UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.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 SeptemberJune 30, 20172019 

 

ORor

 

☐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 File Number:001-16767

 

Western New England Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

141 Elm Street, Westfield, Massachusetts73-162767301086
(State or other jurisdictionAddress of incorporation or organization)principal executive offices)(I.R.S. Employer Identification No.)Zip Code)

 

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 classTrading
Symbol(s)		Name of each exchange on which registered
Common Stock, $0.01 par value per shareWNEBNASDAQ

 

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☐Yes ☒     No ☐

 

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

 

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

 

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

 

At November 3, 2017,August 2, 2019, the registrant had30,634,170 26,653,429 shares of common stock, $0.01 par value, issued and outstanding.

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
FORWARD-LOOKING STATEMENTSi
   
PART I – FINANCIAL INFORMATION 
   
Item 1.Financial Statements of Western New England Bancorp, Inc. and Subsidiaries (Unaudited) 
   
 Consolidated Balance Sheets – SeptemberJune 30, 20172019 and December 31, 201620181
  
 Consolidated Statements of Net IncomeOperations – Three and NineSix Months Ended SeptemberJune 30, 20172019 and 201620182
  
 Consolidated Statements of Comprehensive Income – Three and NineSix Months Ended SeptemberJune 30, 20172019 and 201620183
  
 Consolidated Statements of Changes in Shareholders’ Equity – NineThree and Six Months Ended SeptemberJune 30, 20172019 and 201620184
  
 Consolidated Statements of Cash Flows – NineSix Months Ended SeptemberJune 30, 20172019 and 2016201856
   
 Notes to Consolidated Financial Statements67
 
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations3233
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk4445
   
Item 4.Controls and Procedures4445
   
PART II – OTHER INFORMATION 
   
Item 1.Legal Proceedings4546
   
Item 1A.Risk Factors4546
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds4546
   
Item 3.Defaults upon Senior Securities4546
   
Item 4.Mine Safety Disclosures4546
   
Item 5.Other Information4546
   
Item 6.Exhibits4647

 

 

 

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,”statements” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “would,“planned,” “plan,“estimated,” “estimate,” “potential” and other similar expressions.“potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operationoperations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

 

●changes in the interest rate environment that reduce margins;

 

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

 

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

 

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

 

●changes in business conditions and inflation;

 

●changes in credit market conditions;

 

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

 

●changes in the securities markets which affect investment management revenues;

 

●increases in Federal Deposit Insurance Corporation deposit insurance premiums and assessments could adversely affect our financial condition;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 linelines of business or new products and services, which may subject us to additional risks;

 

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

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

 

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

 

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

 

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

 

i

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)STATEMENTS.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(Dollars in thousands, except share data)

 

  September 30,  December 31, 
  2017  2016 
ASSETS        
CASH AND DUE FROM BANKS $25,108  $23,297 
FEDERAL FUNDS SOLD  885   4,388 
INTEREST-BEARING DEPOSITS AND OTHER SHORT-TERM INVESTMENTS  2,907   42,549 
CASH AND CASH EQUIVALENTS  28,900   70,234 
         
SECURITIES AVAILABLE-FOR-SALE – AT FAIR VALUE  297,919   300,115 
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT COST  15,704   16,124 
LOANS - Net of allowance for loan losses of $10,518 and $10,068 at September 30, 2017 and December 31, 2016, respectively  1,608,255   1,556,416 
PREMISES AND EQUIPMENT, Net  23,440   20,885 
ACCRUED INTEREST RECEIVABLE  5,764   5,782 
BANK-OWNED LIFE INSURANCE  68,307   66,938 
DEFERRED TAX ASSET, Net  15,636   16,159 
GOODWILL  12,487   13,747 
CORE DEPOSIT INTANGIBLE  4,156   4,438 
OTHER REAL ESTATE OWNED  103   298 
OTHER ASSETS  5,707   4,882 
TOTAL ASSETS $2,086,378  $2,076,018 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
LIABILITIES:        
DEPOSITS :        
Non-interest-bearing $308,934  $303,993 
Interest-bearing  1,206,264   1,214,078 
Total deposits  1,515,198   1,518,071 
         
SHORT-TERM BORROWINGS  192,465   172,351 
LONG-TERM DEBT  106,339   124,836 
SECURITIES PENDING SETTLEMENT  137   455 
OTHER LIABILITIES  19,684   21,909 
TOTAL LIABILITIES  1,833,823   1,837,622 
         
SHAREHOLDERS’ EQUITY:        
Preferred stock - $0.01 par value, 5,000,000 shares authorized, none outstanding at September 30, 2017 and December 31, 2016  —   — 
Common stock - $0.01 par value, 75,000,000 shares authorized, 30,816,813 shares issued and outstanding at September 30, 2017; 30,380,231 shares issued and outstanding at December 31, 2016  309   304 
Additional paid-in capital  206,914   205,996 
Unearned compensation - ESOP  (5,946)  (6,418)
Unearned compensation - Equity Incentive Plan  (950)  (536)
Retained earnings  61,695   51,711 
Accumulated other comprehensive loss  (9,467)  (12,661)
Total shareholders’ equity  252,555   238,396 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $2,086,378  $2,076,018 
  June 30,  December 31, 
  2019  2018 
ASSETS        
Cash and due from banks $19,729  $20,616 
Federal funds sold  1,407   1,246 
Interest-bearing deposits and other short-term investments  4,552   4,927 
Cash and cash equivalents  25,688   26,789 
         
Securities available-for-sale, at fair value  234,999   253,748 
Marketable equity securities, at fair value  6,639   6,408 
Federal Home Loan Bank stock and other restricted stock, at cost  11,756   14,695 
Loans, net of allowance for loan losses of $12,423 and $12,053 at June 30, 2019 and December 31, 2018, respectively  1,709,738   1,684,804 
Premises and equipment, net  24,265   24,624 
Accrued interest receivable  5,493   5,652 
Bank-owned life insurance  70,155   69,252 
Deferred tax asset, net  7,943   9,872 
Goodwill  12,487   12,487 
Core deposit intangible  3,500   3,688 
Other assets  14,481   6,803 
Total Assets $2,127,144  $2,118,822 
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
LIABILITIES:        
Deposits:        
Non-interest-bearing $375,534  $355,389 
Interest-bearing  1,269,017   1,240,604 
Total deposits  1,644,551   1,595,993 
         
Short-term borrowings  50,000   59,250 
Long-term debt  175,683   208,018 
Other liabilities  27,194   18,532 
Total liabilities  1,897,428   1,881,793 
         
SHAREHOLDERS' EQUITY:        
Preferred stock - $0.01 par value, 5,000,000 shares authorized, none outstanding at June 30, 2019 and December 31, 2018  —   — 
Common stock - $0.01 par value, 75,000,000 shares authorized, 26,703,468 shares issued and outstanding at June 30, 2019; 28,393,348 shares issued and outstanding at December 31, 2018  267   284 
Additional paid-in capital  165,479   182,096 
Unearned compensation - ESOP  (4,873)  (5,171)
Unearned compensation - Equity Incentive Plan  (1,504)  (872)
Retained earnings  78,100   74,108 
Accumulated other comprehensive loss  (7,753)  (13,416)
TOTAL SHAREHOLDERS’ EQUITY  229,716   237,029 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,127,144  $2,118,822 

 

See accompanying notes to unaudited consolidated financial statements.


WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOMEOPERATIONS – UNAUDITED

(Dollars in thousands, except per share data)

             
  Three Months  Nine Months 
  Ended September 30,  Ended September 30, 
  2017  2016  2017  2016 
INTEREST AND DIVIDEND INCOME:                
Residential and commercial real estate loans $13,474  $7,367  $40,042  $20,803 
Commercial and industrial loans  2,883   1,728   8,180   5,098 
Consumer loans  88   43   260   126 
Debt securities, taxable  1,828   1,618   5,529   5,723 
Debt securities, tax-exempt  25   32   81   136 
Equity securities  35   45   105   140 
Other investments  172   130   501   398 
Federal funds sold, interest-bearing deposits and other short-term investments  11   14   103   67 
Total interest and dividend income  18,516   10,977   54,801   32,491 
                 
INTEREST EXPENSE:
                
Deposits  2,111   1,582   6,180   4,589 
Long-term debt  534   446   1,633   1,749 
Short-term borrowings  1,075   621   2,946   1,580 
Total interest expense  3,720   2,649   10,759   7,918 
Net interest and dividend income  14,796   8,328   44,042   24,573 
PROVISION FOR LOAN LOSSES  200   375   850   400 
Net interest and dividend income after provision for loan losses  14,596   7,953   43,192   24,173 
                 
NON-INTEREST INCOME (LOSS):                
Service charges and fees  1,714   953   4,789   2,696 
Income from bank-owned life insurance  450   369   1,369   1,133 
Loss on prepayment of borrowings  —   —   —   (915)
Gain on sales of securities, net  70   1   52   684 
Gain on sale of OREO  67   —   67   — 
Other income  111   —   227   — 
Total non-interest income  2,412   1,323   6,504   3,598 
                 
NON-INTEREST EXPENSE:                
Salaries and employee benefits  6,490   4,057   18,954   11,709 
Occupancy  891   555   2,815   1,712 
Furniture and equipment  410   242   1,149   723 
Data processing  680   404   1,740   1,167 
Professional fees  642   656   1,919   1,717 
FDIC insurance assessment  163   214   466   594 
Merger related expenses  —   830   626   1,913 
Advertising  328   192   961   696 
Other  1,552   1,075   4,792   3,064 
Total non-interest expense  11,156   8,225   33,422   23,295 
INCOME BEFORE INCOME TAXES  5,852   1,051   16,274   4,476 
INCOME TAX PROVISION  2,037   423   3,600   1,495 
NET INCOME $3,815  $628  $12,674  $2,981 
                 
EARNINGS PER COMMON SHARE:                
Basic earnings per share $0.13  $0.04  $0.42  $0.17 
Weighted average shares outstanding  30,103,095   17,377,844   29,895,621   17,340,101 
Diluted earnings per share $0.13  $0.02  $0.42  $0.17 
Weighted average diluted shares outstanding  30,219,083   17,377,844   30,074,361   17,340,101 

             
  Three Months  Six Months 
  Ended June 30,  Ended June 30, 
  2019  2018  2019  2018 
Interest and dividend income:                
Residential and commercial real estate loans $15,146  $14,543  $30,117  $28,342 
Commercial and industrial loans  3,071   3,777   6,074   6,592 
Consumer loans  85   85   169   173 
Debt securities, taxable  1,571   1,770   3,201   3,518 
Debt securities, tax-exempt  17   21   37   45 
Equity securities  42   38   82   74 
Other investments  210   202   446   403 
Short-term investments  73   28   149   49 
Total interest and dividend income  20,215   20,464   40,275   39,196 
                 
Interest expense:                
Deposits  4,367   2,718   8,336   5,073 
Long-term debt  1,051   1,130   2,190   1,985 
Short-term borrowings  596   751   1,222   1,551 
Total interest expense  6,014   4,599   11,748   8,609 
Net interest and dividend income  14,201   15,865   28,527   30,587 
                 
Provision for loan losses  350   750   400   1,250 
Net interest and dividend income after provision for loan losses  13,851   15,115   28,127   29,337 
                 
Non-interest income (loss):                
Service charges and fees  1,850   1,693   3,483   3,276 
Income from BOLI  478   484   903   926 
Bank-owned life insurance death benefit  —   715   —   715 
Loss on available-for-sale securities, net  (96)  (49)  (61)  (250)
Unrealized gain (loss) on marketable equity securities, net  79   (41)  149   (147)
Gain on sale of other real estate owned  —   —   —   48 
Other income  206   131   214   131 
Total non-interest income  2,517   2,933   4,688   4,699 
                 
Non-interest expense:                
Salaries and employees benefits  6,876   6,564   13,656   13,097 
Occupancy  998   967   2,169   2,027 
Furniture and equipment  427   382   832   749 
Data processing  702   678   1,367   1,315 
Professional fees  607   681   1,312   1,340 
FDIC insurance assessment  236   147   412   305 
Advertising  370   355   734   702 
Other expenses  1,924   1,772   3,681   3,437 
Total non-interest expense  12,140   11,546   24,163   22,972 
Income before income taxes  4,228   6,502   8,652   11,064 
Income tax provision  971   1,364   1,965   2,407 
         Net income $3,257  $5,138  $6,687  $8,657 
                 
Earnings per common share:                
Basic earnings per share $0.13  $0.18  $0.25  $0.30 
Weighted average shares outstanding  26,047,187   29,035,895   26,539,618   29,259,119 
Diluted earnings per share $0.12  $0.18  $0.25  $0.29 
Weighted average diluted shares outstanding  26,160,169   29,178,264   26,653,929   29,398,356 

 

 See accompanying notes to unaudited consolidated financial statements.

 


WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED

(Dollars in thousands)

 

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
             
Net income $3,815  $628  $12,674  $2,981 
                 
Other comprehensive income (loss):                
Unrealized gains (losses) on securities:                
Unrealized holding gains (losses) on available for sale securities  381   (359)  2,133   5,820 
Reclassification adjustment for gains realized in income(1)  (70)  (1)  (52)  (684)
Amortization of net unrealized loss on held-to-maturity securities(2)  —   —   —   26 
Net unrealized loss upon transfer of held-to-maturity to available-for-sale(3)  —   —   —   2,288 
Net unrealized gains (losses)  311   (360)  2,081   7,450 
Tax effect  (100)  125   (627)  (2,567)
Net-of-tax amount  211   (235)  1,454   4,883 
                 
Derivative instruments:                
Change in fair value of derivatives used for cash flow hedges  (14)  417   (307)  (2,863)
Reclassification adjustment for loss realized in interest expense(4)  228   128   751   313 
Reclassification adjustment for termination fee realized in interest expense(5)  269   269   799   687 
Net adjustments relating to derivative instruments  483   814   1,243   (1,863)
Tax effect  (133)  (277)  32   633 
Net-of-tax amount  350   537   1,275   (1,230)
                 
Defined benefit pension plans:                
Amortization of defined benefit plans actuarial loss(6)  51   24   153   71 
Tax effect  28   (8)  312   (24)
Net-of-tax amount  79   16   465   47 
                 
Other comprehensive income  640   318   3,194   3,700 
                 
Comprehensive income $4,455  $946  $15,868  $6,681 

(1)

Realized gains on available-for-sale securities are recognized as a component of non-interest income. The tax effects applicable to net realized gains were $29,000 and $407 for the three months ended September 30, 2017 and 2016, respectively. The tax effects applicable to net realized gains were $21,000 and $236,000 for the nine months ended September 30, 2017 and 2016, respectively.

(2)Amortization of net unrealized gains on held-to-maturity securities is recognized as a component of interest income on debt securities. Income tax effects associated with the reclassification adjustments were $(9,000) for the nine months ended September 30, 2016.
(3)Income tax effect associated with the reclassification adjustments upon transfer of held-to-maturity to available-for-sale was $790,000 for the nine months ended September 30, 2016.
(4)Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term debt. Income tax effects associated with the reclassification adjustment were $93,000 and $44,000 for the three months ended September 30, 2017 and 2016, respectively. Income tax effects associated with the reclassification adjustment were $307,000 and $106,000 for the nine months ended September 30, 2017 and 2016, respectively
(5)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 adjustment were $110,000 and $91,000 for the three months ended September 30, 2017 and 2016, respectively. Income tax effects associated with the reclassification adjustment were $326,000 and $234,000 for the nine months ended September 30, 2017 and 2016, respectively
(6)Amounts represent the reclassification of defined benefit plans amortization and have been recognized as a component of salaries and employee benefit expense. Income tax effects associated with the reclassification adjustments were $(21,000) and $8,000 for the three months ended September 30, 2017 and 2016, respectively. Income tax effects associated with the reclassification adjustments were $(63,000) and $24,000 for the nine months ended September 30, 2017 and 2016, respectively.
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2019  2018  2019  2018 
             
Net income $3,257  $5,138  $6,687  $8,657 
                 
Other comprehensive income (loss):                
Unrealized gains (losses) on available-for-sale securities:                
 Unrealized holding gains (losses)  3,360   (1,545)  7,687   (6,424)
 Reclassification adjustment for net losses realized in income(1)  96   49   61   250 
 Cumulative-effect adjustment due to change in accounting principle (ASU 2017-08)  —   —   7   — 
  Unrealized gains (losses)  3,456   (1,496)  7,755   (6,174)
 Tax effect  (867)  259   (1,980)  1,329 
Net-of-tax amount  2,589   (1,237)  5,775   (4,845)
                 
Cash flow hedges:                
 Change in fair value of derivatives used for cash flow hedges  (583)  240   (911)  918 
 Reclassification adjustment for loss realized in interest expense(2)  84   102   152   273 
 Reclassification adjustment for termination fee realized in interest expense(3)  266   266   530   530 
 Unrealized gains (losses) on cash flow hedges  (233)  608   (229)  1,721 
 Tax effect  65   (171)  64   (484)
Net-of-tax amount  (168)  437   (165)  1,237 
                 
Defined benefit pension plan:                
 Amortization of defined benefit plans actuarial loss(4)  32   57   64   114 
 Tax effect  (9)  (16)  (18)  (32)
Net-of-tax amount  23   41   46   82 
                 
Other comprehensive income (loss)  2,444   (759)  5,656   (3,526)
                 
Comprehensive income $5,701  $4,379  $12,343  $5,131 
                 

(1) Realized losses on available-for-sale securities are recognized as a component of non-interest income. The tax effects applicable to net realized losses were $(37,000) and $(14,000) for the three months ended June 30, 2019 and 2018, respectively.   The tax effects applicable to net realized losses were $(28,000) and $(70,000) for the six months ended June 30, 2019 and 2018, 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 $24,000 and $29,000 for the three months ended June 30, 2019 and 2018, respectively.  Income tax effects associated with the reclassification adjustments were $43,000 and $77,000 for the six months ended June 30, 2019 and 2018, respectively.

 

Tax rate(3) Amortization of termination fees 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 was 40.85%were $75,000 for the 2017 periodthree months ended June 30, 2019 and 34.0%2018, respectively.  Income tax effects associated with the reclassification adjustments were $149,000 for the comparable 2016 period.six months ended June 30, 2019 and 2018, 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 $9,000 and $16,000 for the three months ended June 30, 2019 and 2018, respectively.  Income tax effects associated with the reclassification adjustments were $18,000 and $32,000 for the six months ended June 30, 2019 and 2018, respectively.

 

See accompanying notes to unaudited consolidated financial statements.

