WNEB 10-Q Quarterly Report March 31, 2013

WESTERN NEW ENGLAND BANCORP, INC.

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10-Q 1 a50622694.htm WESTFIELD FINANCIAL, INC. 10-Q a50622694.htm

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 March 31, 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 x No o

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 x No o

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 o No x

At April 26, 2013, the registrant had 21,837,060 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) – March 31, 2013 and December 31, 2012		1

	Consolidated Statements of Net Income (Unaudited) – Three Months Ended
	March 31, 2013 and 2012		2

	Consolidated Statements of Comprehensive Income (Unaudited) –
	Three Months Ended March 31, 2013 and 2012		3

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) –
	Three Months Ended March 31, 2013 and 2012		4

	Consolidated Statements of Cash Flows (Unaudited) – Three Months Ended
	March 31, 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		34

Item 4.	Controls and Procedures		35


PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		35

Item 1A.	Risk Factors		35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		36

Item 3.	Defaults upon Senior Securities		36

Item 4.	Mine Safety Disclosures		36

Item 5.	Other Information		36

Item 6.	Exhibits		36

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)

	March 31,			December 31,
	2013			2012
ASSETS
CASH AND DUE FROM BANKS	$	11,597		$	9,847
FEDERAL FUNDS SOLD		138			459
INTEREST-BEARING DEPOSITS AND OTHER SHORT-TERM INVESTMENTS		7,448			1,455
CASH AND CASH EQUIVALENTS		19,183			11,761

SECURITIES AVAILABLE FOR SALE – AT FAIR VALUE		616,155			621,507
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT COST		15,242			14,269
LOANS - Net of allowance for loan losses of $7,565 and $7,794 at March 31, 2013 and December 31, 2012, respectively		588,699			587,124
PREMISES AND EQUIPMENT, Net		11,127			11,077
ACCRUED INTEREST RECEIVABLE		4,477			4,602
BANK-OWNED LIFE INSURANCE		46,607			46,222
DEFERRED TAX ASSET, Net		2,130			123
OTHER REAL ESTATE OWNED		-			964
OTHER ASSETS		3,233			3,813
TOTAL ASSETS	$	1,306,853		$	1,301,462

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
DEPOSITS :
Noninterest-bearing	$	115,322		$	114,388
Interest-bearing		656,874			639,025
Total deposits		772,196			753,413

SHORT-TERM BORROWINGS		55,827			69,934
LONG-TERM DEBT		289,600			278,861
SECURITIES PENDING SETTLEMENT		288			-
OTHER LIABILITIES		9,962			10,067
TOTAL LIABILITIES		1,127,873			1,112,275

SHAREHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized, none outstanding at March 31, 2013 and December 31, 2012		-			-
Common stock - $.01 par value, 75,000,000 shares authorized, 21,902,642 shares issued and outstanding at March 31, 2013; 22,843,722 shares issued and outstanding at December 31, 2012		219			228
Additional paid-in capital		137,677			144,718
Unearned compensation - ESOP		(8,416	)		(8,553	)
Unearned compensation - Equity Incentive Plan		(240	)		(265	)
Retained earnings		42,877			42,364
Accumulated other comprehensive income		6,863			10,695
Total shareholders' equity		178,980			189,187
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,306,853		$	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 share and per share data)

	Three Months
	Ended March 31,
	2013			2012
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans	$	4,995		$	5,039
Commercial and industrial loans		1,241			1,302
Consumer loans		35			40
Debt securities, taxable		3,716			3,844
Debt securities, tax-exempt		304			423
Equity securities		37			45
Other investments - at cost		19			22
Federal funds sold, interest-bearing deposits and other short-term investments		2			-
Total interest and dividend income		10,349			10,715
INTEREST EXPENSE:
Deposits		1,387			1,637
Long-term debt		1,258			1,631
Short-term borrowings		34			30
Total interest expense		2,679			3,298
Net interest and dividend income		7,670			7,417
(CREDIT) PROVISION FOR LOAN LOSSES		(235	)		220
Net interest and dividend income after (credit) provision for loan losses		7,905			7,197

NONINTEREST INCOME (LOSS):
Service charges and fees		572			509
Income from bank-owned life insurance		385			384
Gain on bank-owned life insurance death benefit		-			75
Loss on prepayment of borrowings		(1,426	)		-
Gain on sales of securities, net		1,427			1,585
Total noninterest income		958			2,553
NONINTEREST EXPENSE:
Salaries and employees benefits		3,808			4,277
Occupancy		705			705
Computer operations		526			527
Professional fees		510			437
OREO expense		22			17
FDIC insurance assessment		161			143
Other		783			738
Total noninterest expense		6,515			6,844
INCOME BEFORE INCOME TAXES		2,348			2,906
INCOME TAX PROVISION		566			567
NET INCOME	$	1,782		$	2,339

EARNINGS PER COMMON SHARE:
Basic earnings per share	$	0.08		$	0.09
Weighted average shares outstanding		21,102,021			25,449,759
Diluted earnings per share	$	0.08		$	0.09
Weighted average diluted shares outstanding		21,102,075			25,502,311
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 March 31,
	2013			2012

