Western New England Bancorp (WNEB) 10-Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

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

Westfield Financial, 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 twelve 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 x  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, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer ¨	Accelerated filer x
Non-accelerated filer ¨	Smaller reporting company ¨

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

At August 2, 2010 the registrant had 29,458,167 shares of common stock, $0.01 par value, issued and outstanding.

TABLE OF CONTENTS

		Page
FORWARD-LOOKING STATEMENTS
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements of Westfield Financial, Inc. and Subsidiaries	1
	Consolidated Balance Sheets (Unaudited) – June 30, 2010 and December 31, 2009	1
	Consolidated Statements of Operations (Unaudited) – Three and Six Months Ended
	June 30, 2010 and 2009	2
	Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive
	Income (Unaudited) – Six Months Ended June 30, 2010 and 2009	3
	Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended
	June 30, 2010 and 2009	4
	Notes to Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 4.	Controls and Procedures	34
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults upon Senior Securities	36
Item 4.	[Removed and Reserved]	36
Item 5.	Other Information	36
Item 6.	Exhibits	36
SIGNATURES		37
EXHIBITS		38

FORWARD – LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements.”  These forward-looking statements are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.  The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements.  These forward-looking statements may be subject to significant known and unknown risks, uncertainties and other factors, including, but not limited to, changes in the real estate market or local economy, changes in interest rates, changes in laws and regulations to which we are subject, and competition in our primary market area.

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.  Westfield Financial undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

i

PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(Dollars in thousands)

	June 30,			December 31,
	2010			2009
ASSETS
Cash and due from banks	$	9,841		$	12,204
Federal funds sold		5			2
Interest-bearing deposits and other short-term investments		6,149			16,513
Cash and cash equivalents		15,995			28,719
SECURITIES:
Available for sale - at fair value		20,280			19,316
Held to maturity - at amortized cost (fair value of $65,522 at June 30, 2010, and $72,364 at December 31, 2009)		61,444			69,244
MORTGAGE-BACKED SECURITIES:
Available for sale - at fair value		349,668			299,805
Held to maturity - at amortized cost (fair value of $246,364 at June 30, 2010, and $231,255 at December 31, 2009)		238,477			225,767
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT COST		12,036			10,339
LOANS - Net of allowance for loan losses of $7,827 at June 30, 2010, and $7,645 at December 31, 2009		470,068			469,149
PREMISES AND EQUIPMENT, Net		11,917			12,202
ACCRUED INTEREST RECEIVABLE		4,921			5,198
BANK-OWNED LIFE INSURANCE		38,606			37,880
DEFERRED TAX ASSET, Net		5,891			6,995
OTHER REAL ESTATE OWNED		328			1,662
OTHER ASSETS		5,317			5,134
TOTAL ASSETS	$	1,234,948		$	1,191,410
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
DEPOSITS:
Noninterest-bearing	$	83,396		$	80,110
Interest-bearing		586,794			567,865
Total deposits		670,190			647,975
SHORT-TERM BORROWINGS		90,716			74,499
LONG-TERM DEBT		226,408			213,845
OTHER LIABILITIES		7,995			7,792
TOTAL LIABILITIES		995,309			944,111
SHAREHOLDERS' EQUITY:
Preferred stock – $0.01 par value 5,000,000 shares authorized.  None outstanding at June 30, 2010 and December 31, 2009.		-			-
Common stock - $0.01 par value, 75,000,000 shares authorized, 29,243,678 shares issued and outstanding at June 30, 2010;  29,818,526 shares issued and outstanding at December 31, 2009		293			298
Additional paid-in capital		189,347			193,609
Unearned compensation – ESOP		(10,000	)		(10,299	)
Unearned compensation - Equity Incentive Plan		(2,669	)		(3,248	)
Retained earnings		63,137			69,253
Accumulated other comprehensive loss		(469	)		(2,314	)
Total shareholders’ equity		239,639			247,299
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,234,948		$	1,191,410

See accompanying notes to unaudited consolidated financial statements.

1

WESTFIELD FINANCIAL, 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,
	2010			2009			2010			2009
INTEREST AND DIVIDEND INCOME:
Debt securities, taxable	$	5,018		$	6,083		$	10,379		$	12,296
Residential and commercial real estate loans		4,408			4,580			8,883			9,200
Commercial and industrial loans		1,671			1,813			3,306			3,581
Debt securities, tax-exempt		385			367			756			735
Consumer loans		53			67			109			138
Equity securities		58			61			114			120
Federal funds sold, interest-bearing deposits and other short-term investments		2			4			3			8
Total interest and dividend income		11,595			12,975			23,550			26,078
INTEREST EXPENSE:
Deposits		2,495			3,290			5,109			6,565
Long-term debt		1,600			1,791			3,186			3,493
Short-term borrowings		76			88			139			194
Total interest expense		4,171			5,169			8,434			10,252
Net interest and dividend income		7,424			7,806			15,116			15,826
PROVISION FOR LOAN LOSSES		4,120			590			4,620			1,740
Net interest and dividend income after provision for loan losses		3,304			7,216			10,496			14,086
NONINTEREST INCOME (LOSS):
Total other-than-temporary impairment losses on securities		-			-			(1,071	)		-
Portion of other-than-temporary impairment losses recognized in  accumulated other comprehensive loss		-			-			971			-
Net other-than-temporary impairment losses recognized in income		-			-			(100	)		-
Service charges and fees		492			735			984			1,444
Income from bank-owned life insurance		368			363			726			714
Gain on sales of securities, net		1,132			122			1,317			208
Loss on disposal of premises and equipment, net		-			-			-			(8	)
Loss on prepayment of borrowings		-			(142	)		-			(142	)
(Loss) gain on sale of other real estate owned		(6	)		-			1			-
Total noninterest income		1,986			1,078			2,928			2,216
NONINTEREST EXPENSE:
Salaries and employees benefits		3,434			3,876			7,234			7,983
Occupancy		636			667			1,296			1,316
Professional fees		443			518			867			920
Computer operations		497			421			982			857
FDIC insurance assessment		168			691			332			848
Other real estate owned expense		21			38			264			38
Other		724			796			1,326			1,454
Total noninterest expense		5,923			7,007			12,301			13,416
(LOSS) INCOME BEFORE INCOME TAXES		(633	)		1,287			1,123			2,886
INCOME TAX (BENEFIT) PROVISION		(247	)		214			155			607
NET (LOSS) INCOME	$	(386	)	$	1,073		$	968		$	2,279
EARNINGS PER COMMON SHARE:
Basic (loss) earnings per share	$	(0.01	)	$	0.04		$	0.03		$	0.08
Weighted average shares outstanding		27,970,840			29,554,551			28,078,326			29,619,760
Diluted (loss) earnings per share	$	( 0.01	)	$	0.04		$	0.03		$	0.08
Weighted average diluted shares outstanding		27,970,840			29,815,832			28,334,136			29,892,867

See accompanying notes to unaudited consolidated financial statements.

2

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME- UNAUDITED

SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(Dollars in thousands, except share data)

													Unearned						Accumulated
	Common Stock						Additional			Unearned			Compensation						Other
	Shares			Par Value			Paid-in Capital			Compensation - ESOP			- Equity Incentive Plan			Retained Earnings			Comprehensive Loss			Total
BALANCE AT DECEMBER 31, 2008		31,307,881		$	313		$	204,866		$	(10,913	)	$	(4,337	)	$	78,898		$	(8,908	)	$	259,919
Comprehensive income:
Net income		-			-			-			-			-			2,279			-			2,279
Net unrealized gains on securities available for sale arising during the period, net of reclassification adjustment and tax effects		-			-			-			-			-			-			4,427			4,427
Change in pension gains or losses and transition assets, net of tax		-			-			-			-			-			-			344			344
Total comprehensive income																							7,050
Common stock held by ESOP committed to be released (91,493 shares)		-			-			128			307			-			-			-			435
Share-based compensation - stock options		-			-			506			-			-			-			-			506
Share-based compensation - equity incentive plan		-			-			-			-			714			-			-			714
Excess tax benefits from equity incentive plan		-			-			40			-			-			-			-			40
Common stock repurchased		(456,273	)		(5	)		(4,197	)		-			-			-			-			(4,202	)
Issuance of common stock in connection with stock option exercises		59,721			1			574									(313	)		-			262
Issuance of common stock in connection with equity incentive plan		-			-			138			-			(138	)		-			-			-
Forfeiture of common stock in connection with equity incentive plan		-			-			(4	)		-			4			-			-			-
Excess tax benefits in connection with stock option exercises		-			-			103			-			-			-			-			103
Cash dividends declared ($0.25 per share)		-			-			-			-			-			(7,417	)		-			(7,417	)
BALANCE AT JUNE 30, 2009		30,911,329		$	309		$	202,154		$	(10,606	)	$	(3,757	)	$	73,447		$	(4,137	)	$	257,410
BALANCE AT DECEMBER 31, 2009		29,818,526		$	298		$	193,609		$	(10,299	)	$	(3,248	)	$	69,253		$	(2,314	)	$	247,299
Comprehensive income:
Net income		-			-			-			-			-			968			-			968
Net unrealized gains on securities available for sale arising during the period, net of reclassification adjustment and tax effects		-			-			-			-			-			-			1,813			1,813
Change in pension gains or losses and transition assets, net of tax		-			-			-			-			-			-			32			32
Total comprehensive income																							2,813
Common stock held by ESOP committed to be released (89,040 shares)		-			-			82			299			-			-			-			381
Share-based compensation - stock options		-			-			398			-			-			-			-			398
Share-based compensation - equity incentive plan		-			-			-			-			579			-			-			579
Excess tax benefits from equity incentive plan		-			-			30			-			-			-			-			30
Common stock repurchased		(588,848	)		(6	)		(4,912	)		-			-			-			-			(4,918	)
Issuance of common stock in connection with stock option exercises		14,000			1			123			-			-			(62	)		-			62
Excess tax benefit in connection with stock option exercises		-			-			17			-			-			-			-			17
Cash dividends declared ($0.25 per share)		-			-			-			-			-			(7,022	)		-			(7,022	)
BALANCE AT JUNE 30, 2010		29,243,678		$	293		$	189,347		$	(10,000	)	$	(2,669	)	$	63,137		$	(469	)	$	239,639

See the accompanying notes to unaudited consolidated financial statements.

