased mortgage servicing rights		562			—
Purchase accounting adjustments		1,824			—
Net operating loss and tax credit carryforwards		1,320			—
Other		787			648
Gross deferred tax assets		18,432			12,688
Valuation reserve		(973	)		(971	)
Gross deferred tax assets, net of valuation reserve		17,459			11,717

Deferred tax liabilities:
Deferred loan fees		(1,268	)		(759	)
Other		(32	)		(77	)
		(1,300	)		(836	)

Net deferred tax asset	$	16,159		$	10,881

The federal income tax reserve for loan losses at the Bank’s base year is $5.8 million. If any portion of the reserve is used for purposes other than to absorb loan losses, approximately 150% of the amount actually used, limited to the amount of the reserve, would be subject to taxation in the fiscal year in which used. As the Bank intends to use the reserve solely to absorb loan losses, a deferred tax liability of $2.4 million has not been provided.

We do not have any uncertain tax positions at December 31, 2016 or 2015 which require accrual or disclosure. We record interest and penalties as part of income tax expense. No interest was recorded for the years ended December 31, 2016 and 2015, and no penalties were recorded for the years ended December 31, 2016, 2015 and 2014.

Our income tax returns are subject to review and examination by federal and state tax authorities. We are currently open to audit under the applicable statutes of limitations by the Internal Revenue Service for the years ended December 31, 2013 through 2016. The years open to examination by state taxing authorities vary by jurisdiction; however, no years prior to 2013 are open.

The Company had net operating loss carryforwards brought over in the Chicopee merger of $3.5 million, which will expire in 2036 if unused.

F-41

14.

TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS

We have had, and expect to have in the future, loans with our directors and executive officers. Such loans, in our opinion, do not include more than the normal risk of collectability or other unfavorable features. Following is a summary of activity for such loans:

	Years Ended December 31,
	2016			2015
	(In thousands)

Balance at beginning of year	$	1,038		$	2,881
Principal distributions		554			534
Repayments of principal		(156	)		(707	)
Change in related party status		39			(1,670	)

Balance at end of year	$	1,475		$	1,038

15.

COMMITMENTS AND CONTINGENCIES

In the normal course of business, various commitments and contingent liabilities are outstanding, such as standby letters of credit and commitments to extend credit with off-balance-sheet risk that are not reflected in the consolidated financial statements. Financial instruments with off-balance-sheet risk involve elements of credit, interest rate, liquidity and market risk.

We do not anticipate any significant losses as a result of these transactions. The following summarizes these financial instruments and other commitments and contingent liabilities at their contract amounts:

	December 31,
	2016		2015
	(In thousands)
Commitments to extend credit:
Unused lines of credit	$	217,193	$	120,039
Loan commitments		41,285		41,496
Existing construction loan agreements		35,702		37,844
Standby letters of credit		7,090		3,865

We use the same credit policies in making commitments and conditional obligations as for on balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

We also have two risk participation agreements (“RPAs”) with another financial institution. The RPAs are a guarantee to share credit risk associated with an interest rate swap on participation loans in the event of counterparty default. As such, we accept a portion of the credit risk in order to participate in the loans and we receive a one-time fee. The interest rate swap is collateralized (generally by real estate or business assets) by us and the third party, which limits the credit risk associated with the RPAs. Per the terms of the RPAs, we must pledge collateral equal to our exposure for the interest rate swap. We monitor overall collateral as part of our off-balance sheet liability analysis, and at December 31, 2016, believe sufficient collateral is available to cover potential swap losses. At December 31, 2016, we had one RPA with a fair value of $522,000. The remaining term of this RPA at December 31, 2016, which corresponds to the term of the underlying swaps, was 10 years. In addition, we had an RPA with a fair value of $153,000 and a remaining term of 20 years at December 31, 2016. Under these agreements we guarantee a percentage of the amount in the event of a default. The maximum potential future payment guaranteed by us cannot be readily estimated, but is dependent upon the fair value of the interest rate swaps and the probability of a default event. If an event of default on all contracts had occurred at December 31, 2016, we would have been required to make payments of approximately $310,000.

