UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2018

OR

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

For the transition period from _____ to _____.

Commission file number 001-16767

Western New England Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Massachusetts	73-1627673
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

141 Elm Street, Westfield, Massachusetts 01086

(Address of principal executive offices)

(Zip Code)

(413) 568-1911

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate 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 ☐

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):

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

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

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

At August 3, 2018, the registrant had 29,746,707 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 – June 30, 2018 and December 31, 2017	1
	Consolidated Statements of Operations – Three and Six Months Ended June 30, 2018 and 2017	2
	Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2018 and 2017	3
	Consolidated Statements of Changes in Shareholders’ Equity – Six Months Ended June 30, 2018 and 2017	4
	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2018 and 2017	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	43
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	44

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,” “would,” “plan,” “estimate,” “potential” and other similar expressions. Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operation and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

● changes in the interest rate environment that reduce margins;

● 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;

● 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 line 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.

i

PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(Dollars in thousands, except share data)

	June 30,			December 31,
	2018			2017
ASSETS
CASH AND DUE FROM BANKS	$	18,646		$	21,607
FEDERAL FUNDS SOLD		1,329			322
INTEREST-BEARING  DEPOSITS AND OTHER SHORT-TERM INVESTMENTS		2,950			5,203
CASH AND CASH EQUIVALENTS		22,925			27,132
SECURITIES AVAILABLE-FOR-SALE – AT FAIR VALUE		259,689			288,416
MARKETABLE EQUITY SECURITIES – AT FAIR VALUE		6,324			—
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT COST		15,584			15,553
LOANS - Net of allowance for loan losses of $11,986 and $10,831 at June 30, 2018 and December 31, 2017, respectively		1,656,889			1,619,850
PREMISES AND EQUIPMENT, Net		24,426			23,500
ACCRUED INTEREST RECEIVABLE		5,581			5,946
BANK-OWNED LIFE INSURANCE		68,353			68,762
DEFERRED TAX ASSET, Net		9,926			8,784
GOODWILL		12,487			12,487
CORE DEPOSIT INTANGIBLE		3,875			4,063
OTHER ASSETS		9,537			8,577
TOTAL ASSETS	$	2,095,596		$	2,083,070
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
DEPOSITS :
Non-interest-bearing	$	312,596		$	311,851
Interest-bearing		1,239,208			1,194,231
Total deposits		1,551,804			1,506,082
SHORT-TERM BORROWINGS		66,000			144,650
LONG-TERM DEBT		214,672			164,786
OTHER LIABILITIES		21,047			20,271
TOTAL LIABILITIES		1,853,523			1,835,789
SHAREHOLDERS’ EQUITY:
Preferred stock - $0.01 par value, 5,000,000 shares authorized, none outstanding at June 30, 2018 and December 31, 2017		—			—
Common stock - $0.01 par value, 75,000,000 shares authorized, 29,746,707 shares issued and outstanding at June 30, 2018; 30,487,309 shares issued and outstanding at December 31, 2017		298			305
Additional paid-in capital		195,677			203,527
Unearned compensation – ESOP		(5,478	)		(5,786	)
Unearned compensation – Equity Incentive Plan		(1,232	)		(791	)
Retained earnings		68,649			62,578
Accumulated other comprehensive loss		(15,841	)		(12,552	)
TOTAL SHAREHOLDERS’ EQUITY:		242,073			247,281
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,095,596		$	2,083,070

  See accompanying notes to unaudited consolidated financial statements.

1

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED

(Dollars in thousands, except per share data) 

	Three Months					Six Months
	Ended June 30,					Ended June 30,
	2018			2017		2018			2017
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans	$	14,543		$	13,406	$	28,342		$	26,568
Commercial and industrial loans		3,777			2,721		6,592			5,297
Consumer loans		85			84		173			173
Debt securities, taxable		1,770			1,871		3,518			3,700
Debt securities, tax-exempt		21			25		45			56
Equity securities		38			35		74			70
Other investments - at cost		202			166		403			329
Short-term investments		28			19		49			92
Total interest and dividend income		20,464			18,327		39,196			36,285
INTEREST EXPENSE:
Deposits		2,718			2,059		5,073			4,068
Long-term debt		1,130			549		1,985			1,100
Short-term borrowings		751			976		1,551			1,871
Total interest expense		4,599			3,584		8,609			7,039
Net interest and dividend income		15,865			14,743		30,587			29,246
PROVISION FOR LOAN LOSSES:		750			350		1,250			650
Net interest and dividend income after provision for loan losses		15,115			14,393		29,337			28,596
NON-INTEREST INCOME (LOSS):
Service charges and fees		1,693			1,549		3,276			3,075
Income from bank-owned life insurance		484			480		926			919
Bank-owned life insurance death benefit		715			—		715			—
(Loss) gain on securities, net		(49	)		46		(250	)		(18	)
Unrealized losses on marketable equity securities, net		(41	)		—		(147	)		—
Gain on sale of other real estate owned		—			—		48			—
Other income		131			—		131			116
Total non-interest income		2,933			2,075		4,699			4,092
NON-INTEREST EXPENSE:
Salaries and employee benefits		6,564			6,239		13,097			12,464
Occupancy		967			917		2,027			1,924
Furniture and equipment		382			366		749			739
Data processing		678			669		1,315			1,060
Professional fees		681			681		1,340			1,277
FDIC insurance assessment		147			186		305			303
Merger related expenses		—			116		—			526
Advertising		355			385		702			633
Other expenses		1,772			1,737		3,437			3,340
Total non-interest expense		11,546			11,296		22,972			22,266
INCOME BEFORE INCOME TAXES		6,502			5,172		11,064			10,422
INCOME TAX PROVISION		1,364			1,416		2,407			1,563
NET INCOME	$	5,138		$	3,756	$	8,657		$	8,859
EARNINGS PER COMMON SHARE:
Basic earnings per share	$	0.18		$	0.13	$	0.30		$	0.30
Weighted average shares outstanding		29,035,895			29,980,518		29,259,119			29,790,164
Diluted earnings per share	$	0.18		$	0.12	$	0.29		$	0.30
Weighted average diluted shares outstanding		29,178,264			30,120,025		29,398,356			30,000,280

 See accompanying notes to unaudited consolidated financial statements.

2

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED

(Dollars in thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
Net income	$	5,138		$	3,756		$	8,657		$	8,859
Other comprehensive income (loss):
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains on available-for-sale securities		(1,545	)		1,326			(6,424	)		1,752
Reclassification adjustment for loss (gain) realized in income(1)		49			(46	)		250			18
Unrealized (losses) gains on securities		(1,496	)		1,280			(6,174	)		1,770
Tax effect		259			(481	)		1,329			(527	)
Net-of-tax amount		(1,237	)		799			(4,845	)		1,243
Cash flow hedges:
Change in fair value of derivatives used for cash flow hedges		240			(346	)		918			(293	)
Reclassification adjustment for loss realized in interest expense(2)		102			249			273			523
Reclassification adjustment for termination fee realized in interest expense(3)		266			266			530			530
Unrealized gains on cash flow hedges		608			169			1,721			760
Tax effect		(171	)		(67	)		(484	)		165
Net-of-tax amount		437			102			1,237			925
Defined benefit Plan:
Amortization of defined benefit plan actuarial loss(4)		57			51			114			102
Tax effect		(16	)		(21	)		(32	)		284
Net-of-tax amount		41			30			82			386
Other comprehensive (loss) income		(759	)		931			(3,526	)		2,554
Comprehensive income	$	4,379		$	4,687		$	5,131		$	11,413

(1) Realized gains and losses on available-for-sale securities are recognized as a component of non-interest income. The tax effects applicable to net realized (loss) gains were $(14,000) and $19,000 for the three months ended June 30, 2018 and 2017, respectively.   The tax effects applicable to net realized loss was $(70,000) and $(7,000) for the six months ended June 30, 2018 and 2017, respectively.

(2) Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term borrowings.  Income tax effects associated with the reclassification adjustments were $29,000 and $102,000 for the three months ended June 30, 2018 and 2017, respectively.  Income tax effects associated with the reclassification adjustments were $77,000 and $214,000 for the six months ended June 30, 2018 and 2017, respectively.

(3) Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term borrowings.  Income tax effects associated with the reclassification adjustments were $75,000 and $107,000 for the three months ended June 30, 2018 and 2017, respectively.  Income tax effects associated with the reclassification adjustments were $149,000 and $215,000 for the six months ended June 30, 2018 and 2017, 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 $16,000 and $21,000 for the three months ended June 30, 2018 and 2017, respectively.  Income tax effects associated with the reclassification adjustments were $32,000 and $42,000 for the six months ended June 30, 2018 and 2017, respectively.

See accompanying notes to unaudited consolidated financial statements.

