Western New England Bancorp, Inc. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

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

For the transition period from ___________ to ___________

Commission File Number: 001-16767

Western New England Bancorp, Inc.

(Exact name of registrant as specified in its charter)

141 Elm Street, Westfield, Massachusetts		01086
(Address of principal executive offices)		(Zip Code)

(413) 568-1911

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	WNEB	NASDAQ

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

At November 1, 2019, the registrant had 26,561,742 shares of common stock, $0.01 par value, issued and outstanding.

TABLE OF CONTENTS

		Page

FORWARD-LOOKING STATEMENTS		i

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements of Western New England Bancorp, Inc. and Subsidiaries (Unaudited)

	Consolidated Balance Sheets – September 30, 2019 and December 31, 2018	1

	Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2019 and 2018	2

	Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2019 and 2018	3

	Consolidated Statements of Changes in Shareholders’ Equity – Three and Nine Months Ended September 30, 2019 and 2018	4

	Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2019 and 2018	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	46

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults upon Senior Securities	47

Item 4.	Mine Safety Disclosures	47

Item 5.	Other Information	47

Item 6.	Exhibits	48

FORWARD–LOOKING STATEMENTS

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

●

changes in the interest rate environment that reduce margins;

●

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 Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), Basel guidelines, capital requirements and other applicable laws and regulations;

●

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

●

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

●

changes in business conditions and inflation;

●

changes in credit market conditions;

●

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

●

changes in the securities markets which affect investment management revenues;

●

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

●

changes in technology used in the banking business;

●

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

●

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

●

our controls and procedures may fail or be circumvented;

●

new 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;

●

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

●

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

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

PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(Dollars in thousands, except share data)

	September 30,			December 31,
	2019			2018
ASSETS
Cash and due from banks	$	26,229		$	20,616
Federal funds sold		8,002			1,246
Interest-bearing deposits and other short-term investments		11,168			4,927
Cash and cash equivalents		45,399			26,789

Securities available-for-sale, at fair value		231,258			253,748
Marketable equity securities, at fair value		6,726			6,408
Federal Home Loan Bank stock and other restricted stock, at cost		13,064			14,695
Loans, net of allowance for loan losses of $13,272 and $12,053 at September 30, 2019 and December 31, 2018, respectively		1,738,310			1,684,804
Premises and equipment, net		23,989			24,624
Accrued interest receivable		5,460			5,652
Bank-owned life insurance		70,599			69,252
Deferred tax asset, net		7,518			9,872
Goodwill		12,487			12,487
Core deposit intangible		3,406			3,688
Other assets		15,468			6,803
Total Assets	$	2,173,684		$	2,118,822

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Non-interest-bearing	$	382,475		$	355,389
Interest-bearing		1,287,040			1,240,604
Total deposits		1,669,515			1,595,993

Short-term borrowings		35,000			59,250
Long-term debt		205,681			208,018
Other liabilities		31,507			18,532
Total liabilities		1,941,703			1,881,793

SHAREHOLDERS’ EQUITY:
Preferred stock - $0.01 par value, 5,000,000 shares authorized, none outstanding at September 30, 2019 and December 31, 2018		—			—
Common stock - $0.01 par value, 75,000,000 shares authorized, 26,561,742 shares issued and outstanding at September 30, 2019; 28,393,348 shares issued and outstanding at December 31, 2018		266			284
Additional paid-in capital		164,251			182,096
Unearned compensation - ESOP		(4,723	)		(5,171	)
Unearned compensation - Equity Incentive Plan		(1,317	)		(872	)
Retained earnings		80,028			74,108
Accumulated other comprehensive loss		(6,524	)		(13,416	)
TOTAL SHAREHOLDERS’ EQUITY		231,981			237,029
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,173,684		$	2,118,822

See accompanying notes to unaudited consolidated financial statements.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED

(Dollars in thousands, except per share data)


	Three Months					Nine Months
	Ended September 30,					Ended September 30,
	2019		2018			2019			2018
Interest and dividend income:
Residential and commercial real estate loans	$	15,831	$	14,507		$	45,948		$	42,850
Commercial and industrial loans		3,195		2,982			9,269			9,573
Consumer loans		85		88			254			261
Debt securities, taxable		1,406		1,709			4,606			5,227
Debt securities, tax-exempt		17		19			55			64
Equity securities		42		38			124			112
Other investments		192		228			638			631
Short-term investments		36		34			185			83
Total interest and dividend income		20,804		19,605			61,079			58,801

Interest expense:
Deposits		4,454		3,094			12,790			8,167
Long-term debt		1,102		1,193			3,292			3,178
Short-term borrowings		720		713			1,942			2,264
Total interest expense		6,276		5,000			18,024			13,609
Net interest and dividend income		14,528		14,605			43,055			45,192

Provision for loan losses		1,275		350			1,675			1,600
Net interest and dividend income after provision for loan losses		13,253		14,255			41,380			43,592

Non-interest income (loss):
Service charges and fees		2,018		1,891			5,501			5,167
Income from bank-owned life insurance (“BOLI”)		444		448			1,347			1,374
Bank-owned life insurance death benefit		—		—			—			715
Gain (loss) on available-for-sale securities, net		49		—			(12	)		(250	)
Unrealized gain (loss) on marketable equity securities, net		45		(43	)		194			(190	)
Gain on sale of other real estate owned		—		—			—			48
Other income		55		—			270			131
Total non-interest income		2,611		2,296			7,300			6,995

Non-interest expense:
Salaries and employees benefits		6,893		6,451			20,549			19,548
Occupancy		975		952			3,144			2,979
Furniture and equipment		424		400			1,256			1,149
Data processing		710		642			2,077			1,957
Professional fees		546		767			1,858			2,107
FDIC insurance assessment		5		158			417			463
Advertising		364		351			1,098			1,053
Other expenses		1,823		1,851			5,504			5,288
Total non-interest expense		11,740		11,572			35,903			34,544
Income before income taxes		4,124		4,979			12,777			16,043
Income tax provision		899		1,070			2,864			3,476
Net income	$	3,225	$	3,909		$	9,913		$	12,567

Earnings per common share:
Basic earnings per share	$	0.12	$	0.14		$	0.38		$	0.43
Weighted average shares outstanding		25,854,040		28,789,132			26,308,580			29,100,735
Diluted earnings per share	$	0.12	$	0.14		$	0.38		$	0.43
Weighted average diluted shares outstanding		25,969,365		28,937,038			26,423,229			29,242,862

See accompanying notes to unaudited consolidated financial statements.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED

(Dollars in thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018

Net income	$	3,225		$	3,909		$	9,913		$	12,567

Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses)		1,439			(1,635	)		9,133			(8,059	)
Reclassification adjustment for net (gains) losses realized in income ⁽¹⁾		(49	)		—			12			250
Unrealized gains (losses)		1,390			(1,635	)		9,145			(7,809	)
Tax effect		(350	)		404			(2,330	)		1,733
Net-of-tax amount		1,040			(1,231	)		6,815			(6,076	)

Cash flow hedges:
Change in fair value of derivatives used for cash flow hedges		(142	)		168			(1,053	)		1,086
Reclassification adjustment for loss realized in interest expense ⁽²⁾		105			82			257			355
Reclassification adjustment for termination fee realized in interest expense ⁽³⁾		269			269			799			799
Unrealized gains on cash flow hedges		232			519			3			2,240
Tax effect		(65	)		(145	)		(1	)		(629	)
Net-of-tax amount		167			374			2			1,611

Defined benefit pension plan:
Amortization of defined benefit plans actuarial loss⁽⁴⁾		32			56			96			170
Tax effect		(10	)		(16	)		(28	)		(48	)
Net-of-tax amount		22			40			68			122

Other comprehensive income (loss)		1,229			(817	)		6,885			(4,343	)

Comprehensive income	$	4,454		$	3,092		$	16,798		$	8,224

(1) Realized gains and losses on available-for-sale securities are recognized as a component of non-interest income in the consolidated statement of operations. The tax effects applicable to net realized gains were $14,000 for the three months ended September 30, 2019. The tax effects applicable to net realized losses were $(3,000) and $(70,000) for the nine months ended September 30, 2019 and 2018.

(2) Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term debt in the consolidated statement of operations. Income tax effects associated with the reclassification adjustments were $30,000 and $23,000 for the three months ended September 30, 2019 and 2018. Income tax effects associated with the reclassification adjustments were $72,000 and $100,000 for the nine months ended September 30, 2019 and 2018.

(3) Amortization of termination fees realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term debt in the consolidated statement of operations. Income tax effects associated with the reclassification adjustments were $76,000 for the three months ended September 30, 2019 and 2018. Income tax effects associated with the reclassification adjustments were $225,000 for the nine months ended September 30, 2019 and 2018.

(4) Amounts represent the reclassification of defined benefit plan amortization and have been recognized as a component of non-interest expense in the consolidated statement of operations. Income tax effects associated with the reclassification adjustments were $10,000 and $16,000 for the three months ended September 30, 2019 and 2018. Income tax effects associated with the reclassification adjustments were $28,000 and $48,000 for the nine months ended September 30, 2019 and 2018.

See accompanying notes to unaudited consolidated financial statements.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Dollars in thousands, except share data)

	Common Stock
	Shares		Par Value			Additional Paid-in Capital			Unearned Compensation- ESOP			Unearned Compensation- Equity Incentive Plan			Retained Earnings			Accumulated Other Comprehensive Loss			Total

BALANCE AT DECEMBER 31, 2017	30,487,309		$	305		$	203,527		$	(5,786	)	$	(791	)	$	62,578		$	(12,552	)	$	247,281
Comprehensive income	—			—			—			—			—			3,519			(2,767	)		752
Cumulative-effect adjustment due to change in accounting principle (ASU 2016-01)	—			—			—			—			—			(237	)		237			—
Common stock held by ESOP committed to be released (90,978 shares)	—			—			88			154			—			—			—			242
Share-based compensation - equity incentive plan	—			—			—			—			232			—			—			232
Common stock repurchased	(451,641	)		(5	)		(4,798	)		—			—			—			—			(4,803	)
Issuance of common stock in connection with stock option exercises	16,975			1			103			—			—			—			—			104
Issuance of common stock in connection with equity incentive plan	85,440			1			925			—			(926	)		—			—			—
Cash dividends declared and paid on common stock ($0.04 per share)	—			—			—			—			—			(1,185	)		—			(1,185	)

BALANCE AT MARCH 31, 2018	30,138,083		$	302		$	199,845		$	(5,632	)	$	(1,485	)	$	64,675		$	(15,082	)	$	242,623
Comprehensive income	—			—			—			—			—			5,138			(759	)		4,379
Common stock held by ESOP committed to be released (90,978 shares)	—			—			89			154			—			—			—			243
Share-based compensation - equity incentive plan	—			—			—			—			253			—			—			253
Common stock repurchased	(391,376	)		(4	)		(4,257	)		—			—			—			—			(4,261	)
Cash dividends declared and paid on common stock ($0.04 per share)	—			—			—			—			—			(1,164	)		—			(1,164	)

BALANCE AT JUNE 30, 2018	29,746,707		$	298		$	195,677		$	(5,478	)	$	(1,232	)	$	68,649		$	(15,841	)	$	242,073
Comprehensive income	—			—			—			—			—			3,909			(817	)		3,092
Common stock held by ESOP committed to be released (90,978 shares)	—			—			94			153			—			—			—			247
Share-based compensation - equity incentive plan	—			—			—			—			222			—			—			222
Common stock repurchased	(294,899	)		(3	)		(3,200	)		—			—			—			—			(3,203	)
Issuance of common stock in connection with stock option exercises	2,000			—			10			—			—			—			—			10
Cash dividends declared and paid on common stock ($0.04 per share)	—			—			—			—			—			(1,156	)		—			(1,156	)