Net income	$	1,782		$	2,339

Other comprehensive (loss) income:
Unrealized losses on securities:
Unrealized holding losses on available for sale securities		(4,418	)		(1,443	)
Reclassification adjustment for gains realized in income		(1,427	)		(1,585	)
Net unrealized losses		(5,845	)		(3,028	)
Tax effect		2,007			1,051
Net-of-tax amount		(3,838	)		(1,977	)

Defined benefit pension plans:
Reclassification adjustments:
Actuarial loss		12			39
Transition asset		(3	)		(2	)
Net adjustments pertaining to defined benefit plans		9			37
Tax effect		(3	)		(12	)
Net-of-tax amount		6			25

Other comprehensive loss		(3,832	)		(1,952	)

Comprehensive (loss) income	$	(2,050	)	$	387
See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED
THREE MONTHS ENDED MARCH 31, 2013 AND 2012
(Dollars in thousands, except share data)

	Common Stock
	Shares			Par Value			Additional Paid-in Capital			Unearned Compensation- ESOP			Unearned Compensation- Equity Incentive Plan			Retained Earnings			Accumulated Other Comprehensive 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		-			-			-			-			-			2,339			-			2,339
Other comprehensive loss		-			-			-			-			-			-			(1,952	)		(1,952	)
Common stock held by ESOP committed to be released (84,261 shares)		-			-			25			141			-			-			-			166
Share-based compensation - stock options		-			-			196			-			-			-			-			196
Share-based compensation - equity incentive plan		-			-			-			-			288			-			-			288
Excess tax benefits from equity incentive plan		-			-			3			-			-			-			-			3
Common stock repurchased		(493,226	)		(5	)		(3,956	)		-			-			-			-			(3,961	)
Issuance of common stock in connection with stock option exercises		177,077			2			1,454			-			-			(678	)		-			778
Excess tax benefits in connection with stock option exercises		-			-			195			-			-			-			-			195
Cash dividends declared ($0.06 per share)		-			-			-			-			-			(1,529	)		-			(1,529	)
BALANCE AT MARCH, 31 2012		26,602,101		$	266		$	171,532		$	(8,978	)	$	(940	)	$	47,867		$	5,764		$	215,511

BALANCE AT DECEMBER 31, 2012		22,843,722		$	228		$	144,718		$	(8,553	)	$	(265	)	$	42,364		$	10,695		$	189,187
Net income		-			-			-			-			-			1,782			-			1,782
Other comprehensive loss		-			-			-			-			-			-			(3,832	)		(3,832	)
Common stock held by ESOP committed to be released (81,803 shares)		-			-			14			137			-			-			-			151
Share-based compensation - stock options		-			-			13			-			-			-			-			13
Share-based compensation - equity incentive plan		-			-			-			-			25			-			-			25
Excess tax benefit from equity incentive plan		-			-			1			-			-			-			-			1
Common stock repurchased		(941,080	)		(9	)		(7,069	)		-			-			-			-			(7,078	)
Cash dividends declared ($0.06 per share)		-			-			-			-			-			(1,269	)		-			(1,269	)
BALANCE AT MARCH, 31 2013		21,902,642		$	219		$	137,677		$	(8,416	)	$	(240	)	$	42,877		$	6,863		$	178,980
See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)
	Three Months Ended March 31,
	2013			2012
OPERATING ACTIVITIES:
Net income	$	1,782		$	2,339
Adjustments to reconcile net income to net cash provided by operating activities:
(Credit) provision for loan losses		(235	)		220
Depreciation and amortization of premises and equipment		260			266
Net amortization of premiums and discounts on securities and mortgage loans		1,128			952
Net amortization of premiums on modified debt		155			53
Share-based compensation expense		38			484
Amortization of ESOP expense		151			166
Excess tax benefits from equity incentive plan		(1	)		(3	)
Excess tax benefits in connection with stock option exercises		-			(195	)
Net gains on sales of securities		(1,427	)		(1,585	)
Loss on sale of other real estate owned		6			-
Loss on prepayment of borrowings		1,426			-
Deferred income tax benefit		(3	)		(52	)
Income from bank-owned life insurance		(385	)		(384	)
Gain on bank-owned life insurance death benefit		-			(75	)
Changes in assets and liabilities:
Accrued interest receivable		125			(124	)
Other assets		580			(132	)
Other liabilities		(95	)		544
Net cash provided by operating activities		3,505			2,474
INVESTING ACTIVITIES:
Securities, available for sale:
Purchases		(106,632	)		(152,055	)
Proceeds from sales		77,163			100,285
Proceeds from calls, maturities, and principal collections		29,298			21,015
Purchase of residential mortgages		(13,089	)		(14,696	)
Loan originations and principal payments, net		11,726			10,272
Purchase of Federal Home Loan Bank of Boston stock		(1,004	)		-
Proceeds from redemption of Federal Home Loan Bank of Boston stock		31			195
Proceeds from sale of other real estate owned		958			-
Purchases of premises and equipment		(310	)		(351	)
Net cash used in investing activities		(1,859	)		(35,335	)
FINANCING ACTIVITIES:
Net increase in deposits		18,783			15,672
Net change in short-term borrowings		(14,107	)		17,252
Repayment of long-term debt		(22,876	)		(46,731	)
Proceeds from long-term debt		32,034			47,633
Cash dividends paid		(1,269	)		(1,529	)
Common stock repurchased		(6,790	)		(4,313	)
Issuance of common stock in connection with stock option exercises		-			778
Excess tax benefits in connection with equity incentive plan		1			3
Excess tax benefits in connection with stock option exercises		-			195
Net cash provided by financing activities		5,776			28,960

