Western New England Bancorp 10Q 2013 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, 2013

o	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 S 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 S 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 o	Accelerated filer x

	Non-accelerated filer o	Smaller reporting company o

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

At August 1, 2013, the registrant had 20,745,060 shares of common stock, $.01 par value, issued and outstanding.

TABLE OF CONTENTS

Page

FORWARD-LOOKING STATEMENTS		i

PART I -	FINANCIAL INFORMATION

Item 1.	Financial Statements of Westfield Financial, Inc. and Subsidiaries

	Consolidated Balance Sheets (Unaudited) - June 30, 2013 and December 31, 2012	1

	Consolidated Statements of Net Income (Unaudited) - Three and Six Months Ended
	June 30, 2013 and 2012	2

	Consolidated Statements of Comprehensive Income (Unaudited) -
	Three and Six Months Ended June 30, 2013 and 2012	3

	Consolidated Statements of Changes in Shareholders' Equity (Unaudited) -
	Six Months Ended June 30, 2013 and 2012	4

	Consolidated Statements of Cash Flows (Unaudited) -Six Months Ended
	June 30, 2013 and 2012	5

	Notes to Consolidated Financial Statements (Unaudited)	6

Item 2.	Management's Discussion and Analysis of Financial Condition and
	Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	41


PART II -	OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 3.	Defaults upon Senior Securities	42

Item 4.	Mine Safety Disclosures	42

Item 5.	Other Information	42

Item 6.	Exhibits	42

FORWARD–LOOKING STATEMENTS

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

●	changes in the interest rate environment that reduce margins;

●	changes in the regulatory environment;

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

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

●	changes in business conditions and inflation;

●	changes in credit market conditions;

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

●	increases in Federal Deposit Insurance Corporation deposit insurance premiums and assessments could adversely affect our financial condition;

●	changes in technology used in the banking business;

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

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

●	our controls and procedures may fail or be circumvented;

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

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

●	the effect on our operations of recent legislative and regulatory initiatives that were or may be enacted in response to the ongoing financial crisis;

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

●	other factors detailed from time to time in our Securities and Exchange Commission (“SEC”) filings.

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

PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS.
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(Dollars in thousands)

	June 30,			December 31,
	2013			2012
ASSETS
CASH AND DUE FROM BANKS	$	12,100		$	9,847
FEDERAL FUNDS SOLD		104			459
INTEREST-BEARING DEPOSITS AND OTHER SHORT-TERM INVESTMENTS		3,502			1,455
CASH AND CASH EQUIVALENTS		15,706			11,761

SECURITIES AVAILABLE FOR SALE – AT FAIR VALUE		417,053			621,507
SECURITIES HELD TO MATURITY (Fair value of $165,990 at June 30, 2013)		173,982			-
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT COST		15,629			14,269
LOANS - Net of allowance for loan losses of $7,473 and $7,794 at June 30, 2013 and December 31, 2012, respectively		599,132			587,124
PREMISES AND EQUIPMENT, Net		11,311			11,077
ACCRUED INTEREST RECEIVABLE		4,461			4,602
BANK-OWNED LIFE INSURANCE		46,403			46,222
DEFERRED TAX ASSET, Net		6,987			123
OTHER REAL ESTATE OWNED		-			964
OTHER ASSETS		2,971			3,813
TOTAL ASSETS	$	1,293,635		$	1,301,462

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
DEPOSITS :
Noninterest-bearing	$	120,501		$	114,388
Interest-bearing		662,181			639,025
Total deposits		782,682			753,413

SHORT-TERM BORROWINGS		69,972			69,934
LONG-TERM DEBT		269,991			278,861
OTHER LIABILITIES		10,573			10,067
TOTAL LIABILITIES		1,133,218			1,112,275

SHAREHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized, none outstanding at June 30, 2013 and December 31, 2012, respectively		-			-
Common stock - $.01 par value, 75,000,000 shares authorized, 20,745,060 shares issued and outstanding at June 30, 2013; 22,843,722 shares issued and outstanding at December 31, 2012		207			228
Additional paid-in capital		128,932			144,718
Unearned compensation - ESOP		(8,278	)		(8,553	)
Unearned compensation - Equity Incentive Plan		(263	)		(265	)
Retained earnings		42,196			42,364
Accumulated other comprehensive income (loss)		(2,377	)		10,695
Total shareholders' equity		160,417			189,187
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,293,635		$	1,301,462
See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME – UNAUDITED
(Dollars in thousands, except per share data)

	Three Months					Six Months
	Ended June 30,					Ended June 30,
	2013			2012		2013			2012
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans	$	5,006		$	5,084	$	10,002		$	10,122
Commercial and industrial loans		1,267			1,253		2,507			2,555
Consumer loans		34			40		69			80
Debt securities, taxable		3,611			4,050		7,327			7,894
Debt securities, tax-exempt		270			415		574			839
Equity securities		36			42		73			86
Other Investments - at cost		21			25		40			47
Federal funds sold, interest-bearing deposits and other short-term investments		1			1		3			1
Total interest and dividend income		10,246			10,910		20,595			21,624
INTEREST EXPENSE:
Deposits		1,390			1,523		2,777			3,159
Long-term debt		1,188			1,623		2,446			3,254
Short-term borrowings		31			37		65			67
Total interest expense		2,609			3,183		5,288			6,480
Net interest and dividend income		7,637			7,727		15,307			15,144
(CREDIT) PROVISION FOR LOAN LOSSES		(70	)		260		(305	)		480
Net interest and dividend income after provision for loan losses		7,707			7,467		15,612			14,664

NONINTEREST INCOME (LOSS):
Service charges and fees		594			521		1,164			1,032
Income from bank-owned life insurance		387			278		773			661
Gain on bank-owned life insurance death benefit		563			5		563			80
Loss on prepayment of borrowings		(1,404	)		-		(2,830	)		-
Gain on sales of securities, net		823			97		2,250			1,681
Total noninterest income		963			901		1,920			3,454
NONINTEREST EXPENSE:
Salaries and employees benefit		3,817			4,127		7,625			8,404
Occupancy		730			703		1,434			1,408
Computer operations		602			523		1,152			1,050
Professional fees		527			532		1,037			969
OREO expense		-			21		22			38
FDIC insurance assessment		163			155		324			298
Other		950			772		1,709			1,510
Total noninterest expense		6,789			6,833		13,303			13,677
INCOME BEFORE INCOME TAXES		1,881			1,535		4,229			4,441
INCOME TAX PROVISION		297			561		863			1,128
NET INCOME	$	1,584		$	974	$	3,366		$	3,313

EARNINGS PER COMMON SHARE:
Basic earnings per share	$	0.08		$	0.04	$	0.16		$	0.13
Weighted average shares outstanding		20,276,261			25,141,989		20,686,860			25,295,875
Diluted earnings per share	$	0.08		$	0.04	$	0.16		$	0.13
Weighted average diluted shares outstanding		20,276,261			25,158,171		20,686,887			25,330,242
See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED

(Dollars in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012

Net income	$	1,584		$	974		$	3,366		$	3,313

Other comprehensive income:
Unrealized (loss) gain on securities:
Unrealized holding (loss) gain on available for sale securities		(13,282	)		4,583			(17,701	)		3,139
Reclassification adjustment for gain realized in income		(823	)		(97	)		(2,250	)		(1,681	)
Net unrealized (loss) gain		(14,105	)		4,486			(19,951	)		1,458
Tax effect		4,857			(1,546	)		6,864			(495	)
Net-of-tax amount		(9,248	)		2,940			(13,087	)		963

Defined benefit pension plans:
Reclassification adjustment:
Actuarial loss		17			48			29			87
Transition asset		(3	)		(3	)		(6	)		(5	)
Net adjustments pertaining to defined benefit plans		14			45			23			82
Tax effect		(5	)		(15	)		(8	)		(27	)
Net-of-tax amount		9			30			15			55

Other comprehensive (loss) income		(9,239	)		2,970			(13,072	)		1,018

Comprehensive (loss) income	$	(7,655	)	$	3,944		$	(9,706	)	$	4,331

See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED
SIX MONTHS ENDED JUNE 30, 2013 AND 2012
(Dollars in thousands)

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

BALANCE AT DECEMBER 31, 2011		26,918,250		$	269		$	173,615		$	(9,119	)	$	(1,228	)	$	47,735		$	7,716		$	218,988
Net income		-			-			-			-			-			3,313			-			3,313
Other comprehensive loss		-			-			-			-			-			-			1,018			1,018
Common stock held by ESOP committed to be released (84,261 shares)		-			-			44			283			-			-			-			327
Share-based compensation - stock options		-			-			392			-			-			-			-			392
Share-based compensation - equity incentive plan		-			-			-			-			576			-			-			576
Excess tax benefits from equity incentive plan		-			-			12			-			-			-			-			12
Common stock repurchased		(1,150,632	)		(12	)		(8,660	)		-			-			-			-			(8,672	)
Issuance of common stock in connection with stock option exercises		194,656			2			1,598			-			-			(746	)		-			854
Excess tax benefits from stock option exercises		-			-			203			-			-			-			-			203
Cash dividends declared ($0.22 per share)		-			-			-			-			-			(5,581	)		-			(5,581	)
BALANCE AT JUNE, 30 2012		25,962,274		$	259		$	167,204		$	(8,836	)	$	(652	)	$	44,721		$	8,734		$	211,430