 


 3

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(Dollars in thousands, except share data)

 

  Common Stock        Unearned     Accumulated    
 Shares  Par Value  Additional
Paid-in
Capital		  Unearned Compensation-
ESOP		  Compensation-
Equity
Incentive Plan		  Retained
Earnings		  Other
Comprehensive
Loss		  Total 
                         
BALANCE AT DECEMBER 31, 2015  18,267,747  $183  $108,210  $(6,952) $(313) $49,316  $(10,978) $139,466 
Comprehensive income  —   —   —   —   —   2,981   3,700   6,681 
Common stock held by ESOP committed to be released (74,430 shares)  —   —   62   382   —   —   —   444 
Share-based compensation - equity incentive plan  —   —   —   —   186   —   —   186 
Excess tax benefit from equity incentive plan  —   —   5   —   —   —   —   5 
Issuance of common stock in connection with equity incentive plan  62,740   1   484   —   (485)  —   —   — 
Cash dividends declared and paid ($0.09 per share)  —   —   —   —   —   (1,559)  —   (1,559)
BALANCE AT SEPTEMBER 30, 2016  18,330,487  $184  $108,761  $(6,570) $(612) $50,738  $(7,278) $145,223 
                                 
BALANCE AT DECEMBER 31, 2016  30,380,231  $304  $205,996  $(6,418) $(536) $51,711  $(12,661) $238,396 
Comprehensive income  —   —   —   —   —   12,674   3,194   15,868 
Common stock held by ESOP committed to be released (93,679 shares)  —   —   226   472   —   —   —   698 
Share-based compensation - equity incentive plan  —   —   —   —   490   —   —   490 
Common stock repurchased  (574,309)  (5)  (5,667)  —   —   —   —   (5,672)
Issuance of common stock in connection with stock option exercises  921,849   9   5,456   —   —   —   —   5,465 
Issuance of common stock in connection with equity incentive plan  89,042   1   903   —   (904)  —   —   — 
Cash dividends declared and paid ($0.09 per share)  —   —   —   —   —   (2,690)  —   (2,690)
BALANCE AT SEPTEMBER 30, 2017  30,816,813  $309  $206,914  $(5,946) $(950) $61,695  $(9,467) $252,555 

See accompanying notes to unaudited consolidated financial statements. 


WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED

THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

(Dollars in thousands)thousands, except share data)

 

  Nine Months Ended September 30, 
  2017  2016 
OPERATING ACTIVITIES:        
Net income $12,674  $2,981 
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for loan losses  850   400 
Depreciation and amortization of premises and equipment  1,468   969 
Accretion of purchase accounting adjustments, net  (1,431)  — 
Amortization of core deposit intangible  282   — 
Net amortization of premiums and discounts on securities and mortgage loans  2,577   2,758 
Net amortization of premiums on modified debt  —   60 
Share-based compensation expense  490   186 
ESOP expense  698   444 
Excess tax benefits from equity incentive plan  —   (5)
Net gains on sales of securities  (52)  (684)
Gain on sale of other real estate owned  (67)  — 
Loss on prepayment of borrowings  —   915 
Deferred income tax benefit  (973)  — 
Income from bank-owned life insurance  (1,369)  (1,133)
Changes in assets and liabilities:        
Accrued interest receivable  18   300 
Other assets  (3,578)  (1,468)
Other liabilities  1,995   (2,184)
Net cash provided by operating activities  13,582   3,539 
         
INVESTING ACTIVITIES:
        
Securities, held to maturity:        
Proceeds from calls, maturities, and principal collections  —   6,835 
Securities, available for sale:        
Purchases  (67,246)  (59,595)
Proceeds from sales  22,453   136,825 
Proceeds from calls, maturities, and principal collections  46,576   46,639 
Purchase of residential mortgages  (48,205)  (107,632)
Loan originations and principal payments, net  (4,133)  (21,185)
Redemption of Federal Home Loan Bank of Boston stock  420   2,880 
Proceeds from sale of other real estate owned  365   — 
Purchases of premises and equipment  (1,645)  (565)
Proceeds from sale of premises and equipment  —   20 
Net cash (used in) provided by investing activities  (51,415)  4,222 
         
FINANCING ACTIVITIES:
        
Net (decrease) increase in deposits  (2,120)  62,195 
Net change in short-term borrowings  20,114   51,866 
Repayment of long-term debt  (19,700)  (84,333)
Proceeds from long-term debt  1,420   1,165 
Cash dividends paid  (2,690)  (1,559)
Common stock repurchased  (5,990)  — 
Issuance of common stock in connection with stock option exercises  5,465   — 
Excess tax benefits in connection with equity incentive plan  —   5 
Net cash (used in) provided by financing activities  (3,501)  29,339 
         
NET CHANGE IN CASH AND CASH EQUIVALENTS:  (41,334)  37,100 
Beginning of period  70,234   13,703 
End of period $28,900  $50,803 
         
Supplemental cashflow information:        
Securities reclassified from held-to-maturity to available-for-sale $—  $(232,817)
Net change in cash due to broker for common stock repurchased  (318)  — 
Interest paid  10,774   8,036 
Taxes paid  3,658   2,150 
  Common Stock                   
   Shares  Par Value  Additional Paid-in Capital  Unearned Compensation- ESOP  Unearned Compensation- Equity Incentive Plan  Retained Earnings  Accumulated Other Comprehensive Loss  Total 
                          
BALANCE AT DECEMBER 31, 2017  30,487,309  $305  $203,527  $(5,786) $(791) $62,578  $(12,552) $247,281 
Comprehensive income  —   —   —   —   —   3,519   (2,767)  752 
Cumulative-effect adjustment due to change in accounting principle (ASU 2016-01)  —   —   —   —   —   (237)  237   — 
Common stock held by ESOP committed to be released (90,978 shares)  —   —   88   154   —   —   —   242 
Share-based compensation - equity incentive plan  —   —   —   —   232   —   —   232 
Common stock repurchased  (451,641)  (5)  (4,798)  —   —   —   —   (4,803)
Issuance of common stock in connection with stock option exercises  16,975   1   103   —   —   —   —   104 
Issuance of common stock in connection with equity incentive plan  85,440   1   925   —   (926)  —   —   — 
Cash dividends declared and paid on common stock ($0.04 per share)  —   —   —   —   —   (1,185)  —   (1,185)
BALANCE AT MARCH 31, 2018  30,138,083  $302  $199,845  $(5,632) $(1,485) $64,675  $(15,082) $242,623 
Comprehensive income  —   —   —   —   —   5,138   (759)  4,379 
Common stock held by ESOP committed to be released (90,978 shares)  —   —   89   154   —   —   —   243 
Share-based compensation - equity incentive plan  —   —   —   —   253   —   —   253 
Common stock repurchased  (391,376)  (4)  (4,257)  —   —   —   —   (4,261)
Cash dividends declared and paid on common stock ($0.04 per share)  —   —   —   —   —   (1,164)  —   (1,164)
BALANCE AT JUNE 30, 2018  29,746,707  $298  $195,677  $(5,478) $(1,232) $68,649  $(15,841) $242,073 

 

See the 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                   
   Shares  Par Value  Additional Paid-in Capital  Unearned Compensation- ESOP  Unearned Compensation- Equity Incentive Plan  Retained Earnings  Accumulated Other Comprehensive Loss  Total 
                         
BALANCE AT DECEMBER 31, 2018  28,393,348  $284  $182,096  $(5,171) $(872) $74,108  $(13,416) $237,029 
Comprehensive income  —   —   —   —   —   3,430   3,212   6,642 
Cumulative-effect adjustment due to change in accounting principle (ASU 2017-08)                      (7)  7   — 
Common stock held by ESOP committed to be released (88,117 shares)  —   —   60   149   —   —   —   209 
Share-based compensation - equity incentive plan  —   —   (45)  —   240   —   —   195 
Common stock repurchased  (1,555,352)  (15)  (15,432)  —   —   —   —   (15,447)
Issuance of common stock in connection with stock option exercises  12,550   —   64   —   —   —   —   64 
Issuance of common stock in connection with equity incentive plan  102,883   1   1,069   —   (1,070)  —   —   — 
Cash dividends declared and paid on common stock ($0.05 per share)  —   —   —   —   —   (1,375)  —   (1,375)
BALANCE AT MARCH 31, 2019  26,953,429  $270  $167,812  $(5,022) $(1,702) $76,156  $(10,197) $227,317 
Comprehensive income  —   —   —   —   —   3,257   2,444   5,701 
Common stock held by ESOP committed to be released (88,117 shares)  —   —   61   149   —   —   —   210 
Share-based compensation - equity incentive plan  —   —   —   —   198   —   —   198 
Common stock repurchased  (249,961)  (3)  (2,394)  —   —   —   —   (2,397)
Cash dividends declared and paid on common stock ($0.05 per share)  —   —   —   —   —   (1,313)  —   (1,313)
BALANCE AT JUNE 30, 2019  26,703,468  $267  $165,479  $(4,873) $(1,504) $78,100  $(7,753) $229,716 

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, 
  2019  2018 
OPERATING ACTIVITIES:        
Net income $6,687  $8,657 
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for loan losses  400   1,250 
Depreciation and amortization of premises and equipment  1,056   1,001 
Amortization (accretion) of purchase accounting adjustments, net  78   (1,124)
Amortization of core deposit intangible  188   188 
Net amortization of premiums and discounts on securities and mortgage loans  1,004   1,337 
Share-based compensation expense  393   485 
ESOP expense  419   485 
Unrealized (gains) losses on marketable equity securities, net  (149)  147 
Net loss on sales of securities  61   250 
Gain on sale of other real estate owned  —   (48)
Income from bank-owned life insurance  (903)  (926)
Bank-owned life insurance death benefits  —   (715)
Net change in:        
Accrued interest receivable  159   365 
Other assets  (7,688)  (1,078)
Other liabilities  8,717   2,659 
Net cash provided by operating activities  10,422   12,933 
         

INVESTING ACTIVITIES:

        
Securities, available for sale:        
Purchases  (24,864)  (10,681)
Proceeds from redemptions and sales  37,735   12,501 
Proceeds from calls, maturities, and principal collections  12,527   12,385 
Loan originations and principal payments, net  (25,524)  (37,479)
Redemption (purchase) of Federal Home Loan Bank of Boston stock  2,939   (31)
Proceeds from sale of other real estate owned  —   203 
Purchases of premises and equipment  (744)  (1,992)
Proceeds from sale of premises and equipment  27   45 
Proceeds from payout on bank-owned life insurance  —   2,050 
Net cash provided by (used in) investing activities  2,096   (22,999)

FINANCING ACTIVITIES:

        
Net increase in deposits  48,606   45,885 
Net change in short-term borrowings  (9,250)  (78,650)
Repayment of long-term debt  (32,286)  (34,989)
Proceeds from issuance of long-term debt  —   85,000 
Cash dividends paid  (2,688)  (2,349)
Common stock repurchased  (18,065)  (9,142)
Issuance of common stock in connection with stock option exercises  64   104 
Net cash (used in) provided by financing activities  (13,619)  5,859 
         
NET CHANGE IN CASH AND CASH EQUIVALENTS:  (1,101)  (4,207)
Beginning of period  26,789   27,132 
End of period $25,688  $22,925 
         
Supplemental cash flow information:        
Net change in cash due to broker for common stock repurchased $(221) $(78)
Interest paid  11,632   8,514 
Taxes paid  1,888   1,042 

See the accompanying notes to unaudited consolidated financial statements.


WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBERJUNE 30, 20172019

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

The Bank’s deposits are insured up to the limits specified by themaximum Federal Deposit Insurance Corporation (“FDIC”). coverage limits. The Bank operates 2122 banking offices in western Massachusetts and northern Connecticut, and its primary sources of revenue are earnings oninterest income from loans to small and middle-market businesses and to residential property homeowners andas well as interest income from investment securities.

 

Wholly-OwnedWholly-owned Subsidiaries and Acquisition–. Elm Street Securities Corporation, WFD Securities, Inc. and CSB Colts, Inc., are Massachusetts-charteredMassachusetts 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. On October 21, 2016, we acquired Chicopee Bancorp, Inc. (“Chicopee”), the holding company for Chicopee Savings Bank. The acquisition added eight full-service banking offices located in western Massachusetts.

 

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

 

Basis of Presentation –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 SeptemberJune 30, 2017,2019, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented. The results of operations for the three and ninesix months ended SeptemberJune 30, 20172019 are not necessarily indicative of the results of operations for the year ending December 31, 2017.2019. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

 

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2016,2018, included in our Annual Report on Form 10-K for the year ended December 31, 20162018 (the “2016“2018 Annual Report”).

 

Reclassifications –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 representrepresents income available to common shareholders divided by the weighted averageweighted-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. No dilutive potentialPotential common shares that may be issued by us relate to stock options and employee incentive plans and are determined using the treasury stock method. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. There were no anti-dilutive shares outstanding during the periods presented. Share-based compensation awards that qualify as participating securities (entitled to receive non-forfeitable dividends) are included in basic earnings per share.three and six months ended June 30, 2019 and 2018.

 

Earnings per common share for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 have been computed based on the following:

 

 Three Months Ended Nine Months Ended 
 September 30, September 30,  Three Months Ended Six Months Ended 
 2017 2016 2017 2016  June 30,  June 30, 
 (In thousands, except per share data)  2019  2018  2019  2018 
          (In thousands, except per share data) 
Net income applicable to common stock $3,815  $628  $12,674  $2,981  $3,257  $5,138  $6,687  $8,657 
                                
Average number of common shares issued  31,001   18,330   30,799   18,298   26,836   29,897   27,332   30,126 
Less: Average unallocated ESOP Shares  (838)  (926)  (861)  (945)  (678)  (768)  (689)  (779)
Less: Average unvested equity incentive plan shares  (60)  (26)  (42)  (13)  (111)  (93)  (104)  (88)
                                
Average number of common shares outstanding used to calculate basic earnings per common share  30,103   17,378   29,896   17,340   26,047   29,036   26,539   29,259 
                                
Effect of dilutive equity incentive plan  26   —   12   —   41   42   39   39 
Effect of dilutive stock options  90   —   166   —   72   100   75   100 
                                
Average number of common shares outstanding used to calculate diluted earnings per common share  30,219   17,378   30,074   17,340   26,160   29,178   26,653   29,398 
                                
Basic earnings per share $0.13  $0.04  $0.42  $0.17  $0.13  $0.18  $0.25  $0.30 
Diluted earnings per share $0.13  $0.04  $0.42  $0.17  $0.12  $0.18  $0.25  $0.29 

3. COMPREHENSIVE INCOME/LOSSINCOME (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.income (loss).

 

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

 

 

September 30,

2017

  December 31,
2016		 
 (In thousands)  

June 30,

2019

  December 31,
2018		 
      (In thousands) 
Net unrealized losses on securities available-for-sale $(3,782) $(5,863) $(2,129) $(9,891)
Tax effect  1,397   2,024   511   2,491 
Net-of-tax amount  (2,385)  (3,839)  (1,618)  (7,400)
                
Fair value of derivatives used for cash flow hedges  (2,709)  (3,152)  (2,018)  (1,259)
Termination fees on forward starting interest rate swaps  (3,933)  (4,733)
Termination fee on cancelled cash flow hedges  (2,065)  (2,595)
Total derivatives  (6,642)  (7,885)  (4,083)  (3,854)
Tax effect  2,713   2,681   1,148   1,084 
Net-of-tax amount  (3,929)  (5,204)  (2,935)  (2,770)
                
Unrecognized actuarial loss on defined benefit plan  (5,329)  (5,482)
Unrecognized actuarial loss on the defined benefit plan  (4,452)  (4,516)
Tax effect  2,176   1,864   1,252   1,270 
Net-of-tax amount  (3,153)  (3,618)  (3,200)  (3,246)
                
Accumulated other comprehensive loss $(9,467) $(12,661) $(7,753) $(13,416)

 

The following table presents changes in accumulated other comprehensive loss for the periods ended SeptemberJune 30, 20172019 and 20162018 by component:

 

  Securities  Derivatives  Defined
Benefit
Plans		  Accumulated
Other
Comprehensive
Loss		 
  (In thousands) 
Balance at December 31, 2015 $(3,046) $(5,501) $(2,431) $(10,978)
Current-period other comprehensive income (loss)  4,883   (1,230)  47   3,700 
Balance at September 30, 2016 $1,837  $(6,731) $(2,384) $(7,278)
                 
Balance at December 31, 2016 $(3,839) $(5,204) $(3,618) $(12,661)
Current-period other comprehensive income  1,454   1,275   465   3,194 
Balance at September 30, 2017 $(2,385) $(3,929) $(3,153) $(9,467)

  Securities  Derivatives  Defined Benefit
Plans		  Accumulated
Other
Comprehensive
Loss		 
  (In thousands) 
Balance at December 31, 2017 $(4,042) $(4,181) $(4,329) $(12,552)
Cumulative-effect adjustment due to change in accounting principle (ASU 2016-01)
  237   —   —   237 
Current-period other comprehensive (loss) income  (4,845)  1,237   82   (3,526)
Balance at June 30, 2018 $(8,650) $(2,944) $(4,247) $(15,841)
                 
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)


4.       SECURITIES

 

Securities available-for-sale are summarized as follows:

 

 September 30, 2017  June 30, 2019 
 Amortized
Cost		  Gross
Unrealized
Gains		  Gross
Unrealized
Losses		  Fair Value  Amortized
Cost		  Gross
Unrealized
Gains		  Gross
Unrealized
Losses		  Fair Value 
 (In thousands)  (In thousands) 
Available-for-sale securities:                                
Debt securities:                
Government-sponsored enterprise obligations $25,150  $—  $(105) $25,045 
State and municipal bonds  2,723   66   —   2,789 
Corporate bonds  14,470   106   (63)  14,513 
Total debt securities  42,343   172   (168)  42,347 
                
Mortgage-backed securities:                
Government-sponsored mortgage-backed securities $193,037  $120  $(2,836) $190,321   175,874   393   (2,212)  174,055 
U.S. government guaranteed mortgage-backed securities  17,408   —   (447)  16,961   18,911   65   (379)  18,597 
Corporate bonds  56,192   582   (221)  56,553 
State and municipal bonds  3,223   39   (37)  3,225 
Government-sponsored enterprise obligations  25,150   —   (697)  24,453 
Mutual funds  6,691   —   (285)  6,406 
Total mortgage-backed securities  194,785   458   (2,591)  192,652 
                
Total available-for-sale $301,701  $741  $(4,523) $297,919  $237,128  $630  $(2,759) $234,999 

 

 December 31, 2016   December 31, 2018 
 Amortized
Cost		  Gross
Unrealized
Gains		  Gross
Unrealized
Losses		  Fair Value   Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		   Fair Value 
  (In thousands)   (In thousands) 
Available-for-sale securities:                                
Debt securities:                
Government-sponsored enterprise obligations $25,150  $—  $(1,203) $23,947 
State and municipal bonds  2,976   33   (65)  2,944 
Corporate bonds  49,819   —   (1,651)  48,168 
Total debt securities  77,945   33   (2,919)  75,059 
                
Mortgage-backed securities:                
Government-sponsored mortgage-backed securities $184,127  $33  $(4,024) $180,136   165,605   1   (6,255)  159,351 
U.S. government guaranteed mortgage-backed securities  17,753   —   (403)  17,350   20,089   1   (752)  19,338 
Corporate bonds  50,255   265   (203)  50,317 
State and municipal bonds  4,117   13   (122)  4,008 
Government-sponsored enterprise obligations  43,140   —   (1,132)  42,008 
Mutual funds  6,586   —   (290)  6,296 
Total available-for-sale securities $305,978  $311  $(6,174) $300,115 
Total mortgage-backed securities  185,694   2   (7,007)  178,689 
                
Total available-for-sale $263,639  $35  $(9,926) $253,748 

 

Our repurchase agreements are collateralized byAt June 30, 2019, government-sponsored enterprise obligations with a fair value of $6.9 million and certain mortgage-backed securities (see Note 8).with a fair value $52.6 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 SeptemberJune 30, 2017,2019, by final maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or repayprepay obligations. Also, because mortgage-backed securities require periodic principal paydowns, they are not included in the maturity categories in the following maturity summary.

