Western New England Bancorp, Inc. - Quarter Report: 2020 June (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 June 30, 2020

☐

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

For the transition period from ___________ to ___________

Commission File Number: 001-16767

Western New England Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Massachusetts		73-1627673
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

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 August 3, 2020 the registrant had 25,644,334 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)	1

	Consolidated Balance Sheets – June 30, 2020 and December 31, 2019	1

	Consolidated Statements of Net Income – Three and Six Months Ended June 30, 2020 and 2019	2

	Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2020 and 2019	3

	Consolidated Statements of Changes in Shareholders’ Equity – Three and Six Months Ended June 30, 2020 and 2019	4

	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2020 and 2019	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	52

Item 4.	Controls and Procedures	52

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 3.	Defaults upon Senior Securities	53

Item 4.	Mine Safety Disclosures	53

Item 5.	Other Information	53

Item 6.	Exhibits	54

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” with respect to the Company’s financial condition, liquidity, results of operations, future performance, business, measures being taken in response to the coronavirus disease 2019 (“COVID-19”) pandemic and the impact of COVID-19 on the Company’s business. Forward-looking statements 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:

•

the duration and scope of the COVID-19 pandemic and the local, national and global impact of COVID-19;

•

actions governments, businesses and individuals take in response to the COVID-19 pandemic;

•

the pace of recovery when the COVID-19 pandemic subsides;

•

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 Act 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)

	June 30,			December 31,
	2020			2019
ASSETS
Cash and due from banks	$	18,308		$	16,640
Federal funds sold		1,636			1,635
Interest-bearing deposits and other short-term investments		42,888			6,466
Cash and cash equivalents		62,832			24,741

Securities available-for-sale, at fair value		224,509			227,708
Marketable equity securities, at fair value		6,941			6,737
Federal Home Loan Bank stock and other restricted stock, at cost		10,870			14,477
Loans, net of allowance for loan losses of $18,253 and $14,102 at June 30, 2020 and December 31, 2019, respectively		1,981,280			1,761,932
Premises and equipment, net		24,685			23,763
Accrued interest receivable		6,972			5,313
Bank-owned life insurance		71,972			71,051
Deferred tax asset, net		8,086			9,161
Goodwill		12,487			12,487
Core deposit intangible		3,125			3,312
Other assets		21,147			20,794
Total Assets	$	2,434,906		$	2,181,476

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest-bearing	$	536,600		$	393,303
Interest-bearing		1,411,301			1,284,561
Total deposits		1,947,901			1,677,864

Short-term borrowings		35,000			35,000
Long-term debt		188,164			205,515
Other liabilities		34,321			31,073
Total liabilities		2,205,386			1,949,452

SHAREHOLDERS' EQUITY:
Preferred stock - $0.01 par value, 5,000,000 shares authorized, none outstanding at June 30, 2020 and December 31, 2019		—			—
Common stock - $0.01 par value, 75,000,000 shares authorized, 25,644,334 shares issued and outstanding at June 30, 2020; 26,557,981 shares issued and outstanding at December 31, 2019		256			266
Additional paid-in capital		157,132			164,248
Unearned compensation - ESOP		(4,286	)		(4,574	)
Unearned compensation - Equity Incentive Plan		(1,655	)		(1,124	)
Retained earnings		83,738			82,176
Accumulated other comprehensive loss		(5,665	)		(8,968	)
TOTAL SHAREHOLDERS’ EQUITY		229,520			232,024
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	2,434,906		$	2,181,476

See accompanying notes to unaudited consolidated financial statements.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME – UNAUDITED

(Dollars in thousands, except per share data)


	Three Months					Six Months
	Ended June 30,					Ended June 30,
	2020		2019			2020		2019
Interest and dividend income:
Residential and commercial real estate loans	$	15,133	$	15,146		$	30,787	$	30,117
Commercial and industrial loans		3,790		3,071			6,797		6,074
Consumer loans		76		85			162		169
Debt securities, taxable		1,117		1,571			2,462		3,201
Debt securities, tax-exempt		17		17			35		37
Marketable equity securities		31		42			67		82
Other investments		157		210			339		446
Short-term investments		9		73			71		149
Total interest and dividend income		20,330		20,215			40,720		40,275

Interest expense:
Deposits		3,817		4,367			8,053		8,336
Long-term debt		874		1,051			1,888		2,190
Short-term borrowings		547		596			1,134		1,222
Total interest expense		5,238		6,014			11,075		11,748
Net interest and dividend income		15,092		14,201			29,645		28,527

Provision for loan losses		2,450		350			4,550		400
Net interest and dividend income after provision for loan losses		12,642		13,851			25,095		28,127

Non-interest income:
Service charges and fees		1,559		1,850			3,333		3,483
Income from bank-owned life insurance		480		478			921		903
Gain (loss) on available-for-sale securities, net		13		(96	)		36		(61	)
Unrealized gain on marketable equity securities, net		35		79			137		149
Other income		—		206			185		214
Total non-interest income		2,087		2,517			4,612		4,688

Non-interest expense:
Salaries and employees benefits		7,167		6,876			14,339		13,656
Occupancy		1,072		998			2,239		2,169
Furniture and equipment		363		427			754		832
Data processing		707		702			1,422		1,367
Professional fees		637		607			1,236		1,312
FDIC insurance assessment		288		236			439		412
Advertising		219		370			471		734
Other expenses		1,792		1,924			3,659		3,681
Total non-interest expense		12,245		12,140			24,559		24,163
Income before income taxes		2,484		4,228			5,148		8,652
Income tax provision		463		971			1,047		1,965
Net income	$	2,021	$	3,257		$	4,101	$	6,687

Earnings per common share:
Basic earnings per share	$	0.08	$	0.13		$	0.16	$	0.25
Weighted average shares outstanding		24,927,619		26,047,187			25,246,378		26,539,618
Diluted earnings per share	$	0.08	$	0.12		$	0.16	$	0.25
Weighted average diluted shares outstanding		24,927,619		26,160,169			25,272,769		26,653,929

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						Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019

Net income	$	2,021		$	3,257		$	4,101		$	6,687

Other comprehensive income (loss):
Unrealized gains on available-for-sale securities:
Unrealized holding gains		399			3,360			4,549			7,694
Reclassification adjustment for net (gains) losses realized in income ⁽¹⁾		(13	)		96			(36	)		61
Unrealized gains		386			3,456			4,513			7,755
Tax effect		(114	)		(867	)		(1,113	)		(1,980	)
Net-of-tax amount		272			2,589			3,400			5,775

Cash flow hedges:
Change in fair value of derivatives used for cash flow hedges		(117	)		(583	)		(1,240	)		(911	)
Reclassification adjustment for loss realized in interest expense ⁽²⁾		254			84			417			152
Reclassification adjustment for termination fee realized in interest expense ⁽³⁾		225			266			491			530
Unrealized gains (losses) on cash flow hedges		362			(233	)		(332	)		(229	)
Tax effect		(102	)		65			93			64
Net-of-tax amount		260			(168	)		(239	)		(165	)

Defined benefit pension plan:
Amortization of defined benefit plan actuarial loss⁽⁴⁾		98			32			197			64
Tax effect		(27	)		(9	)		(55	)		(18	)
Net-of-tax amount		71			23			142			46

Other comprehensive income		603			2,444			3,303			5,656

Comprehensive income	$	2,624		$	5,701		$	7,404		$	12,343


(1) Realized gains and losses on available-for-sale securities are recognized as a component of non-interest income. The tax effects applicable to net realized gains and losses were $3,000 and $(17,000) for the three months ended June 30, 2020 and 2019, respectively. The tax effects applicable to net realized gains and losses were $8,000 and $(7,000) for the six months ended June 30, 2020 and 2019, respectively.
(2) Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term debt. Income tax effects associated with the reclassification adjustments were $71,000 and $24,000 for the three months ended June 30, 2020 and 2019, respectively. Income tax effects associated with the reclassification adjustments were $117,000 and $43,000 for the six months ended June 30, 2020 and 2019, respectively.
(3) Termination fee realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term debt. Income tax effects associated with the reclassification adjustments were $63,000 and $75,000 for the three months ended June 30, 2020 and 2019, respectively. Income tax effects associated with the reclassification adjustments were $138,000 and $149,000 for the six months ended June 30, 2020 and 2019, respectively.
(4) Amounts represent the reclassification of defined benefit plan amortization and have been recognized as a component of non-interest expense. Income tax effects associated with the reclassification adjustments were $27,000 and $9,000 for the three months ended June 30, 2020 and 2019, respectively. Income tax effects associated with the reclassification adjustments were $55,000 and $18,000 for the six months ended June 30, 2020 and 2019, respectively.

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 SIX MONTHS ENDED JUNE 30, 2019 AND 2018

(Dollars in thousands, except share data)


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

BALANCE AT DECEMBER 31, 2019		26,557,981		$	266		$	164,248		$	(4,574	)	$	(1,124	)	$	82,176		$	(8,968	)	$	232,024
Comprehensive income		—			—			—			—			—			2,080			2,700			4,780
Common stock held by ESOP committed to be released (85,101 shares)		—			—			47			144			—			—			—			191
Share-based compensation - equity incentive plan		—			—			—			—			182			—			—			182
Forfeited equity incentive plan shares reissued (18,645 shares)		—			—			(186	)		—			186			—			—			—
Common stock repurchased		(1,015,055	)		(11	)		(8,069	)		—			—			—			—			(8,080	)
Issuance of common stock in connection with equity incentive plan		101,408			1			1,093			—			(1,094	)		—			—			—
Cash dividends declared and paid on common stock ($0.05 per share)		—			—			—			—			—			(1,288	)		—			(1,288	)
BALANCE AT MARCH 31, 2020		25,644,334		$	256		$	157,133		$	(4,430	)	$	(1,850	)	$	82,968		$	(6,268	)	$	227,809
Comprehensive income		—			—			—			—			—			2,021			603			2,624
Common stock held by ESOP committed to be released (85,101 shares)		—			—			(1	)		144			—			—			—			143
Share-based compensation - equity incentive plan		—			—			—			—			195			—			—			195
Cash dividends declared and paid on common stock ($0.05 per share)		—			—			—			—			—			(1,251	)		—			(1,251	)
BALANCE AT JUNE 30, 2020		25,644,334		$	256		$	157,132		$	(4,286	)	$	(1,655	)	$	83,738		$	(5,665	)	$	229,520

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 SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(Dollars in thousands, except share data)


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

See accompanying notes to unaudited consolidated financial statements.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)


	Six Months Ended June 30,
	2020			2019
OPERATING ACTIVITIES:
Net income	$	4,101		$	6,687
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,550			400
Depreciation and amortization of premises and equipment		996			1,056
(Accretion) amortization of purchase accounting adjustments, net		(8	)		78
Amortization of core deposit intangible		187			188
Net amortization of premiums and discounts on securities and mortgage loans		1,291			1,004
Share-based compensation expense		377			393
ESOP expense		334			419
Net change in unrealized gains on marketable equity securities		(137	)		(149	)
Net (gain) loss on available-for-sale securities		(36	)		61
Income from bank-owned life insurance		(921	)		(903	)
Net change in:
Accrued interest receivable		(1,659	)		159
Other assets		3,169			(7,688	)
Other liabilities		(408	)		8,717
Net cash provided by operating activities		11,836			10,422
INVESTING ACTIVITIES:
Securities, available for sale:
Purchases		(51,860	)		(24,864	)
Proceeds from redemptions and sales		10,792			37,735
Proceeds from calls, maturities, and principal collections		47,587			12,527
Loan originations and principal payments, net		(224,050	)		(25,524	)
Redemption of Federal Home Loan Bank of Boston stock		3,607			2,939
Purchases of premises and equipment		(2,004	)		(744	)
Proceeds from sale of premises and equipment		66			27
Net cash (used in) provided by investing activities		(215,862	)		2,096
FINANCING ACTIVITIES:
Net increase in deposits		270,061			48,606
Net change in short-term borrowings		—			(9,250	)
Repayment of long-term debt		(43,742	)		(32,286	)
Proceeds from long-term debt		26,417			—
Cash dividends paid		(2,539	)		(2,688	)
Common stock repurchased		(8,080	)		(18,065	)
Issuance of common stock in connection with stock option exercises		—			64
Net cash provided by (used in) financing activities		242,117			(13,619	)