BALANCE AT DECEMBER 31, 2012		22,843,722		$	228		$	144,718		$	(8,553	)	$	(265	)	$	42,364		$	10,695		$	189,187
Net income		-			-			-			-			-			3,366			-			3,366
Other comprehensive loss		-			-			-			-			-			-			(13,072	)		(13,072	)
Common stock held by ESOP committed to be released (81,803 shares)		-			-			32			275			-			-			-			307
Share-based compensation - stock options		-			-			27			-			-			-			-			27
Share-based compensation - equity incentive plan		-			-			-			-			55			-			-			55
Excess tax benefit from equity incentive plan		-			-			2			-			-			-			-			2
Common stock repurchased		(2,098,662	)		(21	)		(15,900	)		-			-			-			-			(15,921	)
Issuance of common stock in connection with equity incentive plan		-			-			53			-			(53	)		-			-			-
Cash dividends declared ($0.17 per share)		-			-			-			-			-			(3,534	)		-			(3,534	)
BALANCE AT JUNE, 30 2013		20,745,060		$	207		$	128,932		$	(8,278	)	$	(263	)	$	42,196		$	(2,377	)	$	160,417
See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)

	Six Months Ended June 30,
	2013			2012
OPERATING ACTIVITIES:
Net income	$	3,366		$	3,313
Adjustments to reconcile net income to net cash provided by operating activities:
(Credit) provision for loan losses		(305	)		480
Depreciation and amortization of premises and equipment		530			532
Net amortization of premiums and discounts on securities and mortgage loans		2,307			1,937
Net amortization of premiums on modified debt		312			214
Share-based compensation expense		82			968
Amortization of ESOP expense		307			327
Excess tax benefits from equity incentive plan		(2	)		(12	)
Excess tax benefits in connection with stock option exercises		-			(203	)
Net gains on sales of securities		(2,250	)		(1,681	)
Gain on sale of other real estate owned		6			-
Deferred income tax benefit		(8	)		(102	)
Income from bank-owned life insurance		(773	)		(661	)
Gain on bank-owned life insurance death benefit		(563	)		(80	)
Changes in assets and liabilities:
Accrued interest receivable		141			(661	)
Other assets		842			(332	)
Other liabilities		531			755
Net cash provided by operating activities		4,523			4,804
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases		(2,636	)		-
Proceeds from calls, maturities, and principal collections		363			-
Securities, available for sale:
Purchases		(150,972	)		(255,877	)
Proceeds from sales		122,092			189,949
Proceeds from calls, maturities, and principal collections		41,654			44,884
Purchase of residential mortgages		(28,491	)		(45,690	)
Loan originations and principal payments, net		16,751			15,588
Purchase of Federal Home Loan Bank of Boston stock		(1,391	)		(1,802	)
Proceeds from redemption of other restricted stock		31			195
Proceeds from sale of other real estate owned		958			-
Purchases of premises and equipment		(764	)		(713	)
Purchase of banked-owned life insurance		-			(2,600	)
Surrender of bank-owned life insurance		-			1,585
Disbursement of bank-owned life insurance gain		(282	)		-
Proceeds from payout on bank-owned life insurance		1,437			-
Net cash used in investing activities		(1,250	)		(54,481	)
FINANCING ACTIVITIES:
Net increase in deposits		29,269			14,593
Net change in short-term borrowings		38			5,589
Repayment of long-term debt		(41,250	)		(48,231	)
Proceeds from long-term debt		32,068			90,667
Cash dividends paid		(3,534	)		(5,581	)
Common stock repurchased		(15,921	)		(9,024	)
Issuance of common stock in connection with stock option exercises		-			854
Excess tax benefits in connection with equity incentive plan		2			12
Excess tax benefits in connection with stock option exercises		-			203
Net cash (used) provided by financing activities		672			49,082

NET CHANGE IN CASH AND CASH EQUIVALENTS:		3,945			(595	)
Beginning of period		11,761			21,105
End of period	$	15,706		$	20,510

Supplemental cashflow information:
Securities reclassified from available-for-sale to held-to-maturity	$	172,091		$	-
Interest paid		5,359			6,408
Taxes paid		313			1,604
Net cash paid to broker for common stock repurchased		-			352
See the accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

JUNE 30, 2013

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The Bank’s deposits are insured to the limits specified by the Federal Deposit Insurance Corporation (“FDIC”). The Bank operates 11 branches in western Massachusetts and 1 branch in Granby, Connecticut. The Bank’s primary source of revenue is 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. 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 unaudited consolidated financial statements include the accounts of Westfield Financial, the Bank, Elm Street Securities Corporation, WB Real Estate Holdings, LLC and WFD Securities Corporation. All material intercompany balances and transactions have been eliminated in consolidation.

Estimates – The preparation of unaudited consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of income and expenses for both at the date of the unaudited consolidated financial statements. Actual results could differ from those estimates. Estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, 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, 2013, 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, 2013 are not necessarily indicative of the results of operations for the year ending December 31, 2013. 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, 2012, included in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Annual Report”).

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

2. EARNINGS PER SHARE

Basic earnings per share 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, 2013 and 2012 have been computed based on the following:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(In thousands, except per share data)

Net income applicable to common stock	$	1,584		$	974		$	3,366		$	3,313

Average number of common shares issued		21,464			26,414			21,885			26,578
Less: Average unallocated ESOP shares		(1,181	)		(1,265	)		(1,191	)		(1,275	)
Less: Average ungranted equity incentive plan shares		(7	)		(7	)		(7	)		(7	)

Average number of common shares outstanding used
to calculate basic earnings per common share		20,276			25,142			20,687			25,296

Effect of dilutive stock options		-			16			-			34

Average number of common shares outstanding used
to calculate diluted earnings per common share		20,276			25,158			20,687			25,330

Basic earnings per share	$	0.08		$	0.04		$	0.16		$	0.13

Diluted earnings per share	$	0.08		$	0.04		$	0.16		$	0.13

Antidilutive shares (1)		1,669			1,670			1,665			1,662
___________________
(1) Shares outstanding but not included in the computation of earnings per share because they were anti-dilutive, meaning the exercise price of such options exceeded the market value of the Company’s common stock

3. COMPREHENSIVE INCOME/LOSS

U.S. GAAP generally requires 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.

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

	June 30, 2013			December 31, 2012
	(In thousands)
Net unrealized (loss) gain on securities available for sale	$	(3,817	)	$	20,188
Tax effect		1,324			(6,935	)
Net-of-tax amount		(2,493	)		13,253

Net unrealized gains on securities resulting from the transfer of available-for-sale to held-to-maturity		4,054			-
Tax effect		(1,395	)		-
Net-of-tax amount		2,659			-

Unrecognized transition asset pertaining to defined benefit plan		15			21
Unrecognized deferred loss pertaining to defined benefit plan		(3,868	)		(3,897	)
Net adjustments pertaining to defined benefit plans		(3,853	)		(3,876	)
Tax effect		1,310			1,318
Net-of-tax amount		(2,543	)		(2,558	)
Accumulated other comprehensive (loss) income	$	(2,377	)	$	10,695

The following table presents changes in accumulated other comprehensive (loss) income for the six months ended June 30, 2013 and 2012 by component:

	Securities			Defined Benefit Plans (1)			Accumulated Other Comprehensive Loss
	(In thousands)
Balance at December 31, 2012	$	13,253		$	(2,558	)	$	10,695
Change in unrealized gain/loss		(21,755	)		23			(21,732	)
Tax effect on change in unrealized gain/loss		6,780			(8	)		6,772
Reclassification adjustment for gains realized in income		(2,250	)		-			(2,250	)
Tax effect on gain/loss realized in income		1,479			-			1,479
Unrealized gains on securities resulting from the transfer of available-for-sale to held-to-maturity		4,054			-			4,054
Tax effect on unrealized gains on securities resulting from the transfer of available-for-sale to held-to-maturity		(1,395	)		-			(1,395	)
Net current-period other comprehensive income		(13,087	)		15			(13,072	)
Balance at June 30, 2013	$	166		$	(2,543	)	$	(2,377	)

(1) Amounts represent the reclassification of defined benefit plans amortization and have been recognized through the Consolidated Statements of Income as a component of salaries and benefits expense
	Securities			Defined Benefit Plans			Accumulated Other Comprehensive Income
	(In thousands)
Balance at December 31, 2011	$	10,321		$	(2,605	)	$	7,716
Net current-period other comprehensive income		963			55			1,018
Balance at June 30, 2012	$	11,284		$	(2,550	)	$	8,734

4. SECURITIES

Securities available for sale and held to maturity are summarized as follows:

	June 30, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for sale securities:
Government sponsored mortgage-backed securities	$	233,978	$	1,580	$	(6,904	)	$	228,654
U.S. government guaranteed mortgage-backed securities		95,725		1,395		(598	)		96,522
Corporate bonds		31,032		469		(449	)		31,052
State and municipal bonds		24,087		837		(10	)		24,914
Government sponsored enterprise obligations		28,668		626		(845	)		28,449
Mutual funds		6,071		-		(161	)		5,910
Common and preferred stock		1,309		243		-			1,552

Total available for sale securities		420,870		5,150		(8,967	)		417,053

Held to maturity securities:
Government sponsored mortgage-backed securities	$	90,274	$	9	$	(4,101	)	$	86,182
U.S. government guaranteed mortgage-backed securities		21,843		-		(879	)		20,964
Corporate bonds		23,038		-		(844	)		22,194
State and municipal bonds		4,736		-		(302	)		4,434
Government sponsored enterprise obligations		34,091		-		(1,875	)		32,216

Total held to maturity securities		173,982		9		(8,001	)		165,990

Total	$	594,852	$	5,159	$	(16,968	)	$	583,043

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for sale securities:
Government sponsored mortgage-backed securities	$	318,951	$	9,703	$	(631	)	$	328,023
U.S. government guaranteed mortgage-backed securities		124,650		6,085		-			130,735
Corporate bonds		50,782		1,618		(63	)		52,337
State and municipal bonds		38,788		2,067		(9	)		40,846
Government sponsored enterprise obligations		60,840		1,257		(37	)		62,060
Mutual funds		5,998		117		(69	)		6,046
Common and preferred stock		1,310		150		-			1,460

Total	$	601,319	$	20,997	$	(809	)	$	621,507

U.S. government guaranteed mortgage-backed securities are collateralized by both residential and multifamily loans.