3

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED

SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(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, 2016		30,380,231		$	304		$	205,996		$	(6,418	)	$	(536	)	$	51,711		$	(12,661	)	$	238,396
Comprehensive income		—			—			—			—			—			8,859			2,554			11,413
Common stock held by ESOP committed to be released (93,679 shares)		—			—			141			313			—			—			—			454
Share-based compensation - equity incentive plan		—			—			—			—			331			—			—			331
Common stock repurchased		(321,015	)		(3	)		(3,071	)		—			—			—			—			(3,074	)
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 ($0.06 per share)		—			—			—			—			—			(1,784	)		—			(1,784	)
BALANCE AT JUNE 30, 2017		31,070,107		$	311		$	209,425		$	(6,105	)	$	(1,109	)	$	58,786		$	(10,107	)	$	251,201
BALANCE AT DECEMBER 31, 2017		30,487,309		$	305		$	203,527		$	(5,786	)	$	(791	)	$	62,578		$	(12,552	)	$	247,281
Comprehensive income		—			—			—			—			—			8,657			(3,526	)		5,131
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)		—			—			177			308			—			—			—			485
Share-based compensation - equity incentive plan		—			—			—			—			485			—			—			485
Common stock repurchased		(843,017	)		(8	)		(9,056	)		—			—			—			—			(9,064	)
Issuance of common stock in connection with stock option exercises		16,975			—			104			—			—			—			—			104
Issuance of common stock in connection with equity incentive plan		85,440			1			925			—			(926	)		—			—			—
Cash dividends declared and paid ($0.08 per share)		—			—			—			—			—			(2,349	)		—			(2,349	)
BALANCE AT JUNE 30, 2018		29,746,707		$	298		$	195,677		$	(5,478	)	$	(1,232	)	$	68,649		$	(15,841	)	$	242,073

See accompanying notes to unaudited consolidated financial statements

4

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(Dollars in thousands)

	Six Months Ended June 30,
	2018			2017
OPERATING ACTIVITIES:
Net income	$	8,657		$	8,859
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,250			650
Depreciation and amortization of premises and equipment		1,001			970
Accretion of purchase accounting adjustments, net		(1,124	)		(998	)
Amortization of core deposit intangible		188			188
Net amortization of premiums and discounts on securities and mortgage loans		1,337			1,964
Share-based compensation expense		485			331
ESOP expense		485			454
Unrealized losses on marketable equity securities, net		147			—
Net loss on redemption and sales of securities		250			18
(Gain) loss on sale of other real estate owned		(48	)		6
Deferred income tax benefit		—			(973	)
Income from bank-owned life insurance		(926	)		(919	)
Bank-owned life insurance death benefits		(715	)		—
Net change in:
Accrued interest receivable		365			188
Other assets		(1,078	)		(1,668	)
Other liabilities		2,659			(2,768	)
Net cash provided by operating activities		12,933			6,302
INVESTING ACTIVITIES:
Securities, available for sale:
Purchases		(10,681	)		(44,621	)
Proceeds from redemptions and sales		12,501			4,576
Proceeds from calls, maturities, and principal collections		12,385			36,571
Purchase of residential mortgages		—			(34,375	)
Loan originations and principal payments, net		(37,479	)		(7,786	)
(Purchase) redemption of Federal Home Loan Bank of Boston stock		(31	)		49
Proceeds from sale of other real estate owned		203			292
Purchases of premises and equipment		(1,992	)		(1,445	)
Proceeds from sale of premises and equipment		45			—
Proceeds from payout on bank-owned life insurance		2,050			—
Net cash used in investing activities		(22,999	)		(46,739	)
FINANCING ACTIVITIES:
Net increase (decrease) in deposits		45,885			(22,216	)
Net change in short-term borrowings		(78,650	)		18,657
Repayment of long-term debt		(34,989	)		(8,221	)
Proceeds from long-term debt		85,000			1,238
Cash dividends paid		(2,349	)		(1,784	)
Common stock repurchased		(9,142	)		(3,529	)
Issuance of common stock in connection with stock option exercises		104			5,465
Net cash provided by (used in) financing activities		5,859			(10,390	)
NET CHANGE IN CASH AND CASH EQUIVALENTS:		(4,207	)		(50,827	)
Beginning of period		27,132			70,234
End of period	$	22,925		$	19,407
Supplemental cash flow information:
Net change in cash due to broker for common stock repurchased	$	(78	)	$	(455	)
Interest paid		8,514			7,028
Taxes paid		1,042			3,148

See the accompanying notes to unaudited consolidated financial statements

5

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2018

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The Bank’s deposits are insured to the limits specified by the Federal Deposit Insurance Corporation (“FDIC”). The Bank operates 22 banking offices in western Massachusetts and northern Connecticut, and its primary sources of revenue are earnings on loans to small and middle-market businesses and to residential property homeowners and income from securities.

Wholly-Owned Subsidiaries and Acquisition – 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.

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. The primary purpose of the acquisition with Chicopee was to expand our presence in western Massachusetts and diversify our market area. The transaction qualified as a tax-free reorganization for federal income tax purposes. Merger consideration paid in the transaction to shareholders of Chicopee totaled $98.8 million, consisting of 11,919,412 shares of Company common stock, net of shares of Chicopee already owned, and shares of Chicopee’s ESOP liquidated to pay off the ESOP loan.

We accounted for the transaction using the acquisition method. The acquisition method requires an acquirer to recognize the assets acquired and the liabilities assumed at fair value as of the acquisition date. Additionally, our results of operations include Chicopee’s operating results from the date of acquisition.

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, the disclosure of contingent assets and liabilities and the reported amounts of income and expenses for both at the date of the unaudited consolidated financial statements. Actual results could differ from those estimates. Estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the realizability of deferred tax assets.

Basis of Presentation – In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial condition as of June 30, 2018, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results of operations for the year ending December 31, 2018. 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 SEC.

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, 2017, included in our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Annual Report”).

6

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 represent income available to shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential shares had been issued, as well as any adjustment to income that would result from the assumed issuance. No dilutive potential shares were 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.

Earnings per common share for the three and six months ended June 30, 2018 and 2017 have been computed based on the following:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
	(In thousands, except per share data)
Net income applicable to common stock	$	5,138		$	3,756		$	8,657		$	8,859
Average number of common shares issued		29,897			30,882			30,126			30,696
Less: Average unallocated ESOP Shares		(768	)		(861	)		(779	)		(873	)
Less: Average unvested equity incentive plan shares		(93	)		(40	)		(88	)		(33	)
Average number of common shares outstanding used to calculate basic earnings per common share		29,036			29,981			29,259			29,790
Effect of dilutive equity incentive plan		42			—			39			6
Effect of dilutive stock options		100			141			100			204
Average number of common shares outstanding used to calculate diluted earnings per common share		29,178			30,120			29,398			30,000
Basic earnings per share	$	0.18		$	0.13		$	0.30		$	0.30
Diluted earnings per share	$	0.18		$	0.12		$	0.29		$	0.30

7

3. COMPREHENSIVE INCOME/LOSS

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

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

	June 30, 2018			December 31, 2017
	(In thousands)
Net unrealized losses on securities available-for-sale	$	(11,532	)	$	(5,358	)
Tax effect		2,882			1,316
Net-of-tax amount		(8,650	)		(4,042	)
Fair value of derivatives used for cash flow hedges		(961	)		(2,152	)
Termination fees on cancelled cash flow hedges		(3,134	)		(3,664	)
Total derivatives		(4,095	)		(5,816	)
Tax effect		1,151			1,635
Net-of-tax amount		(2,944	)		(4,181	)
Unrecognized actuarial loss on defined benefit plan		(5,907	)		(6,021	)
Tax effect		1,660			1,692
Net-of-tax amount		(4,247	)		(4,329	)
Accumulated other comprehensive loss	$	(15,841	)	$	(12,552	)

The following table presents changes in accumulated other comprehensive loss for the periods ended June 30, 2018 and 2017 by component:

	Securities			Derivatives			Defined Benefit  Plans			Accumulated Other Comprehensive  Loss
	(In thousands)
Balance at December 31, 2016	$	(3,839	)	$	(5,204	)	$	(3,618	)	$	(12,661	)
Current-period other comprehensive income (loss)		1,243			925			386			2,554
Balance at June 30, 2017	$	(2,596	)	$	(4,279	)	$	(3,232	)	$	(10,107	)
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	)

8

4.       SECURITIES

Securities available-for-sale are summarized as follows:

	June 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available-for-sale securities:
Government-sponsored mortgage-backed securities	$	172,152	$	3	$	(7,412	)	$	164,743
U.S. government guaranteed mortgage-backed securities		20,929		—		(941	)		19,988
Corporate bonds		50,011		—		(1,674	)		48,337
State and municipal bonds		2,979		23		(62	)		2,940
Government-sponsored enterprise obligations		25,150		—		(1,469	)		23,681
Total available-for-sale	$	271,221	$	26	$	(11,558	)	$	259,689

	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available-for-sale securities:
Government-sponsored mortgage-backed securities	$	185,769	$	10	$	(3,778	)	$	182,001
U.S. government guaranteed mortgage-backed securities		16,821		—		(567	)		16,254
Corporate bonds		56,084		352		(292	)		56,144
State and municipal bonds		3,222		36		(19	)		3,239
Government-sponsored enterprise obligations		25,151		—		(770	)		24,381
Mutual funds		6,727		—		(330	)		6,397
Total available-for-sale securities	$	293,774	$	398	$	(5,756	)	$	288,416

At June 30, 2018, government-sponsored enterprise obligations with a fair value of $6.5 million and mortgage-backed securities with a fair value $57.5 million were pledged to secure public deposits and for other purposes as required or permitted by law. The securities collateralizing public deposits 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 such deposits.

In 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments —Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which affects current U.S. GAAP primarily as it relates to the accounting for equity investments. ASU No. 2016-01 also supersedes the guidance that requires (1) classification of equity securities with readily determinable fair values into different categories (i.e., trading or available-for-sale), and (2) recognition of changes in fair value of available-for-sale securities in other comprehensive income.

The main significant effect resulting from the adoption of this ASU is that marketable equity securities previously reported within securities available-for-sale are now shown as a single line item (“Marketable equity securities”) in the Company’s balance sheet and the recognition in net income of the changes in fair value of marketable equity securities. 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, 2018 by $237,000.

9

The amortized cost and fair value of available-for-sale debt securities at June 30, 2018, by final maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations. Also, because mortgage-backed securities require periodic principal paydowns, they are not included in the maturity categories in the following maturity summary.