3

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED

(Dollars in thousands)

	Six Months Ended June 30,
	2010			2009
OPERATING ACTIVITIES:
Net income	$	968		$	2,279
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,620			1,740
Depreciation and amortization of premises and equipment		636			604
Net amortization of premiums and discounts on securities, mortgage-backed securities and mortgage loans		2,839			529
Share-based compensation expense		977			1,220
Amortization of ESOP expense		381			435
Excess tax benefits from equity incentive plan		(30	)		(40	)
Excess tax benefits in connection with stock option exercises		(17	)		(103	)
Net gains on sales of securities		(1,317	)		(208	)
Other-than-temporary impairment losses of securities		100			-
Write-downs of other real estate owned		227			17
Gain on sale of other real estate owned		(1	)		-
Loss on prepayment of borrowings		-			142
Loss on disposal of premises and equipment, net		-			8
Deferred income tax benefit		(106	)		(134	)
Income from bank-owned life insurance		(726	)		(714	)
Changes in assets and liabilities:
Accrued interest receivable		277			(89	)
Other assets		(183	)		(1,365	)
Other liabilities		297			1,497
Net cash provided by operating activities		8,942			5,818
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases		(2,253	)		(10,111	)
Proceeds from calls, maturities, and principal collections		10,000			15,090
Securities, available for sale:
Purchases		(102	)		(106	)
Proceeds from sales		-			5,107
Mortgage-backed securities, held to maturity:
Purchases		(59,858	)		(91,282	)
Principal collections		46,378			25,231
Mortgage-backed securities, available for sale:
Purchases		(348,059	)		(86,489	)
Proceeds from sales		247,475			8,397
Principal collections		52,076			30,141
Purchase of residential mortgages		(16,290	)		(12,194	)
Loan principal payments, net of originations		10,205			5,283
Purchase of Federal Home Loan Bank of Boston stock		(1,697	)		(708	)
Proceeds from sale of other real estate owned		1,646			-
Purchases of premises and equipment		(351	)		(891	)
Net cash used in investing activities		(60,830	)		(112,532	)
FINANCING ACTIVITIES:
Net increase in deposits		22,215			43,951
Net change in short-term borrowings		16,217			1,505
Repayment of long-term debt		(18,500	)		(35,142	)
Proceeds from long-term debt		31,063			74,531
Cash dividends paid		(7,022	)		(7,417	)
Common stock repurchased		(4,918	)		(4,202	)
Issuance of common stock in connection with stock option exercises		62			262
Excess tax benefits in connection with equity incentive plan		30			40
Excess tax benefits in connection with stock option exercises		17			103
Net cash provided by financing activities		39,164			73,631
NET CHANGE IN CASH AND CASH EQUIVALENTS:		(12,724	)		(33,083	)
Beginning of period		28,719			56,533
End of period	$	15,995		$	23,450
Supplemental cash flow information:
Transfer of loans to other real estate owned	$	538		$	275
Interest paid		8,458			10,239
Taxes paid		290			1,760

See the accompanying notes to unaudited consolidated financial statements.

4

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations – Westfield Financial, Inc. (“Westfield Financial,” “we” or “us”) is the bank holding company for Westfield Bank, a federally-chartered stock savings bank.

Westfield Bank’s deposits are insured to the limits specified by the Federal Deposit Insurance Corporation (“FDIC”).  Westfield Bank operates eleven branches in Western Massachusetts and its primary sources of revenue are income from securities and earnings on loans to small and middle-market businesses and to residential property homeowners.

Elm Street Securities Corporation and WFD Securities Corporation, Massachusetts-chartered security corporations, were formed by Westfield Financial for the primary purpose of holding qualified securities.  In October 2009, WB Real Estate Holdings, LLC, a Massachusetts-chartered limited liability company was formed for the primary purpose of holding real property acquired as security for debts previously contracted by the bank.

Principles of Consolidation – The consolidated financial statements include the accounts of Westfield Financial, Westfield Bank, Elm Street Securities Corporation, WB Real Estate Holdings and WFD Securities Corporation.  All material intercompany balances and transactions have been eliminated in consolidation.

Estimates – The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of income and expenses for both at the date of the 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, other-than-temporary impairment of securities, and the valuation 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, 2010, 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, 2010 are not necessarily indicative of the results of operations for the year ending December 31, 2010.  Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2009, included in our Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Annual Report”).

Reclassifications - - Certain amounts in the prior period financial statements have been reclassified to conform to the current year presentation.

5

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.  Potential common shares that may be issued by us relate solely to outstanding stock options and are determined using the treasury stock method.

Earnings per common share for the three and six months ended June 30, 2010 and 2009 have been computed based on the following:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(In thousands, except per share data)
Net (loss) income applicable to common stock	$	(386	)	$	1,073		$	968		$	2,279
Average number of common shares outstanding		29,452			31,134			29,571			31,213
Less: Average unallocated ESOP Shares		(1,437	)		(1,528	)		(1,449	)		(1,540	)
Less: Average ungranted equity incentive plan shares		(44	)		(51	)		(44	)		(53	)
Average number of common shares outstanding used to calculate basic earnings per common share		27,971			29,555			28,078			29,620
Effect of dilutive stock options		-			261			256			273
Average number of common shares outstanding used to calculate diluted earnings per common share		27,971			29,816			28,334			29,893
Basic (loss) earnings per share	$	(0.01	)	$	0.04		$	0.03		$	0.08
Diluted (loss) earnings per share (1)	$	(0.01	)	$	0.04		$	0.03		$	0.08

(1) Weighted average diluted shares outstanding for the three months ended June 30, 2010 does not include 259,266 incremental stock options whose effect would be antidilutive to the calculation due to the net operating loss for the quarter.

Stock options that would have an antidilutive effect on diluted earnings per share are excluded from the calculation.  At June 30, 2010 and 2009, 2,209,012 and 1,538,357 shares were antidilutive, respectively.

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.

6

The components of other comprehensive income and related tax effects are as follows:

	Six Months Ended June 30,
	2010			2009
	(In thousands)
Unrealized holding gains (losses) on available-for-sale securities	$	4,223		$	7,016
Other-than-temporary impairment losses on available-for-sale securities charged to earnings		100			-
Reclassification adjustment for gains realized in income		(1,317	)		(208	)
Net unrealized gains on available-for-sale securities		3,006			6,808
Tax effect		(1,193	)		(2,381	)
Net-of-tax amount		1,813			4,427
Losses arising during the period pertaining to defined benefit plans		7			459
Reclassification adjustments for items reflected in earnings:
Actuarial loss		46			68
Transition asset		(6	)		(6	)
Net adjustments pertaining to defined benefit plan		47			521
Tax effect		(15	)		(177	)
Net-of-tax amount		32			344
Net accumulated other comprehensive income	$	1,845		$	4,771

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

	June 30,			December 31,
	2010			2009
	(In thousands)
Net unrealized gain (loss) on securities available-for-sale	$	2,018		$	(228	)
Tax effect		(695	)		138
Net-of-tax amount		1,323			(90	)
Noncredit portion of other-than-temporary impairment losses on available-for-sale securities		(716	)		(1,476	)
Tax effect		244			604
Net-of-tax amount		(472	)		(872	)
Unrecognized transition asset pertaining to defined benefit plan		50			56
Unrecognized deferred loss pertaining to defined benefit plan		(2,050	)		(2,103	)
Net components pertaining to defined benefit plan		(2,000	)		(2,047	)
Tax effect		680			695
Net-of-tax amount		(1,320	)		(1,352	)
Net accumulated other comprehensive loss	$	(469	)	$	(2,314	)

7

4. SECURITIES

Securities are summarized as follows:

	June 30, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Held to maturity:
Government-sponsored enterprise obligations	$	24,855	$	2,529	$	-		$	27,384
Municipal bonds		36,589		1,554		(5	)		38,138
Total held to maturity		61,444		4,083		(5	)		65,522
Available for sale:
Government-sponsored enterprise obligations		11,000		447		-			11,447
Municipal bonds		1,955		136		-			2,091
Mutual funds		6,663		66		(31	)		6,698
Common and preferred stock		70		-		(26	)		44
Total available for sale		19,688		649		(57	)		20,280
Total securities	$	81,132	$	4,732	$	(62	)	$	85,802

	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Held to maturity:
Government-sponsored enterprise obligations	$	34,884	$	1,776	$	-		$	36,660
Municipal bonds		34,360		1,353		(9	)		35,704
Total held to maturity		69,244		3,129		(9	)		72,364
Available for sale:
Government-sponsored enterprise obligations		11,000		-		(302	)		10,698
Municipal bonds		1,956		114		-			2,070
Mutual funds		6,561		1		(73	)		6,489
Common and preferred stock		70		-		(11	)		59
Total available for sale		19,587		115		(386	)		19,316
Total securities	$	88,831	$	3,244	$	(395	)	$	91,680

8

Information pertaining to securities with gross unrealized losses at June 30, 2010 and December 31, 2009, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	June 30, 2010
	Less Than Twelve Months					Over Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)
Held to maturity:
Municipal bonds	$	(5	)	$	360	$	-			$	-
Total held to maturity		(5	)		360		-				-
Available for sale:
Mutual funds		-			-		(31	)			1,540
Common and preferred stock		(26	)		13		-				-
Total available for sale		(26	)		13		(31	)			1,540
Total	$	(31	)	$	373	$	(31	)		$	1,540

	December 31, 2009
	Less Than Twelve Months					Over Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)
Held to maturity:
Municipal bonds	$	(9	)	$	356	$	-		$	-
Total held to maturity		(9	)		356		-			-
Available for sale:
Government-sponsored enterprise obligations		(302	)		10,698		-			-
Mutual funds		(19	)		2,597		(54	)		1,479
Common and preferred stock		(11	)		28		-			-
Total available for sale		(332	)		13,323		(54	)		1,479
Total	$	(341	)	$	13,679	$	(54	)	$	1,479

At June 30, 2010, one debt security had a gross unrealized loss with aggregate depreciation of 1.4% from our amortized cost basis.  Because the loss on the debt security is related to an investment grade municipal obligation, the decline is the result of fluctuations in interest rates and not credit quality, and since it is more likely than not that we will not be required to sell the security prior to the recovery of its amortized costs basis, no declines are deemed to be other-than-temporary.

At June 30, 2010, one equity security had a gross unrealized loss with aggregate depreciation of 2.0% from our cost basis existing for greater than twelve months and was principally related to fluctuations in interest rates.  This loss relates to a mutual fund which invests primarily in short-term debt instruments and adjustable rate mortgage-backed securities.  Because we do not intend to sell the security and it is more likely than not that we will not be required to sell it prior to the recovery of its amortized cost basis, the loss is deemed temporary.

9

The amortized cost and fair value of debt securities at June 30, 2010, by maturity, are shown below.  Actual maturities may differ from contractual maturities because certain issuers have the right to call or repay obligations.

	June 30, 2010
	Amortized Cost		Fair Value
	(In thousands)
Held to maturity:
Due in one year or less	$	2,084	$	2,112
Due after one year through five years		23,547		25,261
Due after five years through ten years		35,813		38,149
Total held to maturity	$	61,444	$	65,522
Available for sale:
Due after one year through five years	$	480	$	514
Due after five years through ten years		1,475		1,577
Due after ten years		11,000		11,447
Total available for sale	$	12,955	$	13,538

Proceeds from the sale of securities available for sale amounted $5.1 million for the six months ended June 30, 2009.  There were no sales of securities for the six months ended June 30, 2010.

Gross realized gains and losses from the sales of securities available for sale for the three and six months ended June 30, 2010 and 2009 were as follows:

	Three Months Ended  June 30,				Six Months Ended  June 30,
	2010		2009		2010		2009
��	(In thousands)
Gross gains realized	$	-	$	-	$	-	$	88
Gross losses realized		-		-		-		(2	)
Net gain realized	$	-	$	-	$	-	$	86

The tax provision applicable to net realized gains and losses was $29,000 for the six months ended June 30, 2009.

At June 30, 2010 and December 31, 2009, one security with a carrying value of $5.0 million was pledged as collateral to the Federal Reserve Bank of Boston to secure public deposits.

10

5. MORTGAGE-BACKED SECURITIES

Mortgage-backed securities are summarized as follows:

	June 30, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Held to maturity:
Government-sponsored residential	$	201,866	$	7,887	$	(218	)	$	209,535
U.S. Government guaranteed residential		32,342		512		-			32,854
Private-label residential		4,269		26		(320	)		3,975
Total held to maturity		238,477		8,425		(538	)		246,364
Available for sale:
Government-sponsored residential		241,796		2,480		(1,618	)		242,658
U.S. Government guaranteed residential		100,871		1,259		(584	)		101,546
Private-label residential		6,291		-		(827	)		5,464
Total available for sale		348,958		3,739		(3,029	)		349,668
Total mortgage-backed securities	$	587,435	$	12,164	$	(3,567	)	$	596,032

	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Held to maturity:
Government-sponsored residential	$	204,484	$	6,111	$	(184	)	$	210,411
U.S. Government guaranteed residential		16,334		95		(143	)		16,286
Private-label residential		4,949		44		(435	)		4,558
Total held to maturity		225,767		6,250		(762	)		231,255
Available for sale:
Government-sponsored residential		289,840		2,696		(2,288	)		290,248
U.S. Government guaranteed residential		1,030		17		-			1,047
Private-label residential		10,368		-		(1,858	)		8,510
Total available for sale		301,238		2,713		(4,146	)		299,805
Total mortgage-backed securities	$	527,005	$	8,963	$	(4,908	)	$	531,060

11

Proceeds from the sales mortgage-backed securities available for sale amounted to $ 247.5 million and $8.4 million for the six months ended June 30, 2010 and 2009, respectively.

Gross realized gains and losses on sales of mortgage-backed securities for the three and six months ended June 30, 2010 and 2009 are as follows:

	Three Months Ended  June 30,					Six Months Ended June 30
	2010			2009		2010			2009
	(In thousands)
Gross gains realized	$	1,312		$	122	$	1,956		$	122
Gross losses realized		(180	)		-		(639	)		-
Net gain realized	$	1,132		$	122	$	1,317		$	122

The tax provision applicable to net realized gains and losses were $389,000 and $454,000 for the three and six months ended June 30, 2010, respectively.  The tax provision applicable to net realized gains and losses were $42,000 for the three and six months ended June 30, 2009.  

Information pertaining to mortgage-backed securities with gross unrealized losses at June 30, 2010 and December 31, 2009 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	June 30, 2010
	Less Than Twelve Months					Over Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses				Fair Value
	(In thousands)
Held to maturity:
Government-sponsored residential	$	(165	)	$	15,496		$	(53	)	$	5,742
Private-label residential		-			-			(320	)		2,931
Total held to maturity		(165	)		15,496			(373	)		8,673
Available for sale:
Government-sponsored residential		(1,618	)		89,063			-			-
U.S. Government guaranteed residential		(584	)		20,864			-			-
Private-label residential		-			-			(827	)		5,464
Total available for sale		(2,202	)		109,927			(827	)		5,464
Total	$	(2,367	)	$	125,423		$	(1,200	)	$	14,137

12

	December 31, 2009
	Less Than Twelve Months					Over Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses				Fair Value
	(In thousands)
Held to maturity:
Government-sponsored residential	$	(159	)	$	21,227		$	(25	)	$	1,677
U.S. Government guaranteed residential		(143	)		9,760			-			-
Private-label residential		-			-			(435	)		3,123
Total held to maturity		(302	)		30,987			(460	)		4,800
Available for sale:
Government-sponsored residential		(2,287	)		170,741			(1	)		128
Private-label residential		-			-			(1,858	)		8,510
Total available for sale		(2,287	)		170,741			(1,859	)		8,638
Total	$	(2,589	)	$	201,728		$	(2,319	)	$	13,438

At June 30, 2010, thirty-two government-sponsored and U.S. government guaranteed securities had gross unrealized losses with aggregate depreciation of 1.9% from our amortized cost basis existing for less than twelve months.  At June 30, 2010, one government-sponsored security had gross unrealized losses with aggregate depreciation of 0.9% from our amortized cost basis existing for more than twelve months.  Because these losses relate to securities guaranteed by the U.S. government or an agency thereof, the declines are the result of interest rates and not credit quality, 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.