Our repurchase agreements and advances from the Federal Home Loan Bank of Boston (“FHLBB”) are collateralized by government-sponsored enterprise obligations and certain mortgage-backed securities (see Note 7).

The amortized cost and fair value of securities available for sale and held to maturity at June 30, 2013, 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, 2013
	Securities				Securities
	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Mortgage-backed securities:
Due after five years through ten years	$	36,787	$	35,535	$	44,875	$	42,473
Due after ten years		292,916		289,641		67,242		64,673
Total	$	329,703	$	325,176	$	112,117	$	107,146

Debt securities:
Due in one year or less	$	4,449	$	4,540	$	-	$	-
Due after one year through five years		38,367		39,348		8,723		8,397
Due after five years through ten years		40,011		39,545		38,326		36,382
Due after ten years		960		982		14,816		14,065
Total	$	83,787	$	84,415	$	61,865	$	58,844

Gross realized gains and losses on sales of securities for the three and six months ended June 30, 2013 and 2012 are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(In thousands)

Gross gains realized	$	879		$	594		$	2,321		$	2,734
Gross losses realized		(56	)		(497	)		(71	)		(1,053	)
Net gain realized	$	823		$	97		$	2,250		$	1,681

Proceeds from the sale of securities available for sale amounted to $122.1 million and $189.9 million for the six months ended June 30, 2013 and 2012, respectively.

The tax provision applicable to net realized gains was $283,000 and $771,000 for the three and six months ended June 30, 2013, respectively. The tax provision applicable to net realized gains was $32,000 and $582,000 for the three and six months ended June 30, 2012, respectively.

Information pertaining to securities with gross unrealized losses at June 30, 2013, and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

	June 30, 2013
	Less Than 12 Months				Over 12 Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
	(In thousands)

Available for sale:
Government sponsored mortgage-backed securities	$	6,904	$	176,006	$	-	$	-
U.S. government guaranteed mortgage-backed securities		598		26,037		-		-
Corporate bonds		449		15,064		-		-
State and municipal bonds		10		379		-		-
Government sponsored enterprise obligations		845		16,614		-		-
Mutual funds		29		4,261		132		1,650

Total available for sale		8,835		238,361		132		1,650

Held to maturity:
Government sponsored mortgage-backed securities		4,101		83,536		-		-
U.S. government guaranteed mortgage-backed securities		879		20,964		-		-
Corporate bonds		844		22,195		-		-
State and municipal bonds		302		4,434		-		-
Government sponsored enterprise obligations		1,875		32,216		-		-

Total held to maturity		8,001		163,345		-		-

Total	$	16,836	$	401,706	$	132	$	1,650

	December 31, 2012
	Less Than 12 Months				Over 12 Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
	(In thousands)
Available for sale:
Government sponsored mortgage-backed securities	$	631	$	49,081	$	-	$	-
Corporate bonds		63		4,330		-		-
State and municipal bonds		9		1,178		-		-
Government sponsored enterprise obligations		37		17,918		-		-
Mutual funds		-		-		69		1,684

Total	$	740	$	72,507	$	69	$	1,684

At June 30, 2013, 66 mortgage-backed securities had gross unrealized losses with aggregate depreciation of 3.9% from our amortized cost basis existing for less than 12 months. At June 30, 2013, 14 government-sponsored enterprise obligations had gross unrealized loss with aggregate depreciation of 5.3% from our amortized cost basis existing for less than 12 months. At June 30, 2013, 14 corporate bonds had gross unrealized loss of 3.4% from our amortized cost basis existing for less than 12 months. At June 30, 2013, 10 municipal bonds had gross unrealized loss of 6.1% from our amortized cost basis existing for less than 12 months. These unrealized losses are the result of interest rates and not credit quality. Because we do not intend to sell the securities and it is more likely than not that we will not be required to sell the investments before recovery of their amortized cost basis, no declines are deemed to be other-than-temporary.

At June 30, 2013, two mutual funds had gross unrealized loss with aggregate depreciation of 0.7% from our amortized cost basis existing for less than 12 months. At June 30, 2013, one mutual fund had a gross unrealized loss with depreciation of 7.4% from our cost basis existing for greater than 12 months and was principally related to fluctuations in interest rates. This loss relates to a mutual fund that invests primarily in short-term debt instruments and adjustable rate mortgage-backed securities. Because we do not intend to sell the securities and it is more likely than not that we will not be required to sell these prior to the recovery of the amortized cost basis, the losses are deemed temporary.

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, 2012
	(In thousands)

Beginning balance	$	442
Reductions for securities sold during the period		(442	)
Ending balance	$	-

5. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consisted of the following amounts:	June 30,			December 31,
	2013			2012
	(In thousands)
Commercial real estate	$	243,748		$	245,764
Residential real estate:
Residential		198,017			185,345
Home equity		33,910			34,352
Commercial and industrial		128,450			126,052
Consumer		1,729			2,431
Total Loans		605,854			593,944
Unearned premiums and deferred loan fees and costs, net		751			974
Allowance for loan losses		(7,473	)		(7,794	)
	$	599,132		$	587,124

During the six months ended June 30, 2013 and 2012, we purchased residential real estate loans aggregating $28.5 million and $45.7 million, respectively.

We have transferred a portion of our originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in our accompanying unaudited consolidated balance sheets. We share ratably with our participating lenders in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. We continue to service the loans on behalf of the participating lenders and, as such, collect cash payments from the borrowers, remit payments (net of servicing fees) to participating lenders and disburse required escrow funds to relevant parties. At June 30, 2013 and December 31, 2012, we serviced loans for participants aggregating $9.3 million and $7.8 million, respectively.

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

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

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

General component

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

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

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

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

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

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

Allocated component

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

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

Unallocated component

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

An analysis of changes in the allowance for loan losses by segment for the periods ended June 30, 2013 and 2012 is as follows:

	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer			Unallocated			Total
Three Months Ended	(In thousands)
June 30, 2013
Beginning Balance	$	3,289		$	1,722		$	2,077		$	11		$	466		$	7,565
(Credit) provision		(45	)		85			9			9			(128	)		(70	)
Charge-offs		-			-			(56	)		(10	)		-			(66	)
Recoveries		-			-			42			2			-			44
Ending Balance	$	3,244		$	1,807		$	2,072		$	12		$	338		$	7,473

June 30, 2012
Beginning Balance	$	3,343		$	1,636		$	2,808		$	16		$	-		$	7,803
Provision (credit)		137			201			(77	)		(1	)		-			260
Charge-offs		-			(40	)		-			(7	)		-			(47	)
Recoveries		37			3			3			6			-			49
Ending Balance	$	3,517		$	1,800		$	2,734		$	14		$	-		$	8,065

Six Months Ended
June 30, 2013
Beginning Balance	$	3,406		$	1,746		$	2,167		$	13		$	462		$	7,794
(Credit) provision		(297	)		118			(12	)		10			(124	)		(305	)
Charge-offs		(20	)		(57	)		(129	)		(14	)		-			(220	)
Recoveries		155			-			46			3			-			204
Ending Balance	$	3,244		$	1,807		$	2,072		$	12		$	338		$	7,473

June 30, 2012
Beginning Balance	$	3,504		$	1,531		$	2,712		$	17		$	-		$	7,764
Provision		157			305			18			-			-			480
Charge-offs		(195	)		(40	)		-			(11	)		-			(246	)
Recoveries		51			4			4			8			-			67
Ending Balance	$	3,517		$	1,800		$	2,734		$	14		$	-		$	8,065

Further information pertaining to the allowance for loan losses by segment at June 30, 2013, and December 31, 2012 follows:

	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer		Unallocated		Total
	(In thousands)
June 30, 2013

Allowance for loan losses:
Individually evaluated for loss potential	$	214	$	-	$	24	$	-	$	-	$	238
Collectively evaluated for loss potential		3,030		1,807		2,048		12		338		7,235
Total	$	3,244	$	1,807	$	2,072	$	12	$	338	$	7,473

Loans outstanding:
Individually evaluated for loss potential	$	15,179	$	242	$	1,414	$	-	$	-	$	16,835
Collectively evaluated for loss potential		228,569		231,685		127,036		1,729		-		589,019
Total	$	243,748	$	231,927	$	128,450	$	1,729	$	-	$	605,854

December 31, 2012

Allowance for loan losses:
Individually evaluated for loss potential	$	377	$	57	$	104	$	-	$	-	$	538
Collectively evaluated for loss potential		3,029		1,689		2,063		13		462		7,256
Total	$	3,406	$	1,746	$	2,167	$	13	$	462	$	7,794