	June 30, 2018
	Amortized Cost		Fair Value
	(In thousands)
Available-for-sale securities:
Debt securities:
Due in one year or less	$	240	$	241
Due after one year through five years		36,284		35,229
Due after five years through ten years		34,867		33,142
Due after ten years		6,749		6,346
Total securities		78,140		74,958
Mortgage-backed securities		193,081		184,731
Total	$	271,221	$	259,689

Gross realized gains and losses on sales of securities available-for-sale for the three and six months ended June 30, 2018 and 2017 are as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2018			2017		2018			2017
	(In thousands)
Gross gains realized	$	—		$	46	$	—		$	46
Gross losses realized		(49	)		—		(250	)		(64	)
Net gain realized	$	(49	)	$	46	$	(250	)	$	(18	)

Proceeds from the sale and redemption of securities available-for-sale amounted to $12.5 million and $4.6 million for the six months ended June 30, 2018 and 2017, respectively.

Information pertaining to securities with gross unrealized losses at June 30, 2018 and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

	June 30, 2018
	Less Than Twelve Months									Over Twelve Months
	Number of Securities		Fair Value		Gross Unrealized Loss		Depreciation from Amortized Cost Basis (%)			Number of Securities		Fair Value		Gross Unrealized Loss		Depreciation from Amortized Cost Basis (%)
	(Dollars in thousands)
Government-sponsored mortgage-backed securities		21	$	60,237	$	1,774		2.9	%		56	$	104,423	$	5,638		5.1	%
U.S. government guaranteed mortgage-backed securities		4		6,004		105		1.7			6		13,984		836		5.6
Government-sponsored enterprise obligations		0		—		—		—			9		23,681		1,469		5.8
Corporate bonds		13		43,896		1,481		3.3			2		4,441		193		4.2
State and municipal bonds		0		—		—		—			3		1,537		62		3.9
			$	110,137	$	3,360						$	148,066	$	8,198

10

	December 31, 2017
	Less Than Twelve Months									Over Twelve Months
	Number of Securities		Fair Value		Gross Unrealized Loss		Depreciation from Amortized Cost Basis (%)			Number of Securities		Fair Value		Gross Unrealized Loss		Depreciation from Amortized Cost Basis (%)
	(Dollars in thousands)
Government-sponsored mortgage-backed securities		21	$	68,538	$	613		0.9	%		53	$	111,595	$	3,165		2.8	%
U.S. government guaranteed mortgage-backed securities		1		1,205		23		1.8			6		15,049		544		3.5
Government-sponsored enterprise obligations		0		—		—		—			9		24,381		770		3.1
Corporate bonds		9		26,016		292		1.1			0		—		—		—
State and municipal bonds		0		—		—		—			3		1,581		19		1.2
Mutual funds		0		—		—		—			3		6,397		330		4.9
			$	95,759	$	928						$	159,003	$	4,828

These unrealized losses are the result of changes in interest rates and not credit quality. Because we do not intend to sell the securities and it is more likely than not that we will not be required to sell the investments before recovery of their amortized cost basis, no declines are deemed to be other-than-temporary.

5.        LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consisted of the following amounts:	June 30,			December 31,
	2018			2017
	(In thousands)
Commercial real estate	$	748,062		$	732,616
Residential real estate:
Residential		570,384			557,752
Home equity		94,729			92,599
Commercial and industrial		246,281			238,502
Consumer		4,752			4,478
Total Loans		1,664,208			1,625,947
Unearned premiums and deferred loan fees and costs, net		4,667			4,734
Allowance for loan losses		(11,986	)		(10,831	)
	$	1,656,889		$	1,619,850

There were no purchases of loans during the six months ended June 30, 2018. During the six months ended June 30, 2017, we purchased residential real estate loans aggregating $34.4 million.

We have transferred a portion of our 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 share ratably with our participating lenders in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. We continue to service the loans on behalf of the participating lenders and, as such, collect cash payments from the borrowers, remit payments (net of servicing fees) to participating lenders and disburse required escrow funds to relevant parties. At June 30, 2018 and December 31, 2017, we serviced commercial loans for participants aggregating $35.7 million and $32.6 million, respectively.

Residential real estate loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balances of these loans totaled $61.0 million and $65.8 million at June 30, 2018 and December 31, 2017, respectively. Net service fee income of $48,000 and $34,000 was recorded for the six months ended June 30, 2018 and 2017, respectively, and is included in service charges and fees on the consolidated statements of operations.

11

Residential real estate mortgages are originated by the Bank both for its portfolio and for sale into the secondary market. The Bank may sell its loans to institutional investors such as the Federal Home Loan Mortgage Corporation. Under loan sale and servicing agreements with the investor, the Bank generally continues to service the residential real estate mortgages. The Bank pays the investor an agreed upon rate on the loan, which is less than the interest rate received from the borrower. The Bank retains the difference as a fee for servicing the residential real estate mortgages. The Bank capitalizes mortgage servicing rights at their fair value upon sale of the related loans, amortizes the asset over the estimated life of the serviced loan, and periodically assesses the asset for impairment. The significant assumptions used by a third party to estimate the fair value of capitalized servicing rights at June 30, 2018, include weighted average prepayment speed for the portfolio using the Public Securities Association Standard Prepayment Model (126 PSA), weighted average internal rate of return (12.05%), weighted average servicing fee (0.2501%), and average net cost to service loans ($83.80 per loan). The estimated fair value of capitalized servicing rights may vary significantly in subsequent periods primarily due to changing market interest rates, and their effect on prepayment speeds and discount rates.

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

	Three Months Ended June 30, 2018			Six Months Ended June 30, 2018
	(In thousands)
Balance at the beginning of period:	$	335		$	352
Capitalized mortgage servicing rights		—			—
Amortization		(16	)		(33	)
Balance at the end of period	$	319		$	319
Fair value at the end of period	$	501		$	501

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.

12

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.

13

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 periods ended June 30, 2018 and 2017 is as follows:

	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer			Unallocated			Total
	(In thousands)
Three Months Ended
Balance at March 31, 2017	$	4,334		$	3,086		$	2,744		$	43		$	20		$	10,227
Provision (credit)		138			60			108			51			(7	)		350
Charge-offs		—			(42	)		(120	)		(53	)		—			(215	)
Recoveries		—			22			22			12			—			56
Balance at June 30, 2017	$	4,472		$	3,126		$	2,754		$	53		$	13		$	10,418
Balance at March 31, 2018	$	5,199		$	3,397		$	2,681		$	78		$	15		$	11,370
Provision (credit)		259			211			263			47			(30	)		750
Charge-offs		—			(80	)		(25	)		(49	)		—			(154	)
Recoveries		—			1			3			16			—			20
Balance at June 30, 2018	$	5,458		$	3,529		$	2,922		$	92		$	(15	)	$	11,986
Six Months Ended
Balance at December 31, 2016	$	4,083		$	2,862		$	3,085		$	38		$	—		$	10,068
Provision (credit)		307			281			(71	)		120			13			650
Charge-offs		(36	)		(41	)		(285	)		(133	)		—			(495	)
Recoveries		118			24			25			28			—			195
Balance at June 30, 2017	$	4,472		$	3,126		$	2,754		$	53		$	13		$	10,418
Balance at December 31, 2017	$	4,712		$	3,311		$	2,733		$	71		$	4		$	10,831
Provision (credit)		710			282			204			73			(19	)		1,250
Charge-offs		—			(80	)		(25	)		(85	)		—			(190	)
Recoveries		36			16			10			33			—			95
Balance at June 30, 2018	$	5,458		$	3,529		$	2,922		$	92		$	(15	)	$	11,986

14

Further information pertaining to the allowance for loan losses by segment at June 30, 2018 and December 31, 2017 follows:

	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer		Unallocated			Total
	(In thousands)
June 30, 2018
Amount of allowance for impaired loans	$	—	$	—	$	—	$	—	$	—		$	—
Amount of allowance for non-impaired loans		5,458		3,529		2,922		92		(15	)		11,986
Total allowance for loan losses	$	5,458	$	3,529	$	2,922	$	92	$	(15	)	$	11,986
Impaired loans	$	2,787	$	4,820	$	3,411	$	94	$	—		$	11,112
Non-impaired loans		733,696		657,031		241,943		4,658		—			1,637,328
Loans acquired with deteriorated credit quality		11,579		3,262		927		—		—			15,768
Total loans	$	748,062	$	665,113	$	246,281	$	4,752	$	—		$	1,664,208
December 31, 2017
Amount of allowance for impaired loans	$	—	$	—	$	—	$	—	$	—		$	—
Amount of allowance for non-impaired loans		4,712		3,311		2,733		71		4			10,831
Total allowance for loan losses		4,712	$	3,311	$	2,733	$	71	$	4		$	10,831
Impaired loans	$	3,674	$	3,964	$	2,766	$	120	$	—		$	10,524
Non-impaired loans		716,571		642,787		234,582		4,358		—			1,598,298
Loans acquired with deteriorated credit quality		12,371		3,600		1,154		—		—			17,125
Total loans	$	732,616	$	650,351	$	238,502	$	4,478	$	—		$	1,625,947

15

The following is a summary of past due and non-accrual loans by class at June 30, 2018 and December 31, 2017:

	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		Non-Accrual Loans
	(In thousands)
June 30, 2018
Commercial real estate	$	3,405	$	—	$	473	$	3,878	$	—	$	2,284
Residential real estate:
Residential		1,268		1,888		1,528		4,684		—		6,580
Home equity		464		319		32		815		—		437
Commercial and industrial		1,676		369		453		2,498		—		3,615
Consumer		18		6		18		42		—		94
Total	$	6,831	$	2,582	$	2,504	$	11,917	$	—	$	13,010
December 31, 2017
Commercial real estate	$	1,951	$	144	$	290	$	2,385	$	—	$	2,959
Residential real estate:
Residential		2,992		1,480		1,911		6,383		—		5,961
Home equity		635		—		48		683		—		696
Commercial and industrial		1,731		797		162		2,690		—		3,019
Consumer		65		—		41		106		—		120
Total	$	7,374	$	2,421	$	2,452	$	12,247	$	—	$	12,755

The following is a summary of impaired loans by class at June 30, 2018 and December 31, 2017:

					Three Months Ended				Six Months Ended(1)
	At June 30, 2018(1)				June 30, 2018				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	$	14,366	$	17,167	$	14,564	$	182	$	14,984	$	372
Residential real estate		7,595		8,142		6,968		9		6,773		19
Home equity		487		520		606		1		671		2
Commercial and industrial		4,338		8,782		4,198		28		4,094		72
Consumer		94		104		95		—		101		—
Total impaired loans	$	26,880	$	34,715	$	26,431	$	220	$	26,623	$	465

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

16

					Three Months Ended				Six Months Ended
	At December 31, 2017				June 30, 2017				June 30, 2017
	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	$	16,045	$	18,773	$	19,202	$	234	$	19,316	$	451
Residential real estate		6,816		7,298		6,822		11		6,314		23
Home equity		748		783		249		1		187		2
Commercial and industrial		3,920		9,215		4,740		67		4,586		129
Consumer		120		129		93		—		64		—
Total impaired loans	$	27,649	$	36,198	$	31,106	$	313	$	30,467	$	605

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

No interest income was recognized for impaired loans on a cash-basis method during the three and six months ended June 30, 2018 or 2017. Interest income recognized on impaired loans during the three and six months ended June 30, 2018 and 2017 related to performing purchase impaired loans and troubled debt restructuring (“TDRs”).

We may periodically agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a TDR. These concessions could include a reduction in the interest rate on the loan, payment extensions, postponement or forgiveness of principal, forbearance or other actions intended to maximize collection. All TDRs are classified as impaired.

When we modify loans in a TDR, we measure impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, we evaluate all TDRs, including those that have payment defaults, for possible impairment and recognize impairment through the allowance.

Nonperforming TDRs are shown as nonperforming assets. There were no loans modified as TDRs during the three and six months ended June 30, 2018 or 2017.

A default occurs when a loan is 30 days or more past due. No TDRs defaulted within twelve months of restructuring during the three and six months ended June 30, 2018 or 2017.

There were no charge-offs on TDRs during the three and six months ended June 30, 2018 or 2017.

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Loans Acquired with Deteriorated Credit Quality

The following is a summary of loans acquired with evidence of credit deterioration from Chicopee as of June 30, 2018 and 2017.

	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

	Contractual Required Payments Receivable			Cash Expected To Be Collected			Non- Accretable Discount			Accretable Yield			Loans Receivable
	(In thousands)
Balance at December 31, 2016	$	37,437		$	29,040		$	8,397		$	7,521		$	21,519
Collections		(2,314	)		(1,981	)		(333	)		(692	)		(1,289	)
Dispositions		(632	)		(406	)		(226	)		6			(412	)
Balance at June 30, 2017	$	34,491		$	26,653		$	7,838		$	6,835		$	19,818

Credit Quality Information

We utilize an eight-grade internal loan rating system for commercial real estate and commercial and industrial loans. Performing residential real estate, home equity and consumer loans are grouped with “Pass” rated loans. Nonperforming residential real estate, home equity and consumer loans are monitored individually for impairment and risk rated as “Substandard.”

Loans rated 1 – 4 are considered “Pass” or “Pass Watch” rated loans with acceptable risk.

Loans rated 5 are considered “Special Mention.” These loans exhibit potential credit weaknesses or downward trends and are being closely monitored by us.

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

Loans rated 7 are considered “Doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable and that a partial loss of principal is likely.

Loans rated 8 are considered uncollectible and of such little value that their continuance as loans is not warranted.

On an annual basis, or more often if needed, we formally review the ratings on all commercial real estate and commercial and industrial loans. Construction loans are reported within commercial real estate loans and total $91.4 million and $88.9 million at June 30, 2018 and December 31, 2017, 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 list and other loan reports to monitor credit quality in other segments.

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The following table presents our loans by risk rating at June 30, 2018 and December 31, 2017:

	Commercial Real Estate		Residential 1-4 Family		Home Equity		Commercial and Industrial		Consumer		Total
	(In thousands)
June 30, 2018
Loans rated 1 – 4	$	712,470	$	562,970	$	94,049	$	214,115	$	4,750	$	1,588,354
Loans rated 5		24,811		—		—		7,684		—		32,495
Loans rated 6		10,781		7,414		680		24,482		2		43,359
	$	748,062	$	570,384	$	94,729	$	246,281	$	4,752	$	1,664,208
December 31, 2017
Loans rated 1 – 4	$	708,992	$	551,469	$	91,903	$	205,537	$	4,475	$	1,562,376
Loans rated 5		15,098		—		—		24,565		—		39,663
Loans rated 6		8,526		6,283		696		8,400		3		23,908
	$	732,616	$	557,752	$	92,599	$	238,502	$	4,478	$	1,625,947

6.       GOODWILL AND OTHER INTANGIBLES

At June 30, 2018 and December 31, 2017, the Company’s goodwill related to the acquisition of Chicopee in October 2016. No goodwill impairment was recorded for the six months ended June 30, 2018. Annually, or more frequently if events or changes in circumstances warrant such evaluation, the Company evaluates its goodwill for impairment.

Core Deposit Intangibles

In connection with the assumption of $545.7 million of deposit liabilities from the Chicopee acquisition in October 2016, of which $345.2 million were core deposits, the Bank recorded a core deposit intangible of $4.5 million. The resulting core deposit intangible is amortized over twelve years using the straight-line method. Amortization expense was $188,000 for the six months ended June 30, 2018. At June 30, 2018, future amortization of the core deposit intangible totals $375,000 for each of the next five years and $2.0 million thereafter.

7.        SHARE-BASED COMPENSATION

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

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A summary of stock option activity for the six months ended June 30, 2018 is presented below:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2017		257,050		$	6.31		4.41	$	1,175
Exercised		(16,975	)	$	6.13		4.11	$	77
Outstanding at June 30, 2018		240,075		$	6.32		3.92	$	1,118
Exercisable at June 30, 2018		240,075		$	6.32		3.92	$	1,118

Cash received for options exercised during the six months ended June 30, 2018 was $104,000.

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

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

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

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

In May 2016, 62,740 shares were granted under the LTI Plan. Of this total, 36,543 shares are retention-based, with 10,352 vesting in one year and 26,191 vesting ratably over a three-year period. The remaining 26,197 shares granted are performance based and are subject to the achievement of the 2016 LTI performance metric before vesting is realized after a three-year period. Performance shares will be earned based upon how the Company performs relative to threshold and target absolute goals (i.e. Company-specific, not relative to a peer index) over the three-year performance period. 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 LTI Plan for 2016 are as follows:

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

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Participants will be able to earn between 50% (for threshold performance) and 100% (for target performance) of the performance shares but will not earn additional shares if performance exceeds target performance.

In May 2017, 89,042 shares were granted under the LTI Plan. Of this total, 55,159 shares are retention-based, with 21,276 vesting in one year and 33,883 vesting ratably over a three-year period. The remaining 33,883 shares granted are performance based and are subject to the achievement of the 2017 LTI performance metric before vesting is realized after a three-year period. For the performance shares, the primary performance metric for 2017 awards is 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. 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 under the LTI Plan for 2017 are as follows:

	Return on Equity Metrics
Performance Period Ending		Original Threshold		Adjusted Threshold		Original Target		Adjusted Target		Original Maximum		Adjusted Maximum
December 31, 2018		6.30	%	6.87	%	7.00	%	7.63	%	7.60	%	8.28	%
December 31, 2019		6.50	%	7.09	%	7.20	%	7.85	%	7.90	%	8.61	%

Participants will be able to earn between 50% (for threshold performance), 100% (for target performance) and 150% (for maximum performance).The fair market value of shares awarded, based on the market price at the date of grant, is recorded as unearned compensation and amortized over the applicable vesting period. Shares granted under performance-based conditions are monitored on a quarterly basis in order to compare actual results to the performance metric established, with any necessary adjustments being recognized through share-based compensation expense and unearned compensation.

In January 2018, 83,812 shares were granted under the LTI Plan. Of this total, 50,852 shares are retention-based, with 17,908 vesting in one year and 32,944 vesting ratably over a three-year period. The remaining 32,960 shares granted are performance based and are subject to the achievement of the 2018 LTI performance metric before vesting is realized after a three year period. For the performance shares, the primary performance metric for 2018 awards is 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 LTI Plan for 2018 are as follows:

	Return on Equity Metrics
Performance Period Ending	Threshold			Target			Stretch
December 31, 2018		6.30	%		6.80	%		7.20	%
December 31, 2019		6.85	%		7.35	%		7.75	%
December 31, 2020		7.40	%		7.90	%		8.30	%

Participants will be able to earn between 50% (for threshold performance), 100% (for target performance) and 150% (for maximum performance).The fair market value of shares awarded, based on the market price at the date of grant, is recorded as unearned compensation and amortized over the applicable vesting period. Shares granted under performance-based conditions are monitored on a quarterly basis in order to compare actual results to the performance metrics established, with any necessary adjustments being recognized through share-based compensation expense and unearned compensation.