NET CHANGE IN CASH AND CASH EQUIVALENTS:		38,091			(1,101	)
Beginning of period		24,741			26,789
End of period	$	62,832		$	25,688

Supplemental cash flow information:
Net change in cash due to broker for common stock repurchased	$	—		$	(221	)
Interest paid		10,523			11,632
Taxes paid		1,860			1,888

See the accompanying notes to unaudited consolidated financial statements.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2020

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 25 banking offices in Hampden and Hampshire counties in western Massachusetts and Hartford and Tolland counties in northern Connecticut, and its primary sources of revenue are interest income from loans as well as interest income from investment securities. The Bank’s Huntington, Massachusetts branch opened on February 25, 2020 and its Bloomfield, Connecticut branch opened on July 6, 2020. In addition, the Bank’s Financial Services Center in West Hartford, Connecticut, opened on July 21, 2020. The West Hartford Financial Services Center serves as the Company’s Connecticut hub, housing Commercial Lending, Cash Management and a Mortgage Loan Officer (“MLO”).

Wholly-owned Subsidiaries of the Bank. 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 June 30, 2020, 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 six months ended June 30, 2020 are not necessarily indicative of the results of operations for the year ending December 31, 2020. 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, 2019, included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 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 certain performance-based restricted stock awards and are determined using the treasury stock method. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations.

Earnings per common share for the three and six months ended June 30, 2020 and 2019 have been computed based on the following:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019
	(In thousands, except per share data)

Net income applicable to common stock	$	2,021		$	3,257		$	4,101		$	6,687

Average number of common shares issued		25,644			26,836			25,969			27,332
Less: Average unallocated ESOP Shares		(590	)		(678	)		(601	)		(689	)
Less: Average unvested equity incentive plan shares		(126	)		(111	)		(121	)		(104	)

Average number of common shares outstanding used to calculate basic earnings per common share		24,928			26,047			25,247			26,539

Effect of dilutive equity incentive plan		—			41			—			39
Effect of dilutive stock options		—			72			26			75

Average number of common shares outstanding used to calculate diluted earnings per common share		24,928			26,160			25,273			26,653

Basic earnings per share	$	0.08		$	0.13		$	0.16		$	0.25
Diluted earnings per share	$	0.08		$	0.12		$	0.16		$	0.25

Anti-dilutive shares ⁽¹⁾		218			—			109			—

(1)

Shares outstanding but not included because the impact of these shares would be anti-dilutive to the earnings per share calculation for the periods presented.

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:

	June 30, 2020			December 31, 2019
	(In thousands)

Net unrealized gains (losses) on securities available-for-sale	$	4,120		$	(393	)
Tax effect		(1,042	)		71
Net-of-tax amount		3,078			(322	)

Fair value of derivatives used for cash flow hedges		(2,596	)		(1,773	)
Termination fee on cancelled cash flow hedges		(1,035	)		(1,526	)
Total derivatives		(3,631	)		(3,299	)
Tax effect		1,021			928
Net-of-tax amount		(2,610	)		(2,371	)

Unrecognized actuarial loss on the defined benefit plan		(8,531	)		(8,728	)
Tax effect		2,398			2,453
Net-of-tax amount		(6,133	)		(6,275	)

Accumulated other comprehensive loss	$	(5,665	)	$	(8,968	)

The following table presents changes in accumulated other comprehensive loss for the periods ended June 30, 2020 and 2019 by component:

	Securities			Derivatives			Defined Benefit Plan			Accumulated Other Comprehensive Loss
	(In thousands)
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 (loss) income		5,775			(165	)		46			5,656
Balance at June 30, 2019	$	(1,618	)	$	(2,935	)	$	(3,200	)	$	(7,753	)

Balance at December 31, 2019	$	(322	)	$	(2,371	)	$	(6,275	)	$	(8,968	)
Current-period other comprehensive (loss) income		3,400			(239	)		142			3,303
Balance at June 30, 2020	$	3,078		$	(2,610	)	$	(6,133	)	$	(5,665	)

4. SECURITIES

Available-for-sale securities are summarized as follows:


	June 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available-for-sale securities:
Debt securities:
State and municipal bonds	$	2,713	$	128	$	—		$	2,841
Corporate bonds		7,777		258		(165	)		7,870
Total debt securities		10,490		386		(165	)		10,711

Mortgage-backed securities:
Government-sponsored mortgage-backed securities		184,960		3,977		(76	)		188,861
U.S. government guaranteed mortgage-backed securities		24,939		120		(122	)		24,937
Total mortgage-backed securities		209,899		4,097		(198	)		213,798

Total available-for-sale	$	220,389	$	4,483	$	(363	)	$	224,509


	December 31, 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	$	—	$	(136	)	$	20,014
State and municipal bonds		2,718		95		—			2,813
Corporate bonds		7,800		88		(22	)		7,866
Total debt securities		30,668		183		(158	)		30,693

Mortgage-backed securities:
Government-sponsored mortgage-backed securities		186,236		780		(1,015	)		186,001
U.S. government guaranteed mortgage-backed securities		11,197		33		(216	)		11,014
Total mortgage-backed securities		197,433		813		(1,231	)		197,015

Total available-for-sale	$	228,101	$	996	$	(1,389	)	$	227,708

At June 30, 2020, mortgage-backed securities with a fair value $79.3 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 June 30, 2020, 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.

	June 30, 2020
	Amortized Cost		Fair Value
	(In thousands)
Available-for-sale securities:
Debt securities:
Due after one year through five years	$	8,588	$	8,689
Due after five years through ten years		322		365
Due after ten years		1,580		1,657
Total debt securities		10,490		10,711
Mortgage-backed securities		209,899		213,798
Total available-for-sale securities	$	220,389	$	224,509

Gross realized gains and losses on sales of available-for-sale securities for the three and six months ended June 30, 2020 and 2019 are as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019
	(In thousands)

Gross gains realized	$	96		$	64		$	244		$	99
Gross losses realized		(83	)		(160	)		(208	)		(160	)
Net loss realized	$	13		$	(96	)	$	36		$	(61	)

Proceeds from the sale and redemption of available-for-sale securities amounted to $10.8 million and $37.7 million for the six months ended June 30, 2020 and 2019, respectively.

Information pertaining to securities with gross unrealized losses at June 30, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

	June 30, 2020
	Less Than 12 Months				Over 12 Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
	(In thousands)

Available-for-sale:
Corporate bonds	$	165	$	2,881	$	—	$	—
Government sponsored mortgage backed securities		25		7,932		51		2,431
U.S. government guaranteed mortgage-backed securities		31		15,791		91		3,033
Total available-for-sale	$	221	$	26,604	$	142	$	5,464

	December 31, 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	$	122	$	42,834	$	893	$	70,581
U.S. government guaranteed mortgage-backed securities		13		2,783		203		4,688
Corporate bonds		16		1,623		6		3,046
Government-sponsored enterprise obligations		126		14,524		10		1,490
Total available-for-sale	$	277	$	61,764	$	1,112	$	79,805

During the six months ended June 30, 2020 and year ended December 31, 2019, the Company did not record any fair value impairment charges on its investments. Management regularly reviews the portfolio for securities with unrealized losses. At June 30, 2020, 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

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

	June 30,			December 31,
	2020			2019
	(In thousands)
Commercial real estate	$	832,676		$	816,886
Residential real estate:
Residential 1-4 family		607,020			597,727
Home equity		103,611			102,517
Commercial and industrial
Paycheck protection program (“PPP”) loans		221,940			—
Commercial and industrial		231,052			248,893
Consumer		5,280			5,747
Total gross loans		2,001,579			1,771,770
Unamortized PPP loan fees		(5,969	)		—
Unearned premiums and deferred loan fees and costs, net		3,923			4,264
Allowance for loan losses		(18,253	)		(14,102	)
Net loans	$	1,981,280		$	1,761,932

There were no purchases of loans during the six months ended June 30, 2020 and year ended December 31, 2019.

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 June 30, 2020 and December 31, 2019, the Company was servicing commercial loans participated out to various other institutions totaling $37.7 million and $24.2 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. Under loan sale and servicing agreements with the investor, the Bank generally continues to service the residential real estate mortgages. The Bank pays the investor an agreed upon rate on the loan, which is less than the interest rate received from the borrower. The Bank retains the difference as a fee for servicing the residential real estate mortgages. The Bank capitalizes mortgage servicing rights at their fair value upon sale of the related loans, amortizes the asset over the estimated life of the serviced loan, and periodically assesses the asset for impairment. The significant assumptions used by a third party to estimate the fair value of capitalized servicing rights at June 30, 2020, include weighted average prepayment speed for the portfolio using the Public Securities Association Standard Prepayment Model (281 PSA), weighted average internal rate of return (12.06%), weighted average servicing fee (0.25%), and net cost to service loans ($85.11 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 June 30, 2020 and December 31, 2019, the Company was servicing residential mortgage loans owned by investors totaling $42.6 million and $48.2 million, respectively. Net service fee income of $12,000 and $26,000 was recorded for the six months ended June 30, 2020 and 2019, respectively, and is included in service charges and fees on the consolidated statements of net income.

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

	Three Months Ended June 30, 2020			Six Months Ended June 30, 2020
	(In thousands)

Balance at the beginning of period:	$	203		$	219
Capitalized mortgage servicing rights		—			—
Amortization		(17	)		(33	)
Balance at the end of period	$	186		$	186
Fair value at the end of period	$	186		$	186

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

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

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

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. The recent COVID-19 pandemic has put significant pressure on the local business community and increased unemployment. On March 23, 2020, the Governor of Massachusetts issued an emergency order requiring all businesses and organizations that do not provide COVID-19 essential services to close their physical workplaces and facilities to workers, customers and the public from March 24, 2020 until April 7, 2020, which was subsequently extended to May 18, 2020. Because of the mandated shutdowns, near the end of March 2020, a record number of individuals filed for unemployment benefits. Sectors that have been materially impacted include, but are not limited to: hospitality, retail, restaurant and food service, and fuel services. Beginning in March 2020, the Bank added a new qualitative factor category to the allowance calculation – “Economic Impact of COVID-19”. The allocation of additional reserves for the COVID-19 qualitative factor at June 30, 2020 was based upon an analysis of the loan portfolio that included identifying borrowers sensitive to the shutdown (i.e. accommodation and food service, recreation, construction, manufacturing, and wholesale & retail trade) as well as a general allocation for the negative economic outlook given the record number of unemployment benefits claims during the period. Excluding the COVID-19 qualitative factor category, there were no additional 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. The extent to which COVID-19 impacts our borrower’s ability to repay and therefore the classification of a loan as impaired is highly uncertain and cannot be predicted with confidence as it is highly dependent upon the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures.

