Western New England Bancorp, Inc. - Quarter Report: 2010 September (Form 10-Q)

a6499886.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 September 30, 2010

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

For the transition period from _____ to _____.

Commission file number 001-16767

Westfield Financial, Inc.

(Exact name of registrant as specified in its charter)

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

141 Elm Street, Westfield, Massachusetts 01086

(Address of principal executive offices)

(Zip Code)

(413) 568-1911

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes £ No £.

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

	Large accelerated filer £	Accelerated filer S

	Non-accelerated filer £	Smaller reporting company £

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

At October 29, 2010 the registrant had 28,279,934 shares of common stock, $0.01 par value, issued and outstanding.

TABLE OF CONTENTS

		Page

FORWARD-LOOKING STATEMENTS

PART I – FINANCIAL INFORMATION

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

	Consolidated Balance Sheets (Unaudited) – September 30, 2010 and December 31, 2009	1

	Consolidated Statements of Income (Unaudited) – Three and Nine Months Ended September 30, 2010 and 2009	2

	Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Unaudited) – Nine Months Ended September 30, 2010 and 2009	3

	Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 30, 2010 and 2009	4

	Notes to Consolidated Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31

Item 4.	Controls and Procedures	31


PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.	Defaults upon Senior Securities	33

Item 4.	[Removed and Reserved]	33

Item 5.	Other Information	33

Item 6.	Exhibits	33

SIGNATURES		34

EXHIBITS		35

FORWARD – LOOKING STATEMENTS

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

Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Westfield Financial undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(Dollars in thousands)

	September 30,			December 31,
	2010			2009
ASSETS
Cash and due from banks	$	9,962		$	12,204
Federal funds sold		13			2
Interest-bearing deposits and other short term investments		15,334			16,513
CASH AND CASH EQUIVALENTS		25,309			28,719
SECURITIES :
Available for sale - at fair value		674,239			319,121

Held to maturity - at amortized cost (fair value of $303,619 at December 31, 2009)		-			295,011

FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - at cost		12,194			10,339

LOANS - Net of allowance for loan losses of $8,168 at September 30, 2010 and $7,645 at December 31, 2009		478,397			469,149

PREMISES AND EQUIPMENT, net		11,769			12,202

ACCRUED INTEREST RECEIVABLE		4,665			5,198

BANK-OWNED LIFE INSURANCE		38,976			37,880

DEFERRED TAX ASSET, net		2,309			6,995

OTHER REAL ESTATE OWNED		276			1,662

OTHER ASSETS		5,120			5,134
TOTAL ASSETS	$	1,253,254		$	1,191,410

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
DEPOSITS :
Noninterest-bearing	$	83,457		$	80,110
Interest-bearing		609,825			567,865
Total deposits		693,282			647,975

SHORT-TERM BORROWINGS		65,427			74,499

LONG-TERM DEBT		238,820			213,845

SECURITIES PENDING SETTLEMENT		8,125			-
OTHER LIABILITIES		8,364			7,792
TOTAL LIABILITIES		1,014,018			944,111

SHAREHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized. None outstanding at September 30, 2010 and December 31, 2009		-			-
Common stock - $.01 par value, 75,000,000 shares authorized, 28,341,816 shares issued and outstanding at September 30, 2010; 29,818,526 shares issued and outstanding at December 31, 2009		283			298
Additional paid-in capital		183,064			193,609
Unearned compensation - ESOP		(9,851	)		(10,299	)
Unearned compensation - Equity Incentive Plan		(2,449	)		(3,248	)
Retained earnings		60,786			69,253
Accumulated other comprehensive income (loss)		7,403			(2,314	)
Total shareholders' equity		239,236			247,299
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,253,254		$	1,191,410

See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME – UNAUDITED

(Dollars in thousands, except per share data)