BALANCE AT SEPTEMBER 30, 2018	29,453,808		$	295		$	192,581		$	5,325		$	1,010		$	71,402		$	(16,658	)	$	241,285

See accompanying notes to unaudited consolidated financial statements.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Dollars in thousands, except share data)

	Common Stock
	Shares		Par Value			Additional Paid-in Capital			Unearned Compensation- ESOP			Unearned Compensation- Equity Incentive Plan			Retained Earnings			Accumulated Other Comprehensive Loss			Total

BALANCE AT DECEMBER 31, 2018	28,393,348		$	284		$	182,096		$	(5,171	)	$	(872	)	$	74,108		$	(13,416	)	$	237,029
Comprehensive income	—			—			—			—			—			3,430			3,212			6,642
Cumulative-effect adjustment due to change in accounting principle (ASU 2017-08)	—			—			—			—			—			(7	)		7			—
Common stock held by ESOP committed to be released (88,117 shares)	—			—			60			149			—			—			—			209
Share-based compensation - equity incentive plan	—			—			(45	)		—			240			—			—			195
Common stock repurchased	(1,555,352	)		(15	)		(15,432	)		—			—			—			—			(15,447	)
Issuance of common stock in connection with stock option exercises	12,550			—			64			—			—			—			—			64
Issuance of common stock in connection with equity incentive plan	102,883			1			1,069			—			(1,070	)		—			—			—
Cash dividends declared and paid on common stock ($0.05 per share)	—			—			—			—			—			(1,375	)		—			(1,375	)

BALANCE AT MARCH 31, 2019	26,953,429		$	270		$	167,812		$	(5,022	)	$	(1,702	)	$	76,156		$	(10,197	)	$	227,317
Comprehensive income	—			—			—			—			—			3,257			2,444			5,701
Common stock held by ESOP committed to be released (88,117 shares)	—			—			61			149			—			—			—			210
Share-based compensation - equity incentive plan	—			—			—			—			198			—			—			198
Common stock repurchased	(249,961	)		(3	)		(2,394	)		—			—			—			—			(2,397	)
Cash dividends declared and paid on common stock ($0.05 per share)	—			—			—			—			—			(1,313	)		—			(1,313	)

BALANCE AT JUNE 30, 2019	26,703,468		$	267		$	165,479		$	(4,873	)	$	(1,504	)	$	78,100		$	(7,753	)	$	229,716
Comprehensive income	—			—			—			—			—			3,225			1,229			4,454
Common stock held by ESOP committed to be released (88,117 shares)	—			—			55			150			—			—			—			205
Share-based compensation - equity incentive plan	—			—			—			—			187			—			—			187
Common stock repurchased	(141,726	)		(1	)		(1,283	)		—			—			—			—			(1,284	)
Cash dividends declared and paid on common stock ($0.05 per share)	—			—			—			—			—			(1,297	)		—			(1,297	)

BALANCE AT SEPTEMBER 30, 2019	26,561,742		$	266		$	164,251		$	(4,723	)	$	(1,317	)	$	80,028		$	(6,524	)	$	231,981

See accompanying notes to unaudited consolidated financial statements.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(Dollars in thousands)

	Nine Months Ended September 30,
	2019			2018
OPERATING ACTIVITIES:
Net income	$	9,913		$	12,567
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,675			1,600
Depreciation and amortization of premises and equipment		1,579			1,530
Accretion of purchase accounting adjustments, net		(67	)		(1,052	)
Amortization of core deposit intangible		282			282
Net amortization of premiums and discounts on securities and mortgage loans		1,563			1,839
Share-based compensation expense		580			707
ESOP expense		624			732
Unrealized (gains) losses on marketable equity securities, net		(194	)		190
Net loss on sales of securities		12			250
Gain on sale of other real estate owned		—			(48	)
Income from bank-owned life insurance		(1,347	)		(1,374	)
Bank-owned life insurance death benefits		—			(715	)
Net change in:
Accrued interest receivable		192			115
Other assets		(1,825	)		552
Other liabilities		6,443			3,205
Net cash provided by operating activities		19,430			20,380
INVESTING ACTIVITIES:
Securities, available-for-sale:
Purchases		(54,138	)		(12,146	)
Proceeds from redemptions and sales		57,418			12,501
Proceeds from calls, maturities, and principal collections		26,761			18,393
Loan originations and principal payments, net		(55,312	)		(61,445	)
Redemption of Federal Home Loan Bank of Boston stock		1,631			73
Proceeds from sale of other real estate owned		—			203
Purchases of premises and equipment		(1,001	)		(2,565	)
Proceeds from sale of premises and equipment		27			45
Proceeds from payout on bank-owned life insurance		—			2,050
Net cash used in investing activities		(24,614	)		(42,891	)
FINANCING ACTIVITIES:
Net increase in deposits		73,585			103,164
Net change in short-term borrowings		(24,250	)		(89,650	)
Repayment of long-term debt		(58,036	)		(53,322	)
Proceeds from issuance of long-term debt		55,765			113,000
Cash dividends paid		(3,985	)		(3,506	)
Common stock repurchased		(19,349	)		(12,422	)
Issuance of common stock in connection with stock option exercises		64			114
Net cash provided by financing activities		23,794			57,378

NET CHANGE IN CASH AND CASH EQUIVALENTS:		18,610			34,867
Beginning of period		26,789			27,132
End of period	$	45,399		$	61,999

Supplemental cash flow information:
Net change in cash due to broker for common stock repurchased	$	(221	)	$	(155	)
Interest paid		18,047			13,433
Taxes paid		3,017			2,507

See the accompanying notes to unaudited consolidated financial statements.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2019

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The Bank’s deposits are insured up to the maximum Federal Deposit Insurance Corporation (“FDIC”) coverage limits. The Bank operates 22 banking offices in western Massachusetts and northern Connecticut, and its primary sources of revenue are interest income from loans as well as interest income from investment securities.

Wholly-owned Subsidiaries. Elm Street Securities Corporation, WFD Securities, Inc. and CSB Colts, Inc., are Massachusetts chartered securities corporations, formed for the primary purpose of holding qualified securities. WB Real Estate Holdings, LLC, is a Massachusetts-chartered limited liability company that holds real property acquired as security for debts previously contracted by the Bank.

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

Estimates. The preparation of 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 and the realizability of deferred tax assets.

Basis of Presentation. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial condition as of September 30, 2019, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results of operations for the year ending December 31, 2019. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2018, included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Annual Report”).

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

2. EARNINGS PER SHARE

Basic earnings per share 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 to stock options and employee incentive plans and are determined using the treasury stock method. Unallocated Employee Stock Ownership Plan Trust (“ESOP”) shares are not deemed outstanding for earnings per share calculations. There were no anti-dilutive shares outstanding during the three and nine months ended September 30, 2019 and 2018.

Earnings per common share for the three and nine months ended September 30, 2019 and 2018 have been computed based on the following:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(In thousands, except per share data)

Net income applicable to common stock	$	3,225		$	3,909		$	9,913		$	12,567

Average number of common shares issued		26,621			29,627			27,092			29,958
Less: Average unallocated ESOP Shares		(656	)		(745	)		(678	)		(768	)
Less: Average unvested equity incentive plan shares		(111	)		(93	)		(106	)		(90	)

Average number of common shares outstanding used to calculate basic earnings per common share		25,854			28,789			26,308			29,100

Effect of dilutive equity incentive plan		47			49			42			42
Effect of dilutive stock options		68			99			73			100

Average number of common shares outstanding used to calculate diluted earnings per common share		25,969			28,937			26,423			29,242

Basic earnings per share	$	0.12		$	0.14		$	0.38		$	0.43
Diluted earnings per share	$	0.12		$	0.14		$	0.38		$	0.43

3. COMPREHENSIVE INCOME (LOSS)

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

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

	September 30, 2019			December 31, 2018
	(In thousands)

Net unrealized losses on securities available-for-sale	$	(739	)	$	(9,891	)
Tax effect		161			2,491
Net-of-tax amount		(578	)		(7,400	)

Fair value of derivatives used for cash flow hedges		(2,055	)		(1,259	)
Termination fee on cancelled cash flow hedges		(1,796	)		(2,595	)
Total derivatives		(3,851	)		(3,854	)
Tax effect		1,083			1,084
Net-of-tax amount		(2,768	)		(2,770	)

Unrecognized actuarial loss on the defined benefit plan		(4,420	)		(4,516	)
Tax effect		1,242			1,270
Net-of-tax amount		(3,178	)		(3,246	)

Accumulated other comprehensive loss	$	(6,524	)	$	(13,416	)

The following table presents changes in accumulated other comprehensive loss for the periods ended September 30, 2019 and 2018 by component:

	Securities			Derivatives			Defined Benefit Plans			Accumulated Other Comprehensive Loss
	(In thousands)
Balance at December 31, 2017	$	(4,042	)	$	(4,181	)	$	(4,329	)	$	(12,552	)
Cumulative-effect adjustment due to change in accounting principle (ASU 2016-01)		237			—			—			237
Current-period other comprehensive (loss) income		(6,076	)		1,611			122			(4,343	)
Balance at September 30, 2018	$	(9,881	)	$	(2,570	)	$	(4,207	)	$	(16,658	)

Balance at December 31, 2018	$	(7,400	)	$	(2,770	)	$	(3,246	)	$	(13,416	)
Cumulative-effect adjustment due to change in accounting principle (ASU 2017-08)		7			—			—			7
Current-period other comprehensive income		6,815			2			68			6,885
Balance at September 30, 2019	$	(578	)	$	(2,768	)	$	(3,178	)	$	(6,524	)

4. SECURITIES

Securities available-for-sale are summarized as follows:

	September 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available-for-sale securities:
Debt securities:
Government-sponsored enterprise obligations	$	20,150	$	—	$	(24	)	$	20,126
State and municipal bonds		2,721		100		—			2,821
Corporate bonds		7,811		84		(66	)		7,829
Total debt securities		30,682		184		(90	)		30,776

Mortgage-backed securities:
Government-sponsored mortgage-backed securities		188,866		701		(1,435	)		188,132
U.S. government guaranteed mortgage-backed securities		12,449		89		(188	)		12,350
Total mortgage-backed securities		201,315		790		(1,623	)		200,482

Total available-for-sale	$	231,997	$	974	$	(1,713	)	$	231,258

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available-for-sale securities:
Debt securities:
Government-sponsored enterprise obligations	$	25,150	$	—	$	(1,203	)	$	23,947
State and municipal bonds		2,976		33		(65	)		2,944
Corporate bonds		49,819		—		(1,651	)		48,168
Total debt securities		77,945		33		(2,919	)		75,059

Mortgage-backed securities:
Government-sponsored mortgage-backed securities		165,605		1		(6,255	)		159,351
U.S. government guaranteed mortgage-backed securities		20,089		1		(752	)		19,338
Total mortgage-backed securities		185,694		2		(7,007	)		178,689

Total available-for-sale	$	263,639	$	35	$	(9,926	)	$	253,748

At September 30, 2019, government-sponsored enterprise obligations with a fair value of $7.0 million and mortgage-backed securities with a fair value $53.1 million were pledged to secure public deposits and for other purposes as required or permitted by law.

In 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which amends the guidance on the amortization period of premiums on certain purchased callable debt securities from maturity to the earliest call date. The cumulative-effect adjustment resulting from the adoption of this ASU was to decrease retained earnings and reduce accumulated other comprehensive loss as of January 1, 2019 by $7,000.

The amortized cost and fair value of available-for-sale debt securities at September 30, 2019, by final maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations. Also, because mortgage-backed securities require periodic principal paydowns, they are not included in the maturity categories in the following maturity summary.