Loans outstanding:
Individually evaluated for loss potential	$	15,398	$	302	$	1,379	$	-	$	-	$	17,079
Collectively evaluated for loss potential		230,366		219,395		124,673		2,431		-		576,865
Total	$	245,764	$	219,697	$	126,052	$	2,431	$	-	$	593,944

The following is a summary of past due and non-accrual loans by class at June 30, 2013, and December 31, 2012:

	30 – 59 Days Past Due			60 – 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Past Due 90 Days or More and Still Accruing		Loans on Non-Accrual
	(In thousands)
June 30, 2013
Commercial real estate	$	543		$	-	$	803	$	1,346	$	-	$	1,500
Residential real estate:
Residential		268			125		747		1,140		-		1,244
Home equity		144			42		-		186		-		92
Commercial and industrial		308			-		140		448		-		435
Consumer		5			3		1		8		-		1
Total	$	1,268		$	170	$	1,691	$	3,128	$	-	$	3,272

December 31, 2012			��
Commercial real estate	$	94		$	331	$	818	$	1,243	$	-	$	1,558
Residential real estate:
Residential		347			70		735		1,152		-		939
Home equity		139			42		-		181		-		103
Commercial and industrial		138			-		178		316		-		409
Consumer		-			1		-		1		-		-
Total	$	718		$	444	$	1,731	$	2,893	$	-	$	3,009

The following is a summary of impaired loans by class at June 30, 2013 and December 31, 2012:

							Three Months Ended				Six Months Ended
	At June 30, 2013						June 30, 2013				June 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Impaired loans without a valuation allowance:
Commercial real estate	$	1,500	$	1,772	$	-	$	1,513	$	-	$	1,528		-
Residential real estate		242		308		-		243		-		258		-
Commercial and industrial		435		490		-		416		-		404		-
Total		2,177		2,570		-		2,172		-		2,190		-

Impaired loans with a valuation allowance:
Commercial real estate		13,679		13,679		214		13,719		146		13,760		293
Commercial and industrial		979		979		24		982		10		985		21
Total		14,658		14,658		238		14,701		156		14,745		314

Total impaired loans	$	16,835	$	17,228	$	238	$	16,873	$	156	$	16,935	$	314

							Three Months Ended				Six Months Ended
	At December 31, 2012						June 30, 2012				June 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Impaired loans without a valuation allowance:
Commercial real estate	$	1,011	$	1,177	$	-	$	1,572	$	-	$	1,552	$	-
Residential real estate		118		125		-		120		-		120		-
Commercial and industrial		203		212		-		-		-		-		-
Total		1,332		1,514		-		1,692		-		1,672		-

Impaired loans with a valuation allowance:
Commercial real estate		14,387		14,454		377		14,000		198		14,048		347
Residential real estate		184		184		57		186		-		186		-
Home equity		-		-		-		115		-		115		-
Commercial and industrial		1,176		1,178		104		1,180		10		1,172		21
Total		15,747		15,816		538		15,481		208		15,521		368

Total impaired loans	$	17,079	$	17,330	$	538	$	17,173	$	208	$	17,193	$	368

No interest income was recognized for impaired loans on a cash-basis method during the three and six months ended June 30, 2013 or 2012.

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

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

Nonperforming TDRs are shown as nonperforming assets. No loans were modified as a TDR during the three and six months ended June 30, 2013. Performing loans modified as TDRs during the three and six months ended June 30, 2012 are shown in the table below. The modifications changed the scheduled payment to interest-only or extended the interest-only period. One loan relationship of $15.0 million included below was restructured in March 2012 to extend the interest-only period and was restructured again in June 2012 once it had reached stabilization to commence principal and interest payments.

	Three Months Ended						Six Months Ended
	June 30, 2012						June 30, 2012
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(In thousands)						(In thousands)
Troubled Debt Restructurings
Commercial Real Estate		5	$	14,976	$	14,976		5	$	14,976	$	14,976
Commercial and Industrial		2		1,143		1,143		2		1,143		1,143
Total		7	$	16,119	$	16,119		7	$	16,119	$	16,119

A default occurs when a loan is 30 days or more past due and is within 12 months of restructuring. The following is a summary of troubled debt restructurings that have subsequently defaulted within one year of modification:

	June 30, 2013				June 30, 2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
	(In thousands)				(In thousands)
Troubled Debt Restructurings
Commercial Real Estate		-	$	-		4	$	976
Commercial and Industrial		-		-		1		143
Total		-	$	-		5	$	1,119

As of June 30, 2013, we have committed to lend an additional $50,000 to one customer with outstanding loans that are classified as TDRs. This loan will be used for building improvements to generate rental income. There were $0 and $36,000 in charge-offs on TDRs during the three and six months ended June 30, 2013, respectively. There were no charge-offs on TDRs during the three and six months ended June 30, 2012.

Credit Quality Information

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

Loans rated 1 – 3 are considered “Pass” rated loans with low to average risk.

Loans rated 4 are considered “Pass Watch,” which represent loans to borrowers with declining earnings, losses, or strained cash flow.

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

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

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

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

On an annual basis, or more often if needed, we formally review the ratings on all commercial real estate and commercial and industrial loans. Construction loans are reported within commercial real estate loans and total $11.6 and $16.3 million at June 30, 2013 and December 31, 2012, respectively. We engage an independent third party to review a significant portion of loans within these segments on a semi-annual basis. We use the results of these reviews as part of our annual review process.

The following table presents our loans by risk rating at June 30, 2013, and December 31, 2012:

	Commercial Real Estate		Residential 1-4 Family		Home Equity		Commercial and Industrial		Consumer		Total
	(In thousands)
June 30, 2013
Loans rated 1 – 3	$	196,467	$	196,773	$	33,818	$	97,924	$	1,728	$	526,710
Loans rated 4		25,401		-		-		20,350		-		45,751
Loans rated 5		1,353		-		-		1,575		-		2,928
Loans rated 6		20,527		1,244		92		8,601		1		30,465
	$	243,748	$	198,017	$	33,910	$	128,450	$	1,729	$	605,854

December 31, 2012
Loans rated 1 – 3	$	203,756	$	184,406	$	34,249	$	99,405	$	2,431	$	524,247
Loans rated 4		19,027		-		-		15,804		-		34,831
Loans rated 5		1,943		-		-		941		-		2,884
Loans rated 6		21,038		939		103		9,902		-		31,982
	$	245,764	$	185,345	$	34,352	$	126,052	$	2,431	$	593,944

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 1,560,101 stock options, respectively, to our directors, officers, and employees.

Stock awards are recorded as unearned compensation based on the market price at the date of grant. Unearned compensation is amortized over the vesting period. During the three and six months ended June 30, 2013, we granted 7,440 stock awards, which vest in two equal increments on October 20, 2013 and October 21, 2014. At June 30, 2013, there were no stock awards available for future grants.

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 10 years. The fair value of each option grant is estimated on the date of grant using the binomial option pricing model.

No stock options were granted during the three and six months ended June 30, 2013. All prior stock awards and stock options vest at 20% per year. At June 30, 2013, 57,232 stock options were available for future grants.

Our stock award and stock option plans activity for the six months ended June 30, 2013 and 2012 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, 2012		33,800	$	8.23		1,669,431		$	10.02
Shared Granted		7,440		7.08		-			-
Outstanding at June 30, 2013		41,240	$	8.02		1,669,431		$	10.02

Outstanding at December 31, 2011		155,206	$	9.54		1,907,744		$	9.32
Stock options exercised		-		-		(194,656	)		4.39
Outstanding at June 30, 2012		155,206	$	9.54		1,713,088		$	9.88

We recorded compensation costs relating to stock options of $14,000 and $196,000 with related tax benefits of $4,000 and $52,000 for the three months ended June 30, 2013 and 2012, respectively. We recorded compensation costs relating to stock options of $27,000 and $392,000 with related tax benefits of $7,000 and $102,000 for the six months ended June 30, 2013 and 2012, respectively.

We recorded compensation cost related to the stock awards of $30,000 and $288,000 for the three months ended June 30, 2013 and 2012, respectively. We recorded compensation cost related to the stock awards of $55,000 and $576,000 for the six months ended June 30, 2013 and 2012, respectively.

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 FHLBB 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 FHLBB were $47.0 million and $33.0 million at June 30, 2013, and December 31, 2012, respectively. Outstanding line of credit with the FHLBB was $281,000 and $8.7 million at June 30, 2013, and December 31, 2012, respectively. Customer repurchase agreements were $22.7 million at June 30, 2013, and $24.2 million at December 31, 2012. A customer repurchase agreement is an agreement by us to sell to and repurchase from the customer an interest in specific securities issued by or guaranteed by the U.S. government. This transaction settles immediately on a same day basis in immediately available funds. Interest paid is commensurate with other products of equal interest and credit risk. All of our customer repurchase agreements at June 30, 2013, and December 31, 2012, were held by commercial customers. In addition, we have a $4.0 million line of credit with Bankers Bank Northeast (“BBN”) at an interest rate determined and reset by BBN on a daily basis. At December 31, 2012, we had $4.0 million outstanding under this line of credit. There were no advances outstanding under this line of credit at June 30, 2013. As part of our contract with BBN, we are required to maintain a reserve balance of $300,000 with BBN for our use of this line of credit.