F-42

Standby letters of credit are written conditional commitments issued by us that guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

At December 31, 2016, outstanding commitments to extend credit totaled $301.3 million, with $40.0 million in fixed rate commitments with interest rates ranging from 1.99% to 18.00% and $261.3 million in variable rate commitments. At December 31, 2015, outstanding commitments to extend credit totaled $203.2 million, with $35.7 million in fixed rate commitments with interest rates ranging from 2.25% to 18.00% and $167.5 million in variable rate commitments.

In the ordinary course of business, we are party to various legal proceedings, none of which, in our opinion, will have a material effect on our consolidated financial position or results of operations.

We lease facilities and certain equipment under cancelable and non-cancelable leases expiring in various years through the year 2047. Certain of the leases provide for renewal periods for up to forty years at our discretion. Rent expense under operating leases was $798,000, $677,000, and $707,000 for the years ended December 31, 2016, 2015, and 2014, respectively.

Aggregate future minimum rental payments under the terms of non-cancelable operating leases at December 31, 2016, are as follows:

Year Ending December 31,	Amount
	(In thousands)

2017	$	1,172
2018		1,088
2019		1,043
2020		934
2021		879
Thereafter		8,970
	$	14,086

Investment Commitments

The Bank is a limited partner in one Small Business Investment Company (“SBIC”) and committed to contribute capital of $3.0 million to the limited partnerships. The SBIC currently has no net book value at December 31, 2016, net of impairment charges and distributions are included in other assets.

Employment and change of control agreements

We have entered into employment and change of control agreements with certain senior officers. The initial term of the employment agreements is for three years subject to separate one-year extensions as approved by the Board of Directors at the end of each applicable fiscal year. Each employment agreement provides for minimum annual salaries, discretionary cash bonuses and other fringe benefits as well as severance benefits upon certain terminations of employment that are not for cause. The change of control agreements expire one year following a notice of non-extension and only provide for severance benefits upon certain terminations of employment that are not for cause and that are related to a change of control of the Company or the Bank.

F-43

16.

CONCENTRATIONS OF CREDIT RISK

Most of our loans consist of residential and commercial real estate loans located in western Massachusetts. As of December 31, 2016 and 2015, our residential and commercial related real estate loans represented 85.5% and 79.2% of total loans, respectively. Our policy for collateral requires that the amount of the loan may not exceed 100% and 85% of the appraised value of the property for residential and commercial real estate, respectively, at the date the loan is granted. For residential loans, in cases where the loan exceeds 80%, private mortgage insurance is typically obtained for that portion of the loan in excess of 80% of the appraised value of the property.

17.

FAIR VALUE OF ASSETS AND LIABLITIES

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.

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. The carrying amounts of interest-bearing deposits in banks maturing within ninety days approximate their fair values. Fair values of other interest-bearing deposits are estimated using discounted cash flow analyses based on current market rates for similar types of deposits.

Securities and mortgage-backed securities - 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. These securities include government-sponsored enterprise obligations, state and municipal obligations, residential mortgage-backed securities guaranteed and sponsored by the U.S. government or an agency thereof. Fair value measurements are obtained from a third-party pricing service and are not adjusted by management.

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

Loans receivable - For adjustable-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) 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 non-performing 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 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.

F-44

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 - The stated value of commitments to extend credit approximates fair value as the current interest rates for similar commitments do not differ significantly. 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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

	December 31, 2016
	Level 1		Level 2		Level 3		Total
Assets:	(In thousands)
Government-sponsored mortgage-backed securities	$	—	$	180,136	$	—	$	180,136
U.S. government guaranteed mortgage-backed securities		—		17,350		—		17,350
Corporate bonds		—		50,317		—		50,317
State and municipal bonds		—		4,008		—		4,008
Government-sponsored enterprise obligations		—		42,008		—		42,008
Mutual funds		6,296		—		—		6,296
Total assets	$	6,296	$	293,819	$	—	$	300,115

Liabilities:
Interest rate swaps	$	—	$	3,152	$	—	$	3,152

	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

There were no transfers to or from Level 1 and 2 for assets measured at fair value on a recurring basis during the years ended December 31, 2016 and 2015.