	Three Months						Nine Months Ended
	Ended September 30,						Ended September 30,
	2010			2009			2010			2009
INTEREST AND DIVIDEND INCOME:
Debt securities, taxable	$	4,872		$	6,370		$	15,252		$	18,666
Residential and commercial real estate loans		4,524			4,629			13,407			13,828
Commercial and industrial loans		1,657			1,809			4,963			5,390
Debt securities, tax-exempt		387			367			1,143			1,102
Consumer loans		53			65			162			203
Equity securities		55			56			169			176
Federal funds sold, interest-bearing deposits and other short-term investments		2			2			5			11
Total interest and dividend income		11,550			13,298			35,101			39,376
INTEREST EXPENSE:
Deposits		2,381			3,221			7,490			9,785
Long-term debt		1,759			1,757			4,946			5,251
Short-term borrowings		61			78			200			271
Total interest expense		4,201			5,056			12,636			15,307

Net interest and dividend income		7,349			8,242			22,465			24,069

PROVISION FOR LOAN LOSSES		3,928			620			8,548			2,360

Net interest and dividend income after provision for loan losses		3,421			7,622			13,917			21,709

NONINTEREST INCOME (LOSS):
Total other-than-temporary impairment losses on debt securities		-			(1,343	)		(1,071	)		(1,343	)
Portion of other-than-temporary impairment losses recognized in accumulated other comprehensive loss on debt securities		-			1,157			971			1,157
Net other-than-temporary impairment losses recognized in income		-			(186	)		(100	)		(186	)
Service charges and fees		456			580			1,440			2,023
Income from bank-owned life insurance		370			371			1,096			1,084
Loss on sales of premises and equipment, net		-			-			-			(8	)
Loss on prepayment of borrowings		-			-			-			(142	)
Gain (loss) on sales of securities, net		2,609			(774	)		3,926			(565	)
Gain (loss) on disposal of OREO		-			(110	)		1			(110	)
Total noninterest income		3,435			(119	)		6,363			2,096
NONINTEREST EXPENSE:
Salaries and employees benefits		3,651			3,817			10,886			11,800
Occupancy		656			632			1,952			1,948
Computer operations		461			442			1,443			1,299
Professional fees		391			290			1,258			1,210
OREO expense		62			-			326			-
FDIC insurance assessment		223			102			555			950
Other		730			781			2,056			2,274
Total noninterest expense		6,174			6,064			18,476			19,481

INCOME BEFORE INCOME TAXES		682			1,439			1,804			4,324
INCOME TAX (BENEFIT) PROVISION		(17	)		197			137			804
NET INCOME	$	699		$	1,242		$	1,667		$	3,520
EARNINGS PER COMMON SHARE:
Basic earnings per share	$	0.03		$	0.04		$	0.06		$	0.12
Weighted average shares outstanding		27,432,114			29,330,638			27,860,516			29,522,327
Diluted earnings per share	$	0.03		$	0.04		$	0.06		$	0.12
Weighted average diluted shares outstanding		27,586,142			29,591,706			28,082,399			29,791,421

See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

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

NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(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, 2008		31,307,881		$	313		$	204,866		$	(10,913	)	$	(4,337	)	$	78,898		$	(8,908	)	$	259,919
Comprehensive income:
Net income		-			-			-			-			-			3,520			-			3,520
Net unrealized gains on securities available for sale arising during the period, net reclassification adjustment and tax effects		-			-			-			-			-			-			6,710			6,710
Change in pension gains or losses and transition assets, net of tax		-			-			-			-			-			-			62			62
Total comprehensive income																							10.292
Common stock held by ESOP committed to be released (91,493 shares)		-			-			183			460			-			-			-			643
Share-based compensation - stock options		-			-			703			-			-			-			-			703
Share-based compensation - equity incentive plan		-			-			-			-			1,002			-			-			1.002
Excess tax benefits from equity incentive plan		-			-			43			-			-			-			-			43
Common stock repurchased		(758,889	)		(8	)		(6,897	)		-			-			-			-			(6.905	)
Issuance of common stock in connection with stock option exercises		59,721			1			574			-			-			(313	)		-			262
Issuance of common stock in connection with equity incentive plan		-			-			138			-			(138	)		-			-			-
Forfeiture of common stock in connection with equity incentive plan		-			-			(4	)		-			4			-			-			-
Excess tax benefits in connection with stock option exercises		-			-			103			-			-			-			-			103
Cash dividends declared ($0.30 per share)		-			-			-			-			-			(8,885	)		-			(8.885	)
BALANCE AT SEPTEMBER 30, 2009		30,608,713		$	306		$	199,709		$	(10,453	)	$	(3,469	)	$	73,220		$	(2,136	)	$	257,177