 

 September 30, 2017 June 30, 2019 
 Amortized Cost Fair Value Amortized Cost  Fair Value 
 (In thousands) (In thousands) 
Available for securities:        
Available-for-sale securities:        
Debt securities:                
Due in one year or less $—    $—   
Due after one year through five years  28,079   28,497  $22,877  $22,902 
Due after five years through ten years  49,735   49,149   12,730   12,699 
Due after ten years  6,751   6,585   6,736   6,746 
Total securities $84,565  $84,231 
Total debt securities  42,343   42,347 
Mortgage-backed securities  210,445   207,282   194,785   192,652 
Total $295,010  $291,513 
Total available-for-sale securities $237,128  $234,999 

 


Gross realized gains and losses on sales of securities available-for-sale for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 are as follows:

 

 Three Months Ended Nine Months Ended 
 September 30,  September 30,  Three Months Ended Six Months Ended 
 2017  2016  2017  2016  June 30, June 30, 
 (In thousands)  2019 2018 2019 2018 
          (In thousands) 
Gross gains realized $71  $1  $117  $1,521  $64  $—  $99  $— 
Gross losses realized  (1)  —   (65)  (837)  (160)  (49)  (160)  (250)
Net gain realized $70  $1  $52  $684 
Net loss realized $(96) $(49) $(61) $(250)

 

Proceeds from the sale of securities available-for-sale amounted to $22.5$37.8 million and $136.8$12.5 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.

 

Information pertaining to securities with gross unrealized losses at SeptemberJune 30, 20172019 and December 31, 2016,2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

 

 September 30, 2017 
 Less Than 12 Months  Over 12 Months  June 30, 2019 
 Gross
Unrealized
Losses		  Fair Value  Gross
Unrealized
Losses		  Fair Value  Less Than 12 Months Over 12 Months 
 (In thousands)  Gross
Unrealized
Losses		 Fair Value Gross
Unrealized
Losses		 Fair Value 
          (In thousands) 
Available-for-sale:                                
Government-sponsored mortgage-backed securities $1,022  $105,596  $1,814  $61,415  $48  $19,262  $2,164  $118,162 
U.S. government guaranteed mortgage-backed securities  160   9,874   287   7,086   —   —   379   14,302 
Corporate bonds  210   20,915   11   2,058   —   —   63   5,036 
State and municipal bonds  —   —   37   1,564 
Government-sponsored enterprise obligations  129   5,021   568   19,432   41   4,959   64   16,086 
Mutual funds  57   3,508   228   2,898 
Total available-for-sale $1,578  $144,914  $2,945  $94,453  $89  $24,221  $2,670  $153,586 

  December 31, 2018 
  Less Than 12 Months  Over 12 Months 
  Gross
Unrealized
Losses		  Fair Value  Gross
Unrealized
Losses		  Fair Value 
  (In thousands) 
Available-for-sale:                
Government-sponsored mortgage-backed securities $74  $7,354  $6,181  $148,762 
U.S. government guaranteed mortgage-backed securities  15   2,829   737   14,669 
Corporate bonds  110   9,995   1,541   38,173 
State and municipal bonds  —   —   65   1,532 
Government-sponsored enterprise obligations  —   —   1,203   23,947 
Total available-for-sale $199  $20,178  $9,727  $227,083 

 

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

  

December 31, 2016 

 
  Less Than 12 Months  Over 12 Months 
  Gross
Unrealized
Losses		  Fair Value  Gross
Unrealized
Losses		  Fair Value 
  (In thousands) 
             
Available-for-sale:                
Government-sponsored mortgage-backed securities $3,016  $147,691  $1,008  $27,303 
U.S. government guaranteed mortgage-backed securities  192   12,536   211   4,814 
Corporate bonds  203   18,481   —   — 
State and municipal bonds  95   1,507   27   305 
Government-sponsored enterprise obligations  1,132   42,008   —   — 
Mutual funds  79   3,429   211   2,867 
Total available-for-sale $4,717  $225,652  $1,457  $35,289 


  September 30, 2017 
  Less Than 12 Months  Over 12 Months 
  Number of Securities  Amortized
Cost Basis		  Gross
Loss		  Depreciation from Amortized Cost Basis (%)  Number of Securities  Amortized Cost Basis  Gross Loss  Depreciation from Amortized Cost Basis (%) 
  (Dollars in thousands) 
                         
Government-sponsored mortgage-backed securities  41  $106,618  $1,022   1.0%  27  $63,229  $1,814   2.9%
U.S. government guaranteed mortgage-backed securities  3   10,034   160   1.6   4   7,373   287   3.9 
Corporate bonds  7   21,125   210   1.0   1   2,069   11   0.5 
Government-sponsored enterprise obligations  1   5,150   129   2.5   8   20,000   568   2.8 
State and municipal bonds  —   —   —   —   3   1,601   37   2.3 
Mutual funds  1   3,565   57   1.6   2   3,126   228   7.3 
      $146,492  $1,578          $97,398  $2,945     

 

These unrealized lossesThe 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 result of changes in interest rates and not credit quality. Because we do not intend to sellrespective 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 and it is more likely than not that we willwould not be required to sellsettled at a price less than the investments before recoverypar value of their amortized cost basis, no declines are deemed to be other-than-temporary.the Company's investments. Management's assessment of other debt securities within the portfolio includes reviews of market pricing, ongoing credit quality evaluations, assessment of the investments' materiality, and duration of the investments' unrealized loss position.

 

5.        LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Loans consisted of the following amounts: September 30,  December 31, 
  2017  2016 
  (In thousands) 
Commercial real estate $716,890  $720,741 
Residential real estate:        
Residential  555,768   522,083 
Home equity  92,359   92,083 
Commercial and industrial  244,374   222,286 
Consumer  4,467   4,424 
 Total Loans  1,613,858   1,561,617 
Unearned premiums and deferred loan fees and costs, net  4,915   4,867 
Allowance for loan losses  (10,518)  (10,068)
  $1,608,255  $1,556,416 

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

  June 30,  December 31, 
  2019  2018 
  (In thousands) 
Commercial real estate $802,765  $768,881 
Residential real estate:        
Residential 1-4 family  575,792   577,641 
Home equity  96,046   97,238 
Commercial and industrial  237,928   243,493 
Consumer  5,337   5,203 
Total gross loans  1,717,868   1,692,456 
Unearned premiums and deferred loan fees and costs, net  4,293   4,401 
Allowance for loan losses  (12,423)  (12,053)
Net loans $1,709,738  $1,684,804 

 

DuringThere were no purchases of loans during the ninesix months ended SeptemberJune 30, 20172019 and 2016, we purchased residential real estate loans aggregating $48.2 million and $107.6 million, respectively.year ended December 31, 2018.


Loans Serviced for Others.

 

We haveThe Company has transferred a portion of ourits originated commercial real estate and commercial and industrial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in our accompanying unaudited consolidated balance sheets. We continue to service the loans on behalf of the participating lenders. We share ratably with our participating lenders, inon a pro-rata basis, any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. We continue to service the loans on behalf of the participating lenders and, as such, collect cash payments from the borrowers, remit payments (net of servicing fees) to participating lenders and disburse required escrow funds to relevant parties. At SeptemberJune 30, 20172019 and December 31, 2016, we serviced2018, the Company was servicing commercial loans for participants aggregating $32.4participated out to various other institutions totaling $34.9 million and $42.6$35.4 million, respectively.


Residential mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balances of these loans totaled $67.8 million and $75.2 million at September 30, 2017 and December 31, 2016, respectively. Service fee income of $49,000 and $3,000 was recorded for the nine months ended September 30, 2017 and 2016, respectively, and is included in service charges and fees on the consolidated statements of net income.

 

Residential real estate mortgages are originated by the Bank both for its portfolio and for sale into the secondary market. The Bank may sell its loans to institutional investors such as the Federal Home Loan Mortgage Corporation.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 SeptemberJune 30, 2017,2019, include weighted average prepayment speed for the portfolio using the Public Securities Association Standard Prepayment Model (203(172 PSA), weighted average internal rate of return (10.05%(12.05%), weighted average servicing fee (0.2501%(0.25%), and average net cost to service loans ($59.3283.49 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, 2019 and December 31, 2018, the Company was servicing residential mortgage loans owned by investors totaling $53.3 million and $56.6 million, respectively. Net service fee income of $36,000 and $48,000 was recorded for the six months ended June 30, 2019 and 2018, respectively, and is included in service charges and fees on the consolidated statements of operations.

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

 

   

Three Months
Ended

September 30,

2017 

  

Nine Months
Ended

September 30,

2017

 
   (In thousands) 
        
 Balance at the beginning of period: $408  $465 
 Capitalized mortgage servicing rights  —   — 
 Amortization  (28)  (85)
 Balance at the end of period $380  $380 
 Fair value at the end of period $538  $538 

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

  

Three Months Ended

June 30,

2019

  

Six Months Ended

June 30,

2019

 
  (In thousands) 
Balance at the beginning of period: $269  $286 
Capitalized mortgage servicing rights  —   — 
Amortization  (16)  (33)
Balance at the end of period $253  $253 
Fair value at the end of period $381  $381 

 

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. There were no changes in our policies or methodology pertaining to the general component of the allowance for loan losses during the periods presented for disclosure.

 

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

 

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

 

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

 

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

 

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

 

Allocated component

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

 

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


Unallocated component

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

 

An analysis of changes in the allowance for loan losses by segment for the periodssix months ended SeptemberJune 30, 20172019 and 20162018 is as follows:

 

 Commercial Real Estate  Residential Real Estate  Commercial and Industrial  Consumer  Unallocated  Total  Commercial
Real Estate		  Residential
Real Estate		  Commercial and Industrial  Consumer  Unallocated  Total 
 (In thousands)  (In thousands) 
Three Months Ended      
Balance at June 30, 2016 $3,956  $2,804  $2,797  $20  $(7) $9,570 
Balance at March 31, 2018 $5,199  $3,397  $2,681  $78  $15  $11,370 
Provision (credit)  62   189   83   43   (2)  375   259   211   263   47   (30)  750 
Charge-offs  —   (40)  —   (46)  —   (86)  —   (80)  (25)  (49)  —   (154)
Recoveries  59   —   —   9   —   68   —   1   3   16   —   20 
Balance at September 30, 2016 $4,077  $2,953  $2,880  $26  $(9) $9,927 
Balance at June 30, 2018 $5,458  $3,529  $2,922  $92  $(15) $11,986 
                                                
Balance at June 30, 2017 $4,472  $3,126  $2,754  $53  $13  $10,418 
Balance at March 31, 2019 $5,205  $3,571  $2,954  $144  $5  $11,879 
Provision (credit)  (68)  146   (109)  83   148   200   (224)  78   460   40   (4)  350 
Charge-offs  —   (107)  —   (104)  —   (211)  (103)  (31)  (456)  (39)  —   (629)
Recoveries  —   80   3   28   —   111   812   1   2   8   —   823 
Balance at September 30, 2017 $4,404  $3,245  $2,648  $60  $161  $10,518 
Balance at June 30, 2019 $5,690  $3,619  $2,960  $153  $1  $12,423 
                                                
Nine Months Ended                        
Balance at December 31, 2015 $3,856  $2,431  $2,485  $22  $46  $8,840 
Six Months Ended                        
Balance at December 31, 2017 $4,712  $3,311  $2,733  $71  $4  $10,831 
Provision (credit)  (614)  610   395   64   (55)  400   710   282   204   73   (19)  1,250 
Charge-offs  (170)  (90)  —   (87)  —   (347)  —   (80)  (25)  (85)  —   (190)
Recoveries  1,005   2   —   27   —   1,034   36   16   10   33   —   95 
Balance at September 30, 2016 $4,077  $2,953  $2,880  $26  $(9) $9,927 
Balance at June 30, 2018 $5,458  $3,529  $2,922  $92  $(15) $11,986 
                                                
Balance at December 31, 2016 $4,083  $2,862  $3,085  $38  $—  $10,068 
Balance at December 31, 2018 $5,260  $3,556  $3,114  $135  $(12) $12,053 
Provision (credit)  239   427   (180)  203   161   850   (200)  186   334   67   13   400 
Charge-offs  (36)  (148)  (285)  (237)  —   (706)  (219)  (125)  (494)  (85)  —   (923)
Recoveries  118   104   28   56   —   306   849   2   6   36   —   893 
Balance at September 30, 2017 $4,404  $3,245  $2,648  $60  $161  $10,518 
Balance at June 30, 2019 $5,690  $3,619  $2,960  $153  $1  $12,423 

FurtherThe following table presents information pertaining to the allowance for loan losses by segment at September 30, 2017 and December 31, 2016 follows:for the dates indicated:

 

 Commercial Real Estate  Residential Real Estate  Commercial and Industrial  Consumer  Unallocated  Total  Commercial
Real Estate		  Residential
Real Estate		  Commercial
and
Industrial		  Consumer  Unallocated  Total 
 (In thousands)  (In thousands) 
September 30, 2017             
June 30, 2019             
                          
Amount of allowance for impaired loans $—  $—  $—  $—  $—  $—  $—  $—  $—  $—  $—  $— 
Amount of allowance for non-impaired loans  4,404   3,245   2,648   60   161   10,518   5,690   3,619   2,960   153   1   12,423 
Total allowance for loan losses $4,404  $3,245  $2,648  $60  $161  $10,518  $5,690  $3,619  $2,960  $153  $1  $12,423 
                                                
Impaired loans $3,993  $3,854  $2,869  $127  $—  $10,843  $6,898  $4,142  $3,041  $46  $—  $14,127 
Non-impaired loans  699,945   640,622   240,421   4,340   —   1,585,328   785,939   664,553   234,016   5,291   —   1,689,799 
Loans acquired with deteriorated credit quality  12,952   3,651   1,084   —   —   17,687 
Impaired loans acquired with deteriorated credit quality  9,928   3,143   871   —   —   13,942 
Total loans $716,890  $648,127  $244,374  $4,467  $—  $1,613,858  $802,765  $671,838  $237,928  $5,337  $—  $1,717,868 
                                                
December 31, 2016                        
December 31, 2018                        
                                                
Amount of allowance for impaired loans $—  $—  $—  $—  $—  $—  $—  $—  $—  $—  $—  $— 
Amount of allowance for non-impaired loans  4,083   2,862   3,085   38   —   10,068   5,260   3,556   3,114   135   (12)  12,053 
Total allowance for loan losses  4,083   2,862   3,085   38   —   10,068  $5,260  $3,556  $3,114  $135  $(12) $12,053 
                                                
Impaired loans $3,335  $452  $3,042  $—  $—  $6,829  $5,237  $4,754  $2,345  $60  $—  $12,396 
Non-impaired loans  701,766   609,107   217,972   4,424   —   1,533,269   752,770   666,883   240,235   5,143   —   1,665,031 
Loans acquired with deteriorated credit quality  15,640   4,607   1,272   —   —   21,519 
Impaired loans acquired with deteriorated credit quality  10,874   3,242   913   —   —   15,029 
Total loans $720,741  $614,166  $222,286  $4,424  $—  $1,561,617  $768,881  $674,879  $243,493  $5,203  $—  $1,692,456 
                        

1516

Past Due and Non-accrual Loans.

 

The following is a summarytables present an age analysis of past due and non-accrual loans by class at September 30, 2017 and December 31, 2016:as of the dates indicated:

 

 30 – 59 Days
Past Due		  60 – 89 Days
Past Due		  Greater than
90 Days
Past Due		  Total Past
Due		  Past Due 90
Days or More
and Still
Accruing		  Loans on Non-
Accrual		  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)  (In thousands) 
September 30, 2017             
June 30, 2019               
               
Commercial real estate $196  $295  $136  $627  $—  $2,181  $2,863  $81  $4,805  $7,749  $795,016  $802,765  $6,339 
Residential real estate:                                                    
Residential  2,308   570   572   3,450   —   1,744   1,977   527   2,220   4,724   571,068   575,792   5,014 
Home equity  218   135   72   425   —   73   219   —   233   452   95,594   96,046   384 
Commercial and industrial  472   59   108   639   —   2,700   737   714   289   1,740   236,188   237,928   3,137 
Consumer  54   18   5   77   —   17   47   —   —   47   5,290   5,337   46 
Total legacy loans  3,248   1,077   893   5,218   —   6,715 

Total loans

 $5,843  $1,322  $7,547  $14,712  $1,703,156  $1,717,868  $14,920 
                                                    
Loans acquired from Chicopee Savings Bank  2,957   1,610   1,279   5,846   —   6,450 
December 31, 2018                            
                                                    
Total $6,205  $2,687  $2,172  $11,064  $—  $13,165 
                        
December 31, 2016                        
Commercial real estate $302  $555  $137  $994  $—  $2,740  $1,857  $—  $2,865  $4,722  $764,159  $768,881  $4,701 
Residential real estate:                                                    
Residential  791   262   689   1,742   —   1,658   1,798   572   1,879   4,249   573,392   577,641   5,856 
Home equity  208   36   —   244   —   37   600   5   242   847   96,391   97,238   391 
Commercial and industrial  326   32   —   358   —   3,214   794   1,463   305   2,562   240,931   243,493   2,476 
Consumer  27   9   7   43   —   14   93   1   21   115   5,088   5,203   60 
Total legacy loans  1,654   894   833   3,381   —   7,663 
                        
Loans acquired from Chicopee Savings Bank  3,854   1,907   551   6,312   —   6,394 
                        
Total past due loans $5,508  $2,801  $1,384  $9,693  $—  $14,057 

Total loans

 $5,142  $2,041  $5,312  $12,495  $1,679,961  $1,692,456  $13,484 

Impaired Loans.