At June 30, 2010, four private label mortgage-backed securities have gross unrealized losses of 12.0% from our amortized cost basis which existed for greater than twelve months.  Management used a third party experienced in analyzing private-label mortgage-backed securities to determine if credit losses existed for these securities.  The third party incorporated a number of factors to estimate the performance and possible credit loss of the underlying assets.  These factors include but are not limited to: loans in various stages of delinquency i.e. 30, 60, 90 days delinquent, loans in foreclosure, projected prepayment rates (12 constant prepayment rate), projected default rates (weighted average of 0.64% - 28.6%), severity of loss on defaulted loans (45% - 60%), current levels of subordination, current credit enhancement (4.27% - 8.16%), vintage (2006), and geographic location.  As a result of this analysis, two private label mortgage-backed securities were deemed to have other-than- temporary impairment losses.  We had no writedowns due to other-than-temporary impairment on mortgage backed securities during the three months ended June 30, 2010 or 2009.  We had writedowns of $1.1 million due to other-than-temporary impairment on mortgage-backed securities during the six months ended June 30, 2010, of which $971,000 was recognized in accumulated other comprehensive loss and $100,000 was recognized as a credit loss and charged to income for the six months ended June 30, 2010.  No other-than-temporary impairment losses were recorded on mortgage-backed securities during the six months ended June 30, 2009.

13

The following table presents a roll-forward of the amount of credit losses on mortgage-backed securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income:

	Six Months Ended
	June 30, 2010
	(In thousands)
Balance as of December 31, 2009	$	278
Additional credit losses for which other-than-temporary impairment charge was previously recorded		100
Balance as of June 30, 2010	$	378

6. SHARE-BASED COMPENSATION

Under our 2007 Recognition and Retention Plan and 2007 Stock Option Plan, we may grant up to 624,041 stock awards and 1,631,682 stock options to our directors, officers, and employees, respectively.

Stock award allocations are recorded as unearned compensation based on the market price at the date of grant.  Unearned compensation is amortized over the vesting period.

We may grant both incentive and non-statutory stock options.  The exercise price of each option equals the market price of our stock on the date of grant with a maximum term of ten years.

The fair value of each option grant is estimated on the grant date using the binomial option pricing model with the following weighted average assumptions:

	Six Months Ended June 30, 2009
Expected dividend yield		6.07	%
Expected life	10		years
Expected volatility		35.70	%
Risk-free interest rate		2.59	%

No stock options were granted in the three and six months ended June 30, 2010 and 2009, respectively.

All stock awards and stock options currently vest at 20% per year.  At June 30, 2010, 43,941 stock awards and 159,232 stock options were available for future grants.

14

Our stock award and stock option plans activity for the six months ended June 30, 2010 and 2009 is summarized below:

	Unvested Stock Awards Outstanding					Stock Options Outstanding
	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Exercise Price
Outstanding at December 31, 2009		358,573		$	10.00		2,223,012		$	8.36
Stock options exercised		-			-		(14,000	)		4.39
Outstanding at June 30, 2010		358,573			10.00		2,209,012			8.39
Outstanding at December 31, 2008		465,192			10.04		2,276,223			8.15
Granted		14,000			9.89		39,000			9.89
Stock options exercised		-			-		(59,721	)		4.39
Stock awards vested		(11,200	)		10.04		-			-
Forfeited		(400	)		10.04		(2,500	)		10.04
Outstanding at June 30, 2009		467,592		$	10.04		2,253,002		$	8.28

We recorded compensation cost related to the stock awards of $290,000 and $579,000 for the three and six months ended June 30, 2010, respectively, and $331,000 and $714,000 for the three and six month ended June 30, 2009, respectively.

We recorded compensation costs relating to stock options of $199,000 and $398,000, with related tax benefits of $53,000 and $106,000 for the three and six months ended June 30, 2010.  We recorded compensation costs relating to stock options of $233,000 and $506,000, with related tax benefits of $65,000 and $134,000 for the three and six months ended June 30, 2009.

7.  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 (“FHLB”) advances with an original maturity of less than one year as well as customer repurchase agreements, which have an original maturity of one day.  Short-term borrowings issued by the FHLB were $78.0 million and $58.0 million at June 30, 2010 and December 31, 2009, respectively.  Customer repurchase agreements were $12.7 million at June 30, 2010, and $16.5 million at December 31, 2009.  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 United States 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.  All of our customer repurchase agreements at June 30, 2010 and December 31, 2009 were held by commercial customers.

Long-term debt consists of FHLB advances, securities sold under repurchase agreements and customer repurchase agreements with an original maturity of one year or more.  At June 30, 2010, we had $140.0 million in long-term debt with the FHLB and $81.3 million in securities sold under repurchase agreements with an approved broker-dealer.  This compares to $127.5 million in long-term debt with FHLB advances and $81.3 million in securities sold under repurchase agreements with an approved broker-dealer at December 31, 2009.  Customer repurchase agreements were $5.1 million at June 30, 2010 and $5.0 million at December 31, 2009.  The securities sold under agreements to repurchase are callable at the issuer’s option beginning in the year 2010.

15

8.  PENSION BENEFITS

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

	Three Months Ended  June 30,						Six Months Ended  June 30,
	2010			2009			2010			2009
	(In thousands)
Service cost	$	233		$	216		$	465		$	431
Interest cost		193			183			387			366
Expected return on assets		(196	)		(169	)		(392	)		(338	)
Transition obligation		(3	)		(3	)		(6	)		(6	)
Actuarial loss (gain)		23			34			46			68
Net periodic pension cost	$	250		$	261		$	500		$	521

We maintain a pension plan for our eligible employees.  We plan to contribute to the pension plan the amount required to meet the minimum funding standards under Section 412 of the Internal Revenue Code.  Additional contributions will be made as deemed appropriate by management in conjunction with the pension plan’s actuaries.  We expect to contribute up to $600,000 to our pension plan in 2010.  No contributions have been made to the plan for the three and six months ended June 30, 2010.

9.  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 generally measured at fair value in three levels, based on the markets in which the assets and liabilities 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 or liabilities. Level 1 assets and liabilities 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 or liabilities.

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 or liabilities. Level 3 assets and liabilities 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.

16

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

Interest-bearing deposits in banks - The carrying amounts of interest-bearing deposits maturing within ninety days approximate their fair values. Fair values of other interest-bearing deposits are estimated using discounted cash flow analyses based on current market rates for similar types of deposits.

Securities and mortgage-backed securities – Fair value of securities are primarily measured using 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.

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

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

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

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

Short-term borrowings - For short-term borrowings maturing within ninety days, carrying values approximate fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

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

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

17

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

	June 30, 2010
	Level 1		Level 2		Level 3		Total
	(In thousands)
Securities available for sale:
Mutual funds	$	5,245	$	1,453	$	-	$	6,698
Common and preferred stock		44		-		-		44
Debt securities:
Government-sponsored agency debt		-		11,447		-		11,447
State and municipal		-		2,091		-		2,091
Government-sponsored residential mortgage-backed		-		242,658		-		242,658
U.S. Government guaranteed residential mortgage-backed		-		101,546		-		101,546
Private-label residential mortgage-backed		-		5,464		-		5,464
Total assets	$	5,289	$	364,659	$	-	$	369,948

	December 31, 2009
	Level 1		Level 2		Level 3		Total
	(In thousands)
Securities available for sale:
Mutual funds	$	5,037	$	1,452	$	-	$	6,489
Common and preferred stock		59		-		-		59
Debt securities:
Government-sponsored agency debt		-		10,698		-		10,698
State and municipal		-		2,070		-		2,070
Government-sponsored residential mortgage-backed		-		290,248		-		290,248
U.S. Government guaranteed residential mortgage-backed		-		1,047		-		1,047
Private-label residential mortgage-backed		-		8,510		-		8,510
Total assets	$	5,096	$	314,025	$	-	$	319,121

18

Also, we may be required, from time to time, to measure certain other assets and liabilities 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, 2010 and 2009.  Total losses is the change in carrying value as a result of fair value adjustments related to assets still held at June 30, 2010 and 2009.

	At						Three Months Ended			Six Months Ended
	June 30, 2010						June 30, 2010			June 30, 2010
							Total			Total
	Level 1		Level 2		Level 3		Gains (Losses)			Gains (Losses)
							(In thousands)
Impaired loans	$	-	$	-	$	2,000	$	(356	)	$	(863	)
Other real estate owned		-		-		276		-			(105	)
Total Assets	$	-	$	-	$	2,276	$	(356	)	$	(968	)

	At						Three Months Ended			Six Months Ended
	June 30, 2009						June 30, 2009			June 30, 2009
							Total			Total
	Level 1		Level 2		Level 3		Gains (Losses)			Gains (Losses)
							(In thousands)
Impaired loans	$	-	$	-	$	1,757	$	(222	)	$	(397	)
Total Assets	$	-	$	-	$	1,757	$	(222	)	$	(397	)

The amount of 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.

The amount of other real estate owned represents the carrying value of the collateral based on the appraised value of the underlying collateral using a market approach less selling costs.  During the six months ended June 30, 2010, we incurred charges of $105,000 to reduce other real estate owned to fair value.  There were no recognized losses on other real estate owned for the three months ended June 30, 2010 or the three and six months ended June 30, 2009.