At June 30, 2018, an additional 231,846 shares were available for future grants under this plan.

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Our stock award plan activity for the six months ended June 30, 2018 and 2017 is summarized below:

	Unvested Stock Awards Outstanding
	Shares			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2017		138,833		$	8.98
Shares granted		83,812			11.05
Shares vested		(32,476	)		9.13
Outstanding at June 30, 2018		190,169		$	9.87
Outstanding at December 31, 2016		91,371		$	7.51
Shares granted		89,042			10.15
Shares vested		(21,552	)		7.44
Outstanding at June 30, 2017		158,861		$	9.00

We recorded compensation cost related to the stock awards of $485,000 and $331,000 for the six months ended June 30, 2018 and 2017, respectively.

8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

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

Short-term borrowings are made up of Federal Home Loan Bank of Boston (“FHLBB”) advances with an original maturity of less than one year and a line of credit with the FHLBB. Short-term borrowings issued by the FHLBB were $66.0 million at June 30, 2018 and $133.0 million at December 31, 2017. We have an “Ideal Way” line of credit with the FHLBB for $9.5 million at June 30, 2018 and December 31, 2017. Interest on this line of credit is payable at a rate determined and reset by the FHLBB on a daily basis. The outstanding principal is due daily, but the portion not repaid will be automatically renewed. There were no advances outstanding on the line of credit at June 30, 2018 and December 31, 2017. There were no customer repurchase agreements at June 30, 2018 while there were $11.7 million at December 31, 2017. 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 Atlantic Community Bankers Bank (“ACBB”) and PNC Bank, respectively. The interest rates on these lines are determined and reset on a daily basis by each respective bank. There were no advances outstanding under these lines of credit at June 30, 2018 or December 31, 2017.  As part of our contract with ACBB, we are required to maintain a reserve balance of $300,000 with ACBB for our use of this line of credit.

Long-term debt consists of FHLBB advances with an original maturity of one year or more. At June 30, 2018, we had $214.7 million in long-term debt with the FHLBB. This compares to $164.8 million in long-term debt with FHLBB advances at December 31, 2017.

The customer repurchase agreements outstanding at December 31, 2017 were collateralized by government-sponsored enterprise obligations with fair value of $6.7 million and mortgage backed securities with a fair value of $58.4 million, respectively.

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

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9. PENSION BENEFITS

We provide a defined benefit pension plan for eligible employees (the “Plan”). Employees must work a minimum of 1,000 hours per year to be eligible for the Plan. Eligible employees become vested in the Plan after five years of service. We plan to contribute to the 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 Plan’s actuaries. We have not yet determined how much we expect to contribute to our Plan in 2018. No contributions have been made to the Plan for the six months ended June 30, 2018. The Plan assets are invested in various pooled separate investment accounts offered by Principal Life Insurance Company, a division of Principal Financial Group, who is the Custodian of the Plan (the “Custodian”). The Plan is administered by an officer of Westfield Bank (the “Plan Administrator”). On September 30, 2016, we effected a soft freeze on the Plan and therefore no new participants will be included in the Plan after such effective date.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(In thousands)
Service cost	$	303		$	266		$	606		$	533
Interest cost		253			253			506			507
Expected return on assets		(347	)		(299	)		(694	)		(597	)
Actuarial loss		57			51			114			102
Net periodic pension cost	$	266		$	271		$	532		$	545

10. DERIVATIVES AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

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

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Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of our derivative financial instruments designated as hedging instruments as well as our classification on the balance sheet as of June 30, 2018 and December 31, 2017.

June 30, 2018	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(In thousands)
Interest rate swaps	Other Assets	$	29	Other Liabilities	$	990

December 31, 2017	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(In thousands)
Interest rate swaps	Other Assets	$	—	Other Liabilities	$	2,152

At June 30, 2018 and December 31, 2017, all derivatives were designated as hedging instruments.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest income and expense and to manage our exposure to interest rate movements. To accomplish this objective, we entered into interest rate swaps 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 June 30, 2018 and December 31, 2017:

	Notional		Weighted Average		Weighted Average Rate						Estimated Fair
June 30, 2018	Amount		Maturity		Receive			Pay			Value
	(In thousands)		(In years)								(In thousands)
Interest rate swaps on FHLBB borrowings	$	55,000		2.8		2.34	%		2.93	%	$(961)

	Notional		Weighted Average		Weighted Average Rate						Estimated Fair
December 31, 2017	Amount		Maturity		Receive			Pay			Value
	(In thousands)		(In years)								(In thousands)
Interest rate swaps on FHLBB borrowings	$	55,000		3.3		1.64	%		2.93	%	$(2,152)

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received on the Company’s variable-rate borrowings. During the next twelve months, the Company estimates that an additional $1.4 million will be reclassified as an increase to interest expense.

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).

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

	Amount of Gain (Loss) Recognized in OCI on Derivative
	Three Months Ended June 30,					Six Months Ended June 30,
	2018		2017			2018		2017
	(In thousands)
Interest rate swaps	$	240	$	(346	)	$	918	$	(293	)

Amounts reported in accumulated other comprehensive loss related to these derivatives are reclassified to interest expense as interest payments are made on our rate sensitive assets/liabilities. Fees on previously terminated swaps are being amortized as a reclassification of other comprehensive income into interest expense over the terms of the previously hedged borrowings. The amount reclassified from accumulated other comprehensive income into net income for interest rate swaps and termination fees was $368,000 and $515,000 during the three months ended June 30, 2018 and 2017, respectively and $803,000 and $1.1 million during the six months ended June 30, 2018 and 2017, respectively.

Credit-risk-related Contingent Features

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

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

At June 30, 2018 and December 31, 2017, we had a net liability position of $959,000 and $2.2 million with our counterparties, respectively. As of June 30, 2018, we had minimum collateral posting thresholds with certain of our derivative counterparties and had mortgage-backed securities with a fair value of $1.7 million posted as collateral against our obligations under these agreements. If we had breached any of these provisions at June 30, 2018, we could have been required to settle our obligations under the agreements at the termination value.

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11. FAIR VALUE OF ASSETS AND LIABILITIES

Determination of Fair Value

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

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

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

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

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

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

Securities 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.

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.

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

	June 30, 2018
	Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Securities available-for-sale
Government-sponsored mortgage-backed securities	$	—	$	164,743	$	—	$	164,743
U.S. government guaranteed mortgage-backed securities		—		19,988		—		19,988
Corporate bonds		—		48,337		—		48,337
State and municipal bonds		—		2,940		—		2,940
Government-sponsored enterprise obligations		—		23,681		—		23,681
Marketable equity securities		6,324		—		—		6,324
Interest rate swaps		—		29		—		29
Total assets	$	6,324	$	259,718	$	—	$	266,042
Liabilities:
Interest rate swaps	$	—	$	990	$	—	$	990

	December 31, 2017
	Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Government-sponsored mortgage-backed securities	$	—	$	182,001	$	—	$	182,001
U.S. government guaranteed mortgage-backed securities		—		16,254		—		16,254
Corporate bonds		—		56,144		—		56,144
State and municipal bonds		—		3,239		—		3,239
Government-sponsored enterprise obligations		—		24,381		—		24,381
Mutual funds		6,397		—		—		6,397
Total assets	$	6,397	$	282,019	$	—	$	288,416
Liabilities:
Interest rate swaps	$	—	$	2,152	$	—	$	2,152

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Also, we may be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related assets at June 30, 2018. Total losses represent the change in carrying value as a result of fair value adjustments related to assets still held at June 30, 2018. There were no assets measured at fair value on a non-recurring basis at June 30, 2017.

	At						Three Months Ended			Six Months Ended
	June 30, 2018						June 30, 2018			June 30, 2018
	Level		Level		Level		Total Gains			Total Gains
	1		2		3		(Losses)			(Losses)
	(In thousands)
Impaired Loans	$	—	$	—	$	1,413	$	(80	)	$	(80	)
Total Assets	$	—	$	—	$	1,413	$	(80	)	$	(80	)

The amount of impaired loans represents the carrying value and related write-down and 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 six months ended June 30, 2018 and 2017. We did not measure any liabilities at fair value on a non-recurring basis on the consolidated balance sheets.

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

	June 30, 2018
	Carrying Value		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents	$	22,925	$	22,925	$	—	$	—	$	22,925
Securities available-for-sale		259,689		—		259,689		—		259,689
Marketable equity securities		6,324		6,324		—		—		6,324
Federal Home Loan Bank of Boston and other restricted stock		15,584		—		—		15,584		15,584
Loans - net		1,656,889		—		—		1,597,876		1,597,876
Accrued interest receivable		5,581		—		—		5,581		5,581
Mortgage servicing rights		319		—		501		—		501
Derivative assets		29		—		29		—		29
Liabilities:
Deposits		1,551,804		—		—		1,546,467		1,546,467
Short-term borrowings		66,000		—		66,012		—		66,012
Long-term debt		214,672		—		212,931		—		212,931
Accrued interest payable		536		—		—		536		536
Derivative liabilities		990		—		990		—		990

	December 31, 2017
	Carrying Value		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents	$	27,132	$	27,132	$	—	$	—	$	27,132
Securities available-for-sale		288,416		6,397		282,019		—		288,416
Federal Home Loan Bank of Boston and other restricted stock		15,553		—		—		15,553		15,553
Loans - net		1,619,850		—		—		1,581,929		1,581,929
Accrued interest receivable		5,946		—		—		5,946		5,946
Mortgage servicing rights		352		—		528		—		528
Liabilities:
Deposits		1,506,082		—		—		1,503,311		1,503,311
Short-term borrowings		144,650		—		144,650		—		144,650
Long-term debt		164,786		—		164,016		—		164,016
Accrued interest payable		441		—		—		441		441
Derivative liabilities		2,152		—		2,152		—		2,152

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12. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the requirements in Topic 840, Leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in this ASU is permitted for all entities. Management is currently evaluating the impact to the consolidated financial statements of adopting this ASU but does not expect adoption to have a material impact on our consolidated financial statements. As of June 30, 2018, the Company had $9.0 million of future lease payments outstanding on operating leases pertaining to banking premises.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements.  This ASU is effective for the first interim period in fiscal years beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is in the process of evaluating the standard.  We have put together a project team that has begun to identify appropriate loan segments along with related historical losses for each segment and potential models that would be most appropriate for each individual segment.  We have not quantified the effects of any models, but do expect the standard to significantly change the approach to calculating our allowance for loan losses.