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 six months ended June 30, 2020 and 2019 is as follows:

	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer			Unallocated			Total
	(In thousands)
Three Months Ended
Balance at March 31, 2019	$	5,205		$	3,571		$	2,954		$	144		$	5		$	11,879
Provision (credit)		(224	)		78			460			40			(4	)		350
Charge-offs		(103	)		(31	)		(456	)		(39	)		—			(629	)
Recoveries		812			1			2			8			—			823
Balance at June 30, 2019	$	5,690		$	3,619		$	2,960		$	153		$	1		$	12,423

Balance at March 31, 2020	$	7,780		$	4,172		$	3,640		$	239		$	6		$	15,837
Provision (credit)		2,561			(67	)		(58	)		6			8			2,450
Charge-offs		(70	)		(3	)		(19	)		(22	)		—			(114	)
Recoveries		—			65			1			14			—			80
Balance at June 30, 2020	$	10,271		$	4,167		$	3,564		$	237		$	14		$	18,253

Six Months Ended
Balance at December 31, 2018	$	5,260		$	3,556		$	3,114		$	135		$	(12	)	$	12,053
Provision (credit)		(200	)		186			334			67			13			400
Charge-offs		(219	)		(125	)		(494	)		(85	)		—			(923	)
Recoveries		849			2			6			36			—			893
Balance at June 30, 2019	$	5,690		$	3,619		$	2,960		$	153		$	1		$	12,423

Balance at December 31, 2019	$	6,807		$	3,920		$	3,183		$	203		$	(11	)	$	14,102
Provision (credit)		3,571			290			598			66			25			4,550
Charge-offs		(107	)		(109	)		(218	)		(59	)		—			(493	)
Recoveries		—			66			1			27			—			94
Balance at June 30, 2020	$	10,271		$	4,167		$	3,564		$	237		$	14		$	18,253

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)
June 30, 2020

Amount of allowance for impaired loans	$	—	$	—	$	—	$	—	$	—		$	—
Amount of allowance for non-impaired loans		10,271		4,167		3,564		237		14			18,253
Total allowance for loan losses	$	10,271	$	4,167	$	3,564	$	237	$	14		$	18,253

Impaired loans	$	13,098	$	3,322	$	5,049	$	35	$	—		$	21,504
Non-impaired loans		811,820		704,784		447,194		5,245		—			1,969,043
Impaired loans acquired with deteriorated credit quality		7,758		2,525		749		—		—			11,032
Total loans	$	832,676	$	710,631	$	452,992	$	5,280	$	—		$	2,001,579

December 31, 2019

Amount of allowance for impaired loans	$	—	$	—	$	—	$	—	$	—		$	—
Amount of allowance for non-impaired loans		6,807		3,920		3,183		203		(11	)		14,102
Total allowance for loan losses	$	6,807	$	3,920	$	3,183	$	203	$	(11	)	$	14,102

Impaired loans	$	3,457	$	3,575	$	588	$	42	$	—		$	7,662
Non-impaired loans		805,007		694,080		247,499		5,705		—			1,752,291
Impaired loans acquired with deteriorated credit quality		8,422		2,589		806		—		—			11,817
Total loans	$	816,886	$	700,244	$	248,893	$	5,747	$	—		$	1,771,770

Past Due and Non-accrual Loans.

The following tables present an age analysis of past due loans, excluding PPP 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)
June 30, 2020

Commercial real estate	$	1,664	$	1,210	$	3,287	$	6,161	$	826,515	$	832,676	$	3,903
Residential real estate:
Residential		2,296		517		901		3,714		603,306		607,020		4,352
Home equity		100		7		259		366		103,245		103,611		399
Commercial and industrial		877		252		651		1,780		229,272		231,052		1,711
Consumer		6		—		14		20		5,260		5,280		35

Total loans	$	4,943	$	1,986	$	5,112	$	12,041	$	1,767,598	$	1,779,639	$	10,400

December 31, 2019

Commercial real estate	$	2,784	$	1,234	$	2,637	$	6,655	$	810,231	$	816,886	$	3,843
Residential real estate:
Residential		2,574		683		1,433		4,690		593,037		597,727		4,548
Home equity		80		38		149		267		102,250		102,517		445
Commercial and industrial		1,356		645		148		2,149		246,744		248,893		1,003
Consumer		24		—		17		41		5,706		5,747		42

Total loans	$	6,818	$	2,600	$	4,384	$	13,802	$	1,757,968	$	1,771,770	$	9,881

Impaired Loans.

The following is a summary of impaired loans by class:


					Three Months Ended				Six Months Ended
	At June 30, 2020				June 30, 2020				June 30, 2020
	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	$	20,856	$	23,379	$	19,932	$	90	$	17,688	$	200
Residential real estate		5,404		6,578		5,545		25		5,618		39
Home equity		443		498		421		—		428		3
Commercial and industrial		5,798		8,188		3,645		19		2,544		76
Consumer		35		49		37		—		39		—
Total impaired loans	$	32,536	$	38,692	$	29,580	$	134	$	26,317	$	318


					Three Months Ended				Six Months Ended
	At December 31, 2019				June 30, 2019				June 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	$	11,879	$	13,914	$	17,213	$	168	$	17,035	$	299
Residential real estate		5,695		6,383		6,849		20		7,020		64
Home equity		469		539		402		—		409		—
Commercial and industrial		1,394		4,192		4,045		37		3,882		74
Consumer		42		56		49		—		53		—
Total impaired loans	$	19,479	$	25,084	$	28,558	$	225	$	28,399	$	437

(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 non-accrual impaired loans during the three and six months ended June 30, 2020 and 2019. 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 June 30, 2020, we loaned an additional $580,000 for one commercial and industrial loan classified as impaired. The loan proceeds were issued to fund ongoing operations in order to facilitate the sale of the real estate to a third party. In addition, as of June 30, 2020, we have $530,000 in unadvanced funds remaining for the one commercial and industrial loan classified as impaired mentioned above. 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 six months ended June 30, 2020 and 2019 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 specific allowance or a charge-off to the allowance. Non-performing TDRs are included in non-performing loans.

Loans modifications classified as TDRs during the three and six months ended June 30, 2020 and 2019 are included in the table below.

	Three Months Ended						Six Months Ended
	June 30, 2020						June 30, 2020
	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		5	$	4,884	$	4,884		5	$	4,884	$	4,884
Commercial and Industrial		9		4,354		4,354		9		4,523		4,523
Total		14	$	9,238	$	9,238		14	$	9,407	$	9,407

	Three Months Ended						Six Months Ended
	June 30, 2019						June 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		2	$	2,032	$	2,032
Commercial and Industrial		2		383		383		2		383		383
Total		4	$	2,415	$	2,415		4	$	2,415	$	2,415

During the three and six months ended June 30, 2020 and 2019, no TDRs defaulted (defined as 30 days or more past due) within 12 months of restructuring. There was $440,000 in charge-offs on TDRs during the three and six months ended June 30, 2019. There were no charge-offs on TDRs during the three and six months ended June 30, 2020.

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 June 30, 2020 and 2019.

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

Balance at December 31, 2019	$	20,689		$	15,909		$	4,780		$	4,092		$	11,817
Collections		(1,300	)		(922	)		(378	)		(170	)		(752	)
Dispositions		(238	)		(238	)		—			(205	)		—
Balance at June 30, 2020	$	19,151		$	14,749		$	4,402		$	3,717		$	11,032

	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		(1,454	)		(1,366	)		(88	)		(322	)		(1,044	)
Dispositions		(108	)		(108	)		—			(65	)		—
Balance at June 30, 2019	$	23,231		$	18,409		$	4,822		$	4,467		$	13,942

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.

On an annual basis, or more often if needed, we formally review the ratings on all commercial real estate and commercial and industrial loans. In addition, management utilizes delinquency reports, the criticized report and other loan reports to monitor credit quality. In addition, at least on an annual basis, 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. 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)
June 30, 2020
Pass (Rated 1 – 4)	$	725,191	$	601,580	$	103,049	$	414,845	$	5,245	$	1,849,910
Special Mention (Rated 5)		75,445		—		—		20,826		—		96,271
Substandard (Rated 6)		32,040		5,440		562		17,321		35		55,398
Total	$	832,676	$	607,020	$	103,611	$	452,992	$	5,280	$	2,001,579

December 31, 2019
Pass (Rated 1 – 4)	$	766,124	$	591,911	$	101,908	$	222,847	$	5,705	$	1,688,495
Special Mention (Rated 5)		23,138		—		—		2,796		—		25,934
Substandard (Rated 6)		27,624		5,816		609		23,250		42		57,341
Total	$	816,886	$	597,727	$	102,517	$	248,893	$	5,747	$	1,771,770

6. GOODWILL AND OTHER INTANGIBLES

Goodwill.

At June 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 six months ended June 30, 2020 or the year ended December 31, 2019. 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 $187,000 for the three and six months ended June 30, 2020 and $94,000 and $188,000 for the three and six months ended June 30, 2019, respectively. At June 30, 2020, future amortization of the core deposit intangible totaled $375,000 for each of the next five years and $1.3 million thereafter.

7. SHARE-BASED COMPENSATION

Stock Options.

A summary of stock option activity for the six months ended June 30, 2020 is presented below:

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

Outstanding at December 31, 2019		218,214	$	6.42		2.62	$	695
Exercised		—		—		—		—
Outstanding at June 30, 2020		218,214	$	6.42		2.12	$	—

Exercisable at June 30, 2020		218,214	$	6.42		2.12	$	—

Cash received for options exercised during the six months ended June 30, 2019 was $64,000. There were no options exercised during the six months ended June 30, 2020.

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, with the final tranche of shares vesting in January of 2020.

On an annual basis, the Compensation Committee (the “Committee”) approves long-term incentive awards out of the RSA Plan, whereby shares will be granted to eligible participants of the Company that are nominated by the Chief Executive Officer and approved by the Committee, with vesting over a three-year term for employees and a one-year term for directors. Annual employee grants provide for 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 award 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.

In May 2017, there were 89,042 shares granted. 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 performance metric. Vesting is realized after a three-year period. The primary performance metric for 2017 grants 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 grant 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	%

As of December 31, 2019, the three-year performance period for the 2017 grants ended. Performance-based shares were earned based on the Company achieving the annual 2017 performance metrics adjusted threshold, target or maximum metrics at the end of each year of the three-year performance period. Of the original 33,883 performance-based shares granted in 2017, 15,898 performance-based shares vested and were issued to eligible recipients, while 17,985 shares were forfeited in February of 2020. Shares forfeited become available for reissuance under future grants.

In January 2018, there were 83,812 shares granted. 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 performance metric. The primary performance metric for 2018 grants 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 grant 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).

In February 2019, there were 108,718 shares granted. 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. The primary performance metric for 2019 grants 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 grants 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).

In February 2020, there were 120,053 shares granted. Of the 120,053 shares, 69,898 shares were time-based, with 19,760 vesting in one year and 50,138 vesting ratably over a three-year period. The remaining 50,155 shares granted are performance-based and are subject to the achievement of the 2020 long-term incentive performance metrics, with 50% of the performance-shares vesting for each performance metric. The primary performance metrics for the 2020 grants were return on equity and earnings per share. 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 for return on equity metrics and for a three-year cumulative performance period for earnings per share, but will be distributed at the end of the three-year period as earned. The threshold, target and stretch metrics under the 2020 grants are as follows:

	Return on Equity Metrics
Performance Period Ending	Threshold			Target			Stretch

December 31, 2020		5.00	%		5.48	%		6.00	%
December 31, 2021		5.62	%		6.24	%		6.86	%
December 31, 2022		6.29	%		6.99	%		7.69	%

	Earnings Per Share Metrics
Performance Period Ending	Threshold		Target		Stretch

Three-year Cumulative Diluted Earnings Per Share	$	1.50	$	1.65	$	1.80

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.