 

The following is a summary of impaired loans by class at and for the periods ended September 30, 2017 and December 31, 2016:class:

 

 Impaired Loans(1)(2)       Three Months Ended Six Months Ended 
      Three Months Ended Nine Months Ended  At June 30, 2019  June 30, 2019  June 30, 2019 
 At September 30, 2017(1)  September 30, 2017  September 30, 2017  Recorded
Investment		  Unpaid
Principal
Balance		  Average
Recorded
Investment		  Interest
Income
Recognized		  Average
Recorded
Investment		  Interest
Income
Recognized		 
 Recorded
Investment		  Unpaid
Principal
Balance		  Average
Recorded
Investment		  Interest
Income
Recognized		  Average
Recorded
Investment		  Interest
Income
Recognized		  (In thousands) 
 (In thousands) 
Impaired loans without a valuation allowance(2):                        
Impaired Loans(1):                        
Commercial real estate $16,945  $19,380  $17,731  $199  $18,788  $650  $16,826  $20,065  $17,213  $168  $17,035  $299 
Residential real estate:                        
Residential real estate  6,939   7,410   7,016   11   6,548   34   6,876   8,001   6,849   20   7,020   64 
Home equity  566   590   407   1   260   3   409   485   402   —   409   — 
Commercial and industrial  3,953   10,242   4,442   54   4,538   183   3,912   9,028   4,045   37   3,882   74 
Consumer  127   131   122   —   83   —   46   58   49   —   53   — 
                        
Total impaired loans $28,530  $37,753  $29,718  $265  $30,217  $870  $28,069  $37,637  $28,558  $225  $28,399  $437 

  At December 31, 2018  Three Months Ended
June 30, 2018		  Six Months Ended
June 30, 2018		 
  Recorded
Investment		  Unpaid
Principal
Balance		  Average
Recorded
Investment		  Interest
Income
Recognized		  Average
Recorded
Investment		  Interest
Income
Recognized		 
  (In thousands) 
Impaired Loans(1):                        
Commercial real estate $16,111  $19,081  $14,564  $182  $14,984  $372 
Residential real estate  7,558   8,614   6,968   9   6,773   19 
Home equity  438   468   606   1   671   2 
Commercial and industrial  3,258   7,788   4,198   28   4,094   72 
Consumer  60   70   95   —   101   — 
Total impaired loans $27,425  $36,021  $26,431  $220  $26,623  $465 

 

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

(2)   Includes loans acquired with deteriorated credit quality from the Chicopee Bancorp merger.


  Impaired Loans(1)(2) 
        Three Months Ended  Nine Months Ended 
  At December 31, 2016(1)  September 30, 2016  September 30, 2016 
  Recorded
Investment		  Unpaid
Principal
Balance		  Average
Recorded
Investment		  Interest
Income
Recognized		  Average
Recorded
Investment		  Interest
Income
Recognized		 
  (In thousands) 
Impaired loans without a valuation allowance(2):                        
Commercial real estate $18,975  $21,330  $3,487  $17  $3,551  $49 
Residential real estate  5,059   5,676   515   —   482   — 
Commercial and industrial  4,314   11,049   3,356   —   3,434   — 
                         
Total impaired loans $28,348  $38,055  $7,358  $17  $7,467  $49 

(1)Includes loans acquired with deteriorated credit quality from the Chicopee Bancorp, Inc. merger.

(2)Includes loans acquired with deteriorated credit quality from the Chicopee Bancorp merger.

 

No interest income was recognized forThe majority of impaired loans are included within the non-accrual balances; however, not every loan on a cash-basis method during the three and nine months ended September 30, 2017 or 2016. Interest income recognized on an accrual basis during the three and nine months ended September 30, 2017 related to performing purchase impairednon-accrual status has been designated as impaired. Impaired loans while activityinclude loans that have been modified in the comparable 2016 periods related to performing TDR loans.

We may periodically agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). TheseImpaired loans are individually evaluated and exclude large groups of smaller-balance homogeneous loans, such as residential mortgage loans and consumer loans, which are collectively evaluated for impairment, and loans that are measured at fair value, unless the loan is amended in a TDR.

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

Troubled Debt Restructurings.

Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan as a result of financial difficulties of the borrower, the Bank grants the borrower a concession on the terms, that would not otherwise be considered. Typically, such concessions could includemay consist of a reduction in the 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 loan, payment extensions, postponementBank's position or forgivenesssignificantly extends the note's maturity date, such that the present value of principal, forbearance or other actions intendedcash flows to maximize collection.be received is materially less than those contractually established at the loan's origination. All TDRsloans 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 an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, we evaluate allNon-performing TDRs including those that have payment defaults, for possible impairment and recognize impairment through the allowance.are included in non-performing loans.

 


Nonperforming TDRs are shown as nonperforming assets. Two substandard impaired loan relationships in the aggregate amount of $2.4 million were designated as TDRs during the three and six months ended June 30, 2019. One loan relationship consisting of a commercial real estate loan and a commercial and industrial loan totaling $2.2 million was classified as a TDR during the three months ended June 30, 2019 as the Bank entered into a forbearance agreement with the customer that allows for interest-only payments for a specified term. Both loans to the customer were current as of June 30, 2019 and the loan relationship is considered to be adequately secured by real estate. The Bank will continue to monitor the loan relationship for ongoing impairment on a quarterly basis. In addition, a second loan relationship consisting of a commercial real estate loan and a commercial and industrial loan totaling $166,000 was modified as a TDR during the three months ended June 30, 2019 to allow for interest-only payments for a specified term. Both loans were in nonperforming status as of June 30, 2019, however; the loan relationship is considered to be adequately secured by real estate. The Bank will continue to be monitor the loan relationship for ongoing impairment on a quarterly basis.

There were no significant loans modified in TDRs during the three and ninesix months ended SeptemberJune 30, 2017. A substandard impaired loan relationship in2018.

  Three Months Ended
June 30, 2019		  Six Months Ended
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 amount of $4.6 million was designated a TDR during the ninethree and six months ended SeptemberJune 30, 2016. The bank entered into a forbearance agreement which offered an interest only period. Due to the borrower continuing to experience declining sales, the interest only period was extended during the second quarter of 2016, resulting in the TDR classification. The loans are on non-accrual2019 and are current. The loans are measured for impairment quarterly and appropriate reserves/charge offs have been taken.

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


A default occurs when a loan is2018, no TDRs defaulted (defined as 30 days or more past due. No TDRs defaulteddue) within twelve12 months of restructuringrestructuring. As of June 30, 2019, we have not committed to lend any additional funds for loans that are classified as impaired. There were $440,000 in charge-offs on TDRs during the three and ninesix months ended SeptemberJune 30, 2017 or 2016.

2019. There were no charge-offs on TDRs during the three and ninesix months ended SeptemberJune 30, 2017 and 2016.2018.

 

Loans Acquired with Deteriorated Credit QualityQuality.

 

The following is a summary of loans acquired fromin the Chicopee Bancorp, Inc. (“Chicopee”) acquisition with evidence of credit deterioration as of SeptemberJune 30, 2017.2019 and 2018.

 

  Contractual Required Payments Receivable  Cash Expected To Be Collected  Non-
Accretable Discount		  Accretable
Yield		  Loans
Receivable		   Contractual
Required
Payments
Receivable		  Cash Expected
To Be
Collected		  Non-
Accretable
Discount		  Accretable
Yield		  Loans
Receivable		 
 (In thousands)  (In thousands) 
           
Balance at December 31, 2016  $37,437  $29,040  $8,397  $7,521  $21,519 
Balance at December 31, 2018  $24,793  $19,883  $4,910  $4,854  $15,029 
Collections   (3,860)  (3,326)  (534)  (1,003)  (2,323)   (1,454)  (1,366)  (88)  (322)  (1,044)
Dispositions   (1,833)  (1,503)  (330)  6   (1,509)   (108)  (108)  —   (65)  — 
Balance at September 30, 2017  $31,744  $24,211  $7,533  $6,524  $17,687 
Balance at June 30, 2019  $23,231  $18,409  $4,822  $4,467  $13,942 

   Contractual
Required
Payments
Receivable		  Cash Expected
To Be
Collected		  Non-
Accretable
Discount		  Accretable
Yield		  Loans
Receivable		 
   (In thousands) 
Balance at December 31, 2017  $29,362  $23,158  $6,204  $6,033  $17,125 
Collections   (2,783)  (1,702)  (1,081)  (345)  (1,357)
Dispositions   —   —   —   —   — 
Balance at June 30, 2018  $26,579  $21,456  $5,123  $5,688  $15,768 

19

 

Credit Quality InformationInformation.

 

We utilizeThe 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. NonperformingNon-performing residential real estate, home equity and consumer loans are monitored individually for impairment and risk rated as “Substandard.“substandard.”

 

Loans rated 1 – 34: Loans rated 1-4 represent groups of loans that are considered “Pass” rated loans with lownot subject to averageadverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent acceptable risk.

 

Loans rated 4 are considered “Pass Watch,” with an acceptable level of risk. Loans in this category remain “pass” rated and are not a criticized or classified loan, however, represent borrowers which may exhibit tight cash flows and/or leveraged balance sheets.

5: Loans rated 5 are considered “Special Mention.” These loansMention” and may exhibit potential credit weaknesses or downward trends and are being closely monitored by us.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.” Generally, aA loan is consideredclassified as substandard if the borrower exhibits a well-defined weakness thatand 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 in full, onof the basis of currently existing facts,loan highly questionable and improbableimprobable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and that a partialstrengthening of the asset, its classification as an estimated loss of principal is likely.deferred until its more exact status may be determined.

 

Loans rated 8: Loans rated 8 are considered uncollectible and of such littleuncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that their continuance as loansit is not warranted.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. Construction loans are reported within commercial real estate loans and total $67.6 million and $88.9 million at September 30, 2017 and December 31, 2016, respectively. We engage an independent third party to review a significant portion of loans within these segments on a semi-annual basis. We use the results of these reviews as part of our annual review process. In addition, management utilizes delinquency reports, the watch listcriticized report and other loan reports to monitor credit qualityquality. 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 other segments.
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 at Septemberfor the periods indicated:

  Commercial
Real Estate		  Residential
1-4 Family		  Home
Equity		  Commercial
and Industrial		  Consumer  Total 
  (In thousands) 
June 30, 2019                  
Pass (Rated 1 — 4) $757,827  $569,471  $95,458  $202,344  $5,291  $1,630,391 
Special Mention (Rated 5)  23,236   —   —   7,901   —   31,137 
Substandard (Rated 6)  21,702   6,321   588   27,683   46   56,340 
  $802,765  $575,792  $96,046  $237,928  $5,337  $1,717,868 
                         
December 31, 2018                        
Pass (Rated 1 — 4) $732,729  $570,428  $96,643  $207,663  $5,143  $1,612,606 
Special Mention (Rated 5)  17,929   —   —   12,248   —   30,177 
Substandard (Rated 6)  18,223   7,213   595   23,582   60   49,673 
Total $768,881  $577,641  $97,238  $243,493  $5,203  $1,692,456 

20

6.GOODWILL AND OTHER INTANGIBLES

At June 30, 20172019 and December 31, 2016:

  Commercial
Real Estate		  Residential
1-4 Family		  Home
Equity		  Commercial
and Industrial		  Consumer  Total 
  (In thousands) 
September 30, 2017                  
Loans rated 1 – 3 $647,599  $549,936  $91,854  $192,968  $4,340  $1,486,697 
Loans rated 4  45,339   95   —   35,585   —   81,019 
Loans rated 5  14,724   —   —   7,521   —   22,245 
Loans rated 6  9,228   5,737   505   8,300   127   23,897 
  $716,890  $555,768  $92,359  $244,374  $4,467  $1,613,858 
                         
December 31, 2016                        
Loans rated 1 – 3 $673,957  $516,339  $91,964  $180,675  $4,391  $1,467,326 
Loans rated 4  24,207   —   —   16,621   6   40,834 
Loans rated 5  14,068   —   —   6,727   —   20,795 
Loans rated 6  6,604   5,744   119   15,379   27   27,873 
Loans rated 7  1,905   —   —   2,884   —   4,789 
  $720,741  $522,083  $92,083  $222,286  $4,424  $1,561,617 

6.       GOODWILL AND OTHER INTANGIBLES

Goodwill

Goodwill for the nine months ended September 30, 2017 is summarized as follows:

   

Nine Months
Ended
September 30,

2017

 
     (In thousands) 
 Balance at December 31, 2016  $13,747 
 Current period adjustments   (1,260)
 Balance at September 30, 2017  $12,487 

At September 30, 2017 and December 31, 2016,2018, 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, 2019 or the year ended December 31, 2018. Annually, or more frequently if events or changes in circumstances warrant such evaluation, the Company evaluates its goodwill for impairment. No goodwill impairment was recorded for the nine months ended September 30, 2017.

During the three months ended March 31, 2017, management completed their evaluation of premises and equipment acquired from Chicopee, which resulted in a $2.4 million adjustment to the provisional fair values of bank premises acquired and a $1.4 million reduction in goodwill. The remaining adjustments to goodwill of $140,000 during the three months ended March 31, 2017 resulted from information obtain during the quarter about events and circumstances that existed as of the acquisition date.

 

Core Deposit IntangiblesIntangibles.

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

   

Nine Months
Ended
September 30,

2017

 
     (In thousands) 
 Balance at December 31, 2016  $4,438 
 Amortization   (282)
 Balance at September 30, 2017  $4,156 

Amortization expense was $282,000$94,000 and $188,000 for the ninethree and six months ended SeptemberJune 30, 2017.2019 and 2018, respectively. At SeptemberJune 30, 2017,2019, future amortization of the core deposit intangible totalstotaled $375,000 for each of the next five years and $2.3$1.6 million thereafter.

 

7.7. SHARE-BASED COMPENSATION

Stock Options.

 

Stock Options –Under the terms of the Chicopee merger agreement dated April 4,October 21, 2016, each option to purchase shares of Chicopee common stock issued by Chicopee and outstanding at the effective time of the merger October 21, 2016, pursuant to the Chicopee 2007 Equity Incentive Plan fully vested and converted into an option to purchase shares of WNEB common stock on the same terms and conditions as were applicable before the merger, except (1) the number of shares of WNEB common stock subject to the new option was adjusted to be equal to the product of the number of shares of Chicopee common stock subject to the existing option and the exchange ratio (rounding fractional shares to the nearest whole share) and (2) the exercise price per share of WNEB common stock under the new option was adjusted to be equal to the exercise price per share of Chicopee common stock of the existing option divided by the exchange ratio (rounded to the nearest whole cent).


A summary of stock option activity for the ninesix months ended SeptemberJune 30, 20172019 is presented below. No options were outstanding during the nine months ended September 30, 2016.below:

 

   Shares  Weighted
Average
Exercise
Price		  

Weighted
Average
Remaining Contractual
Term

(in years)

  

Aggregate
Intrinsic
Value 

(in thousands)

 
              
Outstanding at December 31, 2016   1,178,899  $6.01   1.98  $3,930 
Exercised   (921,849)  5.93   0.91   3,675 
Outstanding at September 30, 2017   257,050  $6.31   4.66  $1,175 
                  
Exercisable at September 30, 2017   257,050  $6.31   4.66  $1,175 

   Shares  Weighted
Average
Exercise Price		  Weighted
Average
Remaining
Contractual
Term
(in years)		  Aggregate
Intrinsic
Value
(in thousands)		 
Outstanding at December 31, 2018   238,075  $6.33   3.44  $877 
Exercised   (12,550)  5.12   0.74   60 
Outstanding at June 30, 2019   225,525  $6.40   3.33  $633 
                  
Exercisable at June 30, 2019   225,525  $6.40   3.33  $633 

 

Cash received for options exercised during the ninesix months ended SeptemberJune 30, 20172019 and 2018 was $5.5 million.$64,000 and $104,000, respectively.

 

Restricted Stock Awards–Awards.

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

 

In January 2015, there were 48,560 shares were granted under this plan andthe 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 of grant, wasand recorded as unearned compensation and is beingcompensation. The shares are amortized over the applicable vesting period.

 


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

 

The 2016 LTI Plan includes eligible officersparticipants of the Company whothat are nominated by the Company’s Chief Executive Officer and approved by the Compensation Committee. The 2016 LTI Plan is triggered by the Company’s achievement of satisfactory safety and soundness results from its most recent regulatory examination. Employee stockexamination and additional Company performance metrics. Stock grants made throughunder the 2016 LTI plan will be a combinationPlan consist of 50% time-vested restrictedtime-based stock and 50% performance-based restricted stock.

 

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

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

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

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

In May 2017, there were 89,042 shares granted under the 2017 LTI Plan. Of the 89,042 shares, 55,159 shares are time-based, with 21,276 vesting in one year and 33,883 vesting ratably over a three-year period. The remaining 33,883 shares granted were performance-based and are subject to the achievement of the 2017 LTI performance metric. Vesting is realized after a three yearthree-year period. ForUnder the performance shares,2017 LTI Plan, the primary performance metric for 2016 awards iswas return on equity. PerformancePerformance-based shares will be earned based upon how the Company performs relative to threshold, target and targetmaximum absolute goals (i.e. Company-specific, not relative to a peer index) overon an annual performance period, but will be distributed at the end of the three-year performance period. The threshold amount for the performance period will be a return on equity of 5.85% and a target amount of 6.32%. Participants will be able to earn between 50% (for threshold performance) and 100% of the(for target amount forperformance) of the performance shares but will not earn additional shares if performance exceeds target performance.

 

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

  Return on Equity Metrics 
Performance Period
Ending		  

Original

Threshold

  Adjusted
Threshold		   Original
Target		   Adjusted
Target		   Original
Maximum		   Adjusted
Maximum		 
December 31, 2019  6.50%  7.09%  7.20%  7.85%  7.90%  8.61%

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


In May 2017, 89,042January 2018, there were 83,812 shares were granted under the 2018 LTI Plan. Of this total, 55,159the 83,812 shares, are retention-based,50,852 shares were time-based, with 21,27617,908 vesting in one year and 33,88332,944 vesting ratably over a three yearthree-year period. The remaining 33,88332,960 shares granted are performance basedperformance-based and are subject to the achievement of the 20172018 long-term incentive performance metric. Under the 2018 LTI performance metric before vesting is realized after a three year period. For the performance shares,Plan, the primary performance metric for 2017 awards iswas 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 yearthree-year period.


The threshold, target and maximum for the three year periodstretch metrics under the 20172018 LTI Plan isare as follows:

 

   Return on Equity Targets 
     
Performance Period Ending  Threshold   Target   Maximum 
             
December 31, 2017  6.00%  6.60%  7.30%
December 31, 2018  6.30%  7.00%  7.60%
December 31, 2019  6.50%  7.20%  7.90%
             
    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%

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

 

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

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

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

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

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 SeptemberJune 30, 2017,2019, there were an additional 315,658127,335 shares were available for future grants under this plan.the RSA Plan.


OurA summary of the status of restricted stock award plan activity for the nine months ended Septemberawards at June 30, 2017 and 20162019 is summarizedpresented below:

 

  Shares  Weighted Average
Grant Date Fair Value		 
Balance at December 31, 2018   155,712  $9.87 
Shares granted   108,718   9.77 
Shares vested   (53,465)  8.75 
Balance at June 30, 2019   210,965  $10.10 
  Unvested Stock Awards
Outstanding		          
  Shares   Weighted
Average
Grant Date
Fair Value		   Shares  Weighted Average
Grant Date Fair Value		 
       
Outstanding at December 31, 2016 91,371  $7.51 
Balance at December 31, 2017   138,833  $8.98 
Shares granted 89,042   10.15    83,812   11.05 
Shares vested  (21,552)  7.44    (32,476)  9.13 
Outstanding at September 30, 2017  158,861  $9.00 
       
Outstanding at December 31, 2015 54,160  $7.28 
Shares granted 62,740   7.73 
Shares vested  (11,200)  7.18 
Outstanding at September 30, 2016  105,700  $7.56 
Balance at June 30, 2018   190,169  $9.87 

 

We recorded compensation cost related to thetotal expense for restricted stock awards of $490,000$393,000 and $186,000$485,000 for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.

