10-Q 1 wneb-10q_093019.htm QUARTERLY REPORT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

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

For the transition period from ___________ to ___________

Commission File Number: 001-16767

Western New England Bancorp, Inc.

(Exact name of registrant as specified in its charter)

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

(413) 568-1911

(Registrant’s telephone number, including area code)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

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

Yes ☒ No ☐

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

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

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

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

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

TABLE OF CONTENTS

		Page

FORWARD-LOOKING STATEMENTS		i

PART I – FINANCIAL INFORMATION

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

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

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

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

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

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

	Notes to Consolidated Financial Statements	7

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	46

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

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

Item 3.	Defaults upon Senior Securities	47

Item 4.	Mine Safety Disclosures	47

Item 5.	Other Information	47

Item 6.	Exhibits	48

FORWARD–LOOKING STATEMENTS

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

●

changes in the interest rate environment that reduce margins;

●

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

●

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

●

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

●

changes in business conditions and inflation;

●

changes in credit market conditions;

●

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

●

changes in the securities markets which affect investment management revenues;

●

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

●

changes in technology used in the banking business;

●

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

●

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

●

our controls and procedures may fail or be circumvented;

●

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

●

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

●

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

●

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

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

PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(Dollars in thousands, except share data)

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

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

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

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

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

See accompanying notes to unaudited consolidated financial statements.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED

(Dollars in thousands, except per share data)


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

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

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

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

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

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

See accompanying notes to unaudited consolidated financial statements.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED

(Dollars in thousands)

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

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

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

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

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

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

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

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

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

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

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

See accompanying notes to unaudited consolidated financial statements.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Dollars in thousands, except share data)

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

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

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

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

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

See accompanying notes to unaudited consolidated financial statements.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Dollars in thousands, except share data)

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

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

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

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

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

See accompanying notes to unaudited consolidated financial statements.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(Dollars in thousands)

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

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

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

See the accompanying notes to unaudited consolidated financial statements.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2019

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

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

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

2. EARNINGS PER SHARE

Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. If rights to dividends on unvested awards are non-forfeitable, these unvested awards are considered outstanding in the computation of basic earnings per share. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by us relate to stock options and employee incentive plans and are determined using the treasury stock method. Unallocated Employee Stock Ownership Plan Trust (“ESOP”) shares are not deemed outstanding for earnings per share calculations. There were no anti-dilutive shares outstanding during the three and nine months ended September 30, 2019 and 2018.

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

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

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

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

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

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

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

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

3. COMPREHENSIVE INCOME (LOSS)

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

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

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

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

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

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

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

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

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

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

4. SECURITIES

Securities available-for-sale are summarized as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

	September 30, 2019
	Less Than 12 Months				Over 12 Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
	(In thousands)

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

	December 31, 2018
	Less Than 12 Months				Over 12 Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
	(In thousands)

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

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

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

5. LOANS AND ALLOWANCE FOR LOAN LOSSES

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

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

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

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

Loans Serviced for Others.

The Company has transferred a portion of its originated commercial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in our accompanying consolidated balance sheets. We continue to service the loans on behalf of the participating lenders. We share with participating lenders, on a pro-rata basis, any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. At September 30, 2019 and December 31, 2018, the Company was servicing commercial loans participated out to various other institutions totaling $32.2 million and $35.4 million, respectively.

Residential real estate mortgages are originated by the Bank both for its portfolio and for sale into the secondary market. The Bank may sell its loans to institutional investors such as the FHLMC. The Bank generally continues to service the residential real estate mortgages under its loan sale and servicing agreements with the investor. The Bank pays the investor an agreed upon rate on the loan, which is less than the interest rate received from the borrower. The Bank retains the difference as a fee for servicing the residential real estate mortgages. The Bank capitalizes mortgage servicing rights at their fair value upon sale of the related loans, amortizes the asset over the estimated life of the serviced loan, and periodically assesses the asset for impairment. The significant assumptions used by a third party to estimate the fair value of capitalized servicing rights at September 30, 2019, include weighted average prepayment speed for the portfolio using the Public Securities Association Standard Prepayment Model (180 PSA), weighted average internal rate of return (12.05%), weighted average servicing fee (0.25%), and net cost to service loans ($83.53 per loan). The estimated fair value of capitalized servicing rights may vary significantly in subsequent periods primarily due to changing market interest rates, and their effect on prepayment speeds and discount rates.

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

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

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

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

Allowance for Loan Losses.

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

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

General component

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

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

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

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

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

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

Allocated component

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

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

Unallocated component

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

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

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

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


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

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

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

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

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

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

December 31, 2018

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

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

Past Due and Non-accrual Loans.

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

30 – 59 Days Past Due

60 – 89 Days Past Due

90 Days or More Past Due

Total

Past Due Loans

Total

Current Loans

Total

Loans

Non-Accrual Loans

(In thousands)

September 30, 2019

Commercial real estate