Long-term debt consists of FHLBB advances, securities sold under repurchase agreements and customer repurchase agreements with an original maturity of one year or more. At June 30, 2013, we had $244.9 million in long-term debt with the FHLBB and $19.5 million in securities sold under repurchase agreements with an approved broker-dealer. This compares to $220.1 million in long-term debt with FHLBB advances and $53.3 million in securities sold under repurchase agreements with an approved broker-dealer at December 31, 2012. The securities sold under agreements to repurchase are callable at the issuer’s option beginning in the year 2013. Customer repurchase agreements were $5.6 million and $5.4 million at June 30, 2013 and December 31, 2012, respectively.

For the six months ended June 30, 2013, we prepaid repurchase agreements in the amount $33.8 million and incurred a prepayment expense of $2.8 million. The repurchase agreements had a weighted average cost of 3.02%. During the last week of December 2012, we prepaid repurchase agreements in the amount $28.0 million, which had a weighted average cost of 3.06%. The prepayments of repurchase agreements resulted in a decrease to the cost of funds and an increase to the net interest margin.

All FHLBB advances are collateralized by a blanket lien on our owner occupied one-to-four family residential real estate loans and certain mortgage-backed securities.

8. PENSION BENEFITS

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

	Three Months Ended						Six Months Ended,
	June 30,						June 30,
	2013			2012			2013			2012
	(In thousands)
Service cost	$	269		$	279		$	538		$	535
Interest cost		178			200			355			400
Expected return on assets		(232	)		(218	)		(464	)		(432	)
Transition obligation		(3	)		(3	)		(6	)		(5	)
Actuarial loss		20			48			40			87
Net periodic pension cost	$	232		$	306		$	463		$	585

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 of 1986, as amended. Additional contributions will be made as deemed appropriate by management in conjunction with the pension plan’s actuaries. We have not yet determined how much we expect to contribute to our pension plan in 2013. No contributions have been made to the plan for the three months ended June 30, 2013. Effective June 15, 2013, Principal Financial Group, who also acts as our 401(k) plan provider, was appointed as the trustee for the pension plan. The pension plan assets are invested in group annuity contracts with the Principal Financial Group.

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 to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset 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 generally measured at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value.

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

Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets; 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.

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

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

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

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

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

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

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

Deposit liabilities – The fair values disclosed for demand deposits (e.g., interest and non-interest checking, 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 and long-term debt – The fair values of our debt instruments are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

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

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

	June 30, 2013
	Level 1		Level 2		Level 3		Total
Securities available for sale:	(In thousands)
Government-sponsored mortgage-backed securities	$	-	$	228,654	$	-	$	228,654
U.S. government guaranteed mortgage-backed securities		-		96,522		-		96,522
Corporate bonds		-		31,052		-		31,052
State and municipal bonds		-		24,914		-		24,914
Government-sponsored enterprise obligations		-		28,449		-		28,449
Mutual funds		5,910		-		-		5,910
Common and preferred stock		1,552		-		-		1,552
Total assets	$	7,462	$	409,591	$	-	$	417,053

	December 31, 2012
	Level 1		Level 2		Level 3		Total
Securities available for sale:	(In thousands)
Government-sponsored mortgage-backed securities	$	-	$	328,023	$	-	$	328,023
U.S. government guaranteed mortgage-backed securities		-		130,735		-		130,735
Private-label residential mortgage-backed securities		-		52,337		-		52,337
State and municipal bonds		-		40,846		-		40,846
Government-sponsored enterprise obligations		-		62,060		-		62,060
Mutual funds		6,046		-		-		6,046
Common and preferred stock		1,460		-		-		1,460
Total assets	$	7,506	$	614,001	$	-	$	621,507

Also, we may be required, from time to time, to measure certain other assets 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, 2013 and 2012. Total losses represent the change in carrying value as a result of fair value adjustments related to assets still held at June 30, 2013 and 2012.

	At						Three Months Ended		Six Months Ended
	June 30, 2013						June 30, 2013		June 30, 2013
	Level 1		Level 2		Level 3		Total Losses		Total Losses
	(In thousands)						(In thousands)		(In thousands)
Impaired loans	$	-	$	-	$	2,177	$	-	$	69
Total assets	$	-	$	-	$	2,177	$	-	$	69

	At						Three Months Ended		Six Months Ended
	June 30, 2012						June 30, 2012		June 30, 2012
	Level 1		Level 2		Level 3		Total Losses		Total Losses
	(In thousands)						(In thousands)		(In thousands)
Impaired loans	$	-	$	-	$	1,157	$	-	$	157
Total assets	$	-	$	-	$	1,157	$	-	$	157

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

There were no transfers to or from Level 1 and 2 during the three and six months ended June 30, 2013 and 2012. 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:

	June 30, 2013
	Carrying Value		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents	$	15,706	$	15,706	$	-	$	-	$	15,706
Securities available for sale		417,053		7,462		409,591		-		417,053
Securities held to maturity		173,982		-		165,990		-		165,990
Federal Home Loan Bank of Boston and other restricted stock		15,629		-		-		15,629		15,629
Loans - net		599,132		-		-		605,678		605,678
Accrued interest receivable		4,461		-		-		4,461		4,461

Liabilities:
Deposits		782,682		-		-		785,191		785,191
Short-term borrowings		69,972		-		69,967		-		69,967
Long-term debt		269,991		-		272,643		-		272,643
Accrued interest payable		399		-		-		399		399

	December 31, 2012
	Carrying Value		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents	$	11,761	$	11,761	$	-	$	-	$	11,761
Securities available for sale		621,507		7,506		614,001		-		621,507
Federal Home Loan Bank of Boston and other restricted stock		14,269		-		-		14,269		14,269
Loans - net		587,124		-		-		610,695		610,695
Accrued interest receivable		4,602		-		-		4,602		4,602

Liabilities:
Deposits		753,413		-		-		757,450		757,450
Short-term borrowings		69,934		-		69,936		-		69,936
Long-term debt		278,861		-		290,536		-		290,536
Accrued interest payable		471		-		-		471		471

10. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. This ASU is effective for public entities for reporting periods beginning after December 15, 2012. See required disclosures in Note 3 of the unaudited consolidated financial statements.

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

Overview

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

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

●	grow our commercial and industrial and commercial real estate loan portfolios 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

●

supplement the commercial focus, grow the residential loan portfolio to diversify risk and deepen customer relationships. We will maintain our arrangement with a third-party mortgage company which assists in originating and servicing residential real estate loans. By doing this, we reduce the overhead costs associated with these loans.

You should read the following financial results for the three and six months ended June 30, 2013, in the context of this strategy.

●

Net income was $1.6 million, or $0.08 per diluted share, for the three months ended June 30, 2013, compared to $974,000, or $0.04 per diluted share, for the same period in 2012. For the six months ended June 30, 2013, net income was $3.4 million, or $0.16 per diluted share, as compared to net income of $3.3 million, or $0.13 per diluted share, for the same period in 2012.

●

The (credit) provision for loan losses was $(70,000) and $260,000 for the three months ended June 30, 2013 and 2012, respectively, and $(305,000) and $480,000 for the six months ended June 30, 2013 and 2012, respectively. The credit for loan losses is the result of continued improvement in the overall risk profile of the commercial loan portfolio. Classified loans that previously carried higher allowances showed considerable improvement, resulting in a lower allowance requirement.

●

Net interest income was $7.6 million and $7.7 million for the three months ended June 30, 2013 and 2012, respectively. The net interest margin, on a tax-equivalent basis, was 2.55% for the three months ended June 30, 2013, compared to 2.58% for the same period in 2012. For the six months ended June 30, 2013 and 2012, net interest income was $15.3 million and $15.1 million, respectively. The net interest margin, on a tax-equivalent basis, was 2.57% for both the six months ended June 30, 2013 and 2012.

REGULATORY DEVELOPMENTS

On July 2, 2013, the Federal Reserve Board issued final rules, and on July 9, 2013, the Office of the Comptroller of the Currency issued interim final rules implementing the Basel III capital standards. The final rules change how banks and their holding companies calculate their regulatory capital requirements by increasing the minimum levels of required capital, narrowing the definition of capital and placing greater emphasis on common equity. We are still in the process of assessing the impacts of these complex final rules, however, we believe we will continue to exceed all estimated well capitalized regulatory requirements on a fully phased-in basis.

CRITICAL ACCOUNTING POLICIES

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

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. There have been no material changes to our critical accounting policies during the three and six months ended June 30, 2013. For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the accompanying unaudited consolidated financial statements and Note 1 of the consolidated financial statements included in our 2012 Annual Report.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2013 AND DECEMBER 31, 2012

Total assets were stable at $1.3 billion at June 30, 2013 and December 31, 2012. Securities decreased $29.1 million to $606.7 million at June 30, 2013, from $635.8 million at December 31, 2012. Cash flow received from payoffs and pay downs on the securities portfolio were used to fund loan originations and share repurchases. In addition, during the second quarter of 2013, securities with an amortized cost of $172.1 million were reclassified from available-for-sale to held-to-maturity. The transfers of securities into the held-to-maturity category from the available-for-sale category were made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer was retained in other comprehensive income and in the carrying value of the held-to-maturity securities. Such amounts will be amortized to interest income over the remaining life of the securities.

Management selected the securities because of our positive intent and ability to hold until maturity. Considerations were taken into account in the selection of each security, including our overall sources of liquidity, the ability to pledge the security as collateral if needed, and the impact on our interest rate risk (IRR) positioning. In a rising rate environment, this reclassification helps to mitigate the effects on shareholders’ equity and tangible book value from changes in the fair market value of securities. This reclassification still allows much flexibility in the balance sheet to manage IRR and liquidity.