	September 30, 2019
	Amortized Cost		Fair Value
	(In thousands)
Available-for-sale securities:
Debt securities::
Due after one year through five years	$	16,623	$	16,623
Due after five years through ten years		7,324		7,371
Due after ten years		6,735		6,782
Total debt securities		30,682		30,776
Mortgage-backed securities		201,315		200,482
Total available-for-sale securities	$	231,997	$	231,258

Gross realized gains and losses on sales of securities available-for-sale for the three and nine months ended September 30, 2019 and 2018 are as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019			2018
	(In thousands)

Gross gains realized	$	49	$	—	$	148		$	—
Gross losses realized		—		—		(160	)		(250	)
Net loss realized	$	49	$	—	$	(12	)	$	(250	)

Proceeds from the sale of securities available-for-sale amounted to $57.4 million and $12.5 million for the nine months ended September 30, 2019 and 2018, respectively.

Information pertaining to securities with gross unrealized losses at September 30, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

	September 30, 2019
	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	$	128	$	37,162	$	1,307	$	87,948
U.S. government guaranteed mortgage-backed securities		9		978		179		5,211
Corporate bonds		—		—		66		2,989
Government-sponsored enterprise obligations		12		2,488		12		1,488
Total available-for-sale	$	149	$	40,628	$	1,564	$	97,636

	December 31, 2018
	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	$	74	$	7,354	$	6,181	$	148,762
U.S. government guaranteed mortgage-backed securities		15		2,829		737		14,669
Corporate bonds		110		9,995		1,541		38,173
State and municipal bonds		—		—		65		1,532
Government-sponsored enterprise obligations		—		—		1,203		23,947
Total available-for-sale	$	199	$	20,178	$	9,727	$	227,083

During the nine months ended September 30, 2019 and year ended December 31, 2018, the Company did not record any fair value impairment charges on its investments. Management regularly reviews the portfolio for securities with unrealized losses. At September 30, 2019, management did not consider any debt securities to have other-than-temporary impairment (“OTTI”) and attributes the unrealized losses to increases in current market yields compared to the yields at the time the investments were purchased by the Company and not due to credit quality.

The process for assessing investments for OTTI may vary depending on the type of security. In assessing the Company’s investments in government-sponsored mortgage-backed securities and obligations, the contractual cash flows of these investments are guaranteed by the respective government-sponsored enterprise: Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), Federal Farm Credit Bank (“FFCB”), or Federal Home Loan Bank (“FHLB”). Accordingly, it is expected that the securities would not be settled at a price less than the par value of the Company’s investments. Management’s assessment of other debt securities within the portfolio includes reviews of market pricing, ongoing credit quality evaluations, assessment of the investments’ materiality, and duration of the investments’ unrealized loss position.

5. LOANS AND ALLOWANCE FOR LOAN LOSSES

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

Major classifications of loans at the periods indicated were as follows:

	September 30,			December 31,
	2019			2018
	(In thousands)
Commercial real estate	$	821,321		$	768,881
Residential real estate:
Residential 1-4 family		580,881			577,641
Home equity		97,720			97,238
Commercial and industrial		241,732			243,493
Consumer		5,670			5,203
Total gross loans		1,747,324			1,692,456
Unearned premiums and deferred loan fees and costs, net		4,258			4,401
Allowance for loan losses		(13,272	)		(12,053	)
Net loans	$	1,738,310		$	1,684,804

There were no purchases of loans during the nine months ended September 30, 2019 and year ended December 31, 2018.

Loans Serviced for Others.

The Company has transferred a portion of its 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 continue to service the loans on behalf of the participating lenders. We share with participating lenders, on a pro-rata basis, any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. At September 30, 2019 and December 31, 2018, the Company was servicing commercial loans participated out to various other institutions totaling $32.2 million and $35.4 million, respectively.

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 FHLMC. The Bank generally continues to service the residential real estate mortgages under its loan sale and servicing agreements with the investor. 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 September 30, 2019, include weighted average prepayment speed for the portfolio using the Public Securities Association Standard Prepayment Model (180 PSA), weighted average internal rate of return (12.05%), weighted average servicing fee (0.25%), and net cost to service loans ($83.53 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.

At September 30, 2019 and December 31, 2018, the Company was servicing residential mortgage loans owned by investors totaling $50.7 million and $56.6 million, respectively. Net service fee income of $52,000 and $68,000 was recorded for the nine months ended September 30, 2019 and 2018, respectively, and is included in service charges and fees on the consolidated statements of operations.

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

	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
	(In thousands)

Balance at the beginning of period:	$	253		$	286
Capitalized mortgage servicing rights		—			—
Amortization		(17	)		(50	)
Balance at the end of period	$	236		$	236
Fair value at the end of period	$	357		$	357

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

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

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

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

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

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

Allocated component

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

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

Unallocated component

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

An analysis of changes in the allowance for loan losses by segment for the nine months ended September 30, 2019 and 2018 is as follows:

	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer			Unallocated			Total
	(In thousands)
Three Months Ended
Balance at June 30, 2018	$	5,458		$	3,529		$	2,922		$	92		$	(15	)	$	11,986
Provision (credit)		(389	)		481			211			45			2			350
Charge-offs		—			(393	)		(30	)		(40	)		—			(463	)
Recoveries		334			9			8			11			—			362
Balance at September 30, 2018	$	5,403		$	3,626		$	3,111		$	108		$	(13	)	$	12,235

Balance at June 30, 2019	$	5,690		$	3,619		$	2,960		$	153		$	1		$	12,423
Provision (credit)		844			312			63			81			(25	)		1,275
Charge-offs		(200	)		(180	)		(20	)		(70	)		—			(470	)
Recoveries		—			26			5			13			—			44
Balance at September 30, 2019	$	6,334		$	3,777		$	3,008		$	177		$	(24	)	$	13,272


	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer			Unallocated			Total
	(In thousands)
Nine Months Ended
Balance at December 31, 2017	$	4,712		$	3,311		$	2,733		$	71		$	4		$	10,831
Provision (credit)		322			762			415			118			(17	)		1,600
Charge-offs		—			(473	)		(55	)		(125	)		—			(653	)
Recoveries		369			26			18			44			—			457
Balance at September 30, 2018	$	5,403		$	3,626		$	3,111		$	108		$	(13	)	$	12,235

Balance at December 31, 2018	$	5,260		$	3,556		$	3,114		$	135		$	(12	)	$	12,053
Provision (credit)		644			498			397			148			(12	)		1,675
Charge-offs		(419	)		(305	)		(514	)		(155	)		—			(1,393	)
Recoveries		849			28			11			49			—			937
Balance at September 30, 2019	$	6,334		$	3,777		$	3,008		$	177		$	(24	)	$	13,272

The following table presents information pertaining to the allowance for loan losses by segment for the dates indicated:

	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer		Unallocated			Total
	(In thousands)
September 30, 2019

Amount of allowance for impaired loans	$	—	$	—	$	—	$	—	$	—		$	—
Amount of allowance for non-impaired loans		6,334		3,777		3,008		177		(24	)		13,272
Total allowance for loan losses	$	6,334	$	3,777	$	3,008	$	177	$	(24	)	$	13,272

Impaired loans	$	4,691	$	3,420	$	2,190	$	43	$	—		$	10,344
Non-impaired loans		807,031		672,323		238,713		5,627		—			1,723,694
Impaired loans acquired with deteriorated credit quality		9,599		2,858		829		—		—			13,286
Total loans	$	821,321	$	678,601	$	241,732	$	5,670	$	—		$	1,747,324

December 31, 2018

Amount of allowance for impaired loans	$	—	$	—	$	—	$	—	$	—		$	—
Amount of allowance for non-impaired loans		5,260		3,556		3,114		135		(12	)		12,053
Total allowance for loan losses	$	5,260	$	3,556	$	3,114	$	135	$	(12)		$	12,053

Impaired loans	$	5,237	$	4,754	$	2,345	$	60	$	—		$	12,396
Non-impaired loans		752,770		666,883		240,235		5,143		—			1,665,031
Impaired loans acquired with deteriorated credit quality		10,874		3,242		913		—		—			15,029
Total loans	$	768,881	$	674,879	$	243,493	$	5,203	$	—		$	1,692,456

Past Due and Non-accrual Loans.

The following tables present an age analysis of past due loans as of the dates indicated:

	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days or More Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Non-Accrual Loans
		(In thousands)
September 30, 2019
Commercial real estate	$	1,017	$	1,889	$	2,609	$	5,515	$	815,806	$	821,321	$	4,131
Residential real estate:
Residential		1,829		1,004		1,143		3,976		576,905		580,881		4,258
Home equity		94		46		150		290		97,430		97,720		378
Commercial and industrial		1,637		1,624		342		3,603		238,129		241,732		2,248
Consumer		34		2		15		51		5,619		5,670		43
Total loans	$	4,611	$	4,565	$	4,259	$	13,435	$	1,733,889	$	1,747,324	$	11,058

December 31, 2018
Commercial real estate	$	1,857	$	—	$	2,865	$	4,722	$	764,159	$	768,881	$	4,701
Residential real estate:
Residential		1,798		572		1,879		4,249		573,392		577,641		5,856
Home equity		600		5		242		847		96,391		97,238		391
Commercial and industrial		794		1,463		305		2,562		240,931		243,493		2,476
Consumer		93		1		21		115		5,088		5,203		60
Total loans	$	5,142	$	2,041	$	5,312	$	12,495	$	1,679,961	$	1,692,456	$	13,484

Impaired Loans.

The following is a summary of impaired loans by class:

					Three Months Ended				Nine Months Ended
	At September 30, 2019				September 30, 2019				September 30, 2019
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Impaired Loans⁽¹⁾:
Commercial real estate	$	14,290	$	17,572	$	15,558	$	182	$	16,542	$	481
Residential real estate		5,875		7,200		6,375		23		6,805		87
Home equity		403		470		406		—		408		—
Commercial and industrial		3,019		8,131		3,466		37		3,743		111
Consumer		43		56		45		—		50		—
Total impaired loans	$	23,630	$	33,429	$	25,850	$	242	$	27,548	$	679


					Three Months Ended				Nine Months Ended
	At December 31, 2018				September 30, 2018				September 30, 2018
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Impaired Loans⁽¹⁾:
Commercial real estate	$	16,111	$	19,081	$	14,240	$	186	$	14,736	$	558
Residential real estate		7,558		8,614		7,302		14		6,949		33
Home equity		438		468		613		1		652		3
Commercial and industrial		3,258		7,788		4,413		34		4,201		106
Consumer		60		70		78		—		93		—
Total impaired loans	$	27,425	$	36,021	$	26,646	$	235	$	26,631	$	700

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

The majority of impaired loans are included within the non-accrual balances; however, not every loan on non-accrual status has been designated as impaired. Impaired loans include loans that have been modified in a troubled debt restructuring (“TDR”). Impaired loans are individually evaluated and exclude large groups of smaller-balance homogeneous loans, such as residential mortgage loans and consumer loans, which are collectively evaluated for impairment, and loans that are measured at fair value, unless the loan is amended in a TDR.

All payments received on impaired loans in non-accrual status are applied to principal. There was no interest income recognized on nonaccrual impaired loans during the three and nine months ended September 30, 2019 and 2018. The Company’s obligation to fulfill the additional funding commitments on impaired loans is generally contingent on the borrower’s compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company’s discretion. As of September 30, 2019, we have not committed to lend any additional funds for loans that are classified as impaired. Payments received on performing impaired loans are recorded in accordance with the contractual terms of the loan. Interest income recognized on impaired loans during the three and nine months ended September 30, 2019 and 2018 pertained to performing TDRs and purchased impaired loans.

Troubled Debt Restructurings.

Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan as a result of financial difficulties of the borrower, the Bank grants the borrower a concession on the terms, that would not otherwise be considered. Typically, such concessions may consist of a reduction in interest rate to a below market rate, taking into account the credit quality of the note, extension of additional credit based on receipt of adequate collateral, or a deferment or reduction of payments (principal or interest) which materially alters the Bank’s position or significantly extends the note’s maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan’s origination. All loans that are modified are reviewed by the Company to identify if a TDR has occurred. All TDR loans 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 charge-off to the allowance. Non-performing TDRs are included in non-performing loans.