At June 30, 2020, there were an additional 25,927 shares available for future grants under the RSA Plan.

A summary of the status of restricted stock awards at June 30, 2020 and 2019 is presented below:

	Shares			Weighted Average Grant Date Fair Value
Balance at December 31, 2019		172,866		$	10.07
Shares granted		101,408			9.11
Shares forfeited		(16,803	)		10.15
Shares vested		(41,894	)		9.54
Shares reissued		18,645			9.11
Balance at June 30, 2020		234,222		$	9.67

	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
Balance at June 30, 2019		210,965		$	10.10

We recorded total expense for restricted stock awards of $377,000 and $393,000 for the six months ended June 30, 2020 and 2019, 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. Borrowings from the Federal Reserve Bank (“FRB”) Discount Window are secured by certain securities from the Company’s investment portfolio not otherwise pledged.

FHLB advances with an original maturity of less than one year totaled $35.0 million at June 30, 2020 and December 31, 2019 with a weighted average rate of 0.46% and 1.86%, respectively. At June 30, 2020, based on qualifying collateral less outstanding advances, the Bank had the capacity to borrow up to approximately $268.3 million from the FHLB.

In addition, at June 30, 2020 and December 31, 2019, 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 June 30, 2020 and December 31, 2019, 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 June 30, 2020 and 2019. 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 this line at June 30, 2020 and 2019. As of June 30, 2020, we also have an available line of credit of $21.8 million with the FRB Discount Window at an interest rate determined and reset on a daily basis. There were no advances outstanding under this line at June 30, 2020 or December 31, 2019.

At June 30, 2020, we had $161.7 million in long-term debt with the FHLB, compared to $205.5 million in long-term debt with the FHLB at December 31, 2019. In addition, during the second quarter of 2020, in order to fund a portion of the Bank’s PPP loan originations, the Bank borrowed $26.4 million, or 12.0% of the PPP loans, from the Federal Reserve Bank’s PPP Loan Facility (“PPPLF”), which carries a rate of 0.35% fixed for two years with interest due at maturity. The Bank pledged eligible PPP loans as collateral for the borrowings.

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 2020. No contributions have been made to the plan for the six months ended June 30, 2020. 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						Six Months Ended,
	June 30,						June 30,
	2020			2019			2020			2019
	(In thousands)
Service cost	$	356		$	274		$	712		$	548
Interest cost		293			284			586			568
Expected return on assets		(382	)		(308	)		(764	)		(616	)
Amortization of actuarial loss		98			32			197			64
Net periodic pension cost	$	365		$	282		$	731		$	564

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 interest rate swaps at June 30, 2020 and December 31, 2019:

June 30, 2020	Notional		Weighted Average		Weighted Average Rate						Estimated Fair
	Amount		Maturity		Receive			Pay			Value
	(In thousands)		(In years)								(In thousands)
Cash flow hedges:
Interest rate swaps on FHLB borrowings	$	35,000		2.2		0.31	%		3.54	%	$	(2,646	)
Non-hedging derivatives:
Loan-level swaps – dealer		13,643		13.0		1.99	%		3.75	%		(1,966	)
Loan-level swaps – borrower		13,643		13.0		3.75	%		1.99	%		1,966
Total	$	62,286									$	(2,646	)

December 31, 2019	Notional		Weighted Average		Weighted Average Rate						Estimated Fair
	Amount		Maturity		Receive			Pay			Value
	(In thousands)		(In years)								(In thousands)
Cash flow hedges:
Interest rate swaps on FHLB borrowings	$	35,000		2.7		1.89	%		3.54	%	$	(1,798	)
Non-hedging derivatives:
Loan-level swaps – dealer		6,484		13.2		3.45	%		3.79	%		(149	)
Loan-level swaps – borrower		6,484		13.2		3.79	%		3.45	%		149
Total	$	47,968									$	(1,798	)

At June 30, 2020, the Company had $35.0 million in derivatives designated as hedging instruments and $27.3 million in derivatives designated as non-hedging instruments, compared to $35.0 million in derivatives designated as hedging instruments and $13.0 million in derivatives designated as non-hedging instruments at December 31, 2019.

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 these objectives, 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 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. 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 the Company’s 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 and non-hedging instruments as well as our classification on the balance sheet as of June 30, 2020 and December 31, 2019.

June 30, 2020	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	$	2,646
Total derivatives designated as hedging instruments		$	—		$	2,646
Derivatives not designated as hedging instruments:
Interest rate swap – with customers	Other Assets	$	1,966		$	—
Interest rate swap – with counterparties			—	Other Liabilities		1,966
Total derivatives not designated as hedging instruments		$	1,966		$	1,966

December 31, 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	$	1,798
Total derivatives designated as hedging instruments		$	—		$	1,798
Derivatives not designated as hedging instruments:
Interest rate swap – with customers	Other Assets	$	149		$	—
Interest rate swap – with counterparties			—	Other Liabilities		149
Total derivatives not designated as hedging instruments		$	149		$	149

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

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

	Amount of Gain (Loss) Recognized in OCI on Derivative
	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(In thousands)

Interest rate swaps	$	(117	)	$	(583	)	$	(1,240	)	$	(911	)

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 loss into net income for interest rate swaps and termination fees:

	Amount of Loss Reclassified from OCI into Expense (Effective Portion)
	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands)

Interest rate swaps	$	479	$	350	$	908	$	682

During the next 12 months, we estimate that $1.8 million will be reclassified as an increase in interest expense.

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 June 30, 2020 and December 31, 2019, we had a net liability position of $2.8 million and $1.8 million with our counterparties, respectively. As of June 30, 2020, we had minimum collateral posting thresholds with certain of our derivative counterparties and had mortgage-backed securities with a fair value of $1.9 million and $2.8 million in cash posted as collateral against our obligations under these agreements. If we had breached any of these provisions at June 30, 2020, 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.

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

	June 30, 2020
	Level 1		Level 2		Level 3		Total
Assets:	(In thousands)
Securities available-for-sale	$	—	$	224,509	$	—	$	224,509
Marketable equity securities		6,941		—		—		6,941
Interest rate swaps		—		1,966		—		1,966
Total assets	$	6,941	$	226,475	$	—	$	233,416

Liabilities:
Interest rate swaps	$	—	$	4,612	$	—	$	4,612

	December 31, 2019
		Level 1		Level 2		Level 3		Total
Assets:	(In thousands)
Securities available-for-sale	$	—	$	227,708	$	—	$	227,708
Marketable equity securities		6,737		—		—		6,737
Interest rate swaps		—		149		—		149
Total assets	$	6,737	$	227,857	$	—	$	234,594

Liabilities:
Interest rate swaps	$	—	$	1,947	$	—	$	1,947

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 June 30, 2020 and December 31, 2019. Total losses for the six months ended June 30, 2020 and the three and six months ended June 30, 2019, respectively, 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		Six Months Ended
	June 30, 2020						June 30, 2020		June 30, 2020
							Total		Total
	Level 1		Level 2		Level 3		Losses		Losses
	(In thousands)
Impaired Loans	$	—	$	—	$	78	$	—	$	106


	At							Three Months Ended		Six Months Ended
	December 31, 2019							June 30, 2019		June 30, 2019
								Total		Total
		Level 1		Level 2		Level 3		Losses		Losses
	(In thousands)
Impaired Loans	$	—	$	—	$	1,836	$	567	$	697

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 June 30, 2020 and December 31, 2019.

Summary of Fair Values of Financial Instruments.

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

	June 30, 2020
	Carrying Value		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents	$	62,832	$	62,832	$	—	$	—	$	62,832
Securities available-for-sale		224,509		—		224,509		—		224,509
Marketable equity securities		6,941		6,941		—		—		6,941
Federal Home Loan Bank of Boston and other restricted stock		10,870		—		—		10,870		10,870
Loans - net		1,981,280		—		—		1,970,078		1,970,078
Accrued interest receivable		6,972		—		—		6,972		6,972
Mortgage servicing rights		186		—		186		—		186
Derivative assets		1,966		—		1,966		—		1,966

Liabilities:
Deposits		1,947,901		—		—		1,952,299		1,952,299
Short-term borrowings		35,000		—		35,001		—		35,001
Long-term debt		188,164		—		189,727		—		189,727
Accrued interest payable		553		—		—		553		553
Derivative liabilities		4,612		—		4,612		—		4,612

	December 31, 2019
	Carrying Value		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents	$	24,741	$	24,741	$	—	$	—	$	24,741
Securities available-for-sale		227,708		—		227,708		—		227,708
Marketable equity securities		6,737		6,737		—		—		6,737
Federal Home Loan Bank of Boston and other restricted stock		14,477		—		—		14,477		14,477
Loans - net		1,761,932		—		—		1,729,150		1,729,150
Accrued interest receivable		5,313		—		—		5,313		5,313
Mortgage servicing rights		219		—		345		—		345
Derivative assets		149		—		149		—		149

Liabilities:
Deposits		1,677,864		—		—		1,679,851		1,679,851
Short-term borrowings		35,000		—		35,004		—		35,004
Long-term debt		205,515		—		205,850		—		205,850
Accrued interest payable		525		—		—		525		525
Derivative liabilities		1,947		—		1,947		—		1,947

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 eighteen year, some of which include options to extend the leases for additional five-year terms up to fifteen years.

The components of lease expense were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
			(In thousands)

Amortization of ROU assets	$	292	$	243	$	538	$	485
Interest on lease liabilities		65		61		123		124
Operating lease cost	$	357	$	304	$	661	$	609

Supplemental cash flow information related to leases was as follows:


	Six Months Ended June 30,
	2020		2019
	(In thousands)

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	636	$	584
ROU assets obtained in exchange for lease obligations:
Operating leases		4,058		—

Supplemental balance sheet information related to leases was as follows:


	June 30, 2020		December 31, 2019
	(In thousands)

Operating lease ROU assets	$	10,318	$	6,795
Operating lease liabilities	$	10,388	$	6,840

The weighted average remaining lease term for our operating leases was 10 years with a weighted average discount rate of 3.07% at June 30, 2020.

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


Years Ending December 31,
2020	$	742
2021		1,397
2022		1,360
2023		1,128
2024		1,063
Thereafter		6,621
Total lease payments		12,311
Less imputed interest		(1,923	)
Total	$	10,388

13. RECENT ACCOUNTING PRONOUNCEMENTS

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. This ASU, as amended, is effective for the Company in fiscal years after December 15, 2022. 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 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 became effective for the Company on January 1, 2020, and as this standard relates to disclosures, its adoption did not 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 of Hampden County and Hampshire County in western Massachusetts and Hartford and Tolland Counties in 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 six months ended June 30, 2020 in the context of this strategy.

•

Net income was $2.0 million, or $0.08 diluted earnings per share, for the three months ended June 30, 2020, compared to $3.3 million, or $0.12 diluted earnings per share, for the same period in 2019. For the six months ended June 30, 2020, net income was $4.1 million, or $0.16 diluted earnings per share, as compared to net income of $6.7 million, or $0.25 diluted earnings per share, for the same period in 2019. Both periods in 2020 were impacted by a higher provision for loan losses resulting from the coronavirus (“COVID-19”) pandemic mandated shutdowns and economic disruption that caused elevated unemployment levels and deterioration in household, business, economic and market conditions.