F-45

Assets Measured at Fair Value on a Non-recurring Basis

We may also be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with generally accepted accounting principles. 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 the carrying values of the related assets as of December 31, 2016 and 2015.

	At						Year Ended
	December 31, 2016						December 31, 2016
							Total
	Level 1		Level 2		Level 3		Losses
	(In thousands)						(In thousands)
Impaired Loans	$	—	$	—	$	2,143	$	230
Total Assets	$	—	$	—	$	2,143	$	230

	At						Year Ended
	December 31, 2015						December 31, 2015
								Total
		Level 1		Level 2		Level 3		Losses
	(In thousands)						(In thousands)
Impaired Loans	$	—	$	—	$	2,111	$	224
Total Assets	$	—	$	—	$	2,111	$	224

The amount of impaired loans represents the carrying value, and net of the related write-down or 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.

There were no liabilities measured at fair value on a non-recurring basis at December 31, 2016 and 2015.

F-46

Summary of Fair Values of Financial Instruments

The estimated fair values of our financial instruments are as follows:

	December 31, 2016
	Carrying Value		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents	$	70,234	$	70,234	$	—	$	—	$	70,234
Securities available-for-sale		300,115		6,296		293,819		—		300,115
Federal Home Loan Bank of Boston and other restricted stock		16,124		—		—		16,124		16,124
Loans - net		1,556,416		—		—		1,525,274		1,525,274
Accrued interest receivable		5,782		—		—		5,782		5,782
Mortgage servicing rights		465		—		628		—		628

Liabilities:
Deposits		1,518,071		—		—		1,521,580		1,521,580
Short-term borrowings		172,351		—		172,351		—		172,351
Long-term debt		124,836		—		125,183		—		125,183
Accrued interest payable		1,012		—		—		1,012		1,012
Derivative liabilities		3,152		—		3,152		—		3,152

	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

Limitations - 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.

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18.

SEGMENT INFORMATION

We have one reportable segment, “Community Banking.” All of our activities are interrelated, and each activity is dependent and assessed based on how each of the activities supports the others. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. Accordingly, all significant operating decisions are based upon our analysis as one operating segment or unit.

We operate only in the U.S. domestic market, primarily in western Massachusetts and northern Connecticut. For the years ended December 31, 2016, 2015 and 2014, there is no customer that accounted for more than 10% of our revenue.

19.

CONDENSED PARENT COMPANY FINANCIAL STATEMENTS

The condensed balance sheets of the parent company are as follows:

	December 31,
	2016		2015
	(In thousands)
ASSETS:
Cash equivalents	$	972	$	53
Securities available-for-sale		—		1,593
Investment in subsidiaries		230,633		131,387
ESOP loan receivable		7,866		8,375
Other assets		7,468		6,683
TOTAL ASSETS		246,939		148,091

LIABILITIES:
ESOP loan payable		7,866		8,375
Other liabilities		677		250
EQUITY		238,396		139,466
TOTAL LIABILITIES AND EQUITY	$	246,939	$	148,091

The condensed statements of income for the parent company are as follows:

	Years Ended December 31,
	2016			2015			2014
	(In thousands)
INCOME:
Dividends from subsidiaries	$	3,499		$	6,557		$	14,712
Interest income from securities		32			20			31
ESOP loan interest income		670			706			741
Gain on sales of securities, net		451			—			—
Total income		4,652			7,283			15,484