Nonperforming TDRs are shown as nonperforming assets. There were no loans designated as TDRs during the three months ended September 30, 2019. Two substandard impaired loan relationships in the aggregate amount of $2.4 million were designated as TDRs during the nine months ended September 30, 2019. One loan relationship consisting of a commercial real estate loan and a commercial and industrial loan totaling $2.2 million was classified as a TDR during the nine months ended September 30, 2019 as the Bank entered into a forbearance agreement with the customer that allows for interest-only payments for a specified term. Both loans to the customer were current as of September 30, 2019 and the loan relationship is considered to be adequately secured by real estate. The Bank will continue to monitor the loan relationship for ongoing impairment on a quarterly basis. In addition, a second loan relationship consisting of a commercial real estate loan and a commercial and industrial loan totaling $166,000 was modified as a TDR during the nine months ended September 30, 2019 to allow for interest-only payments for a specified term. Both loans were in nonperforming status as of September 30, 2019, however; the second loan relationship is considered to be adequately secured by real estate. The Bank will continue to be monitor the second loan relationship for ongoing impairment on a quarterly basis.

There were no significant loans modified in TDRs during the three and nine months ended September 30, 2018.

	Three Months Ended						Nine Months Ended
	September 30, 2019						September 30, 2019
	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	$	2,032	$	2,032
Commercial and Industrial		—		—		—		2		383		383
Total		—	$	—	$	—		4	$	2,415	$	2,415

During the three and nine months ended September 30, 2019 and 2018, no TDRs defaulted (defined as 30 days or more past due) within 12 months of restructuring. As of September 30, 2019, we have not committed to lend any additional funds for loans that are classified as impaired. There were $715,000 in charge-offs on TDRs during the nine months ended September 30, 2019. There were no charge-offs on TDRs during the three and nine months ended September 30, 2018.

Loans Acquired with Deteriorated Credit Quality.

The following is a summary of loans acquired in the Chicopee Bancorp, Inc. (“Chicopee”) acquisition with evidence of credit deterioration as of September 30, 2019 and 2018.

	Contractual Required Payments Receivable			Cash Expected To Be Collected			Non- Accretable Discount			Accretable Yield			Loans Receivable
	(In thousands)
Balance at December 31, 2018	$	24,793		$	19,883		$	4,910		$	4,854		$	15,029
Collections		(2,313	)		(2,187	)		(126	)		(487	)		(1,700	)
Dispositions		(242	)		(242	)		—			(199	)		(43	)
Balance at September 30, 2019	$	22,238		$	17,454		$	4,784		$	4,168		$	13,286

	Contractual Required Payments Receivable			Cash Expected To Be Collected			Non- Accretable Discount			Accretable Yield			Loans Receivable
	(In thousands)

Balance at December 31, 2017	$	29,362		$	23,158		$	6,204		$	6,033		$	17,125
Collections		(3,370	)		(2,258	)		(1,112	)		(504	)		(1,754	)
Dispositions		—			—			—			—			—
Balance at September 30, 2018	$	25,992		$	20,900		$	5,092		$	5,529		$	15,371

Credit Quality Information.

The Company utilizes 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. Non-performing residential real estate, home equity and consumer loans are monitored individually for impairment and risk rated as “substandard”.

Loans rated 1 – 4: Loans rated 1-4 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent acceptable risk.

Loans rated 5: Loans rated 5 are considered “Special Mention” and may exhibit potential credit weaknesses or downward trends and are being monitored by management. Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification.

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

Loans rated 7: 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 of the loan highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.

Loans rated 8: Loans rated 8 are considered “Uncollectible”. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be affected in the future.

We formally review the ratings on all commercial real estate and commercial and industrial loans annually or more frequently if needed. In addition, management utilizes delinquency reports, the criticized report and other loan reports to monitor credit quality. The Company contracts with an external loan review company to review the internal credit ratings assigned to loans in the commercial loan portfolio on a pre-determined schedule, based on the type, size, rating, and overall risk of the loan at least once per year. During the course of its review, the third party examines a sample of loans, including new loans, existing relationships over certain dollar amounts and classified assets.

The following table presents our loans by risk rating for the periods indicated:

	Commercial Real Estate		Residential 1-4 Family		Home Equity		Commercial and Industrial		Consumer		Total
	(In thousands)
September 30, 2019
Pass (Rated 1 – 4)	$	770,820	$	575,352	$	97,178	$	210,992	$	5,627	$	1,659,969
Special Mention (Rated 5)		21,981		—		—		4,480		—		26,461
Substandard (Rated 6)		28,520		5,529		542		26,260		43		60,894
	$	821,321	$	580,881	$	97,720	$	241,732	$	5,670	$	1,747,324

December 31, 2018
Pass (Rated 1 – 4)	$	732,729	$	570,428	$	96,643	$	207,663	$	5,143	$	1,612,606
Special Mention (Rated 5)		17,929		—		—		12,248		—		30,177
Substandard (Rated 6)		18,223		7,213		595		23,582		60		49,673
Total	$	768,881	$	577,641	$	97,238	$	243,493	$	5,203	$	1,692,456

6. GOODWILL AND OTHER INTANGIBLES

At September 30, 2019 and December 31, 2018, the Company’s goodwill was related to the acquisition of Chicopee in October 2016. There was no goodwill impairment recorded during the three and nine months ended September 30, 2019 or the year ended December 31, 2018. Annually, or more frequently if events or changes in circumstances warrant such evaluation, the Company evaluates its goodwill for impairment.

Core Deposit Intangibles.

In connection with the acquisition of Chicopee, the Bank recorded a core deposit intangible of $4.5 million which is amortized over twelve years using the straight-line method. Amortization expense was $94,000 and $282,000 for the three and nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019, future amortization of the core deposit intangible totaled $375,000 for each of the next five years and $1.5 million thereafter.

7. SHARE-BASED COMPENSATION

Stock Options.

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

A summary of stock option activity for the nine months ended September 30, 2019 is presented below:

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



Outstanding at December 31, 2018		238,075		$	6.33		3.44	$	877
Exercised		(12,550	)		5.12		0.74		60
Outstanding at September 30, 2019		225,525		$	6.40		2.83	$	701

Exercisable at September 30, 2019		225,525		$	6.40		2.83	$	701

Cash received for options exercised during the nine months ended September 30, 2019 and 2018 was $64,000 and $114,000, respectively.

Restricted Stock Awards.

In May 2014, the Company’s shareholders approved a stock-based compensation plan (the “RSA Plan”). Under the RSA Plan, up to 516,000 shares of the Company’s 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. Any shares that are not issued because vesting requirements are not met will be available for future issuance under the RSA Plan.

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

In 2016, the Compensation Committee approved a long-term incentive program (the “LTI Plan”). The 2016 LTI Plan provides a periodic award that is both performance and time-based and is designed to recognize the executive’s responsibilities, reward performance and leadership and as a retention tool. The objective of the 2016 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 2016 LTI Plan includes eligible participants of the Company that are nominated by the Chief Executive Officer and approved by the Compensation Committee. The 2016 LTI Plan is triggered by the Company’s achievement of satisfactory safety and soundness results from its most recent regulatory examination and additional Company performance metrics. Stock grants made under the 2016 LTI Plan consist of 50% time-based stock and 50% performance-based stock.

In May 2016, there were 62,740 shares granted under the 2016 LTI Plan. Of the 62,740 shares granted, 36,543 shares were time-based stock, with 10,352 vesting in one year and 26,191 vesting ratably over a three-year period. The remaining 26,197 shares granted were performance-based and are subject to the achievement of the 2016 LTI performance metrics. Under the 2016 LTI Plan, the primary performance metric was return on equity.

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

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

As of December 31, 2018, the three-year performance period for the 2016 LTI Plan performance-based share grant expired. Performance-based shares were earned based on the Company achieving the 2016 LTI Plan threshold and target metrics at the end of the three-year performance period. The Company’s return on equity for the year ended December 31, 2018 was 6.82%, which resulted in the achievement of the target return on equity metric for the 2016 LTI Plan grant. In February 2019, 26,197 performance-based shares vested and were granted to eligible recipients under the Plan.

In May 2017, there were 89,042 shares granted under the 2017 LTI Plan. Of the 89,042 shares, 55,159 shares are time-based, with 21,276 vesting in one year and 33,883 vesting ratably over a three-year period. The remaining 33,883 shares granted were performance-based and are subject to the achievement of the 2017 LTI performance metric. Vesting is realized after a three-year period. Under the 2017 LTI Plan, the primary performance metric was return on equity. Performance-based shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period, but will be distributed at the end of the three-year period. Eligible participants will be able to earn between 50% (“threshold” performance), 100% (“target” performance) and 150% (“maximum” performance).

As a result of the Tax Cuts and Jobs Act of 2017, the return on equity performance metrics were adjusted to incorporate the impact and benefits of the corporate tax rate reductions thereunder. The original and adjusted threshold, target and maximum metrics for 2019 under the 2017 LTI Plan are as follows:

	Return on Equity Metrics
Performance Period Ending	Original Threshold			Adjusted Threshold			Original Target			Adjusted Target			Original Maximum			Adjusted Maximum

December 31, 2019		6.50	%		7.09	%		7.20	%		7.85	%		7.90	%		8.61	%

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

	Return on Equity Metrics
Performance Period Ending	Threshold			Target			Stretch

December 31, 2019		6.85	%		7.35	%		7.75	%
December 31, 2020		7.40	%		7.90	%		8.30	%

Eligible participants will be able to earn between 50% (“threshold” performance), 100% (“target” performance) and 150% (“maximum” performance).

The fair market value of shares awarded is based on the market price at the grant date, recorded as unearned compensation and amortized over the applicable vesting period. Performance-based metrics are monitored on a quarterly basis in order to compare actual results to the performance metric, with any necessary adjustments being recognized through share-based compensation expense and unearned compensation.

In February 2019, there were 108,718 shares granted under the 2019 LTI Plan. Of the 108,718 shares, 64,496 shares were time-based, with 20,262 vesting in one year and 44,234 vesting ratably over a three-year period. The remaining 44,222 shares granted are performance-based and are subject to the achievement of the 2019 long-term incentive performance metric. Under the 2019 LTI Plan, the primary performance metric was return on equity. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period, but will be distributed at the end of the three-year period. The threshold, target and stretch metrics under the 2019 LTI Plan are as follows:

	Return on Equity Metrics
Performance Period Ending	Threshold			Target			Stretch
December 31, 2019		5.75	%		6.13	%		7.00	%
December 31, 2020		6.00	%		6.75	%		7.75	%
December 31, 2021		6.25	%		7.00	%		8.00	%

Eligible participants will be able to earn between 50% (“threshold” performance), 100% (“target” performance) and 150% (“maximum” performance).

A summary of the status of restricted stock awards at September 30, 2019 is presented below:

	Shares			Weighted Average Grant Date Fair Value
Balance at December 31, 2018		155,712		$	9.87
Shares granted		108,718			9.77
Shares vested		(53,465	)		8.75
Shares forfeited		(1,842	)		9.77
Balance at September 30, 2019		209,123		$	10.11


	Shares			Weighted Average Grant Date Fair Value
Balance at December 31, 2017		138,833		$	8.98
Shares granted		83,812			11.05
Shares vested		(32,476	)		9.13
Balance at September 30, 2018		190,169		$	9.87

We recorded total expense for restricted stock awards of $580,000 and $707,000 for the nine months ended September 30, 2019 and 2018, respectively.

8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

As a member of the FHLB, the Bank has the potential capacity to borrow an amount up to the value of its discounted qualified collateral. Borrowings from the FHLB are secured by certain securities from the Company’s investment portfolio not otherwise pledged as well as certain residential real estate and commercial real estate loans.

FHLB advances with an original maturity of less than one year totaled $35.0 million and $59.3 million at September 30, 2019 and December 31, 2018, respectively, with a weighted average rate of 2.26% and 3.28%, respectively. At September 30, 2019, based on qualifying collateral less outstanding advances, the Bank had the additional capacity to borrow up to approximately $232.7 million from the FHLB.