In March 2017, the FASB issued ASU 2017-08—Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We do not expect the application of this guidance to have a material impact on our consolidated financial statements.

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

Overview

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

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

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

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

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

You should read the following financial results for the three and six months ended June 30, 2018 in the context of this strategy.

● Net income was $5.1 million, or $0.18 per diluted share, for the three months ended June 30, 2018, compared to $3.8 million, or $0.12 per diluted share, for the same period in 2017. For the six months ended June 30, 2018, net income was $8.7 million, or $0.29 per diluted share, as compared to net income of $8.9 million, or $0.30 per diluted share, for the same period in 2017.

● The provision for loan losses was $750,000 and $350,000 for the three months ended June 30, 2018 and 2017, respectively, and $1.3 million and $650,000 for the six months ended June 30, 2018 and 2017, respectively.

● Net interest income was $15.9 million and $14.7 million for the three months ended June 30, 2018 and 2017, respectively. The net interest margin was 3.24% for the three months ended June 30, 2018, compared to 3.05% for the same period in 2017. The net interest margin, on a tax-equivalent basis, was 3.27% for the three months ended June 30, 2018, compared to 3.11% for the same period in 2017. Net interest income was $30.6 million and $29.2 million for the six months ended June 30, 2018 and 2017, respectively. The net interest margin was 3.17% and 3.04% for the six months ended June 30, 2018 and 2017, respectively. The net interest margin, on a tax-equivalent basis, was 3.19% and 3.09% for the six months ended June 30, 2018 and 2017, respectively.

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CRITICAL ACCOUNTING POLICIES

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

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. There have been no material changes to our critical accounting policies during the six months ended June 30, 2018. 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 2017 Annual Report.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2018 AND DECEMBER 31, 2017

At June 30, 2018, total assets of $2.1 billion reflect an increase of $12.5 million, or 0.6%, from December 31, 2017. During the same period, total loans increased $38.2 million, or 2.3%, partially offset by a decrease in cash and cash equivalents of $4.2 million, or 15.5%, and a decrease in securities available-for-sale of $22.4 million, or 7.9%, excluding the separate presentation of marketable equity securities.

Total loans increased $38.2 million, or 2.3%, due to an increase in commercial real estate loans of $15.4 million, or 2.1%, an increase in residential loans, including home equity, of $14.8 million, or 2.3%, and an increase in commercial and industrial loans of $7.8 million, or 3.3%.

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 $13.0 million at June 30, 2018 and $12.8 million at December 31, 2017. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $393,000 and $392,000 for the six months ended June 30, 2018 and 2017, respectively. At June 30, 2018 and December 31, 2017, our nonperforming loans to total loans were 0.78%, while our nonperforming assets to total assets were 0.62% for both periods. A summary of our nonaccrual and past due loans by class are listed in Note 5 of the accompanying unaudited consolidated financial statements.

At June 30, 2018, total deposits of $1.6 billion reflect an increase of $45.7 million, or 3.0%, from December 31, 2017. Core deposits, which the Company defines as all deposits except time deposits, increased $17.4 million, or 1.8%, from $949.5 million, or 63.0% of total deposits, at December 31, 2017, to $966.9 million, or 62.3% of total deposits, at June 30, 2018. Non-interest-bearing deposits increased $745,000, or 0.2%, to $312.6 million, money market accounts increased $6.8 million, or 1.7%, to $417.0 million, and interest-bearing checking accounts increased $10.2 million, or 11.7%, to $97.6 million. Time deposits increased $28.3 million, or 5.1%, from $556.5 million at December 31, 2017 to $584.9 million at June 30, 2018.

Borrowings decreased $28.7 million, or 9.3%, to $280.7 million at June 30, 2018 from $309.4 million at December 31, 2017. Short-term borrowings decreased $78.7 million, or 54.4%, to $66.0 million at June 30, 2018 from $144.7 million at December 31, 2017 primarily due to a decrease in short-term FHLBB funding. In addition, customer repurchase agreements decreased $11.7 million. During the three months ended March 31, 2018, the Company eliminated customer repurchase agreements and balances were transferred to the customer’s respective core deposit account. Long-term debt increased $49.9 million, or 3.03%, to $214.7 million at June 30, 2018 from $164.8 million at December 31, 2017. Management reduced a portion of its position in short-term adjustable-rate borrowings and increased its long-term fixed-rate funding in order to better manage rising funding costs due to the increase in the Federal Funds target rate. Additional information regarding short-term borrowings and long-term debt is included in Note 8 of the accompanying unaudited consolidated financial statements.

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At June 30, 2018, shareholders’ equity was $242.1 million, or 11.6% of total assets, compared to $247.3 million, or 11.9% of total assets at December 31, 2017. The decrease in shareholders’ equity during the six months ended June 30, 2018 reflects $3.3 million net increase in accumulated other comprehensive loss, $9.1 million for the repurchase of shares of the Company’s common stock, $2.3 million for payment of common stock dividends, partially offset by a net increase of $8.7 million in the Company’s retained earnings reflective of current period net income and $1.0 million in share-based compensation.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2018 AND JUNE 30, 2017

General

Net income was $5.1 million, or $0.18 per diluted share, for the quarter ended June 30, 2018, compared to $3.8 million, or $0.12 per diluted share, for the same period in 2017. Net interest income was $15.9 million and $14.7 million for the three months ended June 30, 2018 and 2017, respectively.

Net Interest and Dividend Income

The following tables set forth the information relating to our average balance and net interest income for the three months ended June 30, 2018 and 2017, 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. 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.

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	Three Months Ended June 30,
	2018								2017
	Average					Average			Average					Average
	Balance		Interest			Yield/Cost			Balance		Interest			Yield/Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans(1)(2)	$	1,664,903	$	18,531			4.45	%	$	1,602,057	$	16,472			4.11	%
Securities(2)		272,809		1,835			2.69			305,457		1,945			2.55
Other investments - at cost		17,601		202			4.59			17,734		166			3.74
Short-term investments(3)		8,386		28			1.34			10,789		19			0.70
Total interest-earning assets		1,963,699		20,596			4.20			1,936,037		18,602			3.84
Total non-interest-earning assets		132,467								140,643
Total assets	$	2,096,166							$	2,076,680
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Interest-bearing checking accounts	$	98,493	$	87			0.35	%	$	87,952	$	95			0.43	%
Savings accounts		142,991		48			0.13			151,986		52			0.14
Money market accounts		419,604		476			0.45			393,613		381			0.39
Time deposit accounts		578,860		2,107			1.46			565,789		1,531			1.08
Total interest-bearing deposits		1,239,948		2,718			0.88			1,199,340		2,059			0.69
Short-term borrowings and long-term debt		288,054		1,881			2.61			301,274		1,525			2.02
Interest-bearing liabilities		1,528,002		4,599			1.20			1,500,614		3,584			0.96
Non-interest-bearing deposits		312,754								308,310
Other non-interest-bearing liabilities		16,566								18,737
Total non-interest-bearing liabilities		329,320								327,047
Total liabilities		1,857,322								1,827,661
Total equity		238,844								249,019
Total liabilities and equity	$	2,096,166							$	2,076,680
Less: Tax-equivalent adjustment(2)				(132	)							(275	)
Net interest and dividend income			$	15,865							$	14,743
Net interest rate spread							2.97	%							2.83	%
Net interest rate spread, on a tax equivalent basis(4)							3.00	%							2.88	%
Net interest margin							3.24	%							3.05	%
Net interest margin, on a tax equivalent basis(5)							3.27	%							3.11	%
Ratio of average interest-earning assets to average interest-bearing liabilities							128.51	%							129.02	%

(1)	Loans, including non-accrual loans, are net of deferred loan origination costs and unadvanced funds.
(2)	Loan and securities income are presented on a tax-equivalent basis using a tax rate of 21% for the 2018 period and 35% for the 2017 period. 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 operations. See “Explanation of Use of Non-GAAP Financial Measurements”.
(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”.

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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 income and interest expense during the periods indicated. Information is provided in each category with respect to:

● 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 June 30, 2018 compared to Three Months Ended June 30, 2017
	Increase (Decrease) Due to
	Volume			Rate			Net
	(In thousands)
Interest-earning assets
Loans(1)	$	641		$	1,418		$	2,059
Securities(1)		(207	)		97			(110	)
Other investments - at cost		(1	)		37			36
Short-term investments		(4	)		13			9
Total interest-earning assets		429			1,565			1,994
Interest-bearing liabilities
Interest-bearing checking accounts		11			(19	)		(8	)
Savings accounts		(3	)		(1	)		(4	)
Money market accounts		25			70			95
Time deposit accounts		35			541			576
Short-term borrowing and long-time debt		(67	)		423			356
Total interest-bearing liabilities		1			1,014			1,015
Change in net interest and dividend income(1)	$	428		$	551		$	979

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

Net interest income increased $1.1 million, or 7.6%, to $15.9 million, for the three months ended June 30, 2018, from $14.7 million for the three months ended June 30, 2017. The increase in net interest income was due to a $2.1 million, or 11.7%, increase in interest and dividend income, partially offset by an increase in interest expense of $1.0 million, or 28.3%, during the same period. The increase in interest expense of 28.3% from June 30, 2017 was primarily due to an increase of $659,000, or 32.0%, in interest expense on deposits and an increase of $356,000, or 23.3%, in interest expense on borrowings.