There were no transfers to or from Level 1 and 2 during the three and six months ended June 30, 2010.

We did not measure any liabilities at fair value on a recurring or non-recurring basis on the consolidated balance sheets.

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:

19

	June 30, 2010				December 31, 2009
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value
	(In thousands)
Assets:
Cash and cash equivalents	$	15,995	$	15,995	$	28,719	$	28,719
Securities:
Available for sale		20,280		20,280		19,316		19,316
Held to maturity		61,444		65,522		69,244		72,364
Mortgage-backed securities:
Available for sale		349,668		349,668		299,805		299,805
Held to maturity		238,477		246,364		225,767		231,255
Federal Home Loan Bank of Boston and other restricted stock		12,036		12,036		10,339		10,339
Loans- net		470,068		470,313		469,149		474,554
Accrued interest receivable		4,921		4,921		5,198		5,198
Liabilities:
Deposits		670,190		666,656		647,975		649,473
Short-term borrowings		90,716		90,714		74,499		74,499
Long-term debt		226,408		232,619		213,845		214,669
Accrued interest payable		706		706		730		730

10. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued guidance changing the accounting principles and disclosures requirements related to securitizations and special-purpose entities. Specifically, this guidance eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This guidance also expands existing disclosure requirements to include more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The recognition and measurement provisions regarding transfers of financial assets shall be applied to transfers that occur on or after the effective date. We adopted this new guidance on January 1, 2010, as required, and it did not have any impact on our consolidated financial statements.

In March 2010, the FASB issued Accounting Standard Update (“ASU”) No. 2010-09 amending FASB Accounting Standards Codification (“ASC”) Topic 855 to exclude SEC reporting entities from the requirement to disclose the date on which subsequent events have been evaluated. It further modifies the requirement to disclose the date on which subsequent events have been evaluated in reissued financial statements to apply only to such statements that have been restated to correct an error or to apply U.S. GAAP retrospectively. We have complied with ASU No. 2010-09.

20

In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures,” which amends ASC Topic 820. The ASU provides for additional disclosures of transfers between assets and liabilities valued under Level 1 and 2 inputs as well as additional disclosures regarding those assets and liabilities valued under Level 3 inputs. The new disclosures are effective for interim and annual reporting periods beginning after December 15, 2009 except for those provisions addressing Level 3 fair value measurements which provisions are effective for fiscal years, and periods therein, beginning after December 15, 2010. The adoption of this Statement did not have a material impact on our consolidated financial statements.

In July 2010, the Financial Accounting Standards Board issued an Accounting Standards Update, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  The objective of this Update is for an entity to provide disclosures that facilitate financial statement users’ evaluation of (1) the nature of credit risk inherent in the entity’s portfolio of financing receivables (2) how that risk is analyzed and assessed in arriving at the allowance for credit losses (3) the changes and reasons for those changes in the allowance for credit losses.  For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010 and the disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.

21

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 the 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 real estate 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 portfolio by targeting businesses in our primary market area and in 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

· depending on market conditions, refer substantially all of the fixed-rate residential real estate loans to a third-party mortgage company which underwrites, originates and services these loans in order to diversify our loan portfolio, increase fee income and reduce interest rate risk.

You should read the following financial results for the quarter and six months ended June 30, 2010 in the context of this strategy.

· Net loss was $386,000, or $(0.01) per diluted share, for the quarter ended June 30, 2010, compared to net income of $1.1 million, or $0.04 per diluted share for the same period in 2009.  For the six months ended June 30, 2010, net income was $1.0 million, or $0.03 per diluted share, compared to $2.3 million or $0.08 per diluted share for the same period in 2009.

· The provision for loans losses was $4.1 million for the three months ended June 30, 2010 compared to $590,000 for the same period in 2009.  For the six months ended June 30, 2010, the provision for loan losses was $4.6 million compared to $1.7 million for the same period in 2009.  The larger provision for loan losses in the 2010 periods was due to an increase in loan charge-offs, primarily pertaining to a single commercial real estate loan, and the continued weakening of the local and national economy.

· Net interest income was $15.1 million for the six months ended June 30, 2010, compared to $15.8 million for the same period in 2009.  The net interest margin, on a tax-equivalent basis, was 2.79% for the six months ended June 30, 2010, compared to 3.11% for the same period in 2009.  We experienced larger than normal amortization on our securities, particularly in the first quarter of 2010, which decreased the yield on securities.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with US 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.

22

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. For additional information on our critical accounting policies, please refer to the information contained in Notes 1 and 10 of the accompanying consolidated financial statements and Note 1 of the consolidated financial statements included in our 2009 Annual Report.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2010 AND DECEMBER 31, 2009

Total assets increased $43.5 million to $1.2 billion at June 30, 2010.  Securities increased $57.4 million to $681.9      million at June 30, 2010 from $624.5 million at December31, 2009.  The increase in securities was the result of reinvesting funds from deposits, short-term borrowing, long-term debt and pay downs of loans into securities.

The composition of our loan portfolio at June 30, 2010 and December 31, 2009 is summarized as follows:

	June 30,			December 31,
	2010			2009
	(In thousands)
Commercial real estate	$	219,283		$	229,061
Residential real estate		74,669			64,299
Home equity		35,786			34,755
Commercial and industrial		144,424			145,012
Consumer		3,163			3,307
Total loans		477,325			476,434
Unearned premiums and deferred loan fees and costs, net		570			360
Allowance for loan losses		(7,827	)		(7,645	)
	$	470,068		$	469,149

Net loans increased by $919,000 to $470.1 million at June 30, 2010 from $469.1 million at December 31, 2009.  The increase in net loans was primarily the result of increases in residential real estate loans and home equity loans, which were partially offset by a decrease in commercial real estate.  Residential real estate loans increased $10.4 million to $74.7 million while home equity loans increased $1.0 million to $35.8 million at June 30, 2010.

Commercial real estate loans decreased $9.8 million to $219.3 million at June 30, 2010 from $229.1 million at December 31, 2009.  The decrease in commercial real estate loans included the charge-off of $3.6 million on a single commercial real estate loan in addition to normal loan payments and payoffs.  Owner occupied commercial real estate loans totaled $98.5 million at June 30, 2010 and $99.3 million at December 31, 2009, while non-owner occupied commercial real estate loans totaled $120.8 million at June 30, 2010 and $129.7 million at December 31, 2009.  

Nonperforming loans increased $1.9 million to $7.4 million at June 30, 2010 compared to $5.5 million at December 31, 2009.  This represented 1.55% of total loans at June 30, 2010 and 1.15% of total loans at December 31, 2009.  The increase was primarily the result of a single commercial real estate loan that went into nonperforming status during the second quarter of 2010.  A portion of the loan, $3.6 million, was charged-off and the remaining balance on this loan was $3.6 million at June 30, 2010.  The loan is a build-to-suit rental building whose initial lessee went into bankruptcy.

The following table presents information regarding nonperforming mortgages, consumer and other loans and foreclosed real estate as of the dates indicated.  All loans where the interest payment is 90 days or more in arrears as of the closing date of each month are placed on nonaccrual status.  At June 30, 2010, we had $7.4 million of nonaccrual loans and $328,000 in foreclosed real estate.  At December 31, 2009, we had $5.5 million of nonaccrual loans and $1.7 million in foreclosed real estate.  If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $80,000 and $94,000 for the six months ended June 30, 2010 and the year ended December 31, 2009, respectively.

23

	June 30, 2010			December 31, 2009
	(Dollars in thousands)
Nonaccrual real estate loans:
Residential	$	679			$	784
Home equity		7				225
Commercial real estate		4,987				782
Total nonaccrual real estate loans		5,673				1,791
Other loans:
Commercial and industrial		1,745				3,675
Consumer		1				4
Total nonaccrual consumer and other loans		1,746				3,679
Total nonperforming loans		7,419				5,470
Foreclosed real estate, net		328				1,662
Total nonperforming assets	$	7,747			$	7,132
Nonperforming loans to total loans		1.55	%			1.15	%
Nonperforming assets to total assets		0.63				0.60

Asset growth was funded primarily through a $22.2 million increase in deposits to $670.2 million at June 30, 2010, from $648.0 million at December 31, 2009.  The increase in deposits was due to an increase in regular savings accounts and checking accounts.  Regular savings accounts increased $16.5 million to $121.2 million at June 30, 2010, from $104.7 million at December 31, 2009.  The increase in savings accounts was primarily due to an account which pays a higher interest rate than our comparable products.  Checking accounts increased $8.1 million to $158.6 million at June 30, 2010, from $150.5 million at December 31, 2009.  The increase was primarily in noninterest-bearing checking accounts.  These increases were partially offset by decreases in time deposit accounts of $1.4 million and money market accounts of $1.0 million at June 30, 2010.