NET CHANGE IN CASH AND CASH EQUIVALENTS:		7,422			(3,901	)
Beginning of period		11,761			21,105
End of period	$	19,183		$	17,204

Supplemental cashflow information:
Interest paid	$	2,695		$	3,217
Taxes paid		53			70
Net cash due (paid) to broker for common stock repurchased		288			(352	)
See the accompanying notes to consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 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 its primary sources 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 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 consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of income and expenses for both at the date of the consolidated financial statements. Actual results could differ from those estimates. Estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, other-than-temporary impairment of securities, and the valuation of deferred tax assets.

Basis of Presentation – In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial condition as of March 31, 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 months ended March 31, 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 months ended March 31, 2013 and 2012 have been computed based on the following:

	Three Months Ended
	March 31,
	2013			2012
	(In thousands, except per share data)

Net income applicable to common stock	$	1,782		$	2,339

Average number of common shares issued		22,311			26,743
Less: Average unallocated ESOP Shares		(1,202	)		(1,286	)
Less: Average ungranted equity incentive plan shares		(7	)		(7	)

Average number of common shares outstanding used
to calculate basic earnings per common share		21,102			25,450

Effect of dilutive stock options		-			52

Average number of common shares outstanding used
to calculate diluted earnings per common share		21,102			25,502

Basic earnings per share	$	0.08		$	0.09

Diluted earnings per share	$	0.08		$	0.09

Antidilutive shares (1)		1,661			1,641

___________________
(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

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

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

	March 31, 2013			December 31, 2012
	(In thousands)

Net unrealized gain on securities available for sale	$	14,343		$	20,188
Tax effect		(4,928	)		(6,935	)
Net-of-tax amount		9,415			13,253

Unrecognized transition asset pertaining to defined benefit plans		18			21
Unrecognized deferred loss pertaining to defined benefit plans		(3,885	)		(3,897	)
Net adjustments pertaining to defined benefit plans		(3,867	)		(3,876	)
Tax effect		1,315			1,318
Net-of-tax amount		(2,552	)		(2,558	)

Accumulated other comprehensive income	$	6,863		$	10,695

The following table presents changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2013 and 2012 by component:

	Securities			Defined Benefit Plans (1)			Accumulated Other Comprehensive Income
	(In thousands)
Balance at December 31, 2012	$	13,253		$	(2,558	)	$	10,695
Change in unrealized gain/loss		(4,418	)		9			(4,409	)
Tax effect on change in unrealized gain/loss		1,068			(3	)		1,065
Reclassification adjustment for gains realized in income		(1,427	)		-			(1,427	)
Tax effect on gain/loss realized in income		939			-			939
Net current-period other comprehensive (loss) income		(3,838	)		6			(3,832	)
Balance at March 31, 2013	$	9,415		$	(2,552	)	$	6,863

________________________
(1)	Amounts have been recognized through the Consolidated Statements of Net Income as a component of salaries and employee 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 (loss) income		(1,977	)		25			(1,952	)
Balance at March 31, 2012	$	8,344		$	(2,580	)	$	5,764

4. SECURITIES

Securities available for sale are summarized as follows:

	March 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Government sponsored mortgage- backed securities	$	336,625	$	5,669	$	(1,521	)	$	340,773
U.S. government guaranteed mortgage- backed securities		122,366		5,822		(34	)		128,154
Corporate bonds		52,132		1,530		(4	)		53,658
State and municipal bonds		31,705		1,739		(17	)		33,427
Government sponsored enterprise obligations		51,640		1,020		(113	)		52,547
Mutual funds		6,035		88		(79	)		6,044
Common and preferred stock		1,309		243		-			1,552

Total	$	601,812	$	16,111	$	(1,768	)	$	616,155

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)

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 at March 31, 2013, by maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or repay obligations.

	March 31, 2013
	Amortized Cost		Fair Value
	(In thousands)
Mortgage-backed securities:
Due after five years through ten years	$	76,233	$	77,121
Due after ten years		382,758		391,806
Total	$	458,991	$	468,927

Debt securities:
Due in one year or less	$	1,871	$	1,905
Due after one year through five years		47,087		49,045
Due after five years through ten years		71,404		72,932
Due after ten years		15,115		15,750
Total	$	135,477	$	139,632

Gross realized gains and losses on sales of securities for the three months ended March 31, 2013 and 2012 are as follows:

	Three Months Ended
	March 31,
	2013			2012
	(In thousands)

Gross gains realized	$	1,442		$	2,141
Gross losses realized		(15	)		(556	)
Net gain realized	$	1,427		$	1,585

Proceeds from the sale of securities available for sale amounted to $77.2 million and $100.3 million for the three months ended March 31, 2013 and 2012, respectively.

The tax provision applicable to net realized gains and losses was $488,000 and $550,000 for the three months ended March 31, 2013 and 2012, respectively.