BALANCE AT DECEMBER 31, 2009		29,818,526		$	298		$	193,609		$	(10,299	)	$	(3,248	)	$	69,253		$	(2,314	)	$	247,299
Comprehensive income:
Net income		-			-			-			-			-			1,667			-			1,667
Net unrealized gains on securities available for sale arising during the period, net of reclassification adjustment and tax effects		-			-			-			-			-			-			1,322			1,322
Net unrealized gains on securities resulting from the transfer from held-to-maturity to available-for-sale, net of tax effects		-			-			-			-			-			-			8,351			8,351
Change in pension gains or losses and transition assets, net of tax		-			-			-			-			-			-			44			44
Total comprehensive income																							11,384
Common stock held by ESOP committed to be released (89,040 shares)		-			-			119			448			-			-			-			567
Share-based compensation - stock options		-			-			598			-			-			-			-			598
Share-based compensation - equity incentive plan		-			-			-			-			868			-			-			868
Excess tax benefits from equity incentive plan		-			-			34			-			-			-			-			34
Common stock repurchased		(1,813,237	)		(18	)		(14,708	)		-			-			-			-			(14,726	)
Issuance of common stock in connection with stock option exercises		336,527			3			2,942			-			-			(1,468	)		-			1,477
Issuance of common stock in connection with equity incentive plan		-			-			69			-			(69	)		-			-			-
Excess tax benefit in connection with stock option exercises		-			-			401			-			-			-			-			401
Cash dividends declared ($0.31 per share)		-			-			-			-			-			(8,666	)		-			(8,666	)
BALANCE AT SEPTEMBER 30, 2010		28,341,816		$	283		$	183,064		$	(9,851	)	$	(2,449	)	$	60,786		$	7,403		$	239,236

See the accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED

(Dollars in thousands)




	Nine Months Ended September 30,
	2010			2009
OPERATING ACTIVITIES:
Net income	$	1,667		$	3,520
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		8,548			2,360
Depreciation and amortization of premises and equipment		945			929
Net amortization of premiums and discounts on securities, mortgage-backed securities and mortgage loans		4,553			1,098
Share-based compensation expense		1,466			1,705
Amortization of ESOP expense		567			643
Excess tax benefits from equity incentive plan		(34	)		(43	)
Excess tax benefits in connection with stock option exercises		(401	)		(103	)
Net (gains) losses on sales of securities		(3,926	)		565
Other-than-temporary impairment losses of securities		100			186
Write-downs of other real estate owned		232			17
Net (gain) loss on sale of other real estate owned		(1	)		110
Loss on prepayment of borrowings		-			142
Loss on disposal of premises and equipment, net		-			8
Deferred income tax benefit		(159	)		(188	)
Income from bank-owned life insurance		(1,096	)		(1,084	)
Changes in assets and liabilities:
Accrued interest receivable		533			(107	)
Other assets		(474	)		(1,623	)
Other liabilities		1,079			(650	)
Net cash provided by operating activities		13,599			7,485
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases		(62,111	)		(123,734	)
Proceeds from calls, maturities, and principal collections		69,075			63,935
Securities, available for sale:
Purchases		(436,038	)		(174,635	)
Proceeds from sales		309,244			44,255
Proceeds from calls, maturities, and principal collections		80,504			48,633
Purchase of residential mortgages		(32,282	)		(14,521	)
Loan principal payments, net of originations		13,932			17,169
Purchase of Federal Home Loan Bank of Boston stock		(1,855	)		(1,547	)
Proceeds from sale of other real estate owned		1,693			148
Purchases of premises and equipment		(512	)		(1,285	)
Net cash used in investing activities		(58,350	)		(141,582	)
FINANCING ACTIVITIES:
Net increase in deposits		45,307			66,161
Net change in short-term borrowings		(9,072	)		6,019
Repayment of long-term debt		(45,000	)		(45,142	)
Proceeds from long-term debt		69,970			90,513
Cash dividends paid		(8,666	)		(8,885	)
Common stock repurchased		(13,110	)		(6,905	)
Issuance of common stock in connection with stock option exercises		1,477			262
Excess tax benefits in connection with equity incentive plan		34			43
Excess tax benefits in connection with stock option exercises		401			103
Net cash provided by financing activities		41,341			102,169
NET CHANGE IN CASH AND CASH EQUIVALENTS:		(3,410	)		(31,928	)
Beginning of period		28,719			56,533
End of period	$	25,309		$	24,605
Supplemental cash flow information:
Transfer of loans to other real estate owned	$	538		$	275
Net cash due to broker for purchase of securities, including treasury stock		8,125			(409	)
Securities reclassified from held-to-maturity to available-for-sale		287,074			-
Interest paid		12,630			15,287
Taxes paid		310			1,761