•

The provision for loan losses was $2.5 million and $350,000 for the three months ended June 30, 2020 and 2019, respectively, and $4.6 million and $400,000 for the six months ended June 30, 2020 and 2019, respectively.

•

Net interest income was $15.1 million and $14.2 million for the three months ended June 30, 2020 and 2019, respectively. The net interest margin was 2.74% for the three months ended June 30, 2020, compared to 2.89% for the same period in 2019. The net interest margin, on a tax-equivalent basis, was 2.76% for the three months ended June 30, 2020, compared to 2.92% for the same period in 2019. Net interest income was $29.6 million and $28.5 million for the six months ended June 30, 2020 and 2019, respectively. The net interest margin was 2.80% and 2.92% for the six months ended June 30, 2020 and 2019, respectively. The net interest margin, on a tax-equivalent basis, was 2.82% and 2.95% for the six months ended June 30, 2020 and 2019, 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 six months ended June 30, 2020. 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 2019 Annual Report.

RECENT DEVELOPMENTS: CORONAVIRUS PANDEMIC RESPONSE AND ACTIONS.

Beginning in the first quarter of 2020, we responded to the ongoing COVID-19 pandemic while prioritizing the health and safety of our community. On March 23, 2020, the Governor of Massachusetts issued an emergency order requiring all businesses and organizations that do not provide COVID-19 “essential services” to close their physical workplaces and facilities to workers, customers and the public from March 24, 2020 until April 7, 2020, which was subsequently extended to May 18, 2020. Although Massachusetts began reopening non-essential businesses in June 2020, the order put significant pressure on the local business community.

As a consequence of the order, we closed our branches and started the transition to working remotely. Our drive-up windows and ATMs remained open while we continued to service our customers through scheduled appointments and online channels. On June 29, 2020, we re-opened our branch lobbies to customers under Massachusetts recommended social distancing, safety and sanitation guidelines, while still offering appointments and online channel transactions as a means of promoting social distancing where possible. As of July 8, 2020, Massachusetts is now in Phase 3 of the re-opening plan. The following industries are open with restrictions: construction, manufacturing, houses of worship, office spaces (limited), hair and nail salons, spas, pet grooming, car washes, retailers, including malls, hotels and motels (no events, functions or conferences), restaurants, golf courses, fitness and health centers, casinos, gaming floors, theaters and museums. The final phase, the “new normal,” will not be allowed to begin until an effective treatment or vaccine is developed.

Loan Portfolio:

The following table provides some insight into the composition of the Bank's loan portfolio and loan modifications, excluding PPP loans:

Commercial Real Estate	% of Total Loans			% of Bank Risk-Based Capital			% of Balance Modified
Apartment		10	%		77	%		21	%
Office		7	%		58	%		13	%
Retail/shopping		7	%		51	%		46	%
Industrial		6	%		49	%		8	%
Hotel		3	%		24	%		61	%
Other		2	%		14	%		24	%
Mixed-use		2	%		17	%		44	%
Residential non-owner		2	%		19	%		21	%
Auto sales		2	%		16	%		44	%
Adult care/Assisted living		2	%		16	%		20	%
College/school		1	%		11	%		1	%
Gas station/convenience store		1	%		5	%		2	%
Restaurant		1	%		5	%		40	%
Auto service		1	%		5	%		12	%
Total commercial real estate		47	%					24	%

Commercial and Industrial Loans	% of Total Loans			% of Bank Risk-Based Capital			% of Balance Modified
Manufacturing		3	%		24	%		5	%
Wholesale trade		2	%		19	%		2	%
Specialty trade		1	%		6	%		0	%
Heavy and civil engineering construction		1	%		6	%		2	%
Educational services		1	%		8	%		1	%
Healthcare and social assistance		1	%		5	%		32	%
Transportation and warehouse		1	%		5	%		62	%
Auto sales		0	%		3	%		23	%
All other C&I ⁽¹⁾		3	%		27	%		6	%
Total commercial and industrial loans		13	%					9	%

Residential and Consumer Loans	% of Total Loans			% of Bank Risk-Based Capital			% of Balance Modified
Residential real estate		34	%		269	%		6	%
Home equity line of credit		4	%		28	%		2	%
Home equity loan		2	%		18	%		4	%
Consumer loans		0	%		2	%		3	%
Total residential and consumer loans		40	%					6	%

Total Portfolio	% of Total Loans			% of Bank Risk-Based Capital			% of Balance Modified
Commercial real estate		47	%		369	%		24	%
Commercial and industrial		13	%		102	%		9	%
Residential real estate		34	%		269	%		6	%
Home equity loans		6	%		46	%		3	%
Consumer loans		0	%		2	%		3	%
Total								15	%

(1)

Other consists of multiple industries, which individually are less than 1% of the total loan portfolio.

Although the Bank's loan portfolio contains impacted sectors, the concentration limits remain acceptable, with no sector, excluding residential, representing more than 100% of the Bank's total risk-based capital. The Company monitors lending exposure by industry classification to determine potential risk associated with industry concentrations, if any, that could lead to additional credit loss exposure. As stated above, as a result of the COVID-19 pandemic, the Company identified sectors that have been materially impacted including, but not limited to: hospitality, retail, and restaurants and food service. These sectors potentially carry a higher level of credit risk, as many of these borrowers have incurred a significant negative impact to their businesses resulting from the governmental stay-at-home orders as well as travel limitations.

Paycheck Protection Program.

As a Preferred Lender with the Small Business Administration (“SBA”), the Company was in a position to react quickly to the PPP component of the March 27, 2020 $2.2 trillion fiscal stimulus bill known as the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) launched by the U.S. Department of Treasury and the SBA. An eligible business was able to apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly “payroll costs,” or (2) $10.0 million. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity, subsequently extended to a five-year loan term maturity for loans granted on or after June 5, 2020 and (c) principal and interest payments deferred from six months to ten months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.

As of June 30, 2020, the Company received funding approval from the SBA for over 1,358 applications totaling approximately $221.9 million, with processing fees totaling approximately $7.1 million. On June 5, 2020, the Paycheck Protection Program Flexibility Act (“Flexibility Act”) was signed into law and extended the June 30, 2020 safe harbor date to December 31, 2020. If borrowers exercise the safe harbor option and return the PPP loan proceeds before December 31, 2020, we are required to return the processing fee to the SBA.

Loan Modifications/Troubled Debt Restructurings.

The banking regulatory agencies, through an Interagency Statement dated April 7, 2020, have encouraged financial institutions to work “prudently” with borrowers who request loan modifications or deferrals as a result of the economic impacts of COVID-19. Pursuant to Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. Financial institutions can then suspend the requirements under U.S. GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a TDR, and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting under U.S. GAAP. The Company has adopted this policy election to address COVID-19 loan modification requests that have been received from the earlier of either December 31, 2020 or the 60^th day after the end of the COVID-19 national emergency.

As a result of the COVID-19 pandemic, the Company granted deferred loan payments for impacted commercial, residential and consumer customers who have experienced financial hardship due to COVID-19. The loan payment deferrals can be up to 90 days, depending upon the financial needs of each customer. Further deferrals will be re-evaluated on a customer-by-customer basis upon the expiration of the existing deferral period. As of June 30, 2020, the deferred loan payment commitments totaled $261.0 million (525 loans), for which principal and interest payments were deferred. The deferred loan payment commitments represented 15% of the total loan portfolio, excluding PPP loans, as of June 30, 2020. Loan payment deferrals by loan type were as follows:

Loan Segment	Outstanding Balance at June 30, 2020		Modification Balance		# of Loans Modified		Balance as a % of Total Loan Segment			Balances Returned to P&I and Made First Payment ⁽²⁾		% Returned to P&I and Made First Payment			# of Loans Returned to P&I⁽²⁾
	(In millions)									(In millions)
Commercial real estate	$	832.7	$	200.0		131		24.0	%	$	71.6		35.8	%		54
Commercial and industrial ⁽¹⁾		231.1		19.1		162		8.3	%		9.7		50.8	%		117
Residential real estate ⁽³⁾		710.6		41.7		219		5.9	%		19.2		46.1	%		107
Consumer		5.3		0.2		13		3.8	%		0.1		50.0	%		10
Total	$	1,780.0	$	261.0		525		14.7	%	$	100.6		38.5	%		288

(1)

Excludes PPP loans and deferred fees

(2)

Data as of July 27, 2020

(3)

Residential includes home equity loans and lines of credit

As of July 28, 2020, of the $261.0 million of modifications granted (525 accounts), $100.6 million, or 38.5%, (288 accounts) made their first principal and interest payment after returning to regular payments.

Allowance for Loan Losses.

The COVID-19 pandemic materially impacted the Company’s determination of the allowance for loan losses for the six months ended June 30, 2020. In determining the allowance for loan losses, the Company considers quantitative loss factors and a number of qualitative factors, such as underwriting policies, current economic conditions, delinquency statistics, the adequacy of the underlying collateral and the financial strength of the borrower. Beginning at the end of March 2020, a record number of Americans filed for unemployment benefits. The global pandemic could cause the Company to experience higher credit losses in its lending portfolio, reduced demand for our products and services and other negative impacts on our financial position, results of operations and prospects.

To appropriately reserve for the impact of the COVID-19 pandemic on the Company’s loan portfolio, the Bank added a new qualitative factor category to the allowance calculation - "Economic Impact of COVID-19" at March 31, 2020. The allocation of additional reserves for the six months ended June 30, 2020 was based upon an analysis of the Company’s loan portfolio that included identifying borrowers sensitive to the shutdown (i.e. accommodation and food service, recreation, construction, manufacturing, and wholesale & retail trade) as well as a general allocation for the negative economic outlook as described above. The Company’s provision for loan losses was $4.6 million for the six months ended June 30, 2020, and based upon these considerations, approximately $1.5 million of the provision at June 30, 2020 related to COVID-19 pandemic factors. This increase was based on management’s evaluation of certain qualitative factors included in the determination of the allowance, primarily a result of the abrupt slowdown in commercial economic activity resulting from actions announced by the State of Massachusetts to close all non-essential businesses in the state as well as the dramatic rise in the unemployment rate. Local unemployment rates were higher than national averages during the second quarter of 2020 due to the slower reopening plan for Massachusetts. In addition, loans demonstrating cash flow declines and borrowers sensitive to the prolonged shutdown were identified and contributed to an overall increase in reserves. The Company is continuing to monitor COVID-19’s impact on its business and its customers, however, the extent to which COVID-19 will impact its results and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures.

Asset Quality.

Based upon an analysis of the portfolio to identify potentially impacted industries from the COVID-19 pandemic, including the downgrade of several lending relationships, specifically within the hotel portfolio, we allocated a total provision for loan losses of $2.5 million for the quarter ended June 30, 2020. Of the total provision, $2.0 million was related to assets quality changes, while $550,000 was related to COVID-19 factors. As mentioned above, the Company has allocated $1.5 million in loan loss reserves during the six months ended June 30, 2020 related to COVID-19 pandemic factors. Our allowance as a percentage of total loans, excluding PPP loans and acquired loans that have been marked to fair value, was 1.09% at June 30, 2020 and March 31, 2020.