In addition, at September 30, 2019 and December 31, 2018, the Company had an available IDEAL Way line of credit with the FHLB for up to $9.5 million. Interest on this line of credit is payable at a rate determined and reset by the FHLB on a daily basis. The outstanding principal is due daily and the portion not repaid will be automatically renewed. At September 30, 2019 and December 31, 2018, there were no advances outstanding under this line.

The Bank also had a line of credit in the amount up to $15.0 million with a correspondent bank at an interest rate determined and reset on a daily basis. There were no advances outstanding under this line at September 30, 2019 and 2018. We also had a $50.0 million line of credit with another correspondent bank at an interest rate determined and reset on a daily basis. There were no advances outstanding under the line at September 30, 2019 and 2018.

Long-term debt consists of FHLB advances with an original maturity of one year or more. At September 30, 2019, we had $205.7 million in long-term debt with the FHLB. This compares to $208.0 million in long-term debt with FHLB advances at December 31, 2018.

9. PENSION BENEFITS

We provide a defined benefit pension plan for eligible employees (the “Plan”). Employees must work a minimum of 1,000 hours per year to be eligible for the Plan. Eligible employees become vested in the Plan after five years of service. We plan to contribute to the pension plan the amount required to meet the minimum funding standards under Section 412 of the Internal Revenue Code of 1986, as amended. Additional contributions will be made as deemed appropriate by management in conjunction with the pension plan’s actuaries. We have not yet determined how much we expect to contribute to our pension plan in 2019. No contributions have been made to the plan for the nine months ended September 30, 2019. The pension plan assets are invested in various pooled separate investment accounts offered by Principal Life Insurance Company, a division of Principal Financial Group, who is the Custodian of the Plan (the “Custodian”). The Plan is administered by an officer of Westfield Bank. On September 30, 2016, we effected a soft freeze on the Plan and therefore no new participants will be included in the Plan after such effective date.

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

	Three Months Ended						Nine Months Ended,
	September 30,						September 30,
	2019			2018			2019			2018
	(In thousands)
Service cost	$	274		$	304		$	822		$	910
Interest cost		284			253			852			759
Expected return on assets		(308	)		(347	)		(924	)		(1,041	)
Actuarial loss		32			56			96			170
Net periodic pension cost	$	282		$	266		$	846		$	798

10. DERIVATIVES AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives.

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

The following table presents information about our cash flow hedges at September 30, 2019 and December 31, 2018:

September 30, 2019	Notional		Weighted Average		Weighted Average Rate						Estimated
	Amount		Maturity		Receive			Pay			Fair Value
	(In thousands)		(In years)								(In thousands)
Cash flow hedges:
Interest rate swaps on FHLB borrowings	$	35,000		3.0		2.12	%		3.54	%	$	(2,076	)
Non-hedging derivatives:
Loan-level swaps – dealer		1,996		9.9		2.08	%		3.79	%		(100	)
Loan-level swaps – borrower		1,996		9.9		3.79	%		2.08	%		100
Total	$	38,992									$	(2,076	)

December 31, 2018	Notional		Weighted Average		Weighted Average Rate						Estimated
	Amount		Maturity		Receive			Pay			Fair Value
	(In thousands)		(In years)								(In thousands)
Cash flow hedges:
Interest rate swaps on FHLB borrowings	$	35,000		3.7		2.79	%		3.54	%	$	(1,259	)

At September 30, 2019, the Company had $35.0 million in derivatives designated as hedging instruments and $4.0 million in derivatives designated as non-hedging instruments. At December 31, 2018, all derivatives were designated as hedging instruments.

Cash Flow Hedges of Interest Rate Risk.

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

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 for the three and nine months ended September 30, 2019 or the year ended December 31, 2018.

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

Non-hedging Derivatives.

Derivatives not designated as hedges are not speculative but rather result from a service the Company provides to certain customers. The Company executes loan level derivative products such as interest-rate swap agreements with commercial banking customers to aid them in managing their interest-rate risk by converting floating-rate loan payments to fixed-rate loan payments. The Company concurrently enters into offsetting swaps with a third party financial institution, effectively minimizing its net risk exposure resulting from such transactions. The third-party financial institution exchanges the customer’s fixed-rate loan payments for floating-rate loan payments. As the interest-rate swap agreements associated with this program do not meet hedge accounting requirements, changes in the fair value are recognized directly in earnings.

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 September 30, 2019 and December 31, 2018.

September 30, 2019	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(In thousands)

Derivatives designated as hedging instruments:
Interest rate swaps – cash flow hedge	Other Assets	$	—	Other Liabilities	$	2,076
Total derivatives designated as hedging instruments		$	—		$	2,076
Derivatives not designated as hedging instruments:
Interest rate swap – with customers		$	100		$	—
Interest rate swap – with counterparties			—			100
Total derivatives not designated as hedging instruments		$	100		$	100

December 31, 2018

Asset Derivatives

Liability Derivatives

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

(In thousands)

Derivatives designated as hedging instruments:

Interest rate swaps

Other Assets

—

Other Liabilities

1,259

Effect of Derivative Instruments in the Consolidated Statements of Operations and Changes in Shareholders’ Equity.

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

	Amount of Gain (Loss) Recognized in OCI on Derivative
	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
	(In thousands)

Interest rate swaps	$	(142	)	$	168	$	(1,053	)	$	1,086

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. The table below presents the amount reclassified from accumulated other comprehensive income into net income for interest rate swaps and termination fees:

	Amount of Gain (Loss) Reclassified from OCI into Expense (Effective Portion)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands)

Interest rate swaps	$	374	$	351	$	1,056	$	1,154

During the next 12 months, we estimate that $1.6 million will be reclassified as an increase in interest expense. During the three and nine months ended September 30, 2019 and 2018, 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 ourselves to credit risk. Credit risk is the risk of failure by the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative is negative, we owe the counterparty and, therefore, it does not possess credit risk. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that we believe to be creditworthy and by limiting the amount of exposure to each counterparty.

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

At September 30, 2019 and December 31, 2018, we had a net liability position of $2.2 million and $1.3 million with our counterparties, respectively. As of September 30, 2019, we had minimum collateral posting thresholds with certain of our derivative counterparties and had mortgage-backed securities with a fair value of $2.2 million and $300,000 in cash posted as collateral against our obligations under these agreements. If we had breached any of these provisions at September 30, 2019, we could have been required to settle our obligations under the agreements at the termination value.

11. FAIR VALUE OF ASSETS AND LIABILITIES

Determination of Fair Value.

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

Fair Value Hierarchy.

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

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

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

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

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

Securities Available-for-sale.

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.

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.

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

	September 30, 2019
	Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Government-sponsored mortgage-backed securities	$	—	$	188,132	$	—	$	188,132
U.S. government guaranteed mortgage-backed securities		—		12,350		—		12,350
Corporate bonds		—		7,829		—		7,829
State and municipal bonds		—		2,821		—		2,821
Government-sponsored enterprise obligations		—		20,126		—		20,126
Marketable equity securities		6,726		—		—		6,726
Interest rate swaps		—		100		—		100
Total assets	$	6,726	$	231,358	$	—	$	238,084

Liabilities:
Interest rate swaps	$	—	$	2,176	$	—	$	2,176

	December 31, 2018
	Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Government-sponsored mortgage-backed securities	$	—	$	159,351	$	—	$	159,351
U.S. government guaranteed mortgage-backed securities		—		19,338		—		19,338
Corporate bonds		—		48,168		—		48,168
State and municipal bonds		—		2,944		—		2,944
Government-sponsored enterprise obligations		—		23,947		—		23,947
Marketable equity securities		6,408		—		—		6,408
Total assets	$	6,408	$	253,748	$	—	$	260,156

Liabilities:
Interest rate swaps	$	—	$	1,259	$	—	$	1,259

Assets Measured at Fair Value on a Non-recurring Basis.

We may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related assets at September 30, 2019 and December 31, 2018. Total losses represent the change in carrying value as a result of fair value adjustments related to assets still held at the periods indicated.

	At						Three Months Ended			Nine Months Ended
	September 30, 2019						September 30, 2019			September 30, 2019
							Total			Total
	Level 1		Level 2		Level 3		Gains (Losses)			Gains (Losses)
		(In thousands)
Impaired Loans	$	—	$	—	$	2,117	$	(380	)	$	(1,077	)
Total Assets	$	—	$	—	$	2,117	$	(380	)	$	(1,077	)


	At						Three Months Ended			Nine Months Ended
	December 31, 2018						September 30, 2018			September 30, 2018
							Total			Total
	Level 1		Level 2		Level 3		Gains (Losses)			Gains (Losses)
		(In thousands)
Impaired Loans	$	—	$	—	$	1,676	$	(393	)	$	(473	)
Total Assets	$	—	$	—	$	1,676	$	(393	)	$	(473	)

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 September 30, 2019 and December 31, 2018.

Summary of Fair Values of Financial Instruments.

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

	September 30, 2019
	Carrying Value		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents	$	45,399	$	45,399	$	—	$	—	$	45,399
Securities available-for-sale		231,258		—		231,258		—		231,258
Marketable equity securities		6,726		6,726		—		—		6,726
Federal Home Loan Bank of Boston and other restricted stock		13,064		—		—		13,064		13,064
Loans - net		1,738,310		—		—		1,742,526		1,742,526
Accrued interest receivable		5,460		—		—		5,460		5,460
Mortgage servicing rights		236		—		357		—		357
Derivative assets		100		—		100		—		100

Liabilities:
Deposits		1,669,515		—		—		1,671,665		1,671,665
Short-term borrowings		35,000		—		35,015		—		35,015
Long-term debt		205,681		—		206,034		—		206,034
Accrued interest payable		507		—		—		507		507
Derivative liabilities		2,176		—		2,176		—		2,176


	December 31, 2018
	Carrying Value		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents	$	26,789	$	26,789	$	—	$	—	$	26,789
Securities available-for-sale		253,748		—		253,748		—		253,748
Marketable equity securities		6,408		6,408		—		—		6,408
Federal Home Loan Bank of Boston and other restricted stock		14,695		—		—		14,695		14,695
Loans - net		1,684,804		—		—		1,631,558		1,631,558
Accrued interest receivable		5,652		—		—		5,652		5,652
Mortgage servicing rights		286		—		456		—		456

Liabilities:
Deposits		1,595,993		—		—		1,592,521		1,592,521
Short-term borrowings		59,250		—		59,247		—		59,247
Long-term debt		208,018		—		206,789		—		206,789
Accrued interest payable		530		—		—		530		530
Derivative liabilities		1,259		—		1,259		—		1,259

12. LEASES

The Company determines if an arrangement is a lease at inception. Effective in 2019, operating leases are included within other assets and other liabilities in our consolidated balance sheets. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. We have not elected the practical expedient to account for lease and non-lease components as one lease component. Additionally, the Company has elected the practical expedient whereby expired leases, existing operating lease classifications and initial direct costs will not be reassessed at inception. The Company has operating leases for certain of our banking offices and ATMs. Our leases have remaining lease terms of less than one year to 19 years, some of which include options to extend the leases for additional five-year terms up to 15 years.

The components of lease expense were as follows:

	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
	(In thousands)

Amortization of ROU assets	$	244	$	729
Interest on lease liabilities		60		184
Operating lease cost	$	304	$	913

Supplemental cash flow information related to leases was as follows:

	Nine Months Ended
	September 30, 2019
	(In thousands)

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	878
ROU assets obtained in exchange for lease obligations:
Operating leases		411

Supplemental balance sheet information related to leases was as follows:

	September 30, 2019
	(In thousands)

Operating lease ROU assets	$	6,851
Operating lease liabilities	$	6,886

The weighted average remaining lease term for our operating leases was 10.5 years with a weighted average discount rate of 3.46% at September 30, 2019.