OPERATING EXPENSE:
Salaries and employee benefits		926			743			697
ESOP interest		670			706			741
Other expenses		507			556			503
Total operating expense		2,103			2,005			1,941

INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES AND INCOME TAXES		2,549			5,278			13,543

EQUITY IN UNDISTRIBUTED INCOME (LOSS) OF SUBSIDIARIES		1,955			90			(7,655	)

NET INCOME BEFORE TAXES		4,504			5,368			5,888

INCOME TAX BENEFIT		(330	)		(347	)		(274	)

NET INCOME	$	4,834		$	5,715		$	6,162

F-48

The condensed statements of cash flows of the parent company are as follows:


	Years Ended December 31,
	2016			2015			2014
	(In thousands)
OPERATING ACTIVITIES:
Net income	$	4,834		$	5,715		$	6,162
Equity in undistributed (income) loss of subsidiaries		(1,955	)		(90	)		7,655
Gain on sales of securities, net		(451	)		—			—
Change in other liabilities		(597	)		(409	)		(409	)
Change in other assets		(271	)		(52	)		175
Other, net		1,049			713			667

Net cash provided by operating activities		2,609			5,877			14,250

INVESTING ACTIVITIES:
Purchase of securities		(116	)		(125	)		(235	)
Sales of securities		116			125			235

Net cash provided by investing activities		—			—			—

FINANCING ACTIVITIES:
Cash dividends paid		(2,439	)		(2,098	)		(3,832	)
Common stock repurchased		(1,378	)		(3,906	)		(10,518	)
Tender offer to purchase outstanding options		—			—			121
Excess tax benefit (shortfall) from share-based compensation		156			2			(1	)
Issuance of common stock in connection with stock option Exercises		1,971			—			—

Net cash used in financing activities		(1,690	)		(6,002	)		(14,230	)

NET CHANGE IN CASH AND
CASH EQUIVALENTS		919			(125	)		20

CASH AND CASH EQUIVALENTS
Beginning of year		53			178			158
End of year	$	972		$	53		$	178

Supplemental cashflow information:
Net cash due to broker for common stock repurchased	$	455		$	—		$	—

F-49

20.

OTHER NONINTEREST EXPENSE

There is no item that as a component of other noninterest expense exceeded 1% of the aggregate of total interest income and noninterest income for the years ended December 31, 2016, 2015 and 2014.

21.

SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following tables present a summary of our quarterly financial information for the periods indicated. The year to date totals may differ slightly due to rounding.

	2016
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(Dollars in thousands, except per share amounts)
Interest and dividend income	$	10,961		$	10,554		$	10,977		$	16,106
Interest expense		2,718			2,552			2,649			3,366

Net interest and dividend income		8,243			8,002			8,328			12,740

Provision (credit) for loan losses		(600	)		625			375			175
Other noninterest income		1,245			1,262			1,322			1,918

Loss on prepayment of borrowings		(915	)		—			—			—
Gain (loss) on sales of securities, net		685			(2	)		1			455
Noninterest expense		7,072			7,998			8,225			12,011

Income before income taxes		2,786			639			1,051			2,927
Income tax provision		822			250			423			1,074
Net income	$	1,964		$	389		$	628		$	1,853

Basic earnings per share	$	0.11		$	0.02		$	0.04		$	0.07
Diluted earnings per share	$	0.11		$	0.02		$	0.04		$	0.07

	2015
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(Dollars in thousands, except per share amounts)
Interest and dividend income	$	10,188		$	10,494		$	10,974		$	10,820
Interest expense		2,598			2,715			2,814			2,667

Net interest and dividend income		7,590			7,779			8,160			8,153

Provision for loan losses		300			350			150			475
Other noninterest income		1,005			1,247			1,163			1,243

Loss on prepayment of borrowings		(593	)		(278	)		(429	)		—
Gain (loss) on sales of securities, net		817			276			414			(1	)
Noninterest expense		6,711			6,865			6,867			6,990

Income before income taxes		1,808			1,809			2,291			1,930
Income tax provision		470			445			680			529
Net income	$	1,338		$	1,364		$	1,611		$	1,401

Basic earnings per share	$	0.08		$	0.08		$	0.09		$	0.08
Diluted earnings per share	$	0.08		$	0.08		$	0.09		$	0.08

F-50

22.