Information pertaining to securities with gross unrealized losses at March 31, 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:

	March 31, 2013
	Less Than Twelve Months					Over Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)

Government sponsored mortgage-backed securities	$	(1,521	)	$	144,445	$	-		$	-
U.S. government guaranteed mortgage-backed securities		(34	)		7,286		-			-
Corporate bonds		(4	)		1,618		-			-
State and municipal bonds		(17	)		1,167		-			-
Government sponsored enterprise obligations		(113	)		19,845		-			-
Mutual funds		(1	)		1,038		(78	)		1,688

Total	$	(1,690	)	$	175,399	$	(78	)	$	1,688

	December 31, 2012
	Less Than Twelve Months					Over Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)

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 March 31, 2013, 35 mortgage-backed securities had gross unrealized losses with aggregate depreciation of 1.0% from our amortized cost basis existing for less than 12 months. At March 31, 2013, six government-sponsored enterprise obligations had gross unrealized loss with aggregate depreciation of 0.6% from our amortized cost basis existing for less than 12 months. At March 31, 2013, two corporate bonds had gross unrealized loss of 0.2% from our amortized cost basis existing for less than 12 months. At March 31, 2013, one municipal bond had gross unrealized loss of 1.4% 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 March 31, 2013, one mutual fund had gross unrealized loss with aggregate depreciation of 0.1% from our amortized cost basis existing for less than 12 months. At March 31, 2013, one mutual fund had a gross unrealized loss with depreciation of 4.4% 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 security and it is more likely than not that we will not be required to sell it prior to the recovery of its amortized cost basis, the loss is deemed temporary.

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:

	Three Months Ended March 31,
	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:	March 31,			December 31,
	2013			2012
	(In thousands)
Commercial real estate	$	243,481		$	245,764
Residential real estate:
Residential		190,537			185,345
Home equity		33,348			34,352
Commercial and industrial		126,233			126,052
Consumer		1,770			2,431
Total Loans		595,369			593,944
Unearned premiums and deferred loan fees and costs, net		895			974
Allowance for loan losses		(7,565	)		(7,794	)
	$	588,699		$	587,124

During the three months ended March 31, 2013 and 2012, we purchased residential real estate loans aggregating $13.1 million and $14.7 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 March 31, 2013 and December 31, 2012, we serviced loans for participants aggregating $8.5 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 March 31, 2013 and 2012 is as follows:

	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer			Unallocated		Total
	(In thousands)
Balance at December 31, 2012	$	3,406		$	1,746		$	2,167		$	13		$	462	$	7,794
Provision (Credit)		(251	)		33			(23	)		2			4		(235	)
Charge-offs		(20	)		(57	)		(72	)		(5	)		-		(154	)
Recoveries		154			-			5			1			-		160
Balance at March 31, 2013	$	3,289		$	1,722		$	2,077		$	11		$	466	$	7,565

Balance at December 31, 2011	$	3,504		$	1,531		$	2,712		$	17		$	-	$	7,764
Provision (Credit)		20			104			95			1			-		220
Charge-offs		(195	)		-			-			(4	)		-		(199	)
Recoveries		14			1			1			2			-		18
Balance at March 31, 2012	$	3,343		$	1,636		$	2,808		$	16		$	-	$	7,803

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

	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer		Unallocated		Total
	(In thousands)
March 31, 2013

Amount of allowance for loans individually evaluated and
deemed impaired	$	279	$	-	$	29	$	-	$	-	$	308
Amount of allowance for loans collectively or individually
evaluated for impairment and not deemed impaired		3,010		1,722		2,048		11		466		7,257
Total allowance for loan losses	$	3,289	$	1,722	$	2,077	$	11	$	466	$	7,565

Loans individually evaluated and deemed impaired	$	15,286	$	244	$	1,381	$	-	$	-	$	16,911
Loans collectively evaluated and not deemed impaired		228,195		223,641		124,852		1,770		-		578,458
Total loans	$	243,481	$	223,885	$	126,233	$	1,770	$	-	$	595,369

December 31, 2012

Amount of allowance for loans individually evaluated and
deemed impaired	$	377	$	57	$	104	$	-	$	-	$	538
Amount of allowance for loans collectively or individually
evaluated for impairment and not deemed impaired		3,029		1,689		2,063		13		462		7,256
Total allowance for loan losses	$	3,406	$	1,746	$	2,167	$	13	$	462	$	7,794

Loans individually evaluated and deemed impaired	$	15,398	$	302	$	1,379	$	-	$	-	$	17,079
Loans collectively evaluated and not deemed impaired		230,366		219,395		124,673		2,431		-		576,865
Total loans	$	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 March 31, 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)
March 31, 2013
Commercial real estate	$	663	$	328	$	808	$	1,799	$	-	$	1,527
Residential real estate:
Residential		125		19		473		617		-		937
Home equity		220		98		-		318		-		97
Commercial and industrial		345		104		140		589		-		396
Consumer		4		13		4		21		-		3
Total	$	1,357	$	562	$	1,425	$	3,344	$	-	$	2,960

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 March 31, 2013, and December 31, 2012:

							Three Months Ended
	At March 31, 2013						March 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Impaired loans without a valuation allowance:
Commercial real estate	$	1,526	$	1,781	$	-	$	1,542	$	-
Residential real estate		244		309		-		273		-
Commercial and industrial		396		445		-		392		-
Total		2,166		2,535		-		2,207		-