Short-term borrowings increased $16.2 million to $90.7 million at June 30, 2010 from $74.5 million at December 31, 2009.  Short-term borrowings are made up of FHLB advances with an original maturity of less than one year as well as customer repurchase agreements, which have an original maturity of one day.  Short-term borrowings issued by the FHLB were $78.0 million and $58.0 million at June 30, 2010 and December 31, 2009, respectively.  Customer repurchase agreements decreased $3.8 million to $12.7 million at June 30, 2010 from $16.5 million at December 31, 2009.  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 United States government or government-sponsored enterprises.  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.  At June 30, 2010 and December 31, 2009, all of our customer repurchase agreements were held by commercial customers.

Long-term debt increased $12.6 million to $226.4 million from $213.8 million at December 31, 2009.  Long-term debt consists of FHLB advances, securities sold under repurchase agreements and customer repurchase agreements with an original maturity of one year or more.  Long-term debt issued by the FHLB was $140.0 million at June 30, 2010 and $127.5 million at December 31, 2009.  Securities sold under repurchase agreements remained unchanged at $81.3 million while customer repurchase agreements were $5.1 million and $5.0 million at June 30, 2010 and December 31, 2009, respectively.  Current interest rates permit us to earn a more advantageous spread by borrowing funds and reinvesting in securities and loans.

Shareholders’ equity at June 30, 2010 and December 31, 2009 was $239.6 million and $247.3 million, respectively, which represented 19.4 % of total assets as of June 30, 2010 and 20.8% of total assets as of December 31, 2009.  The change in shareholders’ equity is comprised of the repurchase of 588,848 shares of common stock for $4.9 million related to the stock repurchase plan and dividends amounting to $7.0 million.  This was partially offset by an increase of $1.8 million in other comprehensive income, net income of $1.0 million and $1.4 million related to the accrual of share-based compensation.

24

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND JUNE 30, 2009

General

Net loss was $386,000, or $(0.01) per diluted share, for the quarter ended June 30, 2010, as compared to $1.1 million, or $0.04 per diluted share, for the same period in 2009.  Net interest and dividend income was $7.4 million for the three months ended June 30, 2010 and $7.8 million for the same period in 2009.

Net Interest and Dividend Income

The following tables set forth the information relating to our average balance at, and net interest income for, the three months ended June 30, 2010 and 2009, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated.  Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown.  The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities.  Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets.  Average balances are derived from actual daily balances over the periods indicated.  Interest income includes fees earned from making changes in loan rates and terms and fees earned when the real estate loans are prepaid or refinanced.  For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilities comparison between taxable and tax-exempt assets.

25

	Three Months Ended June 30,
	2010								2009
	Average Balance		Interest			Average Yield/Cost			Average Balance		Interest			Average Yield/Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets:
Loans(1)(2)	$	471,510	$	6,166			5.23	%	$	475,148	$	6,488			5.46	%
Securities(2)		642,372		5,602			3.49			568,521		6,630			4.66
Short-term investments(3)		14,018		2			0.06			20,760		4			0.08
Total interest-earning assets		1,127,900		11,770			4.17			1,064,429		13,122			4.93
Total noninterest-earning assets		79,236								72,380
Total assets	$	1,207,136							$	1,136,809
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW accounts	$	73,813		227			1.23		$	64,771		326			2.01
Savings accounts		117,805		225			0.76			80,531		235			1.17
Money market deposit accounts		48,494		89			0.73			53,870		127			0.94
Time certificates of deposit		343,344		1,954			2.28			335,403		2,602			3.10
Total interest-bearing deposits		583,456		2,495						534,575		3,290
Short-term borrowings and long-term debt		289,158		1,676			2.32			249,351		1,879			3.01
Interest-bearing liabilities		872,614		4,171			1.91			783,926		5,169			2.64
Noninterest-bearing deposits		83,015								80,865
Other noninterest-bearing liabilities		8,918								12,233
Total noninterest-bearing liabilities		91,933								93,098
Total liabilities		964,547								877,024
Total equity		242,589								259,785
Total liabilities and equity	$	1,207,136							$	1,136,809
Less: Tax-equivalent adjustment(2)				(175	)							(147	)
Net interest and dividend income			$	7,424							$	7,806
Net interest rate spread(4)							2.26	%							2.29	%
Net interest margin(5)							2.70	%							3.00	%
Ratio of average interest-earning assets to average interest-bearing liabilities							129.3	X							135.8	X

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

(2) Securities and loan income are presented on a tax-equivalent basis using a tax rate of 34%.  The tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported in the statements of income.

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

(4) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(5) Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest earning assets.

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.

26

	Three Months Ended June 30, 2010 compared
	to Three Months Ended June 30, 2009
	Increase (Decrease) Due to
	Volume			Rate			Net
	(Dollars in thousands)
Interest-earning assets
Loans (1)	$	(50	)	$	(272	)	$	(322	)
Securities (1)		861			(1,889	)		(1,028	)
Short-term investment		(1	)		(1	)		(2	)
Total interest-earning assets		810			(2,162	)		(1,352	)
Interest-bearing liabilities
NOW accounts		46			(145	)		(99	)
Savings accounts		109			(119	)		(10	)
Money market deposit accounts		(13	)		(25	)		(38	)
Time deposits		62			(710	)		(648	)
Short-term borrowing and long-term debt		300			(503	)		(203	)
Total interest-bearing liabilities		504			(1,502	)		(998	)
Change in net interest and dividend income	$	306		$	(660	)	$	(354	)

(1) Securities, loan income and change in net interest and dividend income are presented on a tax-equivalent basis using a tax rate of 34%. The tax-equivalent adjustment is deducted from tax-equivalentnet interest income.

Net interest and dividend income decreased $382,000 to $7.4 million for the three months ended June 30, 2010, from $7.8 million for the same period in 2009.  Interest and dividend income, on a tax-equivalent basis, decreased $1.3 million to $11.8 million for the three months ended June 30, 2010, from $13.1 million for the same period in 2009.  The net interest margin, on a tax-equivalent basis, was 2.70% for the three months ended June 30, 2010, as compared to 3.00% for the same period in 2009.  The margin decreased because the yield on interest-earning assets decreased more than the cost of interest-bearing liabilities.

The average yield on interest-earning assets decreased 76 basis points to 4.17% for the three months ended June 30, 2010, from 4.93% for the same period in 2009.  The primary reason for the decrease in the average yield on interest-earning assets was a decrease of 117 basis points in the average yield on securities.  For the three months ended June 30, 2010, the average yield on securities was 3.49% compared to 4.66% for the three months ended June 30, 2009.  The average yield on securities decreased primarily due to larger than normal principal payments on our mortgage-backed securities, particularly during the first quarter of 2010, which consequently impacted the yield.  The cash flows from these pay downs were subsequently reinvested in securities having a lower yield that is reflective of the current market rate environment. In addition, the average balance of securities increased $73.9 million for the three months ended June 30, 2010.   The new securities purchases were done so in a lower rate environment.

The decrease in interest income was partially offset by a decrease in interest expense.  Interest expense decreased $998,000 to $4.2 million for the three months ended June 30, 2010, from $5.2 million for the same period in 2009.  The average cost of interest-bearing liabilities decreased 73 basis points to 1.91% for the three months ended June 30, 2010, from 2.64% for the same period in 2009.  The decrease in the cost of interest-bearing liabilities was primarily due to a decrease in rates on time deposits, repurchase agreements and borrowings.

Provision for Loan Losses

The amount that we provided for loan losses during the three months ended June 30, 2010 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio, described in detail below, include an increase in charge-offs, primarily pertaining to a single commercial real estate loan, and the continued weakening of the local and national economy.  After evaluating these factors, we provided $4.1 million for loan losses for the three months ended June 30, 2010, compared to $590,000 for the same period in 2009.  The allowance was $7.8 million at June 30, 2010 and $7.6 million at March 31, 2010.  The allowance for loan losses was 1.64% of total loans at June 30, 2010 and 1.62% at March 31, 2010.

27

Net charge-offs were $3.8 million for the three months ended June 30, 2010.  This was comprised of charge-offs of $3.9 million for the three months ended June 30, 2010, partially offset by recoveries of $17,000 for the same period.  During the second quarter of 2010, we reserved for and subsequently charged-off $3.6 million related to a single commercial real estate loan.  The remaining balance on this loan was $3.6 million at June 30, 2010.  The loan is a build-to-suit rental building whose initial lessee went into bankruptcy.

Net charge-offs were $528,000 for the three months ended June 30, 2009.  This was comprised of charge-offs of $540,000 for the three months ended June 30, 2009, partially offset by recoveries of $12,000 for the same period.

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.

Noninterest Income

Net gains on the sales of securities were $1.1 million for the three months ended June 30, 2010, compared to $122,000 for the same period in 2009.  The net gain on sales of securities for the three months ended June 30, 2009 was offset by a loss on the prepayment of borrowings of $142,000.  During the second quarter of 2009, we paid off higher cost funding early to take advantage of lower rate borrowing opportunities.

Noninterest income increased $908,000 to $2.0 million for the three months ended June 30, 2010, from $1.1 million for the same period in 2009.  Service charge and fee income decreased $243,000 to $492,000 for the three months ended June 30, 2010, compared to the same period in 2009.  This was primarily the result of a decrease of $238,000 in fees received from the third-party mortgage program.  In the 2009 period, we experienced a higher level of mortgage referrals due to a decrease in interest rates.  In the 2010 period, residential loan demand has moderated but of greater significance, we have begun to buy back more loans from the third-party mortgage company.   As a result, we forgo receiving referral fee income on these loans but instead earn interest income for the life of the loans.