Maturities of the Company’s operating lease liabilities were as follows (in thousands):


Years Ending December 31,
2019	$	294
2020		1,100
2021		1,021
2022		987
2023		736
Thereafter		4,295
Total lease payments		8,433
Less imputed interest		(1,547	)
Total	$	6,886

13. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the requirements in Topic 840, Leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this ASU on January 1, 2019 and recorded an increase in assets of $7.2 million and an increase in liabilities of $7.2 million on the consolidated balance sheet as a result of recognizing the right-of-use assets and lease liabilities.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. On October 16, 2019, the FASB approved the drafting of an Update to the standard to move the effective date to fiscal years beginning after December 15, 2023 for small reporting companies, which includes WNEB. The Company is in the process of implementing the standard. We have put together a project team that has begun to identify appropriate loan segments along with related historical losses for each segment and potential models that would be most appropriate for each individual segment. We have not quantified the effects of any models, but do expect the standard to significantly change the approach to calculating our allowance for loan losses.

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer (that is, at a premium). The Company adopted this ASU on January 1, 2019, which reduced premiums on callable debt securities and resulted in a cumulative-effect adjustment directly to retained earnings, net of tax, of $7,000.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removes and modifies the previously required disclosures relating to fair value measurements. Specifically, the ASU removes the required disclosure of amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, the valuation process for Level 3 fair value measurements and the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of a reporting period. It also modifies the required roll forward of Level 3 fair value measurements to a disclosure of any transfers into and out of Level 3, increases disclosure for investments in entities that calculate net asset value, and clarifies the measurement of uncertainty disclosure. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As this standard relates to disclosures, Management does not expect adoption to have a material impact on our consolidated financial statements.

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

Overview.

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

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

In connection with our overall growth strategy, we seek to:

●

grow the Company’s commercial loan portfolio and related commercial deposits by targeting businesses in our primary market area and northern Connecticut to increase the net interest margin and loan income;

●

supplement the commercial portfolio by growing the residential real estate portfolio to diversify the loan portfolio and deepen customer relationships;

●

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

●

invest in people, systems and technology to grow revenue, improve efficiency and enhance the overall customer experience;

●

grow revenues, increase tangible book value, continue to pay competitive dividends to shareholders and utilize the Company’s stock repurchase plan to leverage our capital and enhance franchise value; and

●

consider growth through acquisitions. We may pursue expansion opportunities in existing or adjacent strategic locations with companies that add complementary products to our existing business and at terms that add value to our existing shareholders.

You should read the following financial results for the three and nine months ended September 30, 2019 in the context of this strategy.

●

Net income was $3.2 million, or $0.12 per diluted share, for the three months ended September 30, 2019, compared to $3.9 million, or $0.14 per diluted share, for the same period in 2018. For the nine months ended September 30, 2019, net income was $9.9 million, or $0.38 per diluted share, as compared to net income of $12.6 million, or $0.43 per diluted share, for the same period in 2018.

●

The provision for loan losses was $1.3 million and $350,000 for the three months ended September 30, 2019 and 2018, respectively, and $1.7 million and $1.6 million for the nine months ended September 30, 2019 and 2018, respectively.

●

Net interest income was $14.5 million and $14.6 million for the three months ended September 30, 2019 and 2018, respectively. The net interest margin was 2.88% for the three months ended September 30, 2019, compared to 2.94% for the same period in 2018. The net interest margin, on a tax-equivalent basis, was 2.91% for the three months ended September 30, 2019, compared to 2.96% for the same period in 2018. Net interest income was $43.1 million and $45.2 million for the nine months ended September 30, 2019 and 2018, respectively. The net interest margin was 2.90% and 3.09% for the nine months ended September 30, 2019 and 2018, respectively. The net interest margin, on a tax-equivalent basis, was 2.93% and 3.11% for the nine months ended September 30, 2019 and 2018, respectively.

CRITICAL ACCOUNTING POLICIES.

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

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. There have been no material changes to our critical accounting policies during the nine months ended September 30, 2019. For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the accompanying unaudited consolidated financial statements and Note 1 of the consolidated financial statements included in our 2018 Annual Report.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2019 AND DECEMBER 31, 2018

At September 30, 2019, total assets were $2.2 billion, an increase of $54.9 million, or 2.6%, from December 31, 2018. During the same period, total loans increased $54.7 million, or 3.2%, securities available-for-sale and marketable equity securities available-for-sale decreased $22.2 million, or 8.5%, and cash and cash equivalents increased $18.6 million, or 69.5%.

Total loans increased $54.7 million, or 3.2%, from December 31, 2018, primarily due to an increase in commercial real estate loans of $52.4 million, or 6.8%, an increase in residential real estate loans of $3.7 million, or 0.6%, and an increase in consumer loans of $467,000, or 9.0%, partially offset by a decrease in commercial and industrial loans of $1.8 million, or 0.7%.

All loans where the payments are 90 days or more in arrears as of the closing date of each month are placed on nonaccrual status. Nonperforming loans were $11.1 million at September 30, 2019 and $13.5 million at December 31, 2018. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $826,000 and $654,000 for the nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019 and December 31, 2018, our nonperforming loans to total loans was 0.63% and 0.79%, while our nonperforming assets to total assets was 0.51% and 0.64%, respectively. A summary of our nonaccrual and past due loans by class are listed in Note 5 of the accompanying unaudited consolidated financial statements.

At September 30, 2019, total deposits were $1.7 billion, an increase of $73.5 million, or 4.6%, from December 31, 2018. Core deposits, which the Company defines as all deposits except time deposits, increased $77.4 million, or 8.3%, from $935.9 million, or 58.6% of total deposits, at December 31, 2018, to $1.0 billion, or 60.7% of total deposits, at September 30, 2019. Non-interest-bearing deposits increased $27.1 million, or 7.6%, to $382.5 million, interest-bearing checking accounts increased $18.7 million, or 29.4%, to $82.3 million, savings accounts increased $6.5 million, or 5.4%, to $125.0 million, and money market accounts increased $25.2 million, or 6.3%, to $423.5 million. The increase in these core deposits is a result of management’s continued sales efforts along with customer preferences for competitively priced short-term deposits. Time deposits, which include brokered deposits, represented 39.3% of total deposits, and decreased $3.8 million, or 0.6%, from $660.0 million at December 31, 2018 to $656.2 million at September 30, 2019. Brokered deposits decreased $2.6 million, or 10.9%, to $21.2 million at September 30, 2019 from $23.8 million at December 31, 2018.

FHLB advances decreased $26.6 million, or 10.0%, from $267.3 million at December 31, 2018, to $240.7 million at September 30, 2019. The Company utilized the increase in deposit balances during the year to pay down FHLB borrowings and to fund loan growth. Additional information regarding short-term borrowings and long-term debt is included in Note 8 of the accompanying unaudited consolidated financial statements.

At September 30, 2019, shareholders’ equity was $232.0 million, or 10.7% of total assets, compared to $237.0 million, or 11.2% of total assets, at December 31, 2018. The decrease in shareholders’ equity reflects $19.1 million for the repurchase of the Company’s shares and the payment of regular cash dividends of $4.0 million, both partially offset by net income of $9.9 million and a decrease in accumulated other comprehensive loss of $6.9 million.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND SEPTEMBER 30, 2018

General.

Net income was $3.2 million, or $0.12 per diluted share, for the three months ended September 30, 2019, compared to $3.9 million, or $0.14 per diluted share, for the same period in 2018. Net interest income was $14.5 million and $14.6 million for the three months ended September 30, 2019 and 2018, respectively.

Net Interest and Dividend Income.

The following tables set forth the information relating to our average balance and net interest income for the three months ended September 30, 2019 and 2018, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.

	Three Months Ended September 30,
	2019								2018
	Average					Average Yield/			Average					Average Yield/
	Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans⁽¹⁾⁽²⁾	$	1,739,266	$	19,244			4.39	%	$	1,682,034	$	17,690			4.17	%
Securities⁽²⁾		238,961		1,470			2.44			263,378		1,772			2.67
Other investments - at cost		16,354		192			4.66			17,747		228			5.10
Short-term investments⁽³⁾		8,330		36			1.71			9,083		34			1.49
Total interest-earning assets		2,002,911		20,942			4.15			1,972,242		19,724			3.97
Total non-interest-earning assets		138,543								134,708
Total assets	$	2,141,454							$	2,106,950

LIABILITIES AND EQUITY:
Interest-bearing liabilities
Interest-bearing checking accounts	$	70,619	$	105			0.59	%	$	86,615		94			0.43	%
Savings accounts		128,133		36			0.11			138,112		40			0.11
Money market accounts		402,716		641			0.63			415,416		489			0.47
Time deposit accounts		666,792		3,672			2.18			600,333		2,471			1.63
Total interest-bearing deposits		1,268,360		4,454			1.39			1,240,476		3,094			0.99
Short-term borrowings and long-term debt		249,109		1,822			2.90			279,181		1,906			2.71
Total interest-bearing liabilities		1,517,469		6,276			1.64			1,519,657		5,000			1.31
Non-interest-bearing deposits		368,647								328,735
Other non-interest-bearing liabilities		24,099								16,917
Total non-interest-bearing liabilities		392,746								345,652

Total liabilities		1,910,215								1,865,309
Total equity		231,239								241,641
Total liabilities and equity	$	2,141,454							$	2,106,950
Less: Tax-equivalent adjustment⁽²⁾				(138	)							(119	)
Net interest and dividend income			$	14,528							$	14,605
Net interest rate spread							2.48	%							2.64	%
Net interest rate spread, on a tax equivalent basis⁽⁴⁾							2.51	%							2.66	%
Net interest margin							2.88	%							2.94	%
Net interest margin, on a tax equivalent basis⁽⁵⁾							2.91	%							2.96	%
Ratio of average interest-earning assets to average interest-bearing liabilities							131.99	%							129.78	%

(1)	Loans, including non-accrual loans, are net of deferred loan origination costs, unadvanced funds and the 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 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported in the consolidated statements of operations.

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

(4)	Net interest rate spread, on a tax-equivalent basis, represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. See “Explanation of Use of Non-GAAP Financial Measurements”.

(5)	Net interest margin, on a tax-equivalent basis, represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. See “Explanation of Use of Non-GAAP Financial Measurements”.

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.

	Three Months Ended September 30, 2019 compared to Three Months Ended September 30, 2018
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest-earning assets	(In thousands)
Loans ⁽¹⁾	$	602		$	952		$	1,554
Securities ⁽¹⁾		(164	)		(138	)		(302	)
Other investments - at cost		(18	)		(18	)		(36	)
Short-term investments		(3	)		5			2
Total interest-earning assets		417			801			1,218

Interest-bearing liabilities
Interest-bearing checking accounts		(17	)		28			11
Savings accounts		(3	)		(1)			(4	)
Money market accounts		(15	)		167			152
Time deposit accounts		274			927			1,201
Short-term borrowing and long-time debt		(205	)		121			(84	)
Total interest-bearing liabilities		34			1,242			1,276
Change in net interest and dividend income ⁽¹⁾	$	383		$	(441	)	$	(58	)

(1)	Securities, loan income and change in net interest and dividend income are presented on a tax-equivalent basis using a tax rate of 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest income.

Net interest income decreased $77,000, or 0.5%, to $14.5 million, for the three months ended September 30, 2019, from $14.6 million for the three months ended September 30, 2018. The decrease in net interest income was due to an increase in interest expense of $1.3 million, or 25.5%, partially offset by an increase in interest and dividend income of $1.2 million, or 6.1%. The increase in interest expense was primarily due to a $1.4 million, or 44.0%, increase in interest expense on deposits, partially offset by a decrease of $84,000, or 4.4%, in interest expense on FHLB borrowings.

Net interest income for the three months ended September 30, 2018 included $62,000 in negative purchase accounting adjustments, compared to $154,000 in positive purchase accounting adjustments during the three months ended September 30, 2019. Excluding these adjustments, net interest income decreased $293,000, or 2.0%, from $14.7 million during the three months ended September 30, 2018, compared to $14.4 million during the three months ended September 30, 2019.