The average yield on interest-earning assets increased 36 basis points from 3.84% for the three months ended June 30, 2017 to 4.20% for the three months ended June 30, 2018. During the three months ended June 30, 2018, the average cost of funds increased 24 basis points from 0.96% for the three months ended June 30, 2017 to 1.20% for the three months ended June 30, 2018. The average cost of time deposits increased 38 basis points from 1.08% for the three months ended June 30, 2017 to 1.46% for the three months ended June 30, 2018. The average cost of borrowings increased 59 basis points from 2.02% for the three months ended June 30, 2017 to 2.61% for the three months ended June 30, 2018. The increases in cost of funds from the 2017 period was primarily due to the increase in the Federal Funds target rate.

Average interest-earning assets increased $27.7 million, or 1.4%, to $2.0 billion for the three months ended June 30, 2018 when compared to the three months ended June 30, 2017. The increase in average interest-earning assets was due to an increase in average loans of $62.8 million, or 3.9%, partially offset by a decrease in average securities of $32.6 million, or 10.7%. For the three months ended June 30, 2018, average demand deposits of $312.8 million, an interest-free source of funds, represented 20.2% of average total deposits compared to 20.5% for the three months ended June 30, 2017.

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Provision for Loan Losses

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

The amount of the provision for loan losses during the three months ended June 30, 2018 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio, described in the comparison of financial condition, include an increase in residential real estate loans, commercial and industrial loans and commercial real estate loans. After evaluating these factors, we recorded a provision for loan losses of $750,000 for the three months ended June 30, 2018, compared to $350,000 for the same period in 2017. The allowance was $12.0 million and $10.8 million, respectively, and 0.72% and 0.66% of total loans at June 30, 2018 and December 31, 2017, respectively.

Net charge-offs were $134,000 for the three months ended June 30, 2018. This comprised charge-offs of $154,000 for the three months ended June 30, 2018, offset partially by recoveries of $20,000 during the same period.

Net charge-offs were $159,000 for the three months ended June 30, 2017. This comprised charge-offs of $215,000 for the three months ended June 30, 2017, offset by recoveries of $56,000.

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

Non-interest Income

Non-interest income increased $858,000, or 41.3%, to $2.9 million for the three months ended June 30, 2018, from $2.1 million for the three months ended June 30, 2017. The increase in non-interest income was primarily due to the recognition of $715,000 in bank-owned life insurance death benefits, an increase of $144,000, or 9.3%, in service charges and fees, an increase of $131,000 in other income. Offsetting these increases was $41,000 in unrealized losses on marketable equity securities and current period realized losses on securities amounting to $49,000 versus prior year realized gains of $46,000.

Non-interest Expense

For the three months ended June 30, 2018, non-interest expense increased $250,000, or 2.2%, to $11.5 million from $11.3 million for the three months ended June 30, 2017. For the three months ended June 30, 2018, non-interest expense, excluding merger-related expenses, increased $366,000, or 3.3%, to $11.5 million, or 2.21% of average assets, from $11.2 million, or 2.18% of average assets, for the three months ended June 30, 2017. The increase in non-interest expense was primarily due to an increase of $325,000, or 5.2%, in salaries and benefits, an increase in occupancy expense of $50,000, or 5.5%, an increase in other expense of $35,000, or 2.0%, an increase in furniture and equipment of $16,000, or 4.4%, and an increase in data processing of $9,000, or 1.3%. These increases were partially offset by a decrease of $39,000, or 21.0%, in FDIC insurance expense, a decrease of $30,000, or 7.8%, in advertising expense and an $116,000 decrease in merger-related expenses.

Income Taxes

For the three months ended June 30, 2018 and 2017, we had a tax provision of $1.4 million. The effective tax rate was 21.0% for the three months ended June 30, 2018 and 27.4% for the same period in 2017. The change in effective tax rate compared to the three months ended June 30, 2017 include a reduction in the Company’s corporate tax rate due to corporate tax reform along with higher pre-tax income during the 2018 period.

36

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND JUNE 30, 2017

General

Net income was $8.7 million, or $0.29 per diluted share, for the six months ended June 30, 2018, compared to $8.9 million, or $0.30 per diluted share, for the same period in 2017. Net interest income was $30.6 million and $29.2 million for the six months ended June 30, 2018 and 2017, respectively.

Net Interest and Dividend Income

The following tables set forth the information relating to our average balance and net interest income for the six months ended June 30, 2018 and 2017, 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. 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.

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	Six Months Ended June 30,
	2018								2017
	Average					Average			Average					Average
	Balance		Interest			Yield/Cost			Balance		Interest			Yield/Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans(1)(2)	$	1,645,926	$	35,358			4.30	%	$	1,581,314	$	32,522			4.11	%
Securities(2)		277,656		3,649			2.63			306,677		3,858			2.52
Other investments - at cost		17,357		403			4.64			17,623		329			3.73
Short-term investments(3)		7,173		49			1.37			33,929		92			0.54
Total interest-earning assets		1,948,112		39,459			4.05			1,939,543		36,801			3.79
Total non-interest-earning assets		134,729								135,735
Total assets	$	2,082,841							$	2,075,278
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Interest-bearing checking accounts	$	95,820		167			0.35		$	89,218		169			0.38
Savings accounts		142,941		89			0.12			152,268		94			0.12
Money market accounts		418,897		894			0.43			397,384		764			0.38
Time deposit accounts		570,032		3,923			1.38			568,805		3,041			1.07
Total interest-bearing deposits		1,227,690		5,073			0.83			1,207,675		4,068			0.67
Short-term borrowings and long-term debt		285,397		3,536			2.48			302,528		2,971			1.96
Interest-bearing liabilities		1,513,087		8,609			1.14			1,510,203		7,039			0.93
Non-interest-bearing deposits		311,480								306,390
Other non-interest-bearing liabilities		16,228								12,568
Total non-interest-bearing liabilities		327,708								318,958
Total liabilities		1,840,795								1,829,161
Total equity		242,046								246,117
Total liabilities and equity	$	2,082,841							$	2,075,278
Less: Tax-equivalent adjustment(2)				(263	)							(516	)
Net interest and dividend income			$	30,587							$	29,246
Net interest rate spread							2.88	%							2.81	%
Net interest rate spread, on a tax equivalent basis(4)							2.91	%							2.86	%
Net interest margin							3.17	%							3.04	%
Net interest margin, on a tax equivalent basis(5)							3.19	%							3.09	%
Ratio of average interest-earning assets to average interest-bearing liabilities							128.75	%							128.43	%

(1)	Loans, including non-accrual loans, are net of deferred loan origination costs and unadvanced funds.
(2)	Loan and securities income are presented on a tax-equivalent basis using a tax rate of 21% for the 2018 period and 35% for the 2017 period. The tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported in the statements of operations. See “Explanation of Use of Non-GAAP Financial Measurements”.
(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”.

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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 income and interest expense during the periods indicated. Information is provided in each category with respect to:

● 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.

	Six Months Ended June 30, 2018 compared to Six Months Ended June 30, 2017
	Increase (Decrease) Due to
	Volume			Rate			Net
	(In thousands)
Interest-earning assets
Loans(1)	$	1,315		$	1,521		$	2,836
Securities(1)		(363	)		154			(209	)
Other investments - at cost		(5	)		79			74
Short-term investments		(73	)		30			(43	)
Total interest-earning assets		874			1,784			2,658
Interest-bearing liabilities
Interest-bearing checking accounts		13			(15	)		(2	)
Savings accounts		(6	)		1			(5	)
Money market accounts		41			89			130
Time deposit accounts		7			875			882
Short-term borrowing and long-term debt		(168	)		733			565
Total interest-bearing liabilities		(113	)		1,683			1,570
Change in net interest and dividend income	$	987		$	101		$	1,088

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

Net interest income increased $1.3 million, or 4.6%, from $29.2 million for the six months ended June 30, 2017 to $30.6 million for the six months ended June 30, 2018. The increase in net interest income was primarily due to an increase in interest and dividend income of $2.9 million, or 8.0%, partially offset by an increase in interest expense of $1.6 million, or 22.3%, from the six months ended June 30, 2017. The increase in interest income of $2.9 million was primarily due to a $64.6 million, or 4.1%, increase in average loans outstanding. The increase in interest expense was due to a $1.0 million, or 24.7%, increase in interest expense on deposits and a $565,000, or 19.0%, increase in interest expense on borrowings.

The net interest margin increased 10 basis points from 3.09% for the six months ended June 30, 2017 to 3.19% for the six months ended June 30, 2018. During the six months ended June 30, 2018, accretion of purchase accounting adjustments related to the Chicopee acquisition increased net interest income by $1.1 million. Excluding these items, net interest margin for the six months ended June 30, 2018 was 3.08% compared to 2.99% for the six months ended June 30, 2017. The average asset yield increased 26 basis points from 3.79% for the six months ended June 30, 2017 to 4.05% for the six months ended June 30, 2018. The average cost of funds increased 21 basis points from 0.93% for the six months ended June 30, 2017 to 1.14% for the six months ended June 30, 2018. The average cost of time deposits increased 31 basis points from 1.07% for the six months ended June 30, 2017 to 1.38% for the six months ended June 30, 2018. The average cost of borrowings increased 52 basis points from 1.96% for the six months ended June 30, 2017 to 2.48% for the six months ended June 30, 2018. The increase in the cost of funds was primarily due to the increase in the Federal Funds target rate.