Noninterest Expense

Noninterest expense decreased $1.1 million for the three months ended June 30, 2010 to $5.9 million from $7.0 million in the comparable 2009 period. FDIC insurance decreased by $523,000 to $168,000 for the three months ended June 30, 2010 from $691,000 for the same period in 2009.  The three months ended June 30, 2009 included the accrual for a special assessment that was imposed upon all banks at June 30, 2009, which for Westfield Bank amounted to $453,000.  Salaries and benefits decreased $442,000 to $3.4 million for the three months ended June 30, 2010.  This was primarily the result of a decrease of $328,000 in the accrual for deferred compensation.  In addition, share-based compensation expense decreased $91,000 for the three months ended June 30, 2010 from the comparable 2009 period.

Income Taxes

For the three months ended June 30, 2010, we had a tax benefit of $247,000 as compared to a tax provision of $214,000 for the same period in 2009.  The effective tax rate was 39.0% for the three months ended June 30, 2010 and 16.6% for the same period in 2009.  The increase in effective tax rate from June 30, 2009 is due primarily to the loss before income taxes while maintaining the same level of tax-advantaged income such as BOLI and tax-exempt municipal obligations.

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND JUNE 30, 2009

General

Net income was $1.0 million or $0.03 per diluted share, for the six months ended June 30, 2010, as compared to $2.3 million, or $0.08 per diluted share, for the same period in 2009.  Net interest and dividend income was $15.1 million for the six months ended June 30, 2010 and $15.8 million for the same period in 2009.

28

Net Interest and Dividend Income

The following tables set forth the information relating to our average balance at, and net interest income for, the six months ended June 30, 2010 and 2009, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated.  Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown.  The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities.  Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets.  Average balances are derived from actual daily balances over the periods indicated.  Interest income includes fees earned from making changes in loan rates and terms and fees earned when the real estate loans are prepaid or refinanced.  For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilities comparison between taxable and tax-exempt assets.

	Six Months Ended June 30,
	2010								2009
	Average Balance		Interest			Average Yield/Cost			Average Balance		Interest			Average Yield/Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets:
Loans(1)(2)	$	471,320	$	12,365			5.25	%	$	474,910	$	12,962			5.46	%
Securities(2)		631,861		11,530			3.65			551,287		13,385			4.86
Short-term investments(3)		15,518		3			0.04			19,630		8			0.08
Total interest-earning assets		1,118,699		23,898			4.27			1,045,827		26,355			5.04
Total noninterest-earning assets		80,120								71,799
Total assets	$	1,198,819							$	1,117,626
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW accounts	$	72,663		459			1.26		$	60,730		576			1.90
Savings accounts		114,276		455			0.80			76,362		427			1.12
Money market deposit accounts		48,837		179			0.73			54,730		256			0.94
Time certificates of deposit		343,865		4,016			2.34			332,779		5,306			3.19
Total interest-bearing deposits		579,641		5,109						524,601		6,565
Short-term borrowings and long-term debt		284,614		3,325			2.34			242,330		3,687			3.04
Interest-bearing liabilities		864,255		8,434			1.95			766,931		10,252			2.67
Noninterest-bearing deposits		81,440								78,745
Other noninterest-bearing liabilities		8,512								11,603
Total noninterest-bearing liabilities		89,952								90,348
Total liabilities		954,207								857,279
Total equity		244,612								260,347
Total liabilities and equity	$	1,198,819							$	1,117,626
Less: Tax-equivalent adjustment(2)				(348	)							(277	)
Net interest and dividend income			$	15,116							$	15,826
Net interest rate spread(4)							2.32	%							2.37	%
Net interest margin(5)							2.79	%							3.11	%
Ratio of average interest-earning assets to average interest-bearing liabilities							129.4	X							136.4	X

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

(2) Securities and loan income are presented on a tax-equivalent basis using a tax rate of 34%.  The tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported in the statements of income.

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

(4) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(5) Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest earning assets.

29

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, 2010 compared
	to Six Months Ended June 30, 2009
	Increase (Decrease) Due to
	Volume			Rate			Net
	(Dollars in thousands)
Interest-earning assets
Loans (1)	$	(98	)	$	(499	)	$	(597	)
Securities (1)		1,956			(3,811	)		(1,855	)
Short-term investment		(2	)		(3	)		(5	)
Total interest-earning assets		1,856			(4,313	)		(2,457	)
Interest-bearing liabilities
NOW accounts		113			(230	)		(117	)
Savings accounts		212			(184	)		28
Money market deposit accounts		(28	)		(49	)		(77	)
Time deposits		177			(1,467	)		(1,290	)
Short-term borrowing and long-term debt		643			(1,005	)		(362	)
Total interest-bearing liabilities		1,117			(2,935	)		(1,818	)
Change in net interest and dividend income	$	739		$	(1,378	)	$	(639	)

(1) Securities, loan income and changes in net interest and dividend income are presented on a tax-equivalent basis using a tax rate of 34%. The   tax-equivalent adjustment is deducted from tax-equivalentnet interest income.

Net interest and dividend income decreased $710,000 to $15.1 million for the six months ended June 30, 2010, from $15.8 million for the same period in 2009.  Interest and dividend income, on a tax-equivalent basis, decreased $2.5 million to $23.9 million for the six months ended June 30, 2010, from $26.4 million for the same period in 2009.  The net interest margin, on a tax-equivalent basis, was 2.79% for the six months ended June 30, 2010, as compared to 3.11% for the same period in 2009.  The margin decreased because the yield on interest-earning assets decreased more than the cost of interest-bearing liabilities.  The average yield on interest-earning assets decreased 77 basis points to 4.27% for the six months ended June 30, 2010, from 5.04% for the same period in 2009.

The primary reason for the decrease in the average yield on interest-earning assets was a decrease of 121 basis points in the average yield on securities.  For the six months ended June 30, 2010, the average yield on securities was 3.65% compared to 4.86% for the six months ended June 30, 2009.  We experienced larger than normal amortization on our securities, particularly in the first quarter of 2010, which decreased the yield on securities.  The cash flows from these pay downs were subsequently reinvested in securities having a lower yield that is reflective of the current market rate environment. In addition, the average balance of securities increased $80.6 million for the six months ended June 30, 2010.   The new securities purchases were done so in a lower rate environment.

The decrease in interest income was partially offset by a decrease in interest expense.  Interest expense decreased $1.9 million to $8.4 million for the six months ended June 30, 2010, from $10.3 million for the same period in 2009.  The average cost of interest-bearing liabilities decreased 72 basis points to 1.95% for the six months ended June 30, 2010, from 2.67% for the same period in 2009.  The decrease in the cost of interest-bearing liabilities was primarily due to a decrease in rates on time deposits, repurchase agreements and borrowings.

30

Provision for Loan Losses

The amount that we provided for loan losses during the six months ended June 30, 2010 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio, described in detail below, include an increase in charge-offs, primarily pertaining to a single commercial real estate loan, and the continued weakening of the local and national economy.  After evaluating these factors, we provided $4.6 for loan losses for the six months ended June 30, 2010, compared to $1.7 million for the same period in 2009.  The allowance was $7.8 million at June 30, 2010 and $7.6 million at December 31, 2009.  The allowance for loan losses was 1.64% of total loans at June 30, 2010 and 1.60% at December 31, 2009.

Net charge-offs were $4.4 million for the six months ended June 30, 2010.  This was comprised of charge-offs of $4.5 million for the six months ended June 30, 2010, partially offset by recoveries of $39,000 for the same period.  During the second quarter of 2010, we reserved for and subsequently charged-off $3.6 million related to a single commercial real estate loan.  The remaining balance on this loan was $3.6 million at June 30, 2010.  The loan is a build-to-suit rental building whose initial lessee went into bankruptcy.

Net charge-offs were $3.2 million for the six months ended June 30, 2009.  This was comprised of charge-offs of $3.2 million offset by recoveries of $23,000. The increase in charge-offs was the related to a single commercial manufacturing relationship of $5.5 million. The business was sold in 2009 and resulted in a charge-off of $3.1 million.

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.

Noninterest Income

Noninterest income increased $712,000 to $2.9 million for the six months ended June 30, 2010, from $2.2 million for the same period in 2009.  Service charge and fee income decreased $460,000 to $984,000 for the six months ended June 30, 2010, compared to the same period in 2009.  This was primarily the result of a decrease of $385,000 in fees received from the third-party mortgage program.  In the 2009 period, we experienced a higher level of mortgage referrals due to a decrease in interest rates.  In the 2010 period, residential loan demand has moderated but of greater significance, we have begun to buy back more loans from the third-party mortgage company.   As a result, we forgo receiving referral fee income on these loans but instead earn interest income for the life of the loans.  In addition, net checking account processing fee income decreased $65,000 to $498,000 for the six months ended June 30, 2010, primarily due to a decrease in overdraft fee income.