The net interest margin was 2.88% for the three months ended September 30, 2019, compared to 2.94% for the three months ended September 30, 2018. The net interest margin, on a tax-equivalent basis, was 2.91% for the three months ended September 30, 2019, compared to 2.96% for the three months ended September 30, 2018. The amortization of purchase accounting adjustments related to the merger with Chicopee decreased net interest income by $62,000 during the three months ended September 30, 2018, compared to an increase of $154,000 during the three months ended September 30, 2019. Excluding the purchase accounting adjustments, the net interest margin was 2.85% for the three months ended September 30, 2019 and 2.95% for the three months ended September 30, 2018.

The average yield on interest-earning assets increased 18 basis points from 3.97% for the three months ended September 30, 2018 to 4.15% for the three months ended September 30, 2019. Excluding the purchase accounting adjustments discussed above, the average yield on interest-earning assets increased 12 basis points from 4.00% for the three months ended September 30, 2018 to 4.12% for the three months ended September 30, 2019. During the three months ended September 30, 2019, the average cost of funds increased 33 basis points from 1.31% for the three months ended September 30, 2018 to 1.64% for the three months ended September 30, 2019. The average cost of core deposits, which include non-interest bearing demand accounts, increased six basis points from 0.26% for the three months ended September 30, 2018 to 0.32% for the three months ended September 30, 2019. The average cost of time deposits increased 55 basis points from 1.63% for the three months ended September 30, 2018 to 2.18% for the three months ended September 30, 2019. The average cost of FHLB borrowings increased 19 basis points during the same period. For the three months ended September 30, 2019, average demand deposits, an interest-free source of funds, increased $39.9 million, or 12.1%, to $368.6 million, or 22.5% of total average deposits, from $328.7 million, or 20.9% of total average deposits for the three months ended September 30, 2018.

During the three months ended September 30, 2019, average interest-earning assets increased $30.7 million, or 1.6%, to $2.0 billion compared to the three months ended September 30, 2018. The increase in average interest-earning assets was due to an increase in average loans of $57.2 million, or 3.4%, partially offset by a decrease in average securities of $24.4 million, or 9.3%.

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 of the provision for loan losses during the three months ended September 30, 2019 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio, described in the comparison of financial condition, include an increase in total loans. After evaluating these factors, we recorded a provision for loan losses of $1.3 million for the three months ended September 30, 2019, compared to $350,000 for the same period in 2018.

The Company recorded net charge-offs of $426,000 for the three months ended September 30, 2019, as compared to net charge-offs of $101,000 for the three months ended September 30, 2018. During the three months ended September 30, 2019, the Company recorded charge-offs of $470,000, primarily due to an existing substandard commercial loan relationship, partially offset by recoveries of $44,000. During the three months ended September 30, 2018, the Company recorded charge-offs of $463,000, partially offset by recoveries of $362,000.

The allowance for loan losses was $13.3 million and $12.1 million and 0.76% and 0.71% of total loans at September 30, 2019 and December 31, 2018, respectively.

Although we believe that we have established and maintained the allowance for loan losses at adequate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment.

Non-interest Income.

Non-interest income increased $315,000, or 13.7%, to $2.6 million for the three months ended September 30, 2019, from $2.3 million for the three months ended September 30, 2018, primarily due to an increase in service charges and fees of $127,000, or 6.7%, an increase in other non-interest income of $55,000 primarily related to swap fee income, and a gain on the sale of securities of $49,000. During the three months ended September 30, 2019, the Company reported $45,000 in unrealized gains on marketable equity securities, compared to unrealized losses on marketable equity securities of $43,000 for the three months ended September 30, 2018.

Non-interest Expense.

For the three months ended September 30, 2019, non-interest expense increased $168,000, or 1.5%, to $11.7 million, or 2.18% of average assets, from $11.6 million, or 2.18% of average assets, for the three months ended September 30, 2018. The increase in non-interest expense was primarily due to an increase in salaries and benefits of $442,000, or 6.9%, an increase in data processing of $68,000, or 10.6%, an increase in furniture and equipment of $24,000, or 6.0%, an increase in occupancy expense of $23,000, or 2.4%, and an increase in advertising expense of $13,000, or 3.7%. These increases were partially offset by a decrease in professional fees of $221,000, or 28.8%, and a decrease in FDIC insurance expense of $153,000, or 96.8%, due to the small bank credit applied to quarterly assessments by the FDIC in the third quarter of 2019. Small bank credits will automatically be applied each quarter that the reserve ratio is at least 1.38%, up to the full amount of a small bank’s credit or assessment, whichever is less. For the three months ended September 30, 2019, the efficiency ratio was 68.9%, compared to 68.3% for the three months ended September 30, 2018.

Income Taxes.

The Company’s effective tax rate increased from 21.5% for the three months ended September 30, 2018 to 21.8% for the three months ended September 30, 2019.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND SEPTEMBER 30, 2018

General.

Net income was $9.9 million, or $0.38 per diluted share, for the nine months ended September 30, 2019, compared to $12.6 million, or $0.43 per diluted share, for the same period in 2018. Net interest income was $43.1 million and $45.2 million for the nine months ended September 30, 2019 and 2018, respectively.

Net Interest and Dividend Income.

The following tables set forth the information relating to our average balance and net interest income for the nine months ended September 30, 2019 and 2018, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.

	Nine Months Ended September 30,
	2019								2018
	Average					Average Yield/			Average					Average Yield/
	Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans⁽¹⁾⁽²⁾	$	1,704,173	$	55,857			4.38	%	$	1,658,094	$	53,047			4.28	%
Securities⁽²⁾		249,009		4,801			2.58			272,844		5,422			2.66
Other investments - at cost		15,811		638			5.40			17,489		631			4.82
Short-term investments⁽³⁾		12,834		185			1.93			7,817		83			1.42
Total interest-earning assets		1,981,827		61,481			4.15			1,956,244		59,183			4.04
Total non-interest-earning assets		136,738								134,722
Total assets	$	2,118,565							$	2,090,966

LIABILITIES AND EQUITY:
Interest-bearing liabilities
Interest-bearing checking accounts	$	71,416		280			0.52		$	92,718		261			0.38
Savings accounts		125,886		111			0.12			141,314		129			0.12
Money market accounts		398,189		1,798			0.60			417,724		1,383			0.44
Time deposit accounts		673,492		10,601			2.10			580,243		6,394			1.47
Total interest-bearing deposits		1,268,983		12,790			1.35			1,231,999		8,167			0.89
Short-term borrowings and long-term debt		238,837		5,234			2.93			283,302		5,442			2.57
Total interest-bearing liabilities		1,507,820		18,024			1.60			1,515,301		13,609			1.20
Non-interest-bearing deposits		358,839								317,296
Other non-interest-bearing liabilities		22,574								16,460
Total non-interest-bearing liabilities		381,413								333,756

Total liabilities		1,889,233								1,849,057
Total equity		229,332								241,909
Total liabilities and equity	$	2,118,565							$	2,090,966
Less: Tax-equivalent adjustment⁽²⁾				(402	)							(382	)
Net interest and dividend income			$	43,055							$	45,192
Net interest rate spread							2.52	%							2.82	%
Net interest rate spread, on a tax equivalent basis⁽⁴⁾							2.55	%							2.84	%
Net interest margin							2.90	%							3.09	%
Net interest margin, on a tax equivalent basis⁽⁵⁾							2.93	%							3.11	%
Ratio of average interest-earning assets to average interest-bearing liabilities							131.44	%							129.10	%

(1)	Loans, including non-accrual loans, are net of deferred loan origination costs, unadvanced funds and the 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 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported in the consolidated statements of operations.

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

(4)	Net interest rate spread, on a tax-equivalent basis, represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. See “Explanation of Use of Non-GAAP Financial Measurements”.

(5)	Net interest margin, on a tax-equivalent basis, represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. See “Explanation of Use of Non-GAAP Financial Measurements”.

Rate/Volume Analysis.

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.

	Nine Months Ended September 30, 2019 compared to Nine Months Ended September 30, 2018
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest-earning assets	(In thousands)
Loans ⁽¹⁾	$	1,474		$	1,336		$	2,810
Securities ⁽¹⁾		(474	)		(147	)		(621	)
Other investments - at cost		(61	)		68			7
Short-term investments		53			49			102
Total interest-earning assets		992			1,306			2,298

Interest-bearing liabilities
Interest-bearing checking accounts		(60	)		79			19
Savings accounts		(14	)		(4	)		(18	)
Money market accounts		(65	)		480			415
Time deposit accounts		1,028			3,179			4,207
Short-term borrowing and long-term debt		(854	)		646			(208	)
Total interest-bearing liabilities		35			4,380			4,415
Change in net interest and dividend income	$	957		$	(3,074	)	$	(2,117	)

(1)

Securities, loan income and change in net interest and dividend income are presented on a tax-equivalent basis using a tax rate of 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest income.

During the nine months ended September 30, 2019, net interest income decreased $2.1 million, or 4.7%, to $43.1 million, compared to $45.2 million for the nine months ended September 30, 2018. The decrease in net interest income was due to an increase in interest expense of $4.4 million, or 32.4%, partially offset by an increase of $2.3 million, or 3.9%, in interest and dividend income. The increase in interest expense was primarily due to the increase in interest expense on deposits of $4.6 million, or 56.6%, primarily time deposits, while interest expense on FHLB borrowings decreased $208,000, or 3.8%. Net interest income for the nine months ended September 30, 2018 included $1.1 million in favorable purchase accounting adjustments primarily due to the full payoff of a purchase credit impaired loan from Chicopee, compared to $97,000 in positive purchase accounting adjustments for the nine months ended September 30, 2019. During the nine months ended September 30, 2018, the Company also reported a prepayment penalty fee of $279,000, compared to $67,000 during the nine months ended September 30, 2019. Excluding these adjustments, interest and dividend income increased $3.2 million, or 5.5%, offset by a $4.2 million, or 30.0%, increase in interest expense.

The net interest margin for the nine months ended September 30, 2019 was 2.90%, compared to 3.09% during the nine months ended September 30, 2018. The net interest margin, on a tax-equivalent basis, was 2.93% for the nine months ended September 30, 2019, compared to 3.11% for the nine months ended September 30, 2018.

The decrease in net interest margin was largely due to a decrease in purchase accounting adjustments from a positive adjustment of $1.1 million during the nine months ended September 30, 2018, compared to a positive adjustment of $97,000 during the nine months ended September 30, 2019. The result was a decrease of 12 basis points on the net interest margin. Prepayment penalties decreased $212,000, from $279,000 during the nine months ended September 30, 2018 to $67,000 during the nine months ended September 30, 2019, which further decreased the net interest margin by two basis points. After these adjustments, the adjusted net interest margin decreased from 3.00% during the three months ended September 30, 2018 to 2.89% during the nine months ended September 30, 2019.

The average yield on interest-earning assets increased 11 basis points from 4.04% for the nine months ended September 30, 2018 to 4.15% for the nine months ended September 30, 2019. Excluding the purchase accounting adjustments and the prepayment penalties mentioned above, the average yield on interest-earning assets increased 17 basis points from 3.98% for the nine months ended September 30, 2018 to 4.15% for the nine months ended September 30, 2019, respectively. During the nine months ended September 30, 2019, the average cost of funds increased 40 basis points from 1.20% for the nine months ended September 30, 2018 to 1.60% for the nine months ended September 30, 2019. The average cost of core deposits, including non-interest-bearing demand deposits, increased seven basis points from 0.24% for the nine months ended September 30, 2018 to 0.31% for the nine months ended September 30, 2019, while the average cost of time deposits increased 63 basis points from 1.47% for the nine months ended September 30, 2018 to 2.10% during the same period in 2019. The average cost of borrowings increased 36 basis points from 2.57% for the nine months ended September 30, 2018 to 2.93% for the nine months ended September 20, 2019. For the nine months ended September 30, 2019, average demand deposits, an interest-free source of funds, increased $41.5 million, or 13.1%, from $317.3 million, or 20.5% of total average deposits, for the nine months ended September 30, 2018 to $358.8 million, or 22.0% of total average deposits, for the nine months ended September 30, 2019. During the nine months ended September 30, 2019, average interest-earning assets increased $25.6 million, or 1.3%, to $2.0 billion. The increase in average interest-earning assets was due to an increase in average loans of $46.1 million, or 2.8%, partially offset by a decrease in average securities of $23.8 million, or 8.7%.