Total loans increased by $11.7 million to $606.6 million at June 30, 2013, from $594.9 million at December 31, 2012. Residential loans increased $12.2 million to $231.9 million at June 30, 2013, from $219.7 million at December 31, 2012. Through our long standing relationship with a third-party mortgage company, we originated and purchased a total of $28.5 million in residential loans within and contiguous to our market area. While management has used residential loan growth to supplement the loan portfolio, the long-term strategy remains focused on commercial lending.

Commercial and industrial loans increased $2.4 million to $128.5 million at June 30, 2013, from $126.1 million at December 31, 2012 as customers increased their line of credit usage in addition to new loan originations. These increases were offset by a decrease in commercial real estate loans. Commercial real estate loans decreased $2.1 million to $243.7 million at June 30, 2013, from $245.8 at December 31, 2012. Non-owner occupied commercial real estate loans decreased $4.0 million to $128.8 million at June 30, 2013, from $132.8 million at December 31, 2012, while owner occupied commercial real estate loans increased $2.0 million to $115.0 million at June 30, 2013, from $113.0 million at December 31, 2012. Payoffs and pay downs within the commercial real estate portfolio outpaced new loan originations.

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. Nonperforming loans increased $263,000 to $3.3 million at June 30, 2013, from $3.0 million at December 31, 2012. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $88,000 and $84,000 for the six months ended June 30, 2013 and 2012, respectively. At June 30, 2013, there was no foreclosed real estate, as compared to $964,000 in foreclosed real estate at December 31, 2012. During the first quarter of 2013, we sold this property and did not retain the financing. At June 30, 2013 and December 31, 2012, our nonperforming loans to total loans were 0.54% and 0.51%, respectively, while our nonperforming assets to total assets were 0.25% and 0.31%, respectively. A summary of our nonaccrual and past due loans by class are listed in Note 5 of the accompanying unaudited consolidated financial statements.

Total deposits increased $29.3 million to $782.7 million at June 30, 2013, from $753.4 million at December 31, 2012. The increase in deposits was due to a $35.5 million increase in money market accounts, which were $203.7 million and $168.2 million at June 30, 2013 and December 31, 2012, respectively. This was the result of a relationship-based money market product established in second half of 2012 which continues to grow. Checking accounts increased $900,000 to $167.9 million at June 30, 2013 from $167.0 million at December 31, 2012. Savings accounts decreased $5.0 million to $87.2 million at June 30, 2013 from $92.2 million at December 31, 2012. Time deposit accounts decreased $2.2 million to $323.8 million at June 30, 2013, from $326.0 million at December 31, 2012.

Borrowings decreased $8.8 million to $340.0 million at June 30, 2013, from $348.8 million at December 31, 2012. Short-term borrowings remained consistent at $70.0 million and $69.9 million at June 30, 2013 and December 31, 2012, respectively. Long-term debt decreased $8.9 million to $270.0 million from $278.9 million at December 31, 2012. The decrease in our long-term borrowings was due to prepayments of repurchase agreements, which was partially offset by an increase in funds from the FHLBB in order to take advantage of long-term, low cost FHLBB funding in this interest rate environment. We prepaid repurchase agreements in the amount $33.8 million and incurred a prepayment expense of $2.8 million for the six months ended June 30, 2013. The repurchase agreements had a weighted average cost of 3.02%. During the last week of December 2012, we prepaid repurchase agreements in the amount $28.0 million, which had a weighted average cost of 3.06%. The prepayments of repurchase agreements resulted in a decrease to the cost of funds and an increase to the net interest margin. Long-term FHLBB borrowings increased $24.8 million to $244.9 million at June 30, 2013 from $220.1 million at December 31, 2012. Our short-term borrowings and long-term debt are discussed in Note 7 of the accompanying unaudited consolidated financial statements.

Shareholders’ equity was $160.4 million and $189.2 million, which represented 12.4% and 14.5% of total assets at June 30, 2013 and December 31, 2012, respectively. The decrease in shareholders’ equity during the six months reflects the repurchase of 2,098,662 shares of our common stock at a cost of $15.9 million pursuant to our stock repurchase program, the payment of regular dividends amounting to $3.5 million and a decrease in other comprehensive income of $13.1 million due to changes in the fair value of securities. This was partially offset by net income of $3.4 million for the six months ended June 30, 2013.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2013 AND JUNE 30, 2012

General

Net income was $1.6 million, or $0.08 per diluted share, for the quarter ended June 30, 2013, compared to $974,000, or $0.04 per diluted share, for the same period in 2012. Net interest income was $7.6 million and $7.7 million for the three months ended June 30, 2013 and 2012, respectively.

Net Interest and Dividend Income

The following tables set forth the information relating to our average balance and net interest income for the three months ended June 30, 2013 and 2012, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned from making changes in loan rates and terms and fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.

	Three Months Ended June 30,
	2013								2012
	Average					Avg Yield/			Average					Avg Yield/
	Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans(1)(2)	$	599,149	$	6,345			4.24	%	$	568,215	$	6,416			4.52	%
Securities(2)		608,404		4,045			2.66			644,656		4,693			2.91
Other investments - at cost		17,276		21			0.49			14,988		25			0.67
Short-term investments(3)		3,280		1			0.12			10,110		1			0.04
Total interest-earning assets		1,228,109		10,412			3.39			1,237,969		11,135			3.60
Total noninterest-earning assets		66,393								66,651

Total assets	$	1,294,502							$	1,304,620

LIABILITIES AND EQUITY:
Interest-bearing liabilities
NOW accounts	$	47,533		35			0.29		$	62,027		64			0.41
Savings accounts		89,994		35			0.16			96,339		44			0.18
Money market accounts		195,885		193			0.39			169,360		193			0.46
Time certificates of deposit		327,036		1,127			1.38			315,892		1,222			1.55
Total interest-bearing deposits		660,448		1,390						643,618		1,523
Short-term borrowings and long-term debt		334,035		1,219			1.46			334,505		1,660			1.99
Interest-bearing liabilities		994,483		2,609			1.05			978,123		3,183			1.30
Noninterest-bearing deposits		116,479								101,701
Other noninterest-bearing liabilities		9,992								10,919
Total noninterest-bearing liabilities		126,471								112,620

Total liabilities		1,120,954								1,090,743
Total equity		173,548								213,877
Total liabilities and equity	$	1,294,502							$	1,304,620
Less: Tax-equivalent adjustment(2)				(166	)							(225	)
Net interest and dividend income			$	7,637							$	7,727
Net interest rate spread(4)							2.34	%							2.30	%
Net interest margin(5)							2.55	%							2.58	%
Ratio of average interest-earning
assets to average interest-bearing liabilities							123.49								126.57

________________________

(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.

	Three Months Ended June 30, 2013 compared to Three Months Ended June 30, 2012
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest-earning assets	(In thousands)
Loans (1)	$	349		$	(420	)	$	(71	)
Securities (1)		(264	)		(384	)		(648	)
Other investments - at cost		4			(8	)		(4	)
Short-term investments		(1	)		1			-
Total interest-earning assets		88			(811	)		(723	)

Interest-bearing liabilities
NOW accounts		(15	)		(14	)		(29	)
Savings accounts		(3	)		(6	)		(9	)
Money market accounts		30			(30	)		-
Time deposits		43			(138	)		(95	)
Short-term borrowing and long-time debt		(2	)		(439	)		(441	)
Total interest-bearing liabilities		53			(627	)		(574	)
Change in net interest and dividend income	$	35		$	(184	)	$	(149	)

__________________________

(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-equivalent net interest income.

Interest on earning-assets, on a tax-equivalent basis, decreased $723,000 to $10.4 million for the three months ended June 30, 2013, from $11.1 million for the same period in 2012. The average yield on interest-earning assets decreased 21 basis points to 3.39% for the three months ended June 30, 2013, from 3.60% for the same period in 2012. The average yield on interest-earning assets decreased primarily due to decreases in the average yield on loans and investments. The average yield on loans decreased 28 basis points to 4.24% for the three months ended June 30, 2013, from 4.52% for the same period in 2012 due to the lower interest rate environment. This was partially mitigated by a $30.9 million increase in the average balance of loans to $599.1 million for the three months ended June 30, 2013, from $568.2 million for the same period in 2012. Cash flows from payoffs and pay downs within the loan portfolio were reinvested in loans having a lower yield, which is reflective of the current market rate environment. In addition, the average yield on securities decreased 25 basis points to 2.66% for the three months ended June 30, 2013, compared to 2.91% for the same period in 2012. The average balance of securities decreased $36.3 million to $608.4 million for June 30, 2013, from $644.7 million for the same period in 2012.

Interest expense decreased $574,000 to $2.6 million for the three months ended June 30, 2013, from $3.2 million for the same period in 2012. The average cost of interest-bearing liabilities decreased 25 basis points to 1.05% for the three months ended June 30, 2013, from 1.30% for the same period in 2012. The decrease in the cost of interest-bearing liabilities was primarily due to a decrease in rates on short-term borrowings and long-term debt. We prepaid repurchase agreements in the amount $19.8 million and incurred a prepayment expense of $1.4 million for the three months ended June 30, 2013. The repurchase agreements had a weighted average cost of 2.78%. During the last week of December 2012, we prepaid repurchase agreements in the amount $28.0 million, which had a weighted average cost of 3.06%. The prepayments of repurchase agreements resulted in a decrease to the cost of funds and an increase to the net interest margin.