During the three months ended June 30, 2020, special mention loans increased $60.4 million to $96.3 million at June 30, 2020, from $35.9 million at March 31, 2020. During the three months ended June 30, 2020, we downgraded thirteen lending relationships from pass-rated to special mention. Nine of these relationships, totaling $46.0 million, are in the hotel industry, and the other relationships are in retail or manufacturing. The hotel industry has experienced disruption as a direct result of the negative economic impacts of the COVID-19 pandemic.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2020 AND DECEMBER 31, 2019

At June 30, 2020, total assets were $2.4 billion, an increase of $253.4 million, or 11.6%, from December 31, 2019. During the same period, total loans increased $223.5 million, or 12.6%, securities available-for-sale decreased $3.2 million, or 1.4%, and cash and cash equivalents increased $38.1 million, or 154.0%.

Total loans increased $223.5 million, or 12.6%, primarily due to a $204.1 million, or 82.0%, increase in commercial and industrial loans. Excluding PPP loans of $221.9 million, commercial and industrial loans decreased $17.8 million, or 7.2%, from December 31, 2019. Commercial real estate loans increased $15.8 million, or 1.9%, and residential real estate loans, which include home equity loans, increased $10.4 million, or 1.5%. The decrease in commercial and industrial loans, excluding PPP loans, of $17.8 million, or 7.2%, was due to pay downs on existing revolving lines of credit of approximately $35.6 million, or 36.2%, from March 31, 2020 to June 30, 2020, after increasing $13.0 million, or 15.2%, from December 31, 2019 to March 31, 2020.

All loans where the payments are 90 days or more in arrears as of the closing date of each month are placed on non-accrual status. If all non-accrual loans had been performing in accordance with their terms, we would have earned additional interest income of $311,000 and $651,000 for the six months ended June 30, 2020 and 2019, respectively.

At June 30, 2020, nonperforming loans totaled $10.4 million, or 0.59% of total loans excluding PPP loans, compared to $9.9 million, or 0.56% of total loans at December 31, 2019 and $14.9 million, or 0.87% of total loans at June 30, 2019. There were no loans 90 or more days past due and still accruing interest. Nonperforming assets to total assets, excluding PPP loans, was 0.47% and 0.45% at June 30, 2020 and December 31, 2019, respectively, and 0.70% at June 30, 2019. The allowance for loan losses as a percentage of total loans, excluding PPP loans, which do not require an allowance for loan losses, was 1.03% at June 30, 2020, compared to 0.79% at December 31, 2019. The allowance for loan losses as a percentage of total loans, excluding loans acquired in the Chicopee acquisition, which were recorded at fair value with no related allowance for loan losses, as well as PPP loans, was 1.26% at June 30, 2020 and 1.01% at December 31, 2019. At June 30, 2020, the allowance for loan losses as a percentage of nonperforming loans was 175.5%, compared to 142.7% at December 31, 2019. A summary of our non-accrual and past due loans by class are listed in Note 5 of the accompanying unaudited consolidated financial statements.

At June 30, 2020, total deposits were $1.9 billion, an increase of $270.0 million, or 16.1%, from December 31, 2019, primarily due to a $294.0 million, or 28.7%, increase in core deposits. Core deposits, which the Company defines as all deposits except time deposits, increased from $1.0 billion, or 61.1% of total deposits, at December 31, 2019, to $1.3 billion, or 67.7% of total deposits, at June 30, 2020. Non-interest-bearing deposits increased $143.3 million, or 36.4%, to $536.6 million, interest-bearing checking accounts increased $33.6 million, or 47.8%, to $103.7 million, savings accounts increased $26.9 million, or 21.3%, to $153.3 million, and money market accounts increased $90.2 million, or 20.7%, to $525.6 million. The increase in core deposits of $294.0 million, or 28.7%, can be attributed to the government stimulus for individuals, lower consumer spending over the last several months, and tax payment delays to July 15, 2020 as well as PPP loan funds that may not have been fully utilized at June 30, 2020.

Time deposits decreased $23.9 million, or 3.7%, from $652.6 million at December 31, 2019 to $628.7 million at June 30, 2020. Brokered deposits, which are included within time deposits, were $21.7 million at June 30, 2020 and $21.5 million at December 31, 2019.

Federal Home Loan Bank (“FHLB”) advances decreased $43.8 million, or 18.2%, from $240.5 million at December 31, 2019, to $196.7 million at June 30, 2020. Advances under the Federal Reserve Bank’s PPPLF totaled $26.4 million at June 30, 2020, representing 11.9% of the PPP loan portfolio. The increase in low cost deposits in the second quarter provided funding for the PPP loan portfolio. The Company has access to the PPPLF in the next two years to fund the PPP loan portfolio, if necessary. Our short-term borrowings and long-term debt are discussed in Note 8 of the accompanying consolidated financial statements.

At June 30, 2020, shareholders’ equity was $229.5 million, or 9.4% of total assets, compared to $232.0 million, or 10.6% of total assets, at December 31, 2019. The decrease in shareholders’ equity reflects $8.1 million for the repurchase of the Company’s shares and the payment of regular cash dividends of $2.5 million, both partially offset by net income of $4.1 million and a decrease of $3.3 million in accumulated other comprehensive loss. Total shares outstanding as of June 30, 2019 were 25,644,334.

The Company’s book value per share increased by $0.21, or 2.4%, to $8.95 at June 30, 2020, from $8.74 at December 31, 2019. The Company’s tangible book value per share increased by $0.20, or 2.5%, to $8.34 at June 30, 2020 from $8.14 at December 31, 2019. The Bank’s regulatory capital ratios continued to exceed the levels required to be considered “well-capitalized” under federal banking regulations.

On January 29, 2019, the Board of Directors authorized a stock purchase plan (the “2019 Plan”) pursuant to which the Company may purchase up to 2,814,200 shares, or 10% of its outstanding common stock. During the six months ended June 30, 2020, the Company purchased 1,009,731 shares under the 2019 Plan. As of June 30, 2020, there were 117,135 shares available to purchase under the 2019 Plan. As previously disclosed, on March 24, 2020, the Board of Directors approved a suspension of the 2019 plan in response to the COVID-19 pandemic. This action is effective until further notice but the Company retains the ability to reinstate its buyback program as soon as circumstances warrant.

Although the Company has historically paid quarterly dividends on its common stock and currently intends to continue to pay such dividends, the Company’s ability to pay such dividends depends on a number of factors, including restrictions under federal laws and regulations on the Company’s ability to pay dividends, and as a result, there can be no assurance that dividends will continue to be paid in the future.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND JUNE 30, 2019

General.

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 June 30, 2020 and 2019, 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 June 30,
	2020								2019
	Average					Average Yield/			Average					Average Yield/
	Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans⁽¹⁾⁽²⁾	$	1,959,790	$	19,106			3.92	%	$	1,688,553	$	18,434			4.38	%
Securities⁽²⁾		217,816		1,170			2.16			249,110		1,635			2.63
Other investments - at cost		15,728		157			4.01			15,131		210			5.57
Short-term investments⁽³⁾		20,637		9			0.18			15,134		73			1.93
Total interest-earning assets		2,213,971		20,442			3.71			1,967,928		20,352			4.15
Total non-interest-earning assets		141,310								137,749
Total assets	$	2,355,281							$	2,105,677

LIABILITIES AND EQUITY:
Interest-bearing liabilities
Interest-bearing checking accounts	$	83,345	$	86			0.42	%	$	70,619	$	94			0.53	%
Savings accounts		148,566		37			0.10			126,855		42			0.13
Money market accounts		496,245		720			0.58			396,555		601			0.61
Time deposit accounts		640,129		2,974			1.87			679,909		3,630			2.14
Total interest-bearing deposits		1,368,285		3,817			1.12			1,273,938		4,367			1.37
Short-term borrowings and long-term debt		221,057		1,421			2.59			218,419		1,647			3.02
Interest-bearing liabilities		1,589,342		5,238			1.33			1,492,357		6,014			1.62
Non-interest-bearing deposits		504,885								363,329
Other non-interest-bearing liabilities		31,214								23,210
Total non-interest-bearing liabilities		536,099								386,539

Total liabilities		2,125,441								1,878,896
Total equity		229,840								226,781
Total liabilities and equity	$	2,355,281							$	2,105,677
Less: Tax-equivalent adjustment⁽²⁾				(112	)							(137	)
Net interest and dividend income			$	15,092							$	14,201
Net interest rate spread							2.37	%							2.50	%
Net interest rate spread, on a tax equivalent basis⁽⁴⁾							2.38	%							2.53	%
Net interest margin							2.74	%							2.89	%
Net interest margin, on a tax equivalent basis⁽⁵⁾							2.76	%							2.92	%
Ratio of average interest-earning assets to average interest-bearing liabilities							139.30	%							131.87	%

(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 net income.

(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 June 30, 2020 compared to Three Months Ended June 30, 2019
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest-earning assets	(In thousands)
Loans ⁽¹⁾	$	2,953		$	(2,281	)	$	672
Securities ⁽¹⁾		(205	)		(260	)		(465	)
Other investments - at cost		8			(61	)		(53	)
Short-term investments		26			(90	)		(64	)
Total interest-earning assets		2,782			(2,692	)		90

Interest-bearing liabilities
Interest-bearing checking accounts		17			(25	)		(8	)
Savings accounts		7			(12	)		(5	)
Money market accounts		151			(32	)		119
Time deposit accounts		(212	)		(444	)		(656	)
Short-term borrowing and long-time debt		20			(246	)		(226	)
Total interest-bearing liabilities		(17	)		(759	)		(776	)
Change in net interest and dividend income ⁽¹⁾	$	2,799		$	(1,933	)	$	866

(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 increased $891,000, or 6.3%, to $15.1 million, for the three months ended June 30, 2020, from $14.2 million for the three months ended June 30, 2019. The increase in net interest income was due to a $115,000, or 0.6%, increase in interest and dividend income and a decrease in interest expense of $776,000, or 12.9%. Interest expense on deposits decreased $550,000, or 12.6%, and interest expense on FHLB borrowings decreased $226,000, or 13.7%. Net interest income for the three months ended June 30, 2020 includes interest income and fee income of $1.3 million from the PPP loan portfolio. Excluding PPP income, interest and dividend income decreased $369,000, or 2.6%, from $14.2 million during the three months ended June 30, 2019, compared to $13.8 million during the three months ended June 30, 2020.

The net interest margin was 2.74% for the three months ended June 30, 2020, compared to 2.89% for the three months ended June 30, 2019. The net interest margin, on a tax-equivalent basis, was 2.76% for the three months ended June 30, 2020, compared to 2.92% for the three months ended June 30, 2019. The decrease in the net interest margin was due to the continuing trend of market interest rates falling to historically low levels.

The average yield on interest-earning assets decreased 44 basis points from 4.15% for the three months ended June 30, 2019 to 3.71% for the three months ended June 30, 2020. During the three months ended June 30, 2020, the average cost of funds, including non-interest bearing demand accounts, decreased 29 basis points from 1.30% for the three months ended June 30, 2019 to 1.01% for the three months ended June 30, 2020. The average cost of core deposits, which include non-interest bearing demand accounts, decreased four basis points from 0.31% for the three months ended June 30, 2019 to 0.27% for the three months ended June 30, 2020. The average cost of time deposits decreased 27 basis points from 2.14% for the three months ended June 30, 2019 to 1.87% for the three months ended June 30, 2020. The average cost of FHLB borrowings decreased 43 basis points during the same period. For the three months ended June 30, 2020, average demand deposits, an interest-free source of funds, increased $141.6 million, or 39.0%, to $504.9 million, or 27.0% of total average deposits, from $363.3 million, or 22.2% of total average deposits for the three months ended June 30, 2019.