Impaired loans with a valuation allowance:
Commercial real estate		13,760		13,760		279		13,800		147
Commercial and industrial		985		985		29		988		11
Total		14,745		14,745		308		14,788		158

Total impaired loans	$	16,911	$	17,280	$	308	$	16,995	$	158

							Three Months Ended
	At December 31, 2012						March 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Impaired loans without a valuation allowance:
Commercial real estate	$	1,011	$	1,177	$	-	$	1,532	$	-
Residential real estate		118		125		-		120		-
Commercial and industrial		203		212		-		-		-
Total		1,332		1,514		-		1,652		-

Impaired loans with a valuation allowance:
Commercial real estate		14,387		14,454		377		14,097		149
Residential real estate		184		184		57		187		-
Home equity		-		-		-		115		-
Commercial and industrial		1,176		1,178		104		1,163		11
Total		15,747		15,816		538		15,562		160

Total impaired loans	$	17,079	$	17,330	$	538	$	17,214	$	160

No interest income was recognized for impaired loans on a cash-basis method during the three months ended March 31, 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 months ended March 31, 2013 and 2012.

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:

	March 31, 2013
	Number of Contracts		Recorded Investment
	(Dollars in thousands)
Troubled Debt Restructurings
Commercial and Industrial		1	$	44
Total		1	$	44

No TDRs defaulted during the three months ended March 31, 2012.

As of March 31, 2013, we have committed to lend an additional $46,000 to one customer with outstanding loans that are classified as TDRs. This loan will be used for building improvements to generate rental income. There was $36,000 in charge-offs on TDRs during the three months ended March 31, 2013. There were no charge-offs on TDRs during the three months ended March 13, 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 $12.3 and $16.3 million at March 31, 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 March 31, 2013, and December 31, 2012:

	Commercial Real Estate		Residential 1-4 Family		Home Equity		Commercial and Industrial		Consumer		Total
	(In thousands)
March 31, 2013
Loans rated 1 – 3	$	199,313	$	189,842	$	33,312	$	97,357	$	1,770	$	521,594
Loans rated 4		21,414		-		-		17,766		-		39,180
Loans rated 5		1,387		-		-		1,398		-		2,785
Loans rated 6		21,367		695		36		9,712		-		31,810
	$	243,481	$	190,537	$	33,348	$	126,233	$	1,770	$	595,369

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. No stock awards were granted during the three months ended March 31, 2013. At March 31, 2013, 7,441 stock awards were 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 months ended March 31, 2013. All stock awards and stock options currently vest at 20% per year. At March 31, 2013, 57,232 stock options were available for future grants.

Our stock award and stock option plans activity for the three months ended March 31, 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
No activity		-		-		-			-
Outstanding at March 31, 2013		33,800	$	8.23		1,669,431		$	10.02

Outstanding at December 31, 2011		155,206	$	9.54		1,907,744		$	9.32
Stock options exercised		-		-		(177,077	)		4.39
Outstanding at March 31, 2012		155,206	$	9.54		1,730,667		$	9.82

We recorded compensation costs relating to stock options of $13,000 and $196,000 with related tax benefits of $4,000 and $52,000 for the three months ended March 31, 2013 and 2012, respectively.

We recorded compensation cost related to the stock awards of $25,000 and $288,000 for the three months ended March 31, 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 $20.5 million and $33.0 million at March 31, 2013, and December 31, 2012, respectively. At December 31, 2012, we had $8.7 million outstanding on our line of credit with the FHLBB. There were no advances outstanding on the line of credit as of March 31, 2013. Customer repurchase agreements were $35.3 million at March 31, 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 March 31, 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 March 31, 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 March 31, 2013, we had $244.8 million in long-term debt with the FHLBB and $39.3 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 $5.5 million and $5.4 million at March 31, 2013 and December 31, 2012, respectively.

For the three months ended March 31, 2013, we prepaid repurchase agreements in the amount $9.0 million and incurred a prepayment expense of $1.4 million. The repurchase agreements had a weighted average cost of 3.77%. 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. During the first quarter of 2012, advances totaling $40.2 million with an average rate of 2.16% were modified. A prepayment penalty of $1.7 million was paid upon modification and is being amortized to interest expense on a level yield method over the remaining maturity of the modified advances.

All FHLBB advances are collateralized by a blanket lien on our 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 March 31,
	2013			2012
	(In thousands)
Service cost	$	277		$	256
Interest cost		178			200
Expected return on assets		(232	)		(214	)
Transition asset		(3	)		(2	)
Actuarial loss		12			39
Net periodic pension cost	$	232		$	279

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 March 31, 2013. The Trustee for the pension plan was changed prior to March 31, 2013. The pension plan assets are now invested in group annuity contracts with the Principal Financial Group, who also acts as our 401(k) plan provider.