 

8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

 

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

 

Short-term borrowings are made up of FHLBBFHLB advances with an original maturity of less than one year totaled $50.0 million and $59.3 million at June 30, 2019 and December 31, 2018, respectively, with a weighted average rate of 2.51% and 3.28%, respectively. At June 30, 2019, based on qualifying collateral less outstanding advances, the Bank had the additional capacity to borrow up to approximately $231.6 million from the FHLB.

In addition, at June 30, 2019 and December 31, 2018, the Company had an available Ideal Way line of credit with the FHLBB and customer repurchase agreements, which mature daily. Short-term borrowings issued by the FHLBB were $174.0 million at September 30, 2017 and $155.0 million at December 31, 2016. We have an “Ideal Way” line of credit with the FHLBBFHLB for up to $9.5 million at September 30, 2017 and December 31, 2016.million. Interest on this line of credit is payable at a rate determined and reset by the FHLBBFHLB on a daily basis. The outstanding principal is due daily butand the portion not repaid will be automatically renewed. ThereAt June 30, 2019 and December 31, 2018, there were no advances outstanding on theunder this line.

The Bank also had a line of credit as of September 30, 2017 or December 31, 2016. Customer repurchase agreements were $18.5in the amount up to $15.0 million with a correspondent bank at September 30, 2017 and $17.4 million at December 31, 2016. A customer repurchase agreement is an agreement by us to sell to and repurchase from the customer an interest in specific securities issued by or guaranteed by the U.S. government. This transaction settles immediately on a same day basis in immediately available funds. Interest paid is commensurate with other products of equal interest and credit risk. In addition, we have lines of credit of $4.0 million and $50.0 million with Bankers Bank Northeast (“BBN”) and PNC Bank, respectively. The interest rates on these lines arerate determined and reset on a daily basis by each respective bank.basis. There were no advances outstanding under these linesthis line at June 30, 2019 and 2018. We also had a $50.0 million line of credit with another correspondent bank at Septemberan interest rate determined and reset on a daily basis.  There were no advances outstanding under the line at June 30, 2017 or December 31, 2016. As part of our contract with BBN, we are required to maintain a reserve balance of $300,000 with BBN for our use of this line of credit.2019 and 2018.

 


Long-term debt consists of FHLBB advances with an original maturity of one year or more. At SeptemberJune 30, 2017,2019, we had $106.3$175.7 million in long-term debt with the FHLBB. This compares to $124.8$208.0 million in long-term debt with FHLBB advances at December 31, 2016.

Customer repurchase agreements are collateralized by government-sponsored enterprise obligations with fair value of $6.8 million and $24.6 million, and mortgage backed securities with a fair value of $61.1 million and $57.6 million, at September 30, 2017 and December 31, 2016, respectively. The securities collateralizing repurchase agreements are subject to fluctuations in fair value. We monitor the fair value of the collateral on a periodic basis, and would pledge additional collateral if necessary based on changes in fair value of collateral or the balances of the repurchase agreements.

All FHLBB advances are collateralized by a blanket lien on our owner occupied residential real estate loans and certain eligible commercial real estate loans.2018.

 

9. PENSION BENEFITS

 

We maintainprovide a defined benefit pension plan for our eligible employees. On September 30, 2016, we effectedemployees (the “Plan”). Employees must work a soft freeze onminimum of 1,000 hours per year to be eligible for the Plan and therefore no new participants will be includedPlan. Eligible employees become vested in the Plan after such effective date.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 2017.2019. No contributions have been made to the plan for the ninesix months ended SeptemberJune 30, 2017.2019. The pension plan assets are invested in group annuity contracts with thevarious pooled separate investment accounts offered by Principal Life Insurance Company, a division of Principal Financial Group, who also acts as third-party administrator for our 401(k)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 ESOP plans.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
September 30,		  Nine Months Ended,
September 30,		 
  2017  2016  2017  2016 
  (In thousands) 
Service cost $245  $283  $778  $854 
Interest cost  254   240   761   719 
Expected return on assets  (298)  (275)  (895)  (823)
Amortization of actuarial losses  51   24   153   71 
Net periodic pension cost $252  $272  $797  $821 

  Three Months Ended
June 30,		  Six Months Ended,
June 30,		 
  2019  2018  2019  2018 
  (In thousands) 
Service cost $274  $303  $548  $606 
Interest cost  284   253   568   506 
Expected return on assets  (308)  (347)  (616)  (694)
Actuarial loss  32   57   64   114 
Net periodic pension cost $282  $266  $564  $532 

 

10. DERIVATIVES AND HEDGING ACTIVITIES

 

Risk Management Objective of Using DerivativesDerivatives.

 

We areThe 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.

 

23

Fair Values of Derivative Instruments on the Balance SheetSheet.

 

The table below presents the fair value of our derivative financial instruments designated as hedging instruments as well as our classification on the balance sheet as of SeptemberJune 30, 20172019 and December 31, 2016.2018.

 

September 30, 2017 Asset Derivatives  Liability Derivatives
  Balance Sheet Location  Fair Value  Balance Sheet Location  Fair Value 
  (In thousands) 
             
Interest rate swaps Other Assets $1  Other Liabilities $2,710 

June 30, 2019 Asset Derivatives  Liability Derivatives 
  Balance Sheet     Balance Sheet    
  Location  Fair Value  Location  Fair Value 
  (In thousands) 
             
Interest rate swaps Other Assets $—  Other Liabilities $2,018 

 

December 31, 2016 Asset Derivatives  Liability Derivatives
  Balance Sheet Location  Fair Value  Balance Sheet Location  Fair Value 
  (In thousands) 
             
Interest rate swaps Other Assets $—  Other Liabilities $3,152 

December 31, 2018 Asset Derivatives  Liability Derivatives 
  Balance Sheet     Balance Sheet    
  Location  Fair Value  Location  Fair Value 
  (In thousands) 
             
Interest rate swaps Other Assets $—  Other Liabilities $1,259 

At June 30, 2019 and December 31, 2018, all derivatives were designated as hedging instruments.

 

Cash Flow Hedges of Interest Rate RiskRisk.

 

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

 


The following table presents information about our cash flow hedges at SeptemberJune 30, 20172019 and December 31, 2016:2018:

 

June 30, 2019 Notional Weighted
Average		 Weighted Average Rate Estimated Fair
 Notional  Weighted
Average		  Weighted Average Rate  Estimated Fair  Amount Maturity Receive Pay Value
September 30, 2017 Amount  Maturity  Receive  Pay  Value 
 (In thousands) (In years)     (In thousands) (In thousands) (In years)     (In thousands)
Interest rate swaps on FHLBB borrowings $75,000   2.6   1.31%  2.46% $(2,709) $35,000   3.2   2.41%  3.54% $(2,018)

 

December 31, 2018 Notional Weighted
Average		 Weighted Average Rate Estimated Fair
 Notional  Weighted
Average		  Weighted Average Rate  Estimated Fair  Amount Maturity Receive Pay Value
December 31, 2016 Amount  Maturity  Receive  Pay  Value 
 (In thousands) (In years)     (In thousands)  (In thousands) (In years)     (In thousands)
Interest rate swaps on FHLBB borrowings $75,000   3.4   0.92%  2.46% $(3,152) $35,000   3.7   2.79%  3.54% $(1,259)

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

 

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and theearnings. The ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. We assess the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. We did not recognize any hedge ineffectiveness in earnings duringfor the ninethree and six months ended SeptemberJune 30, 20172019 or 2016.the year ended December 31, 2018.

 


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

 

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

 

  Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) 
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
  (In thousands) 
Interest rate swaps $(14) $417  $(307) $(2,863)
  Amount of Gain (Loss) Recognized in OCI on Derivative 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2019  2018  2019  2018 
  (In thousands) 
Interest rate swaps $(583) $240  $(911) $918 

 

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 assets/liabilities. The amount reclassified from accumulated other comprehensive income into net income for the effective portion of interest rate swaps and termination fees was $497,000$350,000 and $397,000$368,000 during the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and $1.6 million$682,000 and $1.0 million during$803,000 for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. During the next 12 months, we estimate that $1.8 million will be reclassified as an increase in interest expense. During the ninethree and six months ended SeptemberJune 30, 20172019 and 2016,2018, no gains or losses were reclassified from accumulated other comprehensive loss into income for ineffectiveness on cash flow hedges.

 

Credit-risk-related Contingent Features

 

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

 

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

 


As of SeptemberAt June 30, 2017, the termination value of derivatives in2019 and December 31, 2018, we had a net liability position related to these agreements, which includes accrued interest but excludes any adjustment for nonperformance risk, was $2.7 million.of $2.0 million and $1.3 million with our counterparties, respectively. As of SeptemberJune 30, 2017,2019, we havehad minimum collateral posting thresholds with certain of our derivative counterparties and had mortgage-backed securities with a fair value of $3.0$856,000 and $1.2 million and $50,000in cash posted as collateral against our obligations under these agreements. If we had breached any of these provisions at SeptemberJune 30, 2017,2019, we could have been required to settle our obligations under the agreements at the termination value.


11. FAIR VALUE OF ASSETS AND LIABILITIES

 

Determination of Fair ValueValue.

 

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 – 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 –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 –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 –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.

 

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

 

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

 

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

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

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


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

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

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

 

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


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

 

 June 30, 2019 
 September 30, 2017  Level 1  Level 2  Level 3  Total 
 Level 1  Level 2  Level 3  Total  (In thousands) 
Assets: (In thousands)    
Securities available-for-sale                
Government-sponsored mortgage-backed securities $—  $190,321  $—  $190,321  $—  $174,055  $—  $174,055 
U.S. government guaranteed mortgage-backed securities  —   16,961   —   16,961   —   18,597   —   18,597 
Corporate bonds  —   56,553   —   56,553   —   14,513   —   14,513 
State and municipal bonds  —   3,225   —   3,225   —   2,789   —   2,789 
Government-sponsored enterprise obligations  —   24,453   —   24,453   —   25,045   —   25,045 
Mutual funds  6,406   —   —   6,406 
Total securities available-for-sale  6,406   291,513   —   297,919 
                
Interest rate swaps  —   1   —   1 
Marketable equity securities  6,639   —   —   6,639 
Total assets $6,406  $291,514  $—  $297,920  $6,639  $234,999  $—  $241,638 
                                
Liabilities:                                
Interest rate swaps $—  $2,710  $—  $2,710  $—  $2,018  $—  $2,018 

 

 December 31, 2018 
 December 31, 2016  Level 1  Level 2  Level 3  Total 
 Level 1  Level 2  Level 3  Total  (In thousands) 
Assets: (In thousands)    
Government-sponsored mortgage-backed securities $—  $180,136  $—  $180,136  $—  $159,351  $—  $159,351 
U.S. government guaranteed mortgage-backed securities  —   17,350   —   17,350   —   19,338   —   19,338 
Corporate bonds  —   50,317   —   50,317   —   48,168   —   48,168 
State and municipal bonds  —   4,008   —   4,008   —   2,944   —   2,944 
Government-sponsored enterprise obligations  —   42,008   —   42,008   —   23,947   —   23,947 
Mutual funds  6,296   —   —   6,296 
Marketable equity securities  6,408   —   —   6,408 
Total assets $6,296  $293,819  $—  $300,115  $6,408  $253,748  $—  $260,156 
                                
Liabilities:                                
Interest rate swaps $—  $3,152  $—  $3,152  $—  $1,259  $—  $1,259 

 


Also, weAssets 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. There were no assets measured at fair value on a non-recurring basis at SeptemberJune 30, 2017.2019 or December 31, 2018. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related assets at SeptemberJune 30, 2016.2019 and December 31, 2018. Total losses represent the change in carrying value as a result of fair value adjustments related to assets still held at September 30, 2016.the periods indicated.

 

  At September 30, 2016  Three Months Ended September 30, 2016  Nine Months Ended September 30, 2016 
           Total  Total 
  Level 1  Level 2  Level 3  Gains (Losses)  Gains (Losses) 
  (In thousands)       
Impaired Loans $—  $—  $2,059  $—  $(220)
  At  Three Months Ended  Six Months Ended 
  June 30, 2019  June 30, 2019  June 30, 2019 
           Total  Total 
  Level 1  Level 2  Level 3  Gains (Losses)  Gains (Losses) 
  (In thousands)       
Impaired Loans $—  $—  $3,588  $(567) $(697)
Total Assets $—  $—  $3,588  $(567) $(697)

 

  At  Three Months Ended  Six Months Ended 
  December 31, 2018  June 30, 2018  June 30, 2018 
           Total  Total 
  Level 1  Level 2  Level 3  Gains (Losses)  Gains (Losses) 
  (In thousands)       
Impaired Loans $—  $—  $1,676  $(80) $(80)
Total Assets $—  $—  $1,676  $(80) $(80)


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

There were no transfers to or from Level 1 and 2 during the three and nine months ended September 30, 2017 and 2016. We did not measure any liabilities measured at fair value on a non-recurring basis on the consolidated balance sheets.at June 30, 2019 and December 31, 2018.


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

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

 

 September 30, 2017  June 30, 2019 
 Carrying Value  Fair Value  Carrying Value Fair Value 
    Level 1  Level 2  Level 3  Total     Level 1 Level 2 Level 3 Total 
 (In thousands)  (In thousands) 
Assets:                      
Cash and cash equivalents $28,900  $28,900  $—    $—    $28,900  $25,688  $25,688  $—  $—  $25,688 
Securities available-for-sale  297,919   6,406   291,513   —     297,919   234,999   —   234,999   —   234,999 
Marketable equity securities  6,639   6,639   —   —   6,639 
Federal Home Loan Bank of Boston and other restricted stock  15,704   —     —     15,704   15,704   11,756   —   —   11,756   11,756 
Loans - net  1,608,255   —     —     1,577,309   1,577,309   1,709,738   —   —   1,682,834   1,682,834 
Accrued interest receivable  5,764   —     —     5,764   5,764   5,493   —   —   5,493   5,493 
Mortgage servicing rights  380   —     380   —     380   253   —   381   —   381 
Derivative assets  1   —     1   —     1 
                                        
Liabilities:                                        
Deposits  1,515,198   —     —     1,514,641   1,514,641   1,644,551   —   —   1,646,144   1,646,144 
Short-term borrowings  192,465   —     192,482   —     192,482   50,000   —   50,012   —   50,012 
Long-term debt  106,339   —     106,517   —     106,517   175,683   —   176,079   —   176,079 
Accrued interest payable  394   —     —     394   394   646   —   —   646   646 
Derivative liabilities  2,710   —     2,710   —     2,710   2,018   —   2,018   —   2,018 

 

 December 31, 2016  December 31, 2018 
 Carrying Value  Fair Value  Carrying Value  

Fair Value

 

 
    Level 1  Level 2  Level 3  Total     Level 1  Level 2  Level 3  Total 
 (In thousands)  (In thousands) 
Assets:                      
Cash and cash equivalents $70,234  $70,234  $—    $—    $70,234  $26,789  $26,789  $—  $—  $26,789 
Securities available-for-sale  300,115   6,296   293,819   —     300,115   253,748   —   253,748   —   253,748 
Marketable equity securities  6,408   6,408   —   —   6,408 
Federal Home Loan Bank of Boston and other restricted stock  16,124   —     —     16,124   16,124   14,695   —   —   14,695   14,695 
Loans - net  1,556,416   —     —     1,525,274   1,525,274   1,684,804   —   —   1,631,558   1,631,558 
Accrued interest receivable  5,782   —     —     5,782   5,782   5,652   —   —   5,652   5,652 
Mortgage servicing rights  465   —     628   —     628   286   —   456   —   456 
                                        
Liabilities:                                        
Deposits  1,518,071   —     —     1,521,580   1,521,580   1,595,993   —   —   1,592,521   1,592,521 
Short-term borrowings  172,351   —     172,351   —     172,351   59,250   —   59,247   —   59,247 
Long-term debt  124,836   —     125,183   —     125,183   208,018   —   206,789   —   206,789 
Accrued interest payable  1,012   —     —     1,012   1,012   530   —   —   530   530 
Derivative liabilities  3,152   —     3,152   —     3,152   1,259   —   1,259   —   1,259 

12.        RECENT ACCOUNTING PRONOUNCEMENTSLEASES

 

In May 2014,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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,Revenuelease term and lease liabilities represent our obligation to make lease payments arising from Contractsthe 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 Customers (Topic 606).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 amendments in this Update create Topic 606, Revenue from ContractsCompany has operating leases for certain of our banking offices and ATMs. Our leases have remaining lease terms of one year to 19 years, some of which include options to extend the leases for additional five-year terms up to 15 years.

The components of lease expense were as follows:

  Three Months Ended  Six Months Ended 
  June 30, 2019  June 30, 2019 
  (In thousands) 
         
Amortization of right-of-use assets $243  $485 
Interest on lease liabilities  61   124 
Operating lease cost $304  $609 

Supplemental cash flow information related to leases was as follows:

  Six Months Ended 
  June 30, 2019 
   (In thousands) 
     
Cash paid for amounts included in the measurement of lease liabilities:    
Operating cash flows from operating leases $584 

Supplemental balance sheet information related to leases was as follows:

  June 30, 2019 
   (In thousands) 
     
Operating lease right-of-use assets $6,744 
Operating lease liabilities $6,778 

The weighted average remaining lease term for our operating leases was 11 years with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topicsa weighted average discount rate of 3.53% at June 30, 2019.


Maturities of the Codification. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for annual reporting periods, including interim periods, beginning after December 15, 2017. We do not expect the application of this guidance to have a material impact on our consolidated financial statements other than expanded disclosures regarding non-interests income.Company’s operating lease liabilities were as follows (in thousands):

Years Ending December 31,    
2019  $544 
2020   995 
2021   917 
2022   887 
2023   703 
Thereafter   4,333 
Total lease payments   8,379 
Less imputed interest   (1,601)
Total  $6,778 

 

In January 2016, the FASB issued ASU 2016-01,Financial Instruments – Overall, (Subtopic 825-10). The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Targeted improvements to generally accepted accounting principles include the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income and the elimination of the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We do not expect the application of this guidance to have a material impact on our consolidated financial statements due to the limited amounts of marketable equity securities owned by the Company.13. RECENT ACCOUNTING PRONOUNCEMENTS

 

In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842), which supersedes the requirements in Topic 840, Leases.Leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. The amendments in this UpdateASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in this Update is permitted for all entities. Management is currently evaluating the impact to the consolidated financial statements of adopting this Update but does not expect adoption to have a material impact on our consolidated financial statements. As of September 30, 2017, the Company had $9.9 million of outstanding operating leases pertaining to banking premises, which would be recognized as assets and corresponding liabilities upon adoption.