During the three months ended June 30, 2020, average interest-earning assets increased $246.0 million, or 12.5%, to $2.2 billion compared to the three months ended June 30, 2019, primarily due to the increase in average loans of $271.2 million, or 16.1%. Excluding average PPP loans, average loans increased $118.2 million, or 7.0%, from the three months ended June 30, 2019 to the three months ended June 30, 2020.

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 June 30, 2020 was based on the changes that occurred in the loan portfolio during that same period, which were discussed above. The provision for loan losses increased $2.1 million, or 600.0%, from $350,000 for the three months ended June 30, 2019 to $2.5 million for the three months ended June 30, 2020. The Company recorded net charge-offs of $34,000 for the three months ended June 30, 2020, as compared to net recoveries of $194,000 for the three months ended June 30, 2019. During the three months ended June 30, 2019, the Company recorded charge-offs of $629,000, primarily due to an existing substandard commercial loan relationship, offset by recoveries of $823,000. The recovery was primarily due to a previously charged-off loan from 2010. The increase in the provision for loan losses was primarily due to the impacts of the COVID-19 pandemic on multiple sectors.

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. If the COVID-19 pandemic has an adverse effect on the ability of our borrowers to satisfy their obligations to us, the demand for our loans or our other products and services, other aspects of our business operations, or on financial markets, real estate markets, or economic growth, this could, depending on the extent of the loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations could be materially and adversely affected.

Non-interest Income.

Non-interest income decreased $430,000, or 17.1%, to $2.1 million for the three months ended June 30, 2020, from $2.5 million for the three months ended June 30, 2019. Service charges and fees decreased $291,000, or 15.7%, and other non-interest income decreased $206,000, due to a decrease in commercial loans swap fees. The decrease in service charges and fees was due to a $201,000, or 49.3%, decrease in non-sufficient funds (“NSF”) and overdraft fees. The decrease in NSF and overdraft fees was primarily due to an increase in checking account balances during the three months ended June 30, 2020. During the three months ended June 30, 2020, the Company reported unrealized gains on marketable equity securities of $35,000 and realized gains on the sale of securities of $13,000, compared to unrealized gains on marketable equity securities of $79,000 and realized losses on the sale of securities of $96,000 during the three months ended June 30, 2019.

Non-interest Expense.

For the three months ended June 30, 2020, non-interest expense increased $105,000, or 0.9%, to $12.2 million, or 2.09% of average assets, from $12.1 million, or 2.31% of average assets, for the three months ended June 30, 2019. The increase in non-interest expense was primarily due to an increase in salaries and benefits of $291,000, or 4.2%, an increase in occupancy expense of $74,000, or 7.4%, primarily due to the new branches in Connecticut. Federal Deposit Insurance Corporation (“FDIC”) insurance expense increased $52,000, or 22.0%, professional fees increased $30,000, or 4.9%, and data processing expenses increased $5,000, or 0.7%. These increases were partially offset by a decrease of $151,000, or 40.8%, in advertising expense, a decrease of $132,000, or 6.9%, in other non-interest expense and a decrease of $64,000, or 15.0%, in furniture and equipment expense. For the three months ended June 30, 2020, the efficiency ratio was 71.5%, compared to 72.5% for the three months ended June 30, 2019.

Income Taxes.

Income tax expense for the three months ended June 30, 2020 was $463,000, or an effective tax rate of 18.6%, compared to $971,000, or an effective tax rate of 23.0%, for three months ended June 30, 2019. The decrease in the Company’s effective tax rate was primarily due to the effect of lower projected pre-tax income for the fiscal year-end December 31, 2020.

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND JUNE 30, 2019

General.

Net income was $4.1 million, or $0.16 diluted earnings per share, for the six months ended June 30, 2020, compared to $6.7 million, or $0.25 diluted earnings per share, for the same period in 2019. Net interest income was $29.6 million and $28.5 million for the six months ended June 30, 2020 and 2019, respectively.

Net Interest and Dividend Income.

The following tables set forth the information relating to our average balance and net interest income for the six months ended June 30, 2020 and 2019, 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.

	Six Months Ended June 30,
	2020								2019
	Average					Average Yield/			Average					Average Yield/
	Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans⁽¹⁾⁽²⁾	$	1,871,145	$	37,981			4.08	%	$	1,686,336	$	36,613			4.38	%
Securities⁽²⁾		221,875		2,575			2.33			254,116		3,330			2.64
Other investments - at cost		16,245		339			4.20			15,535		446			5.79
Short-term investments⁽³⁾		19,097		71			0.75			15,123		149			1.99
Total interest-earning assets		2,128,362		40,966			3.87			1,971,110		40,538			4.15
Total non-interest-earning assets		139,487								135,820
Total assets	$	2,267,849							$	2,106,930

LIABILITIES AND EQUITY:
Interest-bearing liabilities
Interest-bearing checking accounts	$	76,777		161			0.42		$	71,770		175			0.49
Savings accounts		140,217		71			0.10			124,743		75			0.12
Money market accounts		471,240		1,473			0.63			395,889		1,157			0.59
Time deposit accounts		645,776		6,348			1.98			676,898		6,929			2.06

Total interest-bearing deposits		1,334,010		8,053			1.21			1,269,300		8,336			1.32
Short-term borrowings and long-term debt		226,523		3,022			2.68			233,615		3,412			2.95
Interest-bearing liabilities		1,560,533		11,075			1.43			1,502,915		11,748			1.58
Non-interest-bearing deposits		446,738								353,854
Other non-interest-bearing liabilities		30,340								21,798
Total non-interest-bearing liabilities		477,078								375,652

Total liabilities		2,037,611								1,878,567
Total equity		230,238								228,363
Total liabilities and equity	$	2,267,849							$	2,106,930
Less: Tax-equivalent adjustment⁽²⁾				(246	)							(263	)
Net interest and dividend income			$	29,645							$	28,527
Net interest rate spread							2.42	%							2.54	%
Net interest rate spread, on a tax equivalent basis⁽⁴⁾							2.44	%							2.57	%
Net interest margin							2.80	%							2.92	%
Net interest margin, on a tax equivalent basis⁽⁵⁾							2.82	%							2.95	%
Ratio of average interest-earning assets to average interest-bearing liabilities							136.39	%							131.15	%

(1)

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

(2)

(3)

Short-term investments include federal funds sold.

(4)

(5)

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.

	Six Months Ended June 30, 2020 compared to Six Months Ended June 30, 2019
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest-earning assets	(In thousands)
Loans ⁽¹⁾	$	4,024		$	(2,656	)	$	1,368
Securities ⁽¹⁾		(424	)		(331	)		(755	)
Other investments - at cost		20			(127	)		(107	)
Short-term investments		39			(117	)		(78	)
Total interest-earning assets		3,659			(3,231	)		428

Interest-bearing liabilities
Interest-bearing checking accounts		12			(26	)		(14	)
Savings accounts		9			(13	)		(4	)
Money market accounts		221			95			316
Time deposit accounts		(319	)		(262	)		(581	)
Short-term borrowing and long-term debt		(104	)		(286	)		(390	)
Total interest-bearing liabilities		(181	)		(492	)		(673	)
Change in net interest and dividend income	$	3,840		$	(2,739	)	$	1,101

(1)

During the six months ended June 30, 2020, net interest income increased $1.1 million, or 3.9%, to $29.6 million, compared to $28.5 million for the six months ended June 30, 2019. The increase in net interest income was due to an increase of $445,000, or 1.1%, in interest and dividend income and a decrease in interest expense of $673,000, or 5.7%. For the six months ended June 30, 2020, interest and dividend income included $1.3 million in interest and fee income from PPP loans. Excluding the income from PPP loans, net interest income decreased $128,000, or 0.4%. The decrease in interest expense of $673,000, or 5.7%, was due to a $283,000, or 3.4% decrease in interest expense on deposits and a decrease of $390,000, or 11.4%, in interest expense on FHLB borrowings.

The net interest margin for the six months ended June 30, 2020 was 2.80%, compared to 2.92% during the six months ended June 30, 2019. The net interest margin, on a tax-equivalent basis, was 2.82% for the six months ended June 30, 2020, compared to 2.95% for the six months ended June 30, 2019. Excluding the PPP interest and fee income of $1.3 million, the net interest margin decreased from 2.92% for the six months ended June 30, 2019 to 2.78% for the six months ended June 30, 2020. The decrease in the net interest margin was due to the continuing trend of market interest rates falling to historically low levels.

The average yield on interest-earning assets decreased 28 basis points from 4.15% for the six months ended June 30, 2019 to 3.87% for the six months ended June 30, 2020. During the six months ended June 30, 2020, the average cost of funds, including non-interest bearing demand accounts, decreased 15 basis points from 1.58% for the six months ended June 30, 2019 to 1.43%. For the six months ended June 30, 2020, the average cost of core deposits, including noninterest-bearing demand deposits, of 0.30% was comparable to the same period in 2019. The average cost of time deposits decreased 8 basis points from 2.06% for the six months ended June 30, 2019 to 1.98% during the same period in 2020. The average cost of borrowings decreased 27 basis points from 2.95% for the six months ended June 30, 2019 to 2.68% for the six months ended June 20, 2020. For the six months ended June 30, 2020, average demand deposits, an interest-free source of funds, increased $92.9 million, or 26.2%, from $353.9 million, or 21.8% of total average deposits, for the six months ended June 30, 2019 to $446.7 million, or 25.1% of total average deposits, for the six months ended June 30, 2020. During the six months ended June 30, 2020, average interest-earning assets increased $157.3 million, or 8.0%, to $2.1 billion. The increase in average interest-earning assets was due to an increase in average loans of $184.8 million, or 11.0%, partially offset by a decrease in average securities of $32.2 million, or 12.7%. Excluding average PPP loans, average loans increased $108.4 million, or 6.4%.

Provision for Loan Losses.

The amount that we provided for loan losses during the six months ended June 30, 2020 was based upon the changes that occurred in the loan portfolio during that same period. For the six months ended June 30, 2020, the Company increased the provision for loan losses by $4.2 million from $400,000 at June 30, 2019 to $4.6 million at June 30, 2020. This increase was based on management’s evaluation of certain qualitative factors included in the determination of the allowance, primarily as a result of the abrupt slowdown in commercial economic activity resulting from actions announced by the State of Massachusetts to close all non-essential businesses in the state as well as the dramatic rise in the unemployment rate. As a result, the Company established a special COVID-19 pandemic provision to build reserves resulting from the economic effects the pandemic may have on multiple industries. The increase in the loan provision for the six months ended June 30, 2020 related to COVID-19 factors was $1.5 million. This increase was based on management’s evaluation of certain qualitative factors included in the determination of the allowance, primarily a result of the abrupt slowdown in commercial economic activity resulting from actions announced by the State of Massachusetts to close all non-essential businesses in the state as well as the dramatic rise in the unemployment rate. Local unemployment rates were higher than national averages during the second quarter of 2020 due to the slower reopening plan for Massachusetts. In addition, loans demonstrating cash flow declines and borrowers sensitive to the prolonged shutdown were identified and contributed to an overall increase in reserves. Management will continue to closely monitor portfolio conditions and reevaluate the adequacy of the allowance. While the level of payment deferrals and PPP loan assistance will reduce the short-term risk in the Bank’s loan portfolio, management expects some risk rating downgrades and the potential for an increase in charge-offs in future periods.