Provision for Loan Losses

The amount that we provided for loan losses during the three months ended June 30, 2013 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio for the quarter, described in detail below, include the continuous improvement of the overall risk profile of the commercial loan portfolio, a modest increase in commercial real estate loans, and an increase in residential real estate loans. After evaluating these factors, we recorded a credit of $(70,000) for loan losses for the three months ended June 30, 2013, compared to a provision of $260,000 for the same period in 2012. The allowance was $7.5 million at June 30, 2013, and $7.6 million at March 31, 2013. The allowance for loan losses was 1.23% of total loans at June 30, 2013 and 1.27% at March 31, 2013.

The credit for loan losses was the result of continued improvement in the overall risk profile of the commercial loan portfolio. Allowances on impaired loans decreased $70,000 to $238,000 at June 30, 2013, while balances on impaired loans remained stable at $16.8 million and $16.9 million at June 30, 2013 and March 31, 2013, respectively. In addition, commercial real estate loans increased $267,000 to $243.7 million at June 30, 2013, from $243.5 million at March 31, 2013. Residential real estate loans increased $8.0 million to $231.9 million compared to $223.9 million at March 31, 2013. We consider residential real estate loans to contain less credit risk and market risk than both commercial and industrial and commercial real estate loans. A summary of our provision for loan losses by loan segment is listed in Note 5 of the accompanying unaudited consolidated financial statements.

Net charge-offs were $22,000 for the three months ended June 30, 2013. This comprised charge-offs of $66,000 for the three months ended June 30, 2013, offset by recoveries of $44,000 for the same period.

Net recoveries were $2,000 for the three months ended June 30, 2012. This comprised charge-offs of $47,000 for the three months ended June 30, 2012, offset by recoveries of $49,000.

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

Noninterest Income

Noninterest income increased $62,000 to $963,000 for the three months ended June 30, 2013, compared to $901,000 for the same period in 2012. During the three months ended June 30, 2013, we recorded gains on the proceeds of BOLI death benefits of $563,000, as compared to $5,000 in the comparable 2012 period. In addition, we had $823,000 in gains on sales of securities for the three months ended June 30, 2013, as compared to $97,000 for the comparable 2012 period. Both of these gains were offset by $1.4 million in expense on the prepayment of borrowings for the three months ended June 30, 2013.

Income from BOLI increased $109,000 to $387,000 for the three month ended June 30, 2013, compared to $278,000 for the same period in 2012. During the second quarter of 2012, management redeemed certain BOLI policies because of a sudden downgrade in the credit ratings of the insurance carrier and the carrier’s decision to close out its individual life policies to new sales. The decrease in income from BOLI for the 2012 period was primarily the result of a $102,000 charge associated with transferring the policies to a different carrier. Service charges and fees increased $73,000 to $594,000 at June 30, 2013, from $521,000 at June 30, 2012. Fees collected from card-based transactions increased $55,000 for the three months ended June 30, 2013, which reflects an increase in customer debit card and automated teller machine transactions.

Noninterest Expense

Noninterest expense decreased $44,000 to $6.8 million for the three months ended June 30, 2013. Salaries and benefits decreased $310,000 to $3.8 million for the three months ended June 30, 2013. This was mainly the result of the completion of vesting of certain stock-based compensation during the fourth quarter of 2012. Other expenses increased $178,000, primarily driven by an increase of $81,000 in net ATM/debit card expense resulting from changes in interchange fees.

Income Taxes

For the three months ended June 30, 2013, we had a tax provision of $297,000 as compared to $561,000 for the same period in 2012. The effective tax rate was 15.8% for the three months ended June 30, 2013 and 36.5% for the same period in 2012. The change in effective tax rate is primarily due to the net gain on BOLI death benefits recognized during the three months ended June 30, 2013, while the three months ended June 30, 2012, showed an additional income tax provision of $160,000, or 10.4% of income before income taxes, due to the redemption of BOLI.

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND JUNE 30, 2012

General

Net income was $3.4 million, or $0.16 per diluted share, for the six months ended June 30, 2013, compared to $3.3 million, or $0.13 per diluted share, for the same period in 2012. Net interest income was $15.3 million and $15.1 million for the six months ended June 30, 2013 and 2012, respectively.

Net Interest and Dividend Income

The following tables set forth the information relating to our average balance and net interest income for the six months ended June 30, 2013 and 2012, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned from making changes in loan rates and terms and fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.

	Six Months Ended June 30,
	2013								2012
	Average					Avg Yield/			Average					Avg Yield/
	Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans(1)(2)	$	594,745	$	12,656			4.26	%	$	561,837	$	12,837			4.57	%
Securities(2)		610,832		8,246			2.70			633,755		9,193			2.90
Other investments - at cost		16,975		40			0.47			14,643		47			0.64
Short-term investments(3)		5,635		3			0.11			12,075		1			0.02
Total interest-earning assets		1,228,187		20,945			3.41			1,222,310		22,078			3.61
Total noninterest-earning assets		66,122								65,764

Total assets	$	1,294,309							$	1,288,074

LIABILITIES AND EQUITY:
Interest-bearing liabilities
NOW accounts	$	48,857		72			0.29		$	65,129		167			0.51
Savings accounts		90,877		72			0.16			97,148		108			0.22
Money market accounts		185,111		358			0.39			163,223		421			0.52
Time certificates of deposit		326,712		2,275			1.39			315,692		2,463			1.56
Total interest-bearing deposits		651,557		2,777						641,192		3,159
Short-term borrowings and long-term debt		340,174		2,511			1.48			319,759		3,321			2.08
Interest-bearing liabilities		991,731		5,288			1.07			960,951		6,480			1.35
Noninterest-bearing deposits		114,723								100,596
Other noninterest-bearing liabilities		10,021								10,598
Total noninterest-bearing liabilities		124,744								111,194

Total liabilities		1,116,475								1,072,145
Total equity		177,834								215,929
Total liabilities and equity	$	1,294,309							$	1,288,074
Less: Tax-equivalent adjustment(2)				(350	)							(454	)
Net interest and dividend income			$	15,307							$	15,144
Net interest rate spread(4)							2.34	%							2.26	%
Net interest margin(5)							2.57	%							2.57	%
Ratio of average interest-earning
assets to average interest-bearing liabilities							123.84								127.20

________________________

(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.

●	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, 2013 compared to Six Months Ended June 30, 2012
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest-earning assets	(In thousands)
Loans (1)	$	752		$	(933	)	$	(181	)
Securities (1)		(333	)		(614	)		(947	)
Other investments - at cost		7			(14	)		(7	)
Short-term investments		(1	)		3			2
Total interest-earning assets		425			(1,558	)		(1,133	)

Interest-bearing liabilities
NOW accounts		(42	)		(53	)		(95	)
Savings accounts		(7	)		(29	)		(36	)
Money market accounts		56			(119	)		(63	)
Time deposits		86			(274	)		(188	)
Short-term borrowing and long-time debt		212			(1,022	)		(810	)
Total interest-bearing liabilities		305			(1,497	)		(1,192	)
Change in net interest and dividend income	$	120		$	(61	)	$	59

__________________________

(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-equivalent net interest income.

Net interest income was $15.3 million and $15.1 million for the six months ended June 30, 2013 and 2012, respectively. The net interest margin, on a tax-equivalent basis, was 2.57% for the three months ended June 30, 2013 and 2012, respectively.

The primary reason for the increase of $163,000 in net interest income and stable net interest margin for the six months ended June 30, 2013, was that the decrease in the cost of interest-bearing liabilities outpaced the decrease in the yield on average interest-earning assets and the modest growth in average interest-earning assets. Interest expense decreased $1.2 million to $5.3 million for the six months ended June 30, 2013, from $6.5 million for the same period in 2012. The average cost of interest-bearing liabilities decreased 28 basis points to 1.07% for the six months ended June 30, 2013, from 1.35% for the same period in 2012. The decrease in the cost of interest-bearing liabilities was primarily due to a decrease in rates on short-term borrowings and long-term debt. We prepaid repurchase agreements in the amount $33.8 million and incurred a prepayment expense of $2.8 million for the six months ended June 30, 2013. The repurchase agreements had a weighted average cost of 3.02%. During the last week of December 2012, we prepaid repurchase agreements in the amount $28.0 million, which had a weighted average cost of 3.06%. The prepayments of repurchase agreements resulted in a decrease to the cost of funds and an increase to the net interest margin.

Interest on earning-assets, on a tax-equivalent basis, decreased $1.2 million to $20.9 million for the six months ended June 30, 2013, from $22.1 million for the same period in 2012. The average yield on interest-earning assets decreased 20 basis points to 3.41% for the six months ended June 30, 2013, from 3.61% for the same period in 2012. The average yield on interest-earning assets decreased primarily due to decreases in the average yield on loans and investments. The average yield on loans decreased 31 basis points to 4.26% for the six months ended June 30, 2013, from 4.57% for the same period in 2012 due to the lower interest rate environment. This was partially mitigated by a $32.9 million increase in the average balance of loans to $594.7 million for the six months ended June 30, 2013, from $561.8 million for the same period in 2012. Cash flows from payoffs and pay downs within the loan portfolio were reinvested in loans having a lower yield, which is reflective of the current market rate environment. In addition, the average yield on securities decreased 20 basis points to 2.70% for the six months ended June 30, 2013 compared to 2.90% for the same period in 2012. The average balance of securities decreased $23.0 million to $610.8 million for June 30, 2013 from $633.8 million for the same period in 2012.