In March 2016, the FASB issued ASU 2016-09,Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718). This Update was issued as part of the FASB’s simplification initiative. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted this Update duringASU on January 1, 2019 and recorded an increase in assets of $7.2 million and an increase in liabilities of $7.2 million on the nine months ended September 30, 2017 which resulted inconsolidated balance sheet as a result of recognizing the recognition of $821,000 in income tax benefit that would have previously been recognized in additional paid in capital.right-of-use assets and lease liabilities.

 

In June 2016, the FASB issued ASU No. 2016-13,Financial Instruments—Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. This ASU is effective for the first interim period in fiscal years beginning after December 15, 2019, and for interim periods within that fiscal years. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.2019. The Company is in the process of evaluatingimplementing 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 2016, the FASB issued ASU No. 2016-15,Statement of Cash Flows (Topic 230),Classification of Certain Cash Receipts and Cash Payments. This Update provides guidance on eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; separately identifiable cash flows and application of the predominance principle. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We do not expect the application of this guidance to have a material impact on our consolidated financial statements.

 

In March 2017, the FASB issued ASU No. 2017-08—2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20):Premium Amortization on Purchased Callable Debt Securities. This UpdateASU amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). The Company adopted this ASU on January 1, 2019, which reduced premiums on callable debt securities and resulted in a cumulative-effect adjustment directly to retained earnings, net of tax, of $7,000.


In August 2017, the FASB issued ASU 2017-12,Derivatives and Hedging (Topic 815):Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU refine and expand hedge accounting for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. It also makes certain targeted improvements to simplify the application of hedge accounting guidance. The ASU is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2018. We do2019, and interim periods beginning after December 15, 2020. Early adoption, including adoption in the interim period, is permitted. Management does not expect the applicationadoption of this guidanceASU to have a material impact on our consolidated financial statements.

 

In August 2017,2018, the FASB issued ASU 2017-12,2018-13,DerivativesFair Value Measurement (Topic 820):Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removes and Hedging: Targeted Improvementsmodifies the previously required disclosures relating to Accountingfair value measurements. Specifically, the ASU removes the required disclosure of amounts and reasons for Hedging Activities(ASU 2017-12).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 purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption,2019, including adoption in an interim period, permitted. The Company plansperiods within those fiscal years. As this standard relates to adopt ASU 2017-12 on January 1, 2018. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. While the Company continues to assess all potential impacts of the standard, we dodisclosures, Management does not expect the application of this guidanceadoption to have a material impact on our consolidated financial statements.


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

 

OverviewOverview.

 

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 ourthe Company’s commercial loan portfolio and industrial andrelated commercial real estate loan portfoliosdeposits by targeting businesses in our primary market areas of western Massachusettsarea and northern Connecticut as a means to increase the yield onnet interest margin and loan income;

●supplement the commercial portfolio by growing the residential real estate portfolio to diversify ourthe loan portfolio and build transactional deposit accountdeepen 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

 

●supplement the commercial focus, grow the residential loan portfolioconsider growth through acquisitions. We may pursue expansion opportunities in existing or adjacent strategic locations with companies that add complementary products to diversify riskour existing business and deepen customer relationships.at terms that add value to our existing shareholders.

 

You should read the following financial results for the three and ninesix months ended SeptemberJune 30, 20172019 in the context of this strategy. The third quarter financial results for 2016 reflect the pre-merger operations of the Company. As a result, the Company’s 2017 third quarter may not be comparable to financial results for the third quarter of 2016.

 

●Net income was $3.8$3.3 million, or $0.13$0.12 per diluted share, for the three months ended SeptemberJune 30, 2017,2019, compared to $628,000,$5.1 million, or $0.04$0.18 per diluted share, for the same period in 2016.2018. For the ninesix months ended SeptemberJune 30, 2017,2019, net income was $12.7$6.7 million, or $0.42$0.25 per diluted share, as compared to net income of $3.0$8.7 million, or $0.17$0.29 per diluted share, for the same period in 2016.2018.

 

●The provision for loan losses was $200,000$350,000 and $375,000$750,000 for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and $850,000$400,000 and $400,000$1.3 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The lower provision for the nine months ended September 30, 2016 was primarily the result of a $1.0 million partial recovery on a previously charged-off single commercial real estate loan during the first quarter of 2016.

 

●Net interest income was $14.8$14.2 million and $8.3$15.9 million for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The net interest margin was 2.89% for the three months ended June 30, 2019, compared to 3.24% for the same period in 2018. The net interest margin, on a tax-equivalent basis, was 2.92% for the three months ended June 30, 2019, compared to 3.27% for the same period in 2018. Net interest income was $28.5 million and $30.6 million for the six months ended June 30, 2019 and 2018, respectively. The net interest margin was 2.92% and 3.17% for the six months ended June 30, 2019 and 2018, respectively. The net interest margin, on a tax-equivalent basis, was 3.09%2.95% and 3.19% for the threesix months ended SeptemberJune 30, 2017, compared to 2.65% for the same period in 2016. Net interest income was $44.0 million2019 and $24.6 million for the nine months ended September 30, 2017 and 2016, respectively. The net interest margin, on a tax-equivalent basis, was 3.09% and 2.62% for the nine months ended September 30, 2017 and 2016,2018, respectively.


CRITICAL ACCOUNTING POLICIESPOLICIES.

 

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 ninesix months ended SeptemberJune 30, 2017.2019. For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the accompanying unaudited consolidated financial statements and Note 1 of the consolidated financial statements included in our 20162018 Annual Report.

 

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBERJUNE 30, 20172019 AND DECEMBER 31, 20162018

 

TotalAt June 30, 2019, total assets were $2.1 billion, at September 30, 2017 andan increase of $8.3 million, or 0.4%, from December 31, 2016. A slight increase in2018. During the same period, total assets of $10.4loans increased $25.4 million, or 0.5%1.5%, wassecurities available-for-sale decreased $18.7 million, or 7.4%, and cash and cash equivalents decreased $1.1 million, or 4.1%.

Total loans increased $25.4 million, or 1.5%, primarily due to an increase in totalcommercial real estate loans of $52.3$33.9 million, or 3.3%4.4%, partially offset by a decrease in cash and cash equivalentsresidential real estate loans, which include home equity loans, of $41.3$3.0 million, or 58.8%0.4%, and a decrease in investments of $2.6 million, or 0.8%.

Total loans of $1.6 billion increased $52.3 million, or 3.3%, at September 30, 2017, from $1.6 billion at December 31, 2016. The increase was due to a $33.9 million, or 5.5%, increase in residential loans, including home equity loans, an increase of $22.1 million, or 9.9%, in commercial and industrial loans partially offset by a decrease of $3.9$5.7 million, or 0.5%, in commercial real estate loans. The decrease in the commercial real estate portfolio was largely related to the expected payoff of a $7.5 million completed commercial real estate construction project during first quarter 2017.2.3%.

 

All loans where the payments are 90 days or more in arrears as of the closing date of each month are placed on nonaccrual status. Nonperforming loans were $13.2$14.9 million at SeptemberJune 30, 20172019 and $14.1$13.5 million at December 31, 2016.2018. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $580,000$651,000 and $371,000$393,000 for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. At SeptemberJune 30, 2017, we had $103,000 in other real estate owned (“OREO”). At September 30, 20172019 and December 31, 2016,2018, our nonperforming loans to total loans were 0.81%was 0.87% and 0.90%0.79%, respectively, while our nonperforming assets to total assets werewas 0.70% and 0.64% and 0.69%, respectively. A summary of our nonaccrual and past due loans by class are listed in Note 5 of the accompanying unaudited consolidated financial statements.

 

During the three months ended March 31, 2017, management completed an evaluation of premises and equipment acquired from Chicopee, which resulted in a $2.4 million adjustment to the provisional fair values of bank premises acquired and a $1.4 million reduction to goodwill. The remaining adjustments to goodwill of $140,000 during the three months ended March 31, 2017 resulted from information obtain during the quarter about events and circumstances that existed as of the acquisition date. There were no adjustments to goodwill during the three months ended SeptemberAt June 30, 2017.


At September 30, 2017,2019, total deposits were $1.6 billion, an increase of $1.5 billion decreased $2.9$48.6 million, or 0.2%3.0%, from December 31, 2016. Savings accounts decreased $5.2 million, or 3.5%, to $144.3 million. Time deposits decreased $6.3 million, or 1.1%, from $572.9 million at December 31, 2016 to $566.7 million at September 30, 2017. The decrease in time deposits was due to non-relationship customers and brokered deposits seeking higher yields. We are focused on allowing high cost non-relationship deposits to mature and be replaced with low cost relationship-based core deposits.2018. Core deposits, definedwhich the Company defines as all deposits except time deposits, represented 62.6%increased $30.8 million, or 3.3%, from $935.9 million, or 58.6% of total deposits, and increased $3.4at December 31, 2018, to $966.7 million, or 0.4%58.8% of total deposits, at June 30, 2019. Non-interest-bearing deposits increased $20.1 million, or 5.7%, to $375.5, interest-bearing checking accounts increased $6.3 million, or 9.9%, to $69.9 million, and savings accounts increased $5.8 million, or 4.9%, to $124.3 million, while money market accounts decreased $1.4 million, or 0.3%, to $397.0 million. Time deposits increased $17.8 million, or 2.7%, from $945.1$660.0 million at December 31, 20162018 to $948.5$677.8 million at SeptemberJune 30, 2017. Non-interest bearing2019. Brokered deposits, which are included within time deposits, increased $4.9$4.3 million, or 1.6%,18.1% to $308.9 million, money market accounts increased $3.4 million, or 0.8%, to $412.7 million, and interest-bearing checking accounts increased $228,000, or 0.3%, to $82.6 million.

Borrowings increased $1.6 million, or 0.5%, to $298.8$28.1 million at SeptemberJune 30, 20172019, from $297.2$23.8 million at December 31, 2016. Short-term borrowings increased $20.12018.

FHLB advances decreased $41.6 million, or 11.7%15.6%, to $192.5 million at September 30, 2017 from $172.4$267.3 million at December 31, 2016 due2018, to an increase in short-term FHLBB funding. Long-term debt$225.7 million at June 30, 2019. Short-term FHLB borrowings decreased $18.5$9.3 million, or 14.8%15.6%, to $106.3$50.0 million at SeptemberJune 30, 20172019, from $124.8$59.3 million at December 31, 2016.2018. Long-term debt decreased $32.3 million, or 15.5%, to $175.7 million at June 30, 2019, from $208.0 million at December 31, 2018. The Company utilized the increase in deposit balances during the year to pay down FHLB borrowings. Additional information regarding short-term borrowings and long-term debt is included in Note 8 of the accompanying unaudited consolidated financial statements.

 


Shareholders’At June 30, 2019, shareholders’ equity was $252.6$229.7 million, or 12.1%10.8% of total assets, at September 30, 2017 and $238.4compared to $237.0 million, or 11.5%11.2% of total assets, at December 31, 2016.2018. The increasedecrease in shareholders’ equity during the nine months reflects net income of $12.7$17.8 million the exercise of stock options for $5.7 million and other comprehensive income of $3.2 million. These increases were offset by the repurchase of common stock for $5.7 millionthe Company’s shares and the payment of regular cash dividends of $2.7 million, for the nine months ended September 30, 2017.both partially offset by net income of $6.7 million and a decrease in accumulated other comprehensive loss of $5.7 million.

 

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBERJUNE 30, 20172019 AND SEPTEMBERJUNE 30, 20162018

 

GeneralGeneral.

 

Net income was $3.8$3.3 million, or $0.13$0.12 per diluted share, for the three months ended SeptemberJune 30, 2017,2019, compared to $628,000,$5.1 million, or $0.04$0.18 per diluted share, for the same period in 2016.2018. Net interest income was $14.8$14.2 million and $8.3$15.9 million for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.

 


Net Interest and Dividend IncomeIncome.

 

The following tables set forth the information relating to our average balance and net interest income for the three months ended SeptemberJune 30, 20172019 and 2016,2018, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned from making changes in loan rates and terms and fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.


  Three Months Ended September 30, 
  2017  2016 
  Average     Average
Yield/		  Average     Average
Yield/		 
  Balance  Interest  Cost  Balance  Interest  Cost 
  (Dollars in thousands) 
ASSETS:                  
Interest-earning assets                        
Loans(1)(2) $1,605,376  $16,681   4.16% $932,140  $9,168   3.93%
Securities(2)  302,030   1,901   2.52   296,406   1,709   2.31 
Other investments  17,748   172   3.88   12,728   130   4.09 
Short-term investments(3)  5,206   11   0.85   17,380   14   0.32 
Total interest-earning assets  1,930,360   18,765   3.89   1,258,654   11,021   3.50 
Total non-interest-earning assets  141,119           79,032         
Total assets $2,071,479          $1,337,686         
                         
LIABILITIES AND EQUITY:                        
Interest-bearing liabilities                        
Interest-bearing checking accounts $82,164   81   0.39  $31,194   24   0.31%
Savings accounts  148,433   43   0.12   75,566   20   0.11 
Money market accounts  400,400   386   0.39   278,257   293   0.42 
Time deposit accounts  568,578   1,601   1.13   383,288   1,245   1.30 
Total interest-bearing deposits  1,199,575   2,111   0.70   768,305   1,582   0.82 
Short-term borrowings and long-term debt  301,715   1,609   2.13   229,718   1,067   1.86 
Interest-bearing liabilities  1,501,290   3,720   0.99   998,023   2,649   1.06 
Non-interest-bearing deposits  300,757           177,802         
Other non-interest-bearing liabilities  16,147           16,261         
Total Non-interest-bearing liabilities  316,904           194,063         
                         
Total liabilities  1,818,194           1,192,086         
Total equity  253,285           145,601         
Total liabilities and equity $2,071,479          $1,337,687         
Less: Tax-equivalent adjustment(2)      (249)          (44)    
Net interest and dividend income     $14,796          $8,328     
Net interest rate spread(4)          2.90%          2.44%
Net interest margin(5)          3.09%          2.65%
Ratio of average interest-earning assets to average interest-bearing liabilities          128.58%          126.11%

  Three Months Ended June 30, 
  2019  2018 
  Average     Average
Yield/		  Average     Average
Yield/		 
  Balance  Interest  Cost  Balance  Interest  Cost 
  (Dollars in thousands) 
ASSETS:                  
Interest-earning assets                        
Loans(1)(2) $1,688,553  $18,434   4.38% $1,664,903  $18,531   4.46%
Securities(2)  249,110   1,635   2.63   272,809   1,835   2.70 
Other investments - at cost  15,131   210   5.57   17,601   202   4.60 
Short-term investments(3)  15,134   73   1.93   8,386   28   1.34 
Total interest-earning assets  1,967,928   20,352   4.15   1,963,699   20,596   4.21 
Total non-interest-earning assets  137,749           132,467         
Total assets $2,105,677          $2,096,166         
                         
LIABILITIES AND EQUITY:                        
Interest-bearing liabilities                        
Interest-bearing checking accounts $70,619  $94   0.53% $98,493  $87   0.35%
Savings accounts  126,855   42   0.13   142,991   48   0.13 
Money market accounts  396,555   601   0.61   419,604   476   0.46 
Time deposit accounts  679,909   3,630   2.14   578,860   2,107   1.46 
Total interest-bearing deposits  1,273,938   4,367   1.37   1,239,948   2,718   0.88 
Short-term borrowings and long-term debt  218,419   1,647   3.02   288,054   1,881   2.62 
Interest-bearing liabilities  1,492,357   6,014   1.62   1,528,002   4,599   1.21 
Non-interest-bearing deposits  363,329           312,754         
Other non-interest-bearing liabilities  23,210           16,566         
Total non-interest-bearing liabilities  386,539           329,320         
                         
Total liabilities  1,878,896           1,857,322         
Total equity  226,781           238,844         
Total liabilities and equity $2,105,677          $2,096,166         
Less: Tax-equivalent adjustment(2)      (137)          (132)    
Net interest and dividend income     $14,201          $15,865     
Net interest rate spread          2.50%          2.97%
Net interest rate spread, on a tax equivalent basis(4)          2.53%          3.00%
Net interest margin          2.89%          3.24%
Net interest margin, on a tax equivalent basis(5)          2.92%          3.27%
Ratio of average interest-earning assets to average interest-bearing liabilities          131.87%          128.51%

 

 

 

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

(2)Securitiesincome, loan income and loannet interest income are presented on a tax-equivalent basis using a tax rate of 35% for the 2017 period and 34% for the 2016 period.21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported in the unaudited consolidated statements of net income.operations.

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

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

(5)Net interest margin, on a tax-equivalent basis, represents tax-equivalent net interest and dividend income as a percentage of average interest earninginterest-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.

●interest income changes attributable to changes in volume (changes in volume multiplied by prior rate);

●interest income changes attributable to changes in rate (changes in rate multiplied by current volume); and the net change.

 

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

 

 Three Months Ended September 30, 2017 compared to Three Months Ended September 30, 2016  Three Months Ended June 30, 2019 compared to Three Months Ended
June 30, 2018		 
 Increase (Decrease) Due to     Increase (Decrease) Due to    
 Volume  Rate  Net  Volume Rate Net 
Interest-earning assets (In thousands)  (In thousands) 
Loans(1) $6,622  $891  $7,513  $263  $(360) $(97)
Securities(1)  32   160   192   (159)  (41)  (200)
Other investments  51   (9)  42 
Other investments - at cost  (28)  36   8 
Short-term investments  (10)  7   (3)  23   22   45 
Total interest-earning assets  6,695   1,049   7,744   99   (343)  (244)
                        
Interest-bearing liabilities                        
Interest-bearing checking accounts  39   18   57   (25)  32   7 
Savings accounts  19   4   23   (5)  (1)  (6)
Money market accounts  129   (36)  93   (26)  151   125 
Time deposit accounts  602   (246)  356   368   1,155   1,523 
Short-term borrowing and long-time debt  334   208   542   (455)  221   (234)
Total interest-bearing liabilities  1,123   (52)  1,071   (143)  1,558   1,415 
Change in net interest and dividend income(1) $5,572  $1,101  $6,673  $242  $(1,901) $(1,659)

 

 

 

(1)Securities, loan income and change in net interest and dividend income are presented on a tax-equivalent basis using a tax rate of 35%21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest income.

 

Net interest and dividend income increased $6.5decreased $1.7 million, or 78.3%10.5%, to $14.8$14.2 million, for the three months ended SeptemberJune 30, 2017, compared to $8.32019, from $15.9 million for the three months ended SeptemberJune 30, 2016.2018. The decrease in net interest income was due to an increase in interest expense of $1.4 million, or 30.8%, and a decrease in interest and dividend income of $249,000, or 1.2%. The increase reflectedin interest expense was primarily due to a $7.5$1.6 million, or 68.2%60.7%, increase in interest expense on deposits, partially offset by a decrease of $234,000, or 12.4%, in interest expense on FHLB borrowings.