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:

	March 31, 2013
	Level 1		Level 2		Level 3		Total
Securities available for sale:	(In thousands)
Government-sponsored mortgage-backed securities	$	-	$	340,773	$	-	$	340,773
U.S. government guaranteed mortgage-backed securities		-		128,154		-		128,154
Corporate bonds		-		53,658		-		53,658
State and municipal bonds		-		33,427		-		33,427
Government-sponsored enterprise obligations		-		52,547		-		52,547
Mutual funds		6,044		-		-		6,044
Common and preferred stock		1,552		-		-		1,552
Total assets	$	7,596	$	608,559	$	-	$	616,155

	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 March 31, 2013 and 2012. Total losses represent the change in carrying value as a result of fair value adjustments related to assets still held at March 31, 2013 and 2012.

	At						Three Months Ended
	March 31, 2013						March 31, 2013
							Total
	Level 1		Level 2		Level 3		Losses
	(In thousands)						(In thousands)
Impaired loans	$	-	$	-	$	2,166	$	69
Total assets	$	-	$	-	$	2,166	$	69

	At						Three Months Ended
	March 31, 2012						March 31, 2012
							Total
	Level 1		Level 2		Level 3		Losses
	(In thousands)						(In thousands)
Impaired loans	$	-	$	-	$	1,172	$	157
Total assets	$	-	$	-	$	1,172	$	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 months ended March 31, 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:

	March 31, 2013
	Carrying Value		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents	$	19,183	$	19,183	$	-	$	-	$	19,183
Securities available for sale		616,155		7,596		608,559		-		616,155
Federal Home Loan Bank of Boston and other restricted stock		15,242		-		-		15,242		15,242
Loans - net		588,699		-		-		609,865		609,865
Accrued interest receivable		4,477		-		-		4,477		4,477

Liabilities:
Deposits		772,196		-		-		775,888		775,888
Short-term borrowings		55,827		-		55,826		-		55,826
Long-term debt		289,600		-		299,180		-		299,180
Accrued interest payable		454		-		-		454		454

	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 months ended March 31, 2013 in the context of this strategy.

●

Net income was $1.8 million, or $0.08 per diluted share, for the three months ended March 31, 2013, compared to $2.3 million, or $0.09 per diluted share, for the same period in 2012.

●

The (credit) provision for loan losses was $(235,000) and $220,000 for the three months ended March 31, 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 $7.7 million and $7.4 million for the three months ended March 31, 2013 and 2012, respectively. The net interest margin, on a tax-equivalent basis, was 2.59% for the three months ended March 31, 2013, compared to 2.55% for the same period in 2012. The increase in income was primarily due to a 32 basis point decrease in the cost of average interest-bearing liabilities and an increase of $21.6 million in average interest-earning assets, partially offset by a 20 basis point decrease in the yield on average interest-earning assets.

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 months ended March 31, 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 MARCH 31, 2013 AND DECEMBER 31, 2012

Total assets were stable at $1.3 billion at March 31, 2013 and December 31, 2012. Securities decreased $4.4 million to $631.4 million at March 31, 2013, from $635.8 million at December 31, 2012.

Total loans increased by $1.4 million to $596.3 million at March 31, 2013, from $594.9 million at December 31, 2012. Residential loans increased $4.2 million to $223.9 million at March 31, 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 $13.1 million in residential loans within and contiguous to our market area. While in prior quarters 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 $181,000 to $126.2 million at March 31, 2013, from $126.1 million at December 31, 2012. These increases were offset by a decrease in commercial real estate loans. Commercial real estate loans decreased $2.3 million to $243.5 million at March 31, 2013, from $245.8 at December 31, 2012. Owner occupied commercial real estate loans decreased $640,000 to $112.4 million at March 31, 2013, from $113.0 million at December 31, 2012, while non-owner occupied commercial real estate loans decreased $1.7 million to $131.1 million at March 31, 2013, from $132.8 million at December 31, 2012.

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 remained consistent at $3.0 million at March 31, 2013 and December 31, 2012. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $43,000 for the three months ended March 31, 2013 and 2012, respectively. At March 31, 2013, there was no real estate in foreclosure, 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 March 31, 2013 and December 31, 2012, our nonperforming loans to total loans were 0.50% and 0.51%, respectively, while our nonperforming assets to total assets were 0.23% 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 $18.8 million to $772.2 million at March 31, 2013, from $753.4 million at December 31, 2012. The increase in deposits was due to a $19.2 million increase in money market accounts, which were $187.4 million and $168.2 million at March 31, 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. Time deposit accounts increased $3.1 million to $329.1 million at March 31, 2013, from $326.0 million at December 31, 2012. Checking accounts decreased $3.5 million to $163.5 million at March 31, 2013 from $167.0 million at December 31, 2012. We modified the interest rate structure on consumer checking accounts, which resulted in some funds from consumer checking shifting to the relationship-based money market account.

Borrowings decreased $3.4 million to $345.4 million at March 31, 2013, from $348.8 million at December 31, 2012. Short-term borrowings decreased $14.1 million to $55.8 million at March 31, 2013, from $69.9 million at December 31, 2012. This was partially offset by an increase in long-term debt of $10.7 million to $289.6 million from $278.9 million at December 31, 2012. The change in our short-term debt and long-term borrowings was to take advantage of long-term, low cost FHLBB funding in this interest rate environment. In addition, we prepaid repurchase agreements in the amount $9.0 million and incurred a prepayment expense of $1.4 million for the three months ended March 31, 2013. The repurchase agreements had a weighted average cost of 3.77%. 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. Our short-term borrowings and long-term debt are discussed in Note 7 of the accompanying consolidated financial statements.