Net gains on the sales of securities were $1.3 million for the six months ended June 30, 2010, compared to $208,000 for the same period in 2009.  The net gain on sales of securities for the six months ended June 30, 2009 was offset by a loss on the prepayment of borrowings of $142,000.  During the second quarter of 2009, we paid off higher cost funding early to take advantage of lower rate borrowing opportunities.

Noninterest Expense

Noninterest expense decreased $1.1 million for the six months ended June 30, 2010 to $12.3 million from $13.4 million in the comparable 2009 period. Salaries and benefits decreased $749,000 to $7.2 million for the six months ended June 30, 2010.  This was primarily the result of a decrease of $324,000 in the accrual for deferred compensation.  In addition, share-based compensation expense decreased $297,000 for the six months ended June 30, 2010 from the comparable 2009 period.  The 2009 period included $243,000 in expense related to the acceleration of vesting for employees that reached retirement eligibility age.  FDIC insurance decreased by $516,000 to $332,000 for the six months ended June 30, 2010 from $848,000 for the same period in 2009.  The six months ended June 30, 2009 included the accrual for a special assessment that was imposed upon all banks at June 30, 2009, which for Westfield Bank amounted to $453,000.

31

Income Taxes

For the six months ended June 30, 2010, we had a tax provision of $155,000 as compared to $607,000 for the same period in 2009.  The effective tax rate was 13.8% for the six months ended June 30, 2010 and 21.0% for the same period in 2009.  The decrease in effective tax rate from June 30, 2009 is due primarily to a lower income before taxes while maintaining the same level of tax-advantaged income such as BOLI and tax-exempt municipal obligations.

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 FHLB based on eligible collateral of loans and securities.  Our maximum additional borrowing capacity from the FHLB at June 30, 2010 was $33.2 million.

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 investment 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 its current operating needs.

At June 30, 2010, we exceeded each of the applicable regulatory capital requirements.  As of June 30, 2010, the most recent notification from the Office of Thrift Supervision (the “OTS”) categorized us as “well capitalized” under the regulatory framework for prompt corrective action.  To be categorized as “well capitalized” we must maintain minimum total risk-based, 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, 2010 and December 31, 2009 are also presented in the following table.

32

	Actual					Minimum For Capital  Adequacy Purpose					Minimum To Be Well  Capitalized Under Prompt  Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
June 30, 2010
Total Capital (to Risk Weighted Assets):
Consolidated	$	247,935		36.86	%	$	53,814		8.00	%		N/A		-
Bank		236,931		35.37			53,596		8.00		$	66,994		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		240,108		35.69			26,907		4.00			N/A		-
Bank		230,177		34.36			26,798		4.00			40,197		6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated		240,108		19.48			49,299		4.00			N/A		-
Bank		230,177		18.76			49,072		4.00			61,341		5.00
Tangible Equity (to Tangible Assets):
Consolidated		N/A		-			N/A		-			N/A		-
Bank		230,177		18.76			18,402		1.50			N/A		-
December 31, 2009
Total Capital (to Risk Weighted Assets):
Consolidated	$	257,209		38.07	%	$	54,052		8.00	%		N/A		-
Bank		236,940		35.29			53,706		8.00		$	67,132		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		249,564		36.94			27,026		4.00			N/A		-
Bank		230,109		34.28			26,853		4.00			40,279		6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated		249,564		20.92			47,713		4.00			N/A		-
Bank		230,109		19.56			47,059		4.00			58,824		5.00
Tangible Equity (to Tangible Assets):
Consolidated		N/A		-			N/A		-			N/A		-
Bank		230,109		19.56			17,647		1.50			N/A		-

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.  A summary of lease obligations and credit commitments at June 30, 2010 follows:

33

			After 1 Year		After 3 Years
	Within		But Within		But Within		After
	1 Year		3 Years		5 Years		5 Years		Total
	(In thousands)
Lease Obligations
Operating lease obligations	$	552	$	966	$	891	$	10,350	$	12,759
Borrowings and Debt
Federal Home Loan Bank		101,500		54,300		52,150		10,000		217,950
Securities sold under
agreements to repurchase		17,874		5,000		37,800		38,500		99,174
Total borrowings and debt		119,374		59,300		89,950		48,500		317,124
Credit Commitments
Available lines of credit		56,117		-		-		19,063		75,180
Other loan commitments		18,742		450		-		-		19,192
Letters of credit		2,537		-		-		505		3,042
Total credit commitments		77,396		450		-		19,568		97,414
	$	197,322	$	60,716	$	90,841	$	78,418	$	427,297

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 2009 Annual Report. Please refer to Item 7A of the 2009 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 Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

Changes in Internal Control Over Financial Reporting.

There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

34

PART II – OTHER INFORMATION

ITEM 1.            LEGAL PROCEEDINGS.

None.

ITEM 1A.         RISK FACTORS.

For a summary of risk factors relevant to our operations, see Part 1, Item 1A, “Risk Factors” in our 2009 Annual Report on Form 10-K.  There are no material changes in the risk factors relevant to our operations, except as discussed below:

Compliance with the recently enacted Dodd-Frank Reform Act may increase our costs of operations and adversely impact our earnings.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) into law.  The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial-services industry.  Among other things, the Dodd-Frank Act creates a new federal financial consumer protection agency, tightens capital standards, imposes clearing and margining requirements on many derivatives activities, and generally increases oversight and regulation of financial institutions and financial activities.  In addition to the self-implementing provisions of the statute, the Dodd-Frank Act calls for many administrative rulemakings by various federal agencies to implement various parts of the legislation.  It is impossible to predict when any final rules would be issued through any such rulemakings, and what the content of such rules will be.  The financial reform legislation and any implementing rules that are ultimately issued could have adverse implications on the financial industry, the competitive environment, and our business. We will have to apply resources to ensure that we are in compliance with all applicable provisions of the Dodd-Frank Act and any implementing rules, which may increase our costs of operations and adversely impact our earnings.

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, 2010.

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, 2010		-		-		-		352,034
May 1- 31, 2010		220,107		8.54		220,107		131,927
June 1 - 30, 2010		131,927		8.27		131,927		-
Total		352,034		8.44		352,034		-

(1) As previously reported, the Board of Directors voted to authorize the commencement of a repurchase program on January 22, 2008 authorizing us to repurchase up to 3,194,000 shares, or ten percent of its outstanding shares of common stock.  This program was completed during the second quarter of 2010.   On May 25, 2010, the Board of Directors voted to authorize the commencement of a second repurchase program, authorizing the repurchase of an additional 2,924,367 shares, or ten percent of its outstanding shares of common stock.  There were no shares purchased under the second repurchase program at June 30, 2010.

There were no sales by us of unregistered securities during the three months ended June 30, 2010.

35

ITEM 3.            DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.            [REMOVED AND RESERVED.]

ITEM 5.            OTHER INFORMATION.

The 2010 Annual Meeting of Shareholders was held on May 27, 2010 (the “Annual Meeting”).  There were 29,581,712 shares of common stock eligible to be voted at the Annual Meeting and 25,888,885 shares were represented in person or by proxy at the meeting which constituted a quorum to conduct business.

Both proposals presented at the Annual Meeting were approved by the shareholders with the final voting results of each proposal listed below:

Proposal 1.  The election of three candidates to the Board of Directors, each with a three-year term.

Nominee	For		Withheld		Broker Non-Votes
Victor J. Carra		19,881,221		3,430,596		2,577,068
Richard C. Placek		22,884,704		427,113		2,577,068
Charles E. Sullivan		22,884,955		426,862		2,577,068

Proposal 2.   The ratification of the appointment of Wolf & Company, P.C. as our independent registered public accounting firm for the fiscal year ending December 31, 2010.

For	Against		Abstain
25,742,992		99,296		46,597

ITEM 6.             EXHIBITS.

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

36

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.

Westfield Financial, Inc.
(Registrant)
By:	/s/ James C. Hagan
	James C. Hagan
	President and Chief Executive Officer
By:	/s/ Leo R. Sagan, Jr.
	Leo R. Sagan, Jr.
	Vice President and Chief Financial Officer

August 4, 2010

37

EXHIBIT INDEX

2.1	Amended and Restated Plan of Conversion and Stock Issuance of Westfield Mutual Holding Company, Westfield Financial, Inc. and Westfield Bank (incorporated by reference to Exhibit 2.1 of the Registration Statement No. 333-137024 on Form S-1 filed with the Securities and Exchange Commission on August 31, 2006).
3.1	Articles of Organization of Westfield Financial, Inc. (incorporated by reference to Exhibit 3.3 of the Form 8-K filed with the Securities and Exchange Commission on January 5, 2007).
3.2	Bylaws of Westfield Financial, Inc. (incorporated by reference to Exhibit 3.2 of the Form 8-K filed with the Securities and Exchange Commission on January 5, 2007).
4.1	Form of Stock Certificate of 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*

*  Filed herewith.

38