Net interest income asfor the three months ended June 30, 2018 included $909,000 in favorable purchase accounting adjustments and a prepayment penalty of $269,000, compared to $79,000 in negative purchase accounting adjustments and $21,000 in prepayment penalties reported during the three months ended June 30, 2019. Excluding these adjustments, net interest income decreased $428,000, or 2.9%, from $14.7 million during the three months ended June 30, 2018, compared to $14.3 million during the three months ended June 30, 2019. Interest and dividend income increased $887,000, or 4.6%, for the three months ended June 30, 2019, offset by an increase in interest expense of $1.3 million, or 27.8%.

The net interest margin was 2.89% for the three months ended June 30, 2019, compared to 3.24% for the three months ended June 30, 2018. The net interest margin, on a tax-equivalent basis, was 2.92% for the three months ended June 30, 2019, compared to 3.27% for the three months ended June 30, 2018.


The decrease in the net interest margin was largely due to a decrease of $988,000 in purchase accounting adjustments from a favorable adjustment of $909,000 recorded during the three months ended June 30, 2018, compared to a negative adjustment of $79,000 recorded during the three months ended June 30, 2019. The decrease in purchase accounting adjustments reduced the net interest margin by 21 basis points. Prepayment penalties decreased $248,000 during the three months ended June 30, 2019, which further decreased the net interest margin by six basis points. After these adjustments, the adjusted net interest margin decreased from 3.00% during the three months ended June 30, 2018 to 2.91% during the three months ended June 30, 2019.

The average yield on interest-earning assets increased $671.7 million, or 53.4%, primarily duedecreased six basis points from 4.21% for the three months ended June 30, 2018 to loan growth as a result of4.15% for the merger. Thethree months ended June 30, 2019. Excluding the purchase accounting adjustments and the prepayment penalties mentioned above, the average yield on interest-earning assets increased 3918 basis points from 3.50%3.99% for the three months ended SeptemberJune 30, 20162018 to 3.89%4.17% for the three months ended SeptemberJune 30, 2017.

2019, respectively. During the three months ended June 30, 2019, the average cost of funds increased 41 basis points from 1.21% for the three months ended June 30, 2018 to 1.62% for the three months ended June 30, 2019. The average cost of core deposits, which include non-interest bearing demand accounts, increased six basis points from 0.25% for the three months ended June 30, 2018 to 0.31% for the three months ended June 30, 2019. The average cost of time deposits increased 68 basis points from 1.46% for the three months ended June 30, 2018 to 2.14% for the three months ended June 30, 2019. The average cost of FHLB borrowings increased 40 basis points during the same period. For the three months ended SeptemberJune 30, 2017, interest expense2019, average demand deposits, an interest-free source of funds, increased $1.1$50.6 million, or 42.3%16.2%, to $363.3 million, or 22.2% of total average deposits, from $312.8 million, or 20.2% of total average deposits for the three months ended June 30, 2018.

During the three months ended June 30, 2019, average interest-earning assets increased $4.2 million, or 0.2%, to $2.0 billion compared to the three months ended SeptemberJune 30, 2016. During the same period, interest-bearing liabilities increased $431.32018. The increase in average interest-earning assets was due to an increase in average loans of $23.7 million, or 56.1%1.4%, while non-interest bearing liabilities, such as demand accounts, increased $123.0and an increase in short-term investments of $6.7 million, or 69.2%. The net interest margin80.5%, both of 3.09% for the three months ending September 30, 2017 increased 44 basis points, compared to 2.65% for the three months ended September 30, 2016. The three months ended September 30, 2017 include amortizationwhich were partially offset by a decrease in average securities of purchase accounting adjustments related to the Chicopee acquisition, which increased net interest income by $448,000. Excluding these items, net interest margin for the third quarter of 2017 would have been 3.00%$23.7 million, or 8.7%.


Provision for Loan LossesLosses.

 

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 SeptemberJune 30, 20172019 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio, primarily includesdescribed in the comparison of financial condition, include an increase in residential loans and a higher level of net charge-offs.commercial real estate loans. After evaluating allthese factors, we recorded a provision for loan losses of $200,000$350,000 for the three months ended SeptemberJune 30, 2017,2019, compared to $375,000$750,000 for the same period in 2016. The allowance was $10.5 million, or 0.65% of total loans, and $10.1 million, or 0.64% of total loans, at September 30, 2017 and December 31, 2016, respectively.2018.

 

ForThe Company recorded net recoveries of $194,000 for the three months ended SeptemberJune 30, 2017,2019, as compared to net charge-offs were $100,000. This was comprised of $211,000 in$134,000 for the three months ended June 30, 2018. 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, partially offset by recoveries of $111,000.

For$823,000. The recovery was partially due to a previously charged-off loan from 2010. During the three months ended SeptemberJune 30, 2016,2018, the Company recorded net charge-offs were $18,000. This wasof $134,000, comprised of $86,000 in charge-offs of $154,000, partially offset by recoveries of $68,000.$20,000.

The allowance for loan losses was $12.4 million and $12.1 million and 0.72% and 0.71% of total loans at June 30, 2019 and December 31, 2018, respectively.

 

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


Non-interest Income.

Non-interest income decreased $416,000, or 14.2%, to $2.5 million for the three months ended June 30, 2019, from $2.9 million for the three months ended June 30, 2018. During the three months ended June 30, 2018, non-interest income included $715,000 in gains on bank-owned life insurance (“BOLI”). Excluding the gains on BOLI, non-interest income increased $299,000, or 13.5%, for the three months ended June 30, 2019 primarily due to an increase in service charges and fees of $157,000, or 9.3%, an increase in other non-interest income of $75,000, or 57.3%, primarily related to swap fee income, and $79,000 in unrealized gains on marketable equity securities for the three months ended June 30, 2019, as compared to $41,000 in unrealized losses on marketable equity securities for the three months ended June 30, 2018, partially offset by a $47,000 increase in realized losses on securities. During the three months ended June 30, 2019, service charges and fees included $110,000 in non-recurring interchange fee income.

 

Non-interest IncomeExpense.

 

For the three months ended SeptemberJune 30, 2017,2019, non-interest income of $2.4 millionexpense increased $1.1$594,000, or 5.1%, to $12.1 million, or 84.6%, compared to $1.32.31% of average assets, from $11.5 million, or 2.21% of average assets, for the three months ended SeptemberJune 30, 2016.2018. The increase in non-interest expense was primarily due to the merger with Chicopee. The increase was primarily driven by an increase in service chargessalaries and fee incomebenefits of $761,000,$312,000, or 79.9%4.8%, an increase in other incomeexpense of $111,000,$152,000, or 8.6%, an increase in FDIC insurance expense of $81,000,$89,000, or 22.0%60.5%, an increase in income from bank-owned life insurancefurniture and equipment of $45,000, or 11.8%, an increase in data processing of $24,000, or 3.5%, an increase in advertising expense of $15,000, or 4.2%, and an increase in occupancy expense of $48,000$31,000, or 3.2%. These increases were partially offset by a decrease in gains on salesprofessional fees of securities.

Non-interest Expense

$74,000, or 10.9%. For the three months ended SeptemberJune 30, 2017, non-interest expense of $11.2 million increased $3.0 million, or 36.6%2019, the efficiency ratio was 72.5%, from $8.2 million,compared to 63.5% for the three months ended SeptemberJune 30, 2016. 2018.

Income Taxes.

The increaseCompany’s effective tax rate increased from 21.0% for the three months ended June 30, 2018 to 23.0% for the three months ended June 30, 2019. The lower tax rate for the three months ended June 30, 2018 was primarily due to a $2.4 million, or 58.5%, increase in salaries and benefits due to the addition of the Chicopee staff and normal merit increases that typically occurgain on BOLI recognized during the first quarter of each year. Occupancy expense increased $336,000, or 60.5%, due to the acquisition of the Chicopee branches, and data processing expense increased $276,000, or 68.3%, while merger related expenses decreased $830,000. The increase to non-interest expense reflects generally higher level of expenses associated with operating a larger financial institution, which include additional employees, increased costs for data processing, occupancy, and professional services. Although there are overall added expenses, the merger provided the opportunity to achieve greater economies of scale as reflected in the improvement in the efficiency ratio from 76.6%, for the three months ended September 30, 2016, to 65.4% for the three months ended September 30, 2017.period.

 

Income Taxes

For the three months ended September 30, 2017, we had a tax provision of $2.0 million as compared to $423,000 for the same period in 2016. The effective tax rate was 34.8% for the three months ended September 30, 2017 and 40.2% for the same period in 2016. The three months ended September 30, 2017 include higher levels of pre-tax income as a result of the merger, while the comparable 2016 period includes nondeductible merger expenses of $691,000.


COMPARISON OF OPERATING RESULTS FOR THE NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20172019 AND SEPTEMBERJUNE 30, 20162018

 

GeneralGeneral.

 

Net income was $12.7$6.7 million, or $0.42$0.25 per diluted share, for the ninesix months ended SeptemberJune 30, 2017,2019, compared to $3.0$8.7 million, or $0.17$0.29 per diluted share, for the same period in 2016.2018. Net interest income was $44.0$28.5 million and $24.6$30.6 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.

 


Net Interest and Dividend IncomeIncome.

 

The following tables set forth the information relating to our average balance and net interest income for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned from making changes in loan rates and terms and fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.


  Nine Months Ended September 30, 
  2017  2016 
  Average
Balance		  Interest  Average Yield/
Cost		  Average
Balance		  Interest  Average Yield/
Cost		 
  (Dollars in thousands) 
ASSETS:                  
Interest-earning assets                        
Loans(1)(2) $1,589,423  $49,202   4.13% $875,325  $26,118   3.98%
Securities(2)  305,111   5,761   2.52   334,938   6,062   2.41 
Other investments  17,665   501   3.78   14,703   398   3.61 
Short-term investments(3)  24,023   102   0.57   33,457   67   0.27 
Total interest-earning assets  1,936,222   55,566   3.83   1,258,423   32,645   3.46 
Total Non-interest-earning assets  137,775           77,626         
Total assets $2,073,997          $1,336,049         
                         
LIABILITIES AND EQUITY:                        
Interest-bearing liabilities                        
Interest-bearing checking accounts $86,841   249   0.38  $31,353   64   0.27 
Savings accounts  150,975   137   0.12   76,381   63   0.11 
Money market accounts  398,400   1,150   0.38   264,354   785   0.40 
Time deposit accounts  568,728   4,643   1.09   391,793   3,677   1.25 
Total interest-bearing deposits  1,204,944   6,179   0.68   763,881   4,589   0.80 
Short-term borrowings and long-term debt  302,254   4,579   2.02   250,462   3,329   1.77 
Interest-bearing liabilities  1,507,198   10,758   0.95   1,014,343   7,918   1.04 
Non-interest-bearing deposits  304,492           165,156         
Other non-interest-bearing liabilities  13,774           15,273         
Total non-interest-bearing liabilities  318,266           180,429         
                         
Total liabilities  1,825,464           1,194,772         
Total equity  248,533           141,277         
Total liabilities and equity $2,073,997          $1,336,049         
Less: Tax-equivalent adjustment(2)      (766)          (154)    
Net interest and dividend income     $44,042          $24,573     
Net interest rate spread(4)          2.86%          2.42%
Net interest margin(5)          3.09%          2.62%
Ratio of average interest-earning assets to average interest-bearing liabilities          128.47%          124.06%

  Six Months Ended June 30, 
  2019  2018 
  Average     Average Yield/  Average     Average Yield/ 
  Balance  Interest  Cost  Balance  Interest  Cost 
  (Dollars in thousands) 
ASSETS:                  
Interest-earning assets                        
Loans(1)(2) $1,686,336  $36,613   4.38% $1,645,926  $35,358   4.33%
Securities(2)  254,116   3,330   2.64   277,656   3,649   2.65 
Other investments - at cost  15,535   446   5.79   17,357   403   4.68 
Short-term investments(3)  15,123   149   1.99   7,173   49   1.38 
Total interest-earning assets  1,971,110   40,538   4.15   1,948,112   39,459   4.08 
Total non-interest-earning assets  135,820           134,729         
Total assets $2,106,930          $2,082,841         
                         
LIABILITIES AND EQUITY:                        
Interest-bearing liabilities                        
Interest-bearing checking accounts $71,770   175   0.49  $95,820   167   0.35 
Savings accounts  124,743   75   0.12   142,941   89   0.13 
Money market accounts  395,889   1,157   0.59   418,897   894   0.43 
Time deposit accounts  676,898   6,929   2.06   570,032   3,923   1.39 
Total interest-bearing deposits  1,269,300   8,336   1.32   1,227,690   5,073   0.83 
Short-term borrowings and long-term debt  233,615   3,412   2.95   285,397   3,536   2.50 
Interest-bearing liabilities  1,502,915   11,748   1.58   1,513,087   8,609   1.15 
Non-interest-bearing deposits  353,854           311,480         
Other non-interest-bearing liabilities  21,798           16,228         
Total non-interest-bearing liabilities  375,652           327,708         
                         
Total liabilities  1,878,567           1,840,795         
Total equity  228,363           242,046         
Total liabilities and equity $2,106,930          $2,082,841         
Less: Tax-equivalent adjustment(2)      (263)          (263)    
Net interest and dividend income     $28,527          $30,587     
Net interest rate spread          2.54%          2.91%
Net interest rate spread, on a tax equivalent basis(4)          2.57%          2.93%
Net interest margin          2.92%          3.17%
Net interest margin, on a tax equivalent basis(5)          2.95%          3.19%
Ratio of average interest-earning assets to average interest-bearing liabilities          131.15%          128.75%

 

 

 

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

(2)Securities income, loan income and loannet interest income are presented on a tax-equivalent basis using a tax rate of 35% for the 2017 period and 34% for the 2016 period.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.operations.

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

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

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

Rate/Volume Analysis.

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

●interest income changes attributable to changes in volume (changes in volume multiplied by prior rate);

●interest income changes attributable to changes in rate (changes in rate multiplied by current volume); and the net change.

 

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

 

 Nine Months Ended September 30, 2017 compared to
Nine Months Ended September 30, 2016		  

Six Months Ended June 30, 2019 compared to

Six Months Ended June 30, 2018

 
 Increase (Decrease) Due to     Increase (Decrease) Due to    
 Volume  Rate  Net  Volume  Rate  Net 
Interest-earning assets (In thousands)  (In thousands) 
Loans(1) $21,307  $1,777  $23,084  $868  $387  $1,255 
Securities(1)  (540)  239   (301)  (309)  (10)  (319)
Other investments  80   23   103 
Other investments - at cost  (42)  85   43 
Short-term investments  (19)  54   35   54   46   100 
Total interest-earning assets  20,828   2,093   22,921   571   508   1,079 
                        
Interest-bearing liabilities                        
Interest-bearing checking accounts  113   72   185   (42)  50   8 
Savings accounts  62   12   74   (11)  (3)  (14)
Money market accounts  398   (33)  365   (49)  312   263 
Time deposit accounts  1,661   (695)  966   735   2,271   3,006 
Short-term borrowing and long-term debt  688   562   1,250   (642)  518   (124)
Total interest-bearing liabilities  2,922   (82)  2,840   (9)  3,148   3,139 
Change in net interest and dividend income $17,906  $2,175  $20,081  $580  $(2,640) $(2,060)

 

 

(1)Securities, loan income and change in net interest and dividend income are presented on a tax-equivalent basis using a tax rate of 35%21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest income.

 

Net interest income was $44.0decreased $2.1 million, or 6.7%, to $28.5 million for the ninesix months ended SeptemberJune 30, 2017 and $24.62019, compared to $30.6 million for the ninesix months ended SeptemberJune 30, 2016.2018. The increasedecrease in net interest income was primarily due to thea $3.1 million, or 36.5%, increase in interest expense, partially offset by a $1.1 million, or 2.8%, increase in interest and dividend income of $22.3 million, or 68.7%, partially offset by theincome. The increase in interest expense of $2.8was primarily due to a $3.3 million, or 35.9%64.3%, fromincrease in interest expense on deposits, primarily time deposits, while interest expense on FHLB borrowings decreased $124,000, or 3.5%. Net interest income for the ninesix months ended SeptemberJune 30, 2016.2018 included $1.1 million in favorable purchase accounting adjustments primarily due to the full payoff of a purchase credit impaired loan from Chicopee, compared to $58,000 in negative purchase accounting adjustments for the six months ended June 30, 2019. During the six months ended June 30, 2018, the Company also reported a prepayment penalty of $269,000, compared to $23,000 during the six months ended June 30, 2019. Excluding these adjustments, interest and dividend income increased $2.3 million, or 6.1%, offset by a $2.9 million, or 33.1%, increase in interest expense.

The net interest margin for the six months ended June 30, 2019 was 2.92%, compared to 3.17% during the six months ended June 30, 2018. The net interest margin, on a tax-equivalent basis, was 3.09% and 2.62%2.95% for the ninesix months ended SeptemberJune 30, 2017 and 2016, respectively.2019, compared to 3.19% for the six months ended June 30, 2018.

 

The average balance sheet comparison fordecrease in net interest margin was largely due to a decrease in purchase accounting adjustments from a favorable adjustment of $1.1 million during the ninesix months ended SeptemberJune 30, 20162018, compared to Septembera negative adjustment of $58,000 during the six months ended June 30, 2017 largely reflects2019. The result was a decrease of 12 basis points on the merger with Chicopee. Averagenet interest margin. Prepayment penalties decreased $246,000, from $269,000 during the six months ended June 30, 2018 to $23,000 during the six months ended June 30, 2019, which further decreased the net interest margin by three basis points. After these adjustments, the adjusted net interest margin decreased from 3.05% during the three months ended June 30, 2018 to 2.92% during the six months ended June 30, 2019.


The average yield on interest-earning assets increased $677.8seven basis points from 4.08% for the six months ended June 30, 2018 to 4.15% for the six months ended June 30, 2019. Excluding the purchase accounting adjustments and the prepayment penalties mentioned above, the average yield on interest-earning assets increased 19 basis points from 3.97% for the six months ended June 30, 2018 to 4.16% for the six months ended June 30, 2019, respectively. During the six months ended June 30, 2019, the average cost of funds increased 43 basis points from 1.15% for the six months ended June 30, 2018 to 1.58%. The average cost of core deposits, including noninterest-bearing demand deposits, increased six basis points from 0.24% for the six months ended June 30, 2018 to 0.30% for the six months ended June 30, 2019, while the average cost of time deposits increased 67 basis points from 1.39% for the six months ended June 30, 2018 to 2.06% during the same period in 2019. The average cost of borrowings increased 45 basis points from 2.50% for the six months ended June 30, 2018 to 2.95% for the six months ended June 20, 2019. For the six months ended June 30, 2019, average demand deposits, an interest-free source of funds, increased $42.4 million, or 53.9%13.6%, from $1.3 billion$311.5 million, or 20.2% of total average deposits, for the ninesix months ended SeptemberJune 30, 20162018 to $1.9 billion$353.9 million, or 21.8% of total average deposits, for the ninesix months ended SeptemberJune 30, 2017.2019. During the six months ended June 30, 2019, average interest-earning assets increased $23.0 million, or 1.2%, to $2.0 billion. The increase in average interest-earning assets was due to a $714.1 million, or 81.6%,an increase in average loans of $40.4 million, or 2.5%, partially offset by a $29.8 million, or 8.9%, decrease in average investments and a $9.4securities of $23.5 million, or 28.2%, decrease in other interest-earning assets. The average balance of demand deposit accounts, an interest-free source of funds, increased $139.3 million, or 84.4%, for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016.8.5%.