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Average interest-earning assets increased $8.6 million, or 0.4%, to $1.9 billion for the six months ended June 30, 2018. The increase in average interest-earning assets was due to a $64.6 million, or 4.1%, increase in average loans, partially offset by a $29.0 million, or 9.5%, decrease in average investments and a $26.8 million, or 78.9%, decrease in short-term investments.

Provision for Loan Losses

The amount that we provided for loan losses during the six months ended June 30, 2018 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio for the six months ended June 30, 2018, described in the comparison of financial condition, include increases in commercial real estate loans, residential real estate loans and commercial and industrial loans. After evaluating these factors, we recorded a provision of $1.3 million for loan losses for the six months ended June 30, 2018, compared to $650,000 for the same period in 2017. The allowance was $12.0 million at June 30, 2018 and $10.8 million at December 31, 2017. The allowance for loan losses was 0.72% and 0.66% of total loans at June 30, 2018 and December 31, 2017, respectively.

Net charge-offs were $95,000 for the six months ended June 30, 2018. This comprised charge-offs of $190,000 for the six months ended June 30, 2018, partially offset by recoveries of $95,000.

Net charge-offs were $300,000 for the six months ended June 30, 2017. This comprised charge-offs of $495,000 for the six months ended June 30, 2017, partially offset by recoveries of $195,000.

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

For the six months ended June 30, 2018, non-interest income of $4.7 million reflects an increase of $607,000, or 14.8%, compared to $4.1 million for the six months ended June 30, 2017. The increase was primarily due to the recognition of $715,000 in bank-owned life insurance death benefits, an increase in service charges and fees of $201,000, or 6.5%, and a gain on the sale of OREO of $48,000, partially offset by an increase in unrealized losses on marketable equities of $147,000 and an increase in realized securities losses of $232,000, primarily due to the recognition of unamortized premiums on a bond which was paid in full prior to its final maturity. Excluding the net gain on bank-owned life insurance death benefit and the realized and unrealized losses discussed above, non-interest income increased $223,000, or 5.4%.

Non-interest Expense

For the six months ended June 30, 2018, non-interest expense increased $706,000, or 3.2%, to $23.0 million, or 2.22% of average assets, compared to $22.3 million, or 2.16% of average assets for the six months ended June 30, 2017. Excluding merger-related expenses of $526,000, non-interest expense increased $1.2 million, or 5.7%, from $21.7 million, or 2.11% of average assets, for the six months ended June 30, 2017 to $23.0 million, or 2.22% of average assets for the six months ended June 30, 2018.

The increase in non-interest expense was primarily due to the increase in salaries and benefits of $633,000, or 5.1%, an increase in data processing of $255,000, or 24.1%, due to the expiration of credits related to the merger with Chicopee, an increase in occupancy expense of $103,000, or 5.4%, an increase in professional fees of $63,000, or 4.9%, an increase in advertising expense of $69,000, or 10.9%, an increase in other expenses of $97,000, or 2.9%, an increase in furniture and equipment of $10,000, or 1.4%, and an increase in FDIC insurance expense of $2,000, or 0.7%.

Income Taxes

For the six months ended June 30, 2018, we had a tax provision of $2.4 million as compared to $1.6 million for the same period in 2017. The effective tax rate was 21.8% for the six months ended June 30, 2018 and 15.0% for the same period in 2017. The 2017 period includes $1.8 million in tax benefits recorded on the reversal of a deferred tax valuation allowance and stock option exercises.

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Explanation of Use of Non-GAAP Financial Measurements

We believe that it is common practice in the banking industry to present interest income and related yield information on tax-exempt loans and securities on a tax-equivalent basis and that such information is useful to investors because it facilitates comparisons among financial institutions. However, the adjustment of interest income and yields on tax-exempt loans and securities to a tax-equivalent amount may be considered to include 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,
	2018					2017					2018					2017
	(Dollars in thousands)										(Dollars in thousands)
	Interest		Average Yield			Interest		Average Yield			Interest		Average Yield			Interest		Average Yield
Loans (no tax adjustment)	$	18,405		4.42	%	$	16,211		4.05	%	$	35,107		4.27	%	$	32,037		4.05	%
Tax-equivalent adjustment(1)		126					261					251					485
Loans (tax-equivalent basis)	$	18,531		4.45	%	$	16,472		4.11	%	$	35,358		4.30	%	$	32,522		4.11	%
Securities (no tax adjustment)	$	1,829		2.68	%	$	1,931		2.53	%	$	3,637		2.62	%	$	3,827		2.50	%
Tax-equivalent adjustment(1)		6					14					12					31
Securities (tax-equivalent basis)	$	1,835		2.69	%	$	1,945		2.55	%	$	3,649		2.63	%	$	3,858		2.52	%
Net interest income (no tax adjustment)	$	15,865				$	14,743				$	30,587				$	29,246
Tax-equivalent adjustment(1)		132					275					263					516
Net interest income (tax-equivalent basis)	$	15,997				$	15,018				$	30,850				$	29,762
Interest rate spread (no tax adjustment)				2.97	%				2.83	%				2.88	%				2.81	%
Net interest margin (no tax adjustment)				3.24	%				3.05	%				3.17	%				3.04	%

(1) The tax equivalent adjustment is based upon a 21% tax rate for the 2018 periods and a 35% tax rate for the 2017 periods.

LIQUIDITY AND CAPITAL RESOURCES

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, 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 securities and funds provided by operations. We also can borrow funds from the FHLBB based on eligible collateral of loans and securities. Our maximum additional borrowing capacity from the FHLBB at June 30, 2018 was $157.5 million. In addition, we have available lines of credit of $4.0 million and $50.0 million with ACBB and PNC Bank, respectively. The interest rates on these lines are determined and reset on a daily basis by each respective bank.

Liquidity management is both a daily and long-term function of business management. The measure of a company’s liquidity is its ability 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 of 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 the Company’s current operating needs.

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At June 30, 2018, we exceeded each of the applicable regulatory capital requirements. As of June 30, 2018, the most recent notification from the Office of Comptroller of the Currency categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized” the Bank must maintain minimum total risk-based, Tier 1 risk-based, Common Equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes would change our category. Our actual capital ratios of June 30, 2018 and December 31, 2017 are also presented in the following table.

	Actual					Minimum For Capital Adequacy Purpose					Minimum To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
June 30, 2018
Total Capital (to Risk Weighted Assets):
Consolidated	$	254,627		15.49	%	$	131,499		8.00	%		N/A		N/A
Bank		243,477		14.84			131,265		8.00		$	164,081		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		242,641		14.76			98,624		6.00			N/A		N/A
Bank		231,491		14.11			98,449		6.00			131,265		8.00
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated		242,641		14.76			73,968		4.50			N/A		N/A
Bank		231,491		14.11			73,836		4.50			106,653		6.50
Tier 1 Leverage Ratio (to Adjusted Average Assets):
Consolidated		242,641		11.60			83,677		4.00			N/A		N/A
Bank		231,491		11.08			83,589		4.00			104,487		5.00
December 31, 2017
Total Capital (to Risk Weighted Assets):
Consolidated	$	255,605		15.53	%	$	131,711		8.00	%		N/A		N/A
Bank		245,380		14.94			131,367		8.00		$	164,208		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		244,774		14.87			98,783		6.00			N/A		N/A
Bank		234,549		14.28			98,525		6.00			131,367		8.00
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated		244,774		14.87			74,087		4.50			N/A		N/A
Bank		234,549		14.28			73,894		4.50			106,735		6.50
Tier 1 Leverage Ratio (to Adjusted Average Assets):
Consolidated		244,774		11.84			82,702		4.00			N/A		N/A
Bank		234,549		11.36			82,584		4.00			103,230		5.00

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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 June 30, 2018:

	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)	$	1,114	$	1,981	$	1,561	$	4,359	$	9,015
Borrowings
Federal Home Loan Bank		129,749		137,477		12,762		684		280,672
Credit Commitments
Available lines of credit		161,962		—		—		73,219		235,181
Other loan commitments		70,312		22,194		2,053		1,002		95,561
Letters of credit		5,609		1,441		301		698		8,049
Total credit commitments		237,883		23,635		2,354		74,919		338,791
Other Obligations
Vendor Contracts		2,962		5,923		5,923		4,936		19,744
Total Obligations	$	371,708	$	169,016	$	22,600	$	84,898	$	648,222

(1) Payments are for the lease of real property

OFF-BALANCE SHEET ARRANGEMENTS

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

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our assessment of our sensitivity to market risk since its presentation in our 2017 Annual Report. Please refer to Item 7A of the 2017 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.

43

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 2017 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 June 30, 2018.

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, 2018		215,118		10.84		215,118		1,773,850
May 1 - 31, 2018		79,488		10.95		79,488		1,694,362
June 1 - 30, 2018		96,770		10.93		96,770		1,597,592
Total		391,376		10.89		391,376		1,597,592

(1) On January 31, 2017, the Board of Directors authorized an additional stock repurchase program under which the Company may purchase up to 3,047,000 shares, or 10%, of its outstanding common stock.

There were no sales by us of unregistered securities during the three months ended June 30, 2018.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURE.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

44

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 June 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.

  * Filed herewith.

** 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.

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, 2018.

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