ACQUISITION OF CHICOPEE BANCORP, INC.

On October 21, 2016, we acquired Chicopee. The primary purpose of the acquisition with Chicopee was to expand our presence in western Massachusetts and diversify our market area. The transaction qualified as a tax-free reorganization for federal income tax purposes. Merger consideration paid in the transaction to shareholders of Chicopee totaled $98.8 million, consisting of 11,919,412 shares of Company common stock net of shares of Chicopee already owned and shares of Chicopee’s ESOP liquidated to payoff loan.

We accounted for the transaction using the acquisition method. Accordingly, we recorded acquisition expenses totaling $4.1 million (pre-tax) during 2016. The acquisition method requires an acquirer to recognize the assets acquired and the liabilities assumed at fair value as of the acquisition date. Additionally, our results of operations include Chicopee’s operating results from the date of acquisition.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the date of the acquisition (in thousands).

Assets:
Cash and cash equivalents	$	23,808
Loans receivable, net		640,892
Premises and equipment		7,284
Federal Home Loan Bank stock		4,176
Goodwill		13,747
Core deposit intangible		4,511
Bank-owned life insurance		15,150
Accrued interest receivable		1,440
Deferred tax asset, net		4,688
Other assets		899
Total assets acquired		716,595

Liabilities:
Deposits		545,669
FHLB Advances		63,252
Accrued expense and other liabilities		8,882
Total liabilities assumed		617,803
Net assets acquired	$	98,792

As noted above, we acquired loans with a fair value of $640.9 million. Included in this amount was $28.8 million of loans with evidence of deterioration of credit quality since origination for which it was probable, at the time of the acquisition, that the Company would be unable to collect all contractually required payments receivable. We recorded a provisional nonaccretable credit discount of $8.5 million, which is defined as the loans’ contractually required payments receivable in excess of the amount of its cash flows expected to be collected. We considered factors such as payment history, collateral values and accrual status when determining whether there was evidence of deterioration of the loans’ credit quality at the acquisition date. A provisional accretable credit mark of $7.7 million was also recorded on these loans. The analysis over the purchased impaired loans and related provisional credit marks as of December 31, 2016 is not yet completed and may result in a change to these provisional credit marks and goodwill upon completion. In addition, estimates of the fair value of bank premises acquired based upon current information are still being evaluated by management and are not yet completed and may result in a change to the provisional fair values of bank premises acquired and goodwill upon completion.

F-51

The following table presents selected unaudited pro forma financial information reflecting the acquisitions of Chicopee assuming the acquisitions were completed as of January 1, 2015. The unaudited pro forma financial information includes adjustments for scheduled amortization and accretion of fair value adjustments recorded at the acquisitions. These adjustments would have been different if they had been recorded on January 1, 2015, and they do not include the impact of prepayments. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the combined financial results of the Company and the acquisition had the transactions actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period.

The unaudited pro forma information, for the twelve months ended December 31, 2016 and 2015, set forth below reflects adjustments related to (a) amortization and accretion of purchase accounting fair value adjustments; (b) amortization of core deposit intangibles; and (c) an estimated tax rate of 34 percent. Direct acquisition expenses incurred by the Company during 2016, as noted above, are reversed for the purposes of this unaudited pro forma information. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing or anticipated cost-savings that could occur as a result of the acquisition.

	Years Ended December 31,
	2016		2015
	(In thousands, except per share amounts)
Net interest income	$	55,185	$	53,487
Net income		10,329		8,717
Earnings per share – Basic		0.35		0.30
Earnings per share – Diluted		0.35		0.29

F-52

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