Provision for Loan Losses

The amount that we provided for loan losses during the six months ended June 30, 2013 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio for the six months ended June 30, 2013, described in detail below, include the continuous improvement of the overall risk profile of the commercial loan portfolio, a decrease in commercial real estate loans, and increases in residential real estate loans and commercial and industrial loans. After evaluating these factors, we recorded a credit of $(305,000) for loan losses for the six months ended June 30, 2013, compared to a provision of $480,000 for the same period in 2012. The allowance was $7.5 million at June 30, 2013 and $7.8 million at December 31, 2012. The allowance for loan losses was 1.23% of total loans at June 30, 2013 and 1.31% at December 31, 2012.

The credit for loan losses was the result of continued improvement in the overall risk profile of the commercial loan portfolio. Impaired loans that previously carried higher allowances showed considerable improvement resulting in allowances on impaired loans decreasing $300,000 to $238,000 at June 30, 2013. In addition, commercial real estate loans decreased $2.1 million to $243.7 million at June 30, 2013, from $245.8 million at December 31, 2012. Residential real estate loans increased $12.2 million to $231.9 million compared to $219.7 million at December 31, 2012. Commercial and industrial loan increased $2.4 million to $128.5 million at June 30, 2013 from $126.1 million at December 31, 2012. We consider residential real estate loans to contain less credit risk and market risk than both commercial and industrial and commercial real estate loans. A summary of our provision for loan losses by loan segment is listed in Note 5 of the accompanying unaudited consolidated financial statements.

Net charge-offs were $16,000 for the six months ended June 30, 2013. This comprised charge-offs of $220,000 for the six months ended June 30, 2013, offset by recoveries of $204,000 for the same period.

Net charge-offs were $179,000 for the six months ended June 30, 2012. This comprised charge-offs of $246,000 for the three months ended June 30, 2012, offset by recoveries of $67,000.

Noninterest Income

Noninterest income decreased $1.6 million to $1.9 million for the six months ended June 30, 2013, compared to $3.5 million for the same period in 2012. During the six months ended June 30, 2013, we recorded gains on the proceeds of BOLI death benefits of $563,000, as compared to $80,000 in the comparable 2012 period. In addition, we had $2.3 million in gains on sales of securities, compared to $1.7 million for the comparable 2012 period. For the six months ended June 30, 2013, the gains on BOLI death benefits and sales of securities were offset by $2.8 million in expense on the prepayment of borrowings, which resulted in the overall decrease in noninterest income.

Service charges and fees increased $132,000 to $1.2 million at June 30, 2013, from $1.0 million at June 30, 2012. Fees collected from card-based transactions increased $96,000 for the six months ended June 30, 2013 which reflects an increase in customer debit card and automated teller machine transactions. Income from BOLI increased $112,000 to $773,000 for the six month ended June 30, 2013, compared to $661,000 for the same period in 2012. During the second quarter of 2012, management redeemed certain BOLI policies because of a sudden downgrade in the credit ratings of the insurance carrier and the carrier’s decision to close out its individual life policies to new sales. The decrease in income from BOLI for the six months ended June 30, 2012 was primarily the result of a $102,000 charge associated with transferring the policies to a different carrier.

Noninterest Expense

Noninterest expense decreased $374,000 to $13.3 million for the six months ended June 30, 2013. Salaries and benefits decreased $779,000 to $7.6 million for the six months ended June 30, 2013. This was mainly the result of the completion of vesting of certain stock-based compensation during the fourth quarter of 2012. Other expenses increased $199,000, primarily due to an increase of $145,000 in net ATM/Debit card expense resulting from changes in interchange fees and an increase of $71,000 in charitable contributions due to timing of when the expenses are incurred.

Income Taxes

For the six months ended June 30, 2013, we had a tax provision of $863,000 as compared to $1.1 million for the same period in 2012. The effective tax rate was 20.4% for the six months ended June 30, 2013 and 25.4% for the same period in 2012. The change in effective tax rate is primarily due to the net gain on BOLI death benefits recognized during the six months ended June 30, 2013, while the six months ended June 30, 2012 showed an additional income tax provision of $160,000, or 3.6% of income before income taxes, due to the redemption of BOLI.

LIQUIDITY AND CAPITAL RESOURCES

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, withdrawals of deposits and operating expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of securities and funds provided by operations. We also can borrow funds from the FHLBB based on eligible collateral of loans and securities. Our maximum additional borrowing capacity from the FHLBB at June 30, 2013, was $67.7 million. We also have a $4.0 million line of credit with BBN at an interest rate determined and reset by BBN on a daily basis. As of June 30, 2013, our additional borrowing capacity from the BBN was $4.0 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 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, 2013, we exceeded each of the applicable regulatory capital requirements. As of June 30, 2013, the most recent notification from the Office of Comptroller of the Currency 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 is also a requirement to maintain a ratio of 1.5% tangible capital to tangible assets. There are no conditions or events since that notification that management believes would change our category. Our actual capital ratios of June 30, 2013, and December 31, 2012, are also presented in the following table.

	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, 2013
Total Capital (to Risk Weighted Assets):
Consolidated	$	170,365		22.79	%	$	59,814		8.00	%		N/A		-
Bank		162,242		21.78			59,602		8.00		$	74,502		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	162,794		21.77			29,907		4.00			N/A		-
Bank		154,708		20.77			29,801		4.00			44,701		6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated	$	162,794		12.56			51,840		4.00			N/A		-
Bank		154,708		11.96			51,721		4.00			64,651		5.00
Tangible Equity (to Tangible Assets):
Consolidated		N/A		-			N/A		-			N/A		-
Bank		154,708		11.96			19,395		1.50			N/A		-

December 31, 2012
Total Capital (to Risk Weighted Assets):
Consolidated	$	186,084		25.41	%	$	58,586		8.00	%		N/A		-
Bank		176,904		24.24			58,390		8.00		$	72,988		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		178,201		24.33			29,293		4.00			N/A		-
Bank		169,191		23.18			29,195		4.00			43,793		6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated		178,201		13.91			51,239		4.00			N/A		-
Bank		169,191		13.25			51,090		4.00			63,862		5.00
Tangible Equity (to Tangible Assets):
Consolidated		N/A		-			N/A		-			N/A		-
Bank		169,191		13.25			19,159		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. The following table summarizes the contractual obligations and credit commitments at June 30, 2013:

	Within 1 Year		After 1 Year But Within 3 Years		After 3 Year But Within 5 Years		After 5 Years		Total
	(In thousands)
Lease Obligations
Operating lease obligations	$	655	$	1,209	$	828	$	9,256	$	11,948

Borrowings and Debt
Federal Home Loan Bank		40,781		94,040		98,392		40,000		292,213
Securities sold under agreements to repurchase		47,250		-		19,500		-		47,750
Total borrowings and debt		88,031		94,040		117,892		40,000		339,963

Credit Commitments
Available lines of credit		60,721		-		-		23,334		84,055
Other loan commitments		32,729		3,365		-		44		36,138
Letters of credit		1,570		-		-		517		2,087
Total credit commitments		95,020		3,365		-		23,895		122,280

Total Obligations	$	183,706	$	98,614	$	118,720	$	73,151	$	474,191

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 2012 Annual Report. Please refer to Item 7A of the 2012 Annual Report for additional information.

ITEM 4: CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.

Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered by this report. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

Changes in Internal Control Over Financial Reporting.

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

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We are subject to claims and legal actions in the ordinary course of business. We believe that all such claims and actions currently pending against us, if any, are either adequately covered by insurance or would not have a material adverse effect on us if decided in a manner unfavorable to us.

ITEM 1A. RISK FACTORS.

For a summary of risk factors relevant to our operations, see Part 1, Item 1A, “Risk Factors” in our 2012 Annual Report on Form 10-K. There are no material changes in the risk factors relevant to our operations.

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

The following table sets forth information with respect to purchases made by us of our common stock during the three months ended June 30, 2013.

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
April 1 - 30, 2013		65,582		7.71		65,582		-	(1)(2)
May 1 - 31, 2013		497,533		7.61		497,533		594,467
June 1 - 30, 2013		594,467		7.65		594,467		-	(2)
Total		1,157,582		7.64		1,157,582		-

___________________

(1)

On December 6, 2012, the Board of Directors voted to authorize the commencement of a new repurchase program, authorizing the repurchase of 2,427,000 shares, or 10% of our outstanding common stock. This repurchase program commenced upon the completion of the previously announced program. We completed the stock repurchase program on April 5, 2013.

(2)	On April 23, 2013, the Board of Directors voted to authorize a stock repurchase program under which the Company may repurchase up to 1,092,000 shares, or 5% of our outstanding common stock. We completed the stock repurchase program on June 11, 2013.

There were no sales by us of unregistered securities during the three months ended June 30, 2013.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURE.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 8, 2013.

	Westfield Financial, Inc.


	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

EXHIBIT INDEX

Exhibit Number		Description
3.1		Articles of Organization of New Westfield Financial, Inc. (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1 (No. 333-137024) filed with the Securities and Exchange Commission on August 31, 2006).

3.2		Articles of Amendment of New 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).

3.3		Amended and Restated Bylaws of Westfield Financial, Inc. (incorporated by reference to Exhibit 3.2 of the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2011).

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.

101**		Financial statements from the quarterly report on Form 10-Q of Westfield Financial, Inc. for the quarter ended June 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Shareholders’ Equity and Comprehensive Income, (iv) the Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.

_______________________________

*	Filed herewith.

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

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Western New England Bancorp (WNEB) 10-Q2013 Q2 Quarterly report

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