Provision for Loan Losses.

The amount that we provided for loan losses during the nine months ended September 30, 2019 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio for the nine months ended September 30, 2019, described in the comparison of financial condition, include an increase in commercial real estate loans. After evaluating these factors, we recorded a provision of $1.7 million for loan losses for the nine months ended September 30, 2019, compared to $1.6 million for the same period in 2018.

The Company recorded net charge-offs of $456,000 for the nine months ended September 30, 2019, as compared to net charge-offs of $196,000 for the nine months ended September 30, 2018. During the nine months ended September 30, 2019, the Company recorded charge-offs of $1.4 million, compared to $653,000 during the same period in 2018. During the nine months ended September 30, 2019, the Company also recorded recoveries of $937,000, primarily due to a partial recovery of $812,000 related to a single commercial real estate loan previously charged-off in 2010.

During the nine months ended September 30, 2018, the Company recorded net charge-offs of $196,000 comprised of charge-offs of $653,000, partially offset by recoveries of $457,000.

The allowance for loan losses was $13.3 million at September 30, 2019 and $12.1 million at December 31, 2018. The allowance for loan losses was 0.76% and 0.71% of total loans at September 30, 2019 and December 31, 2018, respectively.

Non-interest Income.

For the nine months ended September 30, 2019, non-interest income of $7.3 million increased $305,000, or 4.4%, compared to $7.0 million for the nine months ended September 30, 2018. Service charges and fees increased $334,000, or 6.5%, and other income increased $139,000, or 106.1%, primarily due to swap fees on commercial real estate loans. During the nine months ended September 30, 2019, service charges and fees included $110,000 in non-recurring interchange fee income. During the nine months ended September 30, 2019, the Company reported unrealized gains on marketable equity securities of $194,000, compared to unrealized losses of $190,000 during the nine months ended September 30, 2018 as well as a decrease in realized losses on the sale of securities of $238,000, or 95.2%, during the same period. During the nine months ended September 30, 2018, the Company reported a $48,000 gain on the sale of other real estate owned (“OREO”) and a $715,000 net gain on BOLI. Excluding the net gain on BOLI, OREO and the realized and unrealized security losses discussed above, non-interest income increased $446,000, or 6.7%, for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.

Non-interest Expense.

For the nine months ended September 30, 2019, non-interest expense increased $1.4 million, or 3.9%, to $35.9 million, or 2.27% of average assets, compared to $34.5 million, or 2.21% of average assets for the nine months ended September 30, 2018. The increase in non-interest expense was primarily due to an increase in salaries and benefits of $1.0 million, or 5.1%, an increase in other non-interest expenses of $216,000, or 4.1%, an increase in occupancy expense of $165,000, or 5.5%, an increase in data processing of $120,000, or 6.1%, an increase in an increase in furniture and equipment of $107,000, or 9.3%, and an increase in advertising expense of $45,000, or 4.3%. These increases were partially offset by a decrease in FDIC insurance expense of $46,000, or 9.9%, and a decrease in professional fees of $249,000, or 11.8%. For the nine months ended September 30, 2019, the efficiency ratio was 71.6%, compared to 66.6% for the nine months ended September 30, 2018. The adjusted efficiency ratio, excluding purchase account adjustments and prepayment penalties, was 71.8% for the nine months ended September 30, 2019, compared to 68.4% for the nine months ended September 30, 2018.

Income Taxes.

The effective tax rate for the nine months ended September 30, 2019 and September 30, 2018 was 22.4% and 21.7%, respectively.

Explanation of Use of Non-GAAP Financial Measurements.

We believe that it is common practice in the banking industry to present interest income and related yield information on tax-exempt loans and securities on a tax-equivalent basis and that such information is useful to investors because it facilitates comparisons among financial institutions. However, the adjustment of interest income and yields on tax-exempt loans and securities to a tax-equivalent amount includes financial information that is not in compliance with GAAP. A reconciliation from GAAP to non-GAAP is provided below.

	Three Months Ended September 30,										Nine Months Ended September 30,
	2019					2018					2019					2018
	(Dollars in thousands)										(Dollars in thousands)
	Interest		Average Yield			Interest		Average Yield			Interest		Average Yield			Interest		Average Yield
Loans (no tax adjustment)	$	19,111		4.36	%	$	17,577		4.15	%	$	55,471		4.35	%	$	52,684		4.25	%
Tax-equivalent adjustment ⁽¹⁾		133					113					386					363
Loans (tax-equivalent basis)	$	19,244		4.39	%	$	17,690		4.17	%	$	55,857		4.38	%	$	53,047		4.28	%

Securities (no tax adjustment)	$	1,465		2.43	%	$	1,766		2.66	%	$	4,785		2.57	%	$	5,403		2.65	%
Tax-equivalent adjustment ⁽¹⁾		5					6					16					19
Securities (tax-equivalent basis)	$	1,470		2.44	%	$	1,772		2.67	%	$	4,801		2.58	%	$	5,422		2.66	%

Net interest income (no tax adjustment)	$	14,528				$	14,605				$	43,055				$	45,192
Tax-equivalent adjustment ⁽¹⁾		138					119					402					382
Net interest income (tax-equivalent basis)	$	14,666				$	14,724				$	43,457				$	45,574

Interest rate spread (no tax adjustment)				2.48	%				2.64	%				2.52	%				2.82	%
Net interest margin (no tax adjustment)				2.88	%				2.94	%				2.90	%				3.09	%

(1)

The tax equivalent adjustment is based upon a 21% tax rate.

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 FHLB based on eligible collateral of loans and securities.

At September 30, 2019 and December 31, 2018, outstanding borrowings from the FHLB were $240.7 million and $267.3 million, respectively. At September 30, 2019, we had $232.7 million in available borrowing capacity with the FHLB. We have the ability to increase our borrowing capacity with the FHLB by pledging investment securities or additional loans. In addition, we have available lines of credit of $15.0 million and $50.0 million with other correspondent banks. Interest rates on these lines are determined and reset on a daily basis by each respective bank. At September 30, 2019 and December 31, 2018, we did not have an outstanding balance under these lines. 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.

At September 30, 2019, we exceeded each of the applicable regulatory capital requirements. As of September 30, 2019, the most recent notification from the Office of Comptroller of the Currency 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, Common Equity 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 would change our category.

	Actual					Minimum For Capital Adequacy Purpose					Minimum To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
September 30, 2019
Total Capital (to Risk Weighted Assets):
Consolidated	$	236,840		14.01	%	$	135,228		8.00	%		N/A		N/A
Bank		224,329		13.29			135,032		8.00		$	168,790		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		223,569		13.23			101,421		6.00			N/A		N/A
Bank		211,057		12.50			101,274		6.00			135,032		8.00
Common Equity Tier 1 Capital (to Risk Weighted Assets)
Consolidated		223,569		13.23			76,066		4.50			N/A		N/A
Bank		211,057		12.50			75,955		4.50			109,713		6.50
Tier 1 Leverage Ratio (to Adjusted Average Assets):
Consolidated		223,569		10.51			85,119		4.00			N/A		N/A
Bank		211,057		9.93			85,044		4.00			106,304		5.00

December 31, 2018
Total Capital (to Risk Weighted Assets):
Consolidated	$	247,361		14.87	%	$	133,089		8.00	%		N/A		N/A
Bank		235,569		14.18			132,892		8.00		$	166,115		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		235,308		14.14			99,817		6.00			N/A		N/A
Bank		223,516		13.46			99,669		6.00			132,892		8.00
Common Equity Tier 1 Capital (to Risk Weighted Assets)
Consolidated		235,308		14.14			74,862		4.50			N/A		N/A
Bank		223,516		13.46			74,752		4.50			107,974		6.50
Tier 1 Leverage Ratio (to Adjusted Average Assets):
Consolidated		235,308		11.14			84,497		4.00			N/A		N/A
Bank		223,516		10.59			84,465		4.00			105,581		5.00

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. The following table summarizes the contractual obligations and credit commitments at September 30, 2019:

	Amounts Due Within 1 Year		Amounts Due After 1 Year But Within 3 Years		Amounts Due After 3 Year But Within 5 Years		Amounts Due After 5 Years		Total
	(In thousands)

Borrowings
Federal Home Loan Bank	$	134,306	$	105,074	$	1,301	$	—	$	240,681

Credit Commitments:
Available lines of credit		183,257		—		—		78,066		261,323
Other loan commitments		70,432		26,671		—		—		97,103
Letters of credit		9,712		363		301		693		11,069
Total credit commitments		263,401		27,034		301		78,759		369,495

Other Obligations
Vendor Contracts		3,356		6,712		6,712		1,388		18,168

Total Obligations	$	401,063	$	138,820	$	8,314	$	80,147	$	628,344

Off-Balance Sheet Arrangements.

We do not have any off-balance sheet arrangements 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.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our assessment of our sensitivity to market risk since its presentation in our 2018 Annual Report. Please refer to Item 7A of the 2018 Annual Report for additional information.

ITEM 4: CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.

Management, including our Chief Executive Officer and Chief Financial Officer, 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 the evaluation, the Chief Executive Officer and Chief Financial Officer 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 Securities Exchange Act of 1934, as amended, is (i) 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, as appropriate to allow timely discussion regarding required disclosure.

Changes in Internal Control Over Financial Reporting.

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 have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We are subject to claims and legal actions in the ordinary course of business. We believe that all such claims and actions currently pending against us, if any, are either adequately covered by insurance or would not have a material adverse effect on us if decided in a manner unfavorable to us.

ITEM 1A. RISK FACTORS.

For a summary of risk factors relevant to our operations, see Part 1, Item 1A, “Risk Factors” in our 2018 Annual Report. There are no material changes in the risk factors relevant to our operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The following table sets forth information with respect to purchases made by us of our common stock during the three months ended September 30, 2019.

Period	Total Number of Shares Purchased		Average Price Paid per Share ($)		Total Number of Shares Purchased as Part of Publicly Announced Programs		Maximum Number of Shares that May Yet Be Purchased Under the Program (1)
July 1 - 31, 2019		50,039		9.40		50,039		1,218,553
August 1 - 31, 2019		64,285		8.84		64,285		1,154,268
September 1 – 30, 2019		27,402		8.85		27,402		1,126,866
Total		141,726		9.04		141,726		1,126,866

(1)

On January 29, 2019, the Board of Directors authorized an additional stock repurchase program under which the Company may purchase up to 2,814,200 shares, or 10%, of its outstanding common stock (the “2019 Plan”). As of September 30, 2019, the Company has repurchased 1,687,334 shares under the 2019 Plan.

There were no sales by us of unregistered securities during the three months ended September 30, 2019.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURE.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

Exhibit Number		Description
2.1		Agreement and Plan of Merger, dated as of April 4, 2016, by and between Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) and Chicopee Bancorp, Inc. (incorporated by reference to Exhibit 2.1 of the Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on April 7, 2016).
3.2		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 No. 333-137024 on Form S-1 filed with the Securities and Exchange Commission on August 31, 2006).
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 quarterly report on Form 10-Q of Western New England Bancorp, Inc. for the quarter ended September 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.

______________________________

* Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 7, 2019.

	Western New England Bancorp, Inc.

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

	By:	/s/ Guida R. Sajdak
		Guida R. Sajdak
		Executive Vice President and Chief Financial Officer