Shareholders’ equity was $179.0 million and $189.2 million, which represented 13.7% and 14.5% of total assets at March 31, 2013 and December 31, 2012, respectively. The decrease in shareholders’ equity during the quarter reflects the repurchase of 941,080 shares of our common stock at a cost of $7.1 million pursuant to our stock repurchase program, the payment of regular dividends amounting to $1.3 million and a decrease in other comprehensive income of $3.8 million due to changes in the market value of securities. This was partially offset by net income of $1.8 million for the three months ended March 31, 2013.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND MARCH 31, 2012

General

Net income was $1.8 million, or $0.08 per diluted share, for the quarter ended March 31, 2013, compared to $2.3 million, or $0.09 per diluted share, for the same period in 2012. Net interest income was $7.7 million and $7.4 million for the three months ended March 31, 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 March 31, 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 March 31,
	2013								2012
	Average					Avg Yield/			Average					Avg Yield/
	Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans (1)(2)	$	590,290	$	6,309			4.28	%	$	555,460	$	6,420			4.62	%
Securities (2)		613,288		4,202			2.74			622,854		4,497			2.89
Other investments - at cost		16,671		19			0.46			14,298		22			0.62
Short-term investments (3)		8,016		2			0.10			14,040		-			0.00
Total interest-earning assets		1,228,265		10,532			3.43			1,206,652		10,939			3.63
Total noninterest-earning assets		65,848								64,916

Total assets	$	1,294,113							$	1,271,568

LIABILITIES AND EQUITY:
Interest-bearing liabilities
NOW accounts	$	50,195		37			0.29		$	68,230		102			0.60
Savings accounts		91,770		37			0.16			97,957		65			0.27
Money market accounts		174,218		165			0.38			157,086		228			0.58
Time certificates of deposit		326,384		1,148			1.41			315,493		1,242			1.57
Total interest-bearing deposits		642,567		1,387						638,766		1,637
Short-term borrowings and long-term debt		346,382		1,292			1.49			305,014		1,661			2.18
Interest-bearing liabilities		988,949		2,679			1.08			943,780		3,298			1.40
Noninterest-bearing deposits		112,947								99,491
Other noninterest-bearing liabilities		10,050								10,317
Total noninterest-bearing liabilities		122,997								109,808

Total liabilities		1,111,946								1,053,588
Total equity		182,167								217,980
Total liabilities and equity	$	1,294,113							$	1,271,568
Less: Tax-equivalent adjustment (2)				(183	)							(224	)
Net interest and dividend income			$	7,670							$	7,417
Net interest rate spread (4)							2.35	%							2.23	%
Net interest margin (5)							2.59	%							2.55	%
Ratio of average interest-earning
assets to average interest-bearing liabilities							124.20								127.85

________________________

(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 March 31, 2013 compared to Three Months Ended March 31, 2012
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest-earning assets	(In thousands)
Loans (1)	$	403		$	(514	)	$	(111	)
Securities (1)		(69	)		(226	)		(295	)
Other investments - at cost		4			(7	)		(3	)
Short-term investments		-			2			2
Total interest-earning assets		338			(745	)		(407	)

Interest-bearing liabilities
NOW accounts		(27	)		(38	)		(65	)
Savings accounts		(4	)		(24	)		(28	)
Money market accounts		25			(88	)		(63	)
Time deposits		43			(137	)		(94	)
Short-term borrowing and long-time debt		225			(594	)		(369	)
Total interest-bearing liabilities		262			(881	)		(619	)
Change in net interest and dividend income	$	76		$	136		$	212

__________________________

(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.

The increase in net interest income was primarily driven by a 32 basis point reduction in the cost of interest-bearing liabilities. Interest expense decreased $619,000 to $2.7 million for the three months ended March 31, 2013, from $3.3 million for the same period in 2012. The average cost of interest-bearing liabilities decreased 32 basis points to 1.08% for the three months ended March 31, 2013, from 1.40% 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. As previously mentioned, we prepaid repurchase agreements in the amount $9.0 million and incurred a prepayment expense of $1.4 million for the three months ended March 31, 2013. The repurchase agreements had a weighted average cost of 3.77%. 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 $407,000 to $10.5 million for the three months ended March 31, 2013, from $10.9 million for the same period in 2012. The average yield on interest-earning assets decreased 20 basis points to 3.43% for the three months ended March 31, 2013, from 3.63% for the same period in 2012. The average yield on interest-earning assets decreased primarily due to a 34 basis point decrease in the average yield on loans to 4.28% for the three months ended March 31, 2013, from 4.62% for the same period in 2012 due to the lower interest rate environment. This was partially mitigated by a $34.8 million increase in the average balance of loans to $590.3 million for the three months ended March 31, 2013, from $555.5 million for the same period in 2012.