 

The net interest margin increased 47 basis points, from 2.62% for the nine months ended September 30, 2016 to 3.09% for the nine months ended September 30, 2017. During the nine months ended September 30, 2017, amortization of purchase accounting adjustments related to the Chicopee acquisition increased net interest income by $1.4 million. Excluding these items, net interest margin for the nine months ended September 30, 2017 was 2.99%. The average asset yield increased from 3.46% for the nine months ended September 30, 2016 to 3.83% for the nine months ended September 30, 2017. The average cost of funds decreased 9 basis points from 1.04% for the nine months ended September 30, 2016 to 0.95% for the nine months ended September 30, 2017 primarily due to purchase accounting adjustments on time deposits and borrowings as well as the continuation of low market interest rates, which allowed us to renew or replace maturing time deposits at lower costs. The average cost of time deposits decreased 16 basis points, from 1.25% for the nine months ended September 30, 2016 to 1.09% for the nine months ended September 30, 2017. The average cost of borrowings increased 25 basis points, from 1.77% for the nine months ended September 30, 2016 to 2.02% for the nine months ended September 30, 2017. The increase in cost of funds in FHLB borrowings was primarily due to the increase in the Federal Funds target rate in December 2016, March 2017 and mid-June 2017.


Provision for Loan LossesLosses.

 

The amount that we provided for loan losses during the ninesix months ended SeptemberJune 30, 20172019 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio for the ninesix months ended SeptemberJune 30, 2017,2019, described in the comparison of financial condition, include increases in residential real estate loans and commercial and industrial loans as well as an increase in net charge-offs over the comparable period.commercial real estate loans. After evaluating these factors, we recorded a provision of $400,000 for loan losses of $850,000 for the ninesix months ended SeptemberJune 30, 2017,2019, compared to $400,000$1.3 million for the same period in 2016. The allowance was $10.5 million, or 0.65% of total loans, at September 30, 2017 and $10.1 million, or 0.64% of total loans, at December 31, 2016.2018.

 

ForThe Company recorded net charge-offs of $30,000 for the ninesix months ended SeptemberJune 30, 2017,2019, as compared to net charge-offs were $400,000. This was comprised of $95,000 for the six months ended June 30, 2018. During the six months ended June 30, 2019, the Company recorded charge-offs of $706,000 for$923,000, compared to $190,000 during the ninesame period in 2018. The charge-offs recorded during the six months ended SeptemberJune 30, 2017, partially offset by2019 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 $306,000.

For the nine months ended September 30, 2016, net recoveries were $687,000. This was comprised of recoveries of $1.0 million for the nine months ended September 30, 2016, partially offset by charge-offs of $347,000. During the nine months ended September 30, 2016, we received$893,000, primarily due to a partial recovery of $1.0 million$812,000 related to a single commercial real estate loan previously charged-off in 2010.

During the six months ended June 30, 2018, the Company recorded net charge-offs of $95,000 comprised of charge-offs of $190,000, partially offset by recoveries of $95,000.

The allowance for loan losses was $12.4 million at June 30, 2019 and $12.1 million at December 31, 2018. The allowance for loan losses was 0.72% and 0.71% of total loans at June 30, 2019 and December 31, 2018, respectively.

 

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

 

Non-interest IncomeIncome.

 

For the ninesix months ended SeptemberJune 30, 2017,2019, non-interest income of $6.5$4.7 million increased $2.9 million,decreased $11,000, or 80.8%0.2%, compared to $3.6$4.7 million for the ninesix months ended SeptemberJune 30, 2016. The increase of $2.9 million was primarily due to an increase in2018. Service charges and fees increased $207,000, or 6.3%, and other income increased $83,000, or 63.4%. During the six months ended June 30, 2019, service charges and fees of $2.1 million, or 77.6%, and an increaseincluded $110,000 in income from bank-owned life insurance of $236,000, or 20.8%. The increase in non-interest income was primarily due tonon-recurring interchange fee income. During the merger with Chicopee. For the ninesix months ended SeptemberJune 30, 2017, wealth management fees2019, the Company reported unrealized gains on marketable equity securities of $404,000 earned by Westfield Financial Management Services, the Company’s investment management subsidiary, were included in service charges and fee income. Total assets under management increased to $111.7 million at September 30, 2017,$149,000, compared to $91.6 million at December 31, 2016 due to positive market movements and additions from new and existing clients. Pre-taxunrealized losses of $147,000 during the six months ended June 30, 2018, as well as a decrease in realized gainslosses on securities of $189,000, or 75.6%, during the same period. During the six months ended June 30, 2018, the Company reported a $48,000 gain on the sale of securities decreased $632,000,other real estate owned and a $715,000 net gain on BOLI. Excluding the net gain on BOLI and the realized and unrealized security losses discussed above, non-interest income increased $267,000, or 92.4%. Additionally, there was a $915,000 decrease on6.2%, for the prepayment of borrowings reported during the ninesix months ended SeptemberJune 30, 2016 as there were no such prepayments in 2017.2019 compared to the six months ended June 30, 2018.


Non-interest ExpenseExpense.

 

For the ninesix months ended SeptemberJune 30, 2017,2019, non-interest expense increased $10.1$1.2 million, or 43.5%5.2%, to $33.4$24.2 million, or 2.15%2.31% of average assets, compared to $23.3$23.0 million, or 2.33%2.22% of average assets for the ninesix months ended SeptemberJune 30, 2016.2018. The increase in non-interest expense was primarily due to a $7.2 million, or 61.9%,the increase in salaries and benefits due to the addition of the Chicopee staff and normal merit increases. Occupancy expense increased $1.1 million,$559,000, or 64.4%4.3%, due to the acquisition of the Chicopee branches. Data processing expense increased $573,000, or 49.1%, from $1.2 million for the nine months ended September 30, 2016 to $1.7 million for the nine months ended September 30, 2017. Furniture and equipment increased $426,000, or 58.9%, from $723,000 for the nine months ended September 30, 2016 to $1.1 million for the nine months ended September 30, 2017. Advertising expense increased $265,000, or 38.1%, professional fees increased $202,000, or 11.8%, andan increase in other non-interest expenses of $244,000, or 7.1%, an increase in occupancy expense increased $1.7 million,of $142,000, or 56.4%. These increases were partially offset by a $1.3 million, or 67.3%7.0%, decrease in merger related expenses as well as a decreasean increase in FDIC insurance expense of $128,000,$107,000, or 21.5%. The35.1%, an increase to non-interest expense reflects generally higher levelin furniture and equipment of expenses associated with operating a larger financial institution, which includes additional employees, increased costs for$83,000, or 11.1%, an increase of data processing occupancy,of $52,000, or 4.0%, an increase in advertising expense of $32,000, or 4.6%, and a decrease in professional services. The merger providedfees of $28,000, or 2.1%. For the opportunity to achieve greater economies of scale as reflected in the improvement insix months ended June 30, 2019, the efficiency ratio from 75.3%was 72.9%, compared to 65.8% for the ninesix months ended SeptemberJune 30, 2016 to 65.0%2018. The adjusted efficiency ratio, excluding purchase account adjustments and prepayment penalties, was 72.9% for the ninesix months ended SeptemberJune 30, 2017.2019, compared to 68.7% for the six months ended June 30, 2018.

 


Income TaxesTaxes.

 

For the nine months ended September 30, 2017, we had a tax provision of $3.6 million as compared to $1.5 million for the same period in 2016. The Company’s effective tax rate was 22.1% for the ninesix months ended SeptemberJune 30, 20172019 and 33.4% for the same period in 2016. The 2017 period includes $1.8 million in tax benefits recorded on the reversal of a deferred tax valuation allowanceJune 30, 2018 was 22.7% and stock option exercises.21.8%, respectively.

 

LIQUIDITY AND CAPITAL RESOURCESExplanation 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, 
  2019  2018  2019  2018 
  (Dollars in thousands)  (Dollars in thousands) 
       
  Interest  Average Yield  Interest  Average Yield  Interest  Average Yield  Interest  Average Yield 
Loans (no tax adjustment) $18,302   4.35% $18,405   4.43% $36,360   4.35% $35,107   4.30%
Tax-equivalent adjustment(1)  132       126       253       251     
Loans (tax-equivalent basis) $18,434   4.38% $18,531   4.46% $36,613   4.38% $35,358   4.33%
                                 
Securities (no tax adjustment) $1,630   2.62% $1,829   2.69% $3,320   2.63% $3,637   2.64%
Tax-equivalent adjustment(1)  5       6       10       12     
Securities (tax-equivalent basis) $1,635   2.63% $1,835   2.70% $3,330   2.64% $3,649   2.65%
                                 
Net interest income (no tax adjustment) $14,201      $15,865      $28,527      $30,587     
Tax-equivalent adjustment(1)  137       132       263       263     
Net interest income (tax-equivalent basis) $14,338      $15,997      $28,790      $30,850     
                                 
Interest rate spread (no tax adjustment)      2.50%      2.97%      2.54%      2.91%
Net interest margin (no tax adjustment)      2.89%      3.24%      2.92%      3.17%

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

43

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 of deposits 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 FHLBBFHLB based on eligible collateral of loans and securities. Our maximum additional

At June 30, 2019 and December 31, 2018, outstanding borrowings from the FHLB were $225.7 million and $267.3 million, respectively. At June 30, 2019, we had $231.6 million in available borrowing capacity fromwith the FHLBB at September 30, 2017, was $132.0 million.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 $4.0$15.0 million and $50.0 million with Bankers Bank Northeast (“BBN”) and PNC Bank, respectively. The interestother correspondent banks. Interest rates on these lines are determined and reset on a daily basis by each respective bank. At June 30, 2019 and December 31, 2018, we did not have an outstanding balance under these lines. In addition, we may enter into reverse repurchase agreements with approved broker-dealers. Reverse repurchase agreements are agreements that allow us to borrow money using our securities as collateral.

 

Liquidity management is bothWe also have outstanding at any time, a dailysignificant number of commitments to extend credit and long-term functionprovide 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 business management. The measure of a company’s liquidity is its abilityfuture cash flows. We are also obligated under agreements with the FHLB to meet its cash commitments at all times with available cash or by conversion of other assets to cash at a reasonable price. Loan repayments and maturing securities are a relatively predictable source ofrepay borrowed funds. However, deposit flow, calls of securities and repayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds. Management believes that we have sufficient liquidity to meet its current operating needs.


At SeptemberJune 30, 2017,2019, we exceeded each of the applicable regulatory capital requirements. As of SeptemberJune 30, 2017,2019, the most recent notification from the Office of Comptroller of the Currency categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized”“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. Our actual capital ratios of September 30, 2017 and December 31, 2016 are also presented in the following table.

 

 Actual Minimum For Capital
Adequacy Purpose		 Minimum To Be Well
Capitalized		 Actual Minimum For Capital
Adequacy Purpose		 Minimum To Be Well
Capitalized		 
 Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio 
 (Dollars in thousands) (Dollars in thousands) 
September 30, 2017            
June 30, 2019             
Total Capital(to Risk Weighted Assets):                                                
Consolidated $257,936   15.76% $130,935   8.00%   N/A    N/A  $234,889   14.05% $133,754   8.00%   N/A    N/A 
Bank  247,801   15.18   130,610   8.00  $163,263   10.00%  222,504   13.33   133,577   8.00  $166,971   10.00%
Tier 1 Capital (to Risk Weighted Assets):                                                
Consolidated  247,358   15.11   98,201   6.00    N/A    N/A   222,466   13.31   100,316   6.00    N/A    N/A 
Bank  237,223   14.53   97,958   6.00   130,610   8.00   210,081   12.58   100,183   6.00   133,577   8.00 
Common Equity Tier 1 Capital (to Risk Weighted Assets)                                                
Consolidated  247,358   15.11   73,651   4.50    N/A    N/A   222,466   13.31   75,237   4.50    N/A    N/A 
Bank  237,223   14.53   73,468   4.50   106,121   6.50   210,081   12.58   75,137   4.50   108,531   6.50 
Tier 1 Leverage Ratio (to Adjusted Average Assets):                                                
Consolidated  247,358   12.01   82,396   4.00    N/A    N/A   222,466   10.62   83,824   4.00    N/A    N/A 
Bank  237,223   11.53   82,313   4.00   102,891   5.00   210,081   10.03   83,753   4.00   104,691   5.00 
                                                
December 31, 2016                        
December 31, 2018                        
Total Capital(to Risk Weighted Assets):                                                
Consolidated $245,389   15.10% $130,037   8.00%   N/A    N/A  $247,361   14.87% $133,089   8.00%   N/A    N/A 
Bank  237,626   14.64   129,879   8.00  $162,349   10.00%  235,569   14.18   132,892   8.00  $166,115   10.00%
Tier 1 Capital (to Risk Weighted Assets):                                                
Consolidated  235,261   14.47   97,528   6.00    N/A    N/A   235,308   14.14   99,817   6.00    N/A    N/A 
Bank  227,498   14.01   97,409   6.00   129,879   8.00   223,516   13.46   99,669   6.00   132,892   8.00 
Common Equity Tier 1 Capital (to Risk Weighted Assets)                                                
Consolidated  235,261   14.47   73,146   4.50    N/A    N/A   235,308   14.14   74,862   4.50    N/A    N/A 
Bank  227,498   14.01   73,057   4.50   105,527   6.50   223,516   13.46   74,752   4.50   107,974   6.50 
Tier 1 Leverage Ratio (to Adjusted Average Assets):                                                
Consolidated  235,261   12.19   77,187   4.00   N/A    N/A   235,308   11.14   84,497   4.00    N/A    N/A 
Bank  227,498   11.86   76,745   4.00   95,931   5.00   223,516   10.59   84,465   4.00   105,581   5.00 
                        

 


We also have outstanding, at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. We are obligated under leases for certain of our branches and equipment. The following table summarizes the contractual obligations and credit commitments at SeptemberJune 30, 2017:2019:

 

  Within 1 Year  After 1 Year But Within 3 Years  After 3 Year But Within 5 Years  After 5 Years  Total 
  (In thousands) 
Lease Obligations                    
Operating lease obligations(1) $1,110  $2,069  $1,716  $4,995  $9,890 
                     
Borrowings and Debt                    
Federal Home Loan Bank  223,938   45,502   10,138   761   280,339 
Securities sold under agreements to repurchase  18,465   —   —   —   18,465 
Total borrowings and debt  242,403   45,502   10,138   761   298,804 
                     
Credit Commitments                    
Available lines of credit  156,127   9   7   59,721   215,864 
Other loan commitments  54,019   13,667   2,053   2,194   71,933 
Letters of credit  7,058   392   —   255   7,705 
Total credit commitments  217,204   14,068   2,060   62,170   295,502 
                     
Other Obligations                    
Vendor Contracts  2,644   5,288   5,288   6,390   19,610 
                     
Total Obligations $463,361  $66,927  $19,202  $74,316  $623,806 

(1)Payments are for the lease of real property
  Amounts
Due Within
1 Year		  Amounts
Due After 1
Year
But Within 3
Years		  Amounts
Due After 3
Year
But Within 5
Years		  Amounts
Due After
5 Years		  Total 
  (In thousands) 
Borrowings                    
Federal Home Loan Bank $143,850  $79,685  $1,570  $578  $225,683 
                     
Credit Commitments:                    
Available lines of credit  182,365   —   —   76,781   259,146 
Other loan commitments  93,551   23,526   1,630   68   118,775 
Letters of credit  7,553   99   301   693   8,646 
Total credit commitments  283,469   23,625   1,931   77,542   386,567 
                     
Other Obligations                    
Vendor Contracts  3,356   6,712   6,712   2,234   19,014 
                     
Total Obligations $430,675  $110,022  $10,213  $80,354  $631,264 

 

OFF-BALANCE SHEET ARRANGEMENTSOff-Balance Sheet Arrangements.

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes in our assessment of our sensitivity to market risk since its presentation in our 20162018 Annual Report. Please refer to Item 7A of the 20162018 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.

 


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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 20162018 Annual Report. There are no material changes in the risk factors relevant to our operations.

 

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

 

The following table sets forth information with respect to purchases made by us of our common stock during the three months ended SeptemberJune 30, 2017.2019.

 

Period  Total Number
of Shares
Purchased		  Average Price
Paid per
Share ($)		  Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Programs		  Maximum
Number of
Shares that May
Yet Be
Purchased
Under the
Program (1)		 
July 1 - 31, 2017   —   —   —   3,011,837 
August 1 - 31, 2017   99,589   9.87   99,589   2,912,248 
September 1 - 30, 2017   153,705   10.51   153,705   2,758,543 
Total   253,294   10.26   253,294   2,758,543 
Period  Total Number of
Shares
Purchased		  Average Price
Paid per
Share ($)		  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, 2019   —   —   —   1,518,553 
 May 1 - 31, 2019   249,961   9.59   249,961   1,268,592 
 June 1 – 30, 2019   —   —   —   1,268,592 
 Total   249,961   9.59   249,961   1,268,592 

 

(1)On January 31, 2017,29, 2019, the Board of Directors authorized an additional stock repurchase program under which the Company may purchase up to 3,047,0002,814,200 shares, or 10%, of its outstanding common stock.stock (the “2019 Plan”). As of June 30, 2019, the Company has repurchased 1,545,608 shares under the 2019 Plan.

 

There were no sales by us of unregistered securities during the three months ended SeptemberJune 30, 2017.2019.

 

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 November 7, 2017.

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

2.1 Agreement and Plan of Merger, dated as of April 4, 2016, by and between Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) and Chicopee Bancorp, Inc. (incorporated by reference to Exhibit 2.1 of the Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on April 7, 2016).
   
3.2 Restated Articles of Organization of Western New England Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of the Form 8-K filed with the SEC on October 26, 2016).
   
3.3 Amended and Restated Bylaws of Western New England Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of the Form 8-K filed with the SEC on February 2, 2017).
   
4.1 Form of Stock Certificate of Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 4.1 of the Registration Statement No. 333-137024 on Form S-1 filed with the Securities and Exchange Commission on August 31, 2006).
   
31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1* Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101** Financial statements from the quarterly report on Form 10-Q of Western New England Bancorp, Inc. for the quarter ended SeptemberJune 30, 2017,2019, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Net Income,Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.

 

*Filed herewith.

 

**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.

 

47

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, 2019.

Western New England Bancorp, Inc.
By:/s/ James C. Hagan
James C. Hagan
President and Chief Executive Officer
By:/s/ Guida R. Sajdak
Guida R. Sajdak
Executive Vice President and Chief Financial Officer

48