Based upon an analysis of the portfolio to identify potentially impacted industries from the COVID-19 pandemic, including the downgrade of several lending relationships, specifically within the hotel portfolio, we allocated a total provision for loan losses of $4.6 million for the six months ended June 30, 2020. Of the total provision, $2.2 million was related to assets quality changes, while $1.5 million was related to COVID-19 factors, as mentioned above. Our allowance as a percentage of total loans, excluding PPP loans and acquired loans that have been marked to fair value, was 1.09% at June 30, 2020 and March 31, 2020.

During the six months ended June 30, 2020, special mention loans increased $70.4 million to $96.3 million at June 30, 2020, from $25.9 million at December 31, 2019. During the three months ended June 30, 2020, we downgraded thirteen lending relationships from pass-rated to special mention. Nine of these relationships, totaling $46.0 million, are in the hotel industry, and the other relationships are in retail or manufacturing. The hotel industry has experienced disruption as a direct result of the negative economic impacts of the COVID-19 pandemic.

The Company recorded net charge-offs of $399,000 for the six months ended June 30, 2020, as compared to net recoveries of $30,000 for the six months ended June 30, 2019. During the six months ended June 30, 2020, the Company recorded charge-offs of $493,000, compared to $923,000 during the same period in 2019. The charge-offs recorded during the six months ended June 30, 2019 were primarily due to a partial charge-off of $440,000 related to one commercial and industrial loan relationship that was previously reported as substandard. During the six months ended June 30, 2019, the Company also recorded recoveries of $893,000, primarily due to a partial recovery of $812,000 related to a single commercial real estate loan previously charged-off in 2010. The increase in the provision for loan losses was primarily due to the impacts of the COVID-19 pandemic on multiple sectors.

Non-interest Income.

For the six months ended June 30, 2020, non-interest income was $4.6 million, a decrease of $76,000, or 1.6%, compared to $4.7 million for the six months ended June 30, 2019. Service charges and fees decreased $150,000, or 4.3%, and other non-interest income decreased $29,000, or 13.6%. During the six months ended June 30, 2019, service charges and fees included $110,000 in non-recurring interchange fee income. During the six months ended June 30, 2020, the Company reported unrealized gains on marketable equity securities of $137,000 and a realized gain on the sale of securities of $36,000, compared to unrealized gains on marketable equity securities of $149,000 and a realized loss on the sale of securities of $61,000 during the six months ended June 30, 2019.

Non-interest Expense.

For the six months ended June 30, 2020, non-interest expense increased $396,000, or 1.6%, to $24.6 million, or 2.18% of average assets, compared to $24.2 million, or 2.31% of average assets for the six months ended June 30, 2019. The increase in non-interest expense was primarily due to the $683,000, or 5.0%, increase in salaries and employee benefits, an increase in occupancy expense of $70,000, or 3.2%, an increase in data processing expenses of $55,000, or 4.0%, and an increase in FDIC insurance expense of $27,000, or 6.6%. These increases were partially offset by a $263,000, or 35.8%, decrease in advertising expense, a decrease of $78,000, or 9.4%, in furniture and equipment related expenses, a decrease in professional fees of $76,000, or 5.8%, and a decrease of $22,000, or 0.6%, in other non-interest expenses. For the six months ended June 30, 2019, the efficiency ratio was 72.1%, compared to 72.9% for the six months ended June 30, 2019.

Income Taxes.

Income tax expense for the six months ended June 30, 2020 was $1.0 million, or an effective tax rate of 20.3%, compared to $2.0 million, or an effective tax rate of 22.7%, for six months ended June 30, 2019. The decrease in the Company’s effective tax rate was primarily due to the effect of lower projected pre-tax income for the fiscal year-end December 31, 2020.

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 June 30,										Six Months Ended June 30,
	2020					2019					2020					2019
	(Dollars in thousands)										(Dollars in thousands)
	Interest		Average Yield			Interest		Average Yield			Interest		Average Yield			Interest		Average Yield
Loans (no tax adjustment)	$	18,999		3.90	%	$	18,302		4.35	%	$	37,746		4.06	%	$	36,360		4.35	%
Tax-equivalent adjustment ⁽¹⁾		107					132					235					253
Loans (tax-equivalent basis)	$	19,106		3.92	%	$	18,434		4.38	%	$	37,981		4.08	%	$	36,613		4.38	%

Securities (no tax adjustment)	$	1,165		2.15	%	$	1,630		2.62	%	$	2,564		2.32	%	$	3,320		2.63	%
Tax-equivalent adjustment ⁽¹⁾		5					5					11					10
Securities (tax-equivalent basis)	$	1,170		2.16	%	$	1,635		2.63	%	$	2,575		2.33	%	$	3,330		2.64	%

Net interest income (no tax adjustment)	$	15,092				$	14,201				$	29,645				$	28,527
Tax-equivalent adjustment ⁽¹⁾		112					137					246					263
Net interest income (tax-equivalent basis)	$	15,204				$	14,338				$	29,891				$	28,790

Interest rate spread (no tax adjustment)				2.37	%				2.50	%				2.42	%				2.54	%
Net interest margin (no tax adjustment)				2.74	%				2.89	%				2.80	%				2.92	%

(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 and FRB based on eligible collateral of loans and securities.

At June 30, 2020 and December 31, 2019, outstanding borrowings from the FHLB were $196.7 million and $240.5 million, respectively. At June 30, 2020, we had $268.3 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. 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 June 30, 2020 and 2019. The Bank 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 this line at June 30, 2020 and 2019. As of June 30, 2020, the Bank also has an available line of credit of $21.8 million with the FRB Discount Window at an interest rate determined and reset on a daily basis. There were no advances outstanding under this line at June 30, 2020 or December 31, 2019. In addition, we may enter into reverse repurchase agreements with approved broker-dealers. Reverse repurchase agreements are agreements that allow us to borrow money using our securities as collateral.

We also have outstanding at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. We are also obligated under agreements with the FHLB to repay borrowed funds.

At June 30, 2020, we exceeded each of the applicable regulatory capital requirements. As of June 30, 2020, 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)
June 30, 2020
Total Capital (to Risk Weighted Assets):
Consolidated	$	238,703		14.00	%	$	136,386		8.00	%		N/A		N/A
Bank		225,881		13.27			136,160		8.00		$	170,199		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		220,451		12.93			102,289		6.00			N/A		N/A
Bank		207,628		12.20			102,120		6.00			136,160		8.00
Common Equity Tier 1 Capital (to Risk Weighted Assets)
Consolidated		220,451		12.93			76,717		4.50			N/A		N/A
Bank		207,628		12.20			76,590		4.50			110,630		6.50
Tier 1 Leverage Ratio (to Adjusted Average Assets):
Consolidated		220,451		9.50			92,816		4.00			N/A		N/A
Bank		207,628		8.96			92,733		4.00			115,917		5.00

December 31, 2019
Total Capital (to Risk Weighted Assets):
Consolidated	$	240,226		13.93	%	$	137,934		8.00	%		N/A		N/A
Bank		227,678		13.22			137,773		8.00		$	172,217		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		226,124		13.11			103,451		6.00			N/A		N/A
Bank		213,576		12.40			103,330		6.00			137,773		8.00
Common Equity Tier 1 Capital (to Risk Weighted Assets)
Consolidated		226,124		13.11			77,588		4.50			N/A		N/A
Bank		213,576		12.40			77,498		4.50			111,941		6.50
Tier 1 Leverage Ratio (to Adjusted Average Assets):
Consolidated		226,124		10.45			86,593		4.00			N/A		N/A
Bank		213,576		9.88			86,500		4.00			108,125		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 June 30, 2020:

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

Lease Obligations
Operating lease obligations	$	1,448	$	2,643	$	2,091	$	6,129	$	12,311

Borrowings and Debt
Federal Home Loan Bank		140,385		53,564		2,798		—		196,747
Federal Reserve Bank		—		26,417		—		—		26,417
Total borrowings and debt		140,385		79,981		2,798		—		223,164

Credit Commitments
Available lines of credit		236,533		—		—		87,038		323,571
Other loan commitments		81,377		24,846		2,791		—		109,014
Letters of credit		9,424		5,626		438		256		15,744
Total credit commitments		327,334		30,472		3,229		87,294		448,329

Other Obligations
Vendor Contracts		3,656		7,247		6,024		—		16,927

Total Obligations	$	472,823	$	120,343	$	14,142	$	93,423	$	700,731

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 our presentation in our 2019 Annual Report. Please refer to Item 7 of the 2019 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 2019 Annual Report. There was one material change in the risk factors relevant to our operations discussed in our 2019 Annual Report, as described below:

The recent COVID-19 pandemic is adversely impacting us and our customers, counterparties, employees and third-party service providers. Further, the COVID-19 pandemic could lead to an economic recession or other severe disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which we operate and the adverse impacts on our business, financial position, results of operations and prospects could be significant.

Our business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions. The COVID-19 global public health crisis and the resulting “stay-at-home” orders have resulted in widespread volatility, severe disruptions in the U.S. economy at large, and for small businesses in particular, deterioration in household, business, economic and market conditions. The extent of the impact of the COVID-19 pandemic and actions taken in response to the pandemic on our capital, liquidity and other financial positions and on our business, results of operations and prospects will depend on a number of evolving factors, including:

●

The duration, extent, and severity of the pandemic. COVID-19 does not yet appear to be contained and could affect significantly more households and businesses. The duration and severity of the pandemic continue to be impossible to predict.

●

The effects on our customers, counterparties, employees and third-party service providers. COVID-19 and its associated consequences and uncertainties may affect individuals, households, and businesses differently and unevenly. In the near-term if not longer, however, our credit, operational and other risks are generally expected to increase.

●

The effects on economies and markets. Whether the actions of governmental and nongovernmental authorities will be successful in mitigating the adverse effects of COVID-19 is unclear. National, regional and local economies and markets could suffer disruptions that are lasting. In addition, governmental actions are meaningfully influencing the interest-rate environment, which could adversely affect our results of operations and financial condition.

Additionally, if the COVID-19 pandemic has an adverse effect on (i) customer deposits, (ii) the ability of our borrowers to satisfy their obligations to us, (iii) the demand for our loans or our other products and services, (iv) other aspects of our business operations, or (v) on financial markets, real estate markets, or economic growth, this could, depending on the extent of the decline in customer deposits or loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations could be materially and adversely affected.

We are unable to estimate the impact of COVID-19 on our business and operations at this time. The global pandemic could cause us to experience higher credit losses in our lending portfolio, impairment of our goodwill and other financial assets, further reduced demand for our products and services and other negative impacts on our financial position, results of operations and prospects. Sustained adverse effects may also prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements or result in downgrades in our credit ratings.

There are no additional material changes in the risk factors relevant to our operations since December 31, 2019.

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 June 30, 2020.

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)
April 1 - 30, 2020		—		—		—		117,135
May 1 - 31, 2020		—		—		—		117,135
June 1 – 30, 2020		—		—		—		117,135
Total		—		—		—		117,135

(1)

On January 29, 2019, the Board of Directors authorized the 2019 Plan under which the Company may purchase up to 2,814,200 shares, or 10%, of its outstanding common stock. As of June 30, 2020, the Company has repurchased 2,697,065 shares under the 2019 Plan.

There were no sales by us of unregistered securities during the three months ended June 30, 2020.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.

MINE SAFETY DISCLOSURE.

Not applicable.

ITEM 5.

OTHER INFORMATION.

None.

ITEM 6.

EXHIBITS.

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

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 August 7, 2020.

	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

EXHIBIT INDEX

Exhibit Number		Description
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 June 30, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Net Income, (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.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

_______________________________

Filed herewith.

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