Provision for Loan Losses

The amount that we provided for loan losses during the three months ended March 31, 2013 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio, described in detail below, include the continuous improvement of the overall risk profile of the commercial loan portfolio and a decrease in commercial real estate loans, and an increase in residential real estate loans. After evaluating these factors, we recorded a credit of $235,000 for loan losses for the three months ended March 31, 2013, compared to a provision of $220,000 for the same period in 2012. The allowance was $7.6 million at March 31, 2013 and $7.8 million at December 31, 2012. The allowance for loan losses was 1.27% of total loans at March 31, 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 $230,000 to $308,000 at March 31, 2013. In addition, commercial real estate loans decreased $2.3 million to $243.5 million at March 31, 2013, from $245.8 million at December 31, 2012. Residential real estate loans increased $4.2 million to $223.9 million compared to 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 consolidated financial statements.

Net recoveries were $6,000 for the three months ended March 31, 2013. This comprised charge-offs of $154,000 for the three months ended March 31, 2013, offset by recoveries of $160,000 for the same period.

Net charge-offs were $181,000 for the three months ended March 31, 2012. This comprised charge-offs of $199,000 for the three months ended March 31, 2012, offset by recoveries of $18,000.

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 decreased $1.3 million to $958,000 for the three months ended March 31, 2013, compared to $2.6 million for the same period in 2012. During the three months ended March 31, 2012, we had $1.6 million in gains on sales of securities. While there were $1.4 million in gains on sales of securities during the three months ended March 31, 2013, these gains were offset by $1.4 million in expense on the prepayment of borrowings.

Service charges and fees increased $63,000 to $572,000 at March 31, 2013, from $509,000 at March 31, 2012. Fees collected from card-based transactions increased $41,000 for the three months ended March 31, 2013 which reflects an increase in customer debit card and automated teller machine transactions. In addition, fees from the third-party mortgage company increased $40,000 to $44,000 for the three months ended March 31, 2013.

Noninterest Expense

Noninterest expense decreased $329,000 to $6.5 million for the three months ended March 31, 2013, compared to $6.8 million for the same period in 2012. Salaries and benefits decreased $469,000 to $3.8 million for the three months ended March 31, 2013. This was mainly the result of the completion of vesting of certain stock-based compensation during the fourth quarter of 2012. Professional fees expense increased $73,000 to $510,000 for the three months ended March 31, 2013, compared to the same period in 2012. This was primarily the result of a $47,000 increase in legal expenses due to general corporate matters.

Income Taxes

For the three months ended March 31, 2013, we had a tax provision of $566,000 as compared to $567,000 for the same period in 2012. The effective tax rate was 24.1% for the three months ended March 31, 2013 and 19.5% for the same period in 2012. The change in effective tax rate from March 31, 2012 is primarily due to the effect of maintaining lower levels of tax-advantaged income such as bank-owned life insurance and tax-exempt municipal obligations.

LIQUIDITY AND CAPITAL RESOURCES

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, withdrawals of deposits and operating expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of securities and funds provided by operations. We also can borrow funds from the FHLBB based on eligible collateral of loans and securities. Our maximum additional borrowing capacity from the FHLBB at March 31, 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 March 31, 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 March 31, 2013, we exceeded each of the applicable regulatory capital requirements. As of March 31, 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 March 31, 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)
March 31, 2013
Total Capital (to Risk Weighted Assets ):
Consolidated	$	179,606		24.42	%	$	58,836		8.00	%		N/A		-
Bank		171,656		23.42			58,633		8.00		$	73,292		10.00	%
Tier 1 Capital ( to Risk Weighted Assets ):
Consolidated		171,867		23.37			29,418		4.00			N/A		-
Bank		164,027		22.38			29,317		4.00			43,975		6.00
Tier 1 Capital ( to Adjusted Total Assets ):
Consolidated		171,867		13.22			51,990		4.00			N/A		-
Bank		164,027		12.65			51,859		4.00			64,824		5.00
Tangible Equity ( to Tangible Assets ):
Consolidated		N/A		-			N/A		-			N/A		-
Bank		164,027		12.65			19,447		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 March 31, 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	$	1,249	$	860	$	9,345	$	12,109

Borrowings and Debt
Federal Home Loan Bank		33,000		75,892		116,383		40,000		265,275
Securities sold under agreements to repurchase		50,652		-		29,500		-		80,152
Total borrowings and debt		83,652		75,892		145,883		40,000		345,427

Credit Commitments
Available lines of credit		61,917		-		-		23,298		85,215
Other loan commitments		21,271		3,365		-		154		24,790
Letters of credit		2,099		-		-		517		2,616
Total credit commitments		85,287		3,365		-		23,969		112,621

Total Obligations	$	169,594	$	80,506	$	146,743	$	73,314	$	470,157

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 March 31, 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
January 1 - 31, 2013		258,969		7.23		258,969		747,693
February 1 - 28, 2013		438,459		7.52		438,459		309,234
March 1 - 31, 2013		243,652		7.83		243,652		65,582	(1	)(2)
Total		941,080		7.52		941,080		65,582

___________________

(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. As of March 31, 2013, there were 65,582 shares remaining to be purchase under the new repurchase 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.

There were no sales by us of unregistered securities during the three months ended March 31, 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 May 6, 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 March 31, 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.

TABLE OF CONTENTS

Part I Financial Information Item 1: Financial Statements Item 2: Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3: Quantitative and Qualitative Disclosures About Market Risk Item 4: Controls and Procedures Part II Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Part Of Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosure Item 5. Other Information Item 6. Exhibits

WNEB 10-Q Quarter ended March 31, 2013