See the accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

Basis of Presentation – In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial condition as of September 30, 2010, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results of operations for the year ending December 31, 2010. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

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

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

2. EARNINGS PER SHARE

Basic earnings per share represent income available to shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by us relate solely to outstanding stock options and are determined using the treasury stock method.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(In thousands, except per share data)

Net income applicable to common stock	$	699		$	1,242		$	1,667		$	3,520

Average number of common shares outstanding		28,891			30,888			29,341			31,103
Less: Average unallocated ESOP Shares		(1,415	)		(1,506	)		(1,437	)		(1,528	)
Less: Average ungranted equity incentive plan shares		(44	)		(51	)		(44	)		(53	)

Average number of common shares outstanding used to calculate basic earnings per common share		27,432			29,331			27,860			29,522

Effect of dilutive stock options		154			261			222			269

Average number of common shares outstanding used to calculate diluted earnings per common share		27,586			29,592			28,082			29,791

Basic earnings per share	$	0.03		$	0.04		$	0.06		$	0.12

Diluted earnings per share	$	0.03		$	0.04		$	0.06		$	0.12

Stock options that would have an antidilutive effect on diluted earnings per share are excluded from the calculation. At September 30, 2010 and 2009, 1,576,024 and 1,538,357 shares were antidilutive, respectively.

3. COMPREHENSIVE INCOME/LOSS

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

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

	Nine Months Ended September 30,
	2010			2009
	(In thousands)

Unrealized holding gains on available-for-sale securities	$	6,156		$	10,934
Reclassification adjustment for securities transferred from held-to-maturity to available for sale		12,653			-
Reclassification adjustment for (gains) losses realized in income		(3,926	)		565
Other-than-temporary impairment losses on available-for-sale securities charged to earnings		100			186
Net unrealized gains on available-for-sale securities		14,983			11,685
Tax effect		(5,310	)		(4,975	)
Net-of-tax amount		9,673			6,710

Losses arising during the period pertaining to defined benefit plans		7			-
Reclassification adjustments for items reflected in earnings:
Actuarial loss		69			103
Transition asset		(9	)		(9	)
Net adjustments pertaining to defined benefit plan		67			94
Tax effect		(23	)		(32	)
Net-of-tax amount		44			62

Net accumulated other comprehensive income	$	9,717		$	6,772

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

	September 30,			December 31,
	2010			2009
	(In thousands)

Net unrealized gain (loss) on securities available-for-sale	$	13,905		$	(228	)
Tax effect		(4,780	)		138
Net-of-tax amount		9,125			(90	)

Noncredit portion of other-than-temporary impairment losses on available-for-sale securities		(626	)		(1,476	)
Tax effect		212			604
Net-of-tax amount		(414	)		(872	)

Unrecognized transition asset pertaining to defined benefit plan		47			56
Unrecognized deferred loss pertaining to defined benefit plan		(2,027	)		(2,103	)
Net components pertaining to defined benefit plan		(1,980	)		(2,047	)
Tax effect		672			695
Net-of-tax amount		(1,308	)		(1,352	)

Net accumulated other comprehensive income (loss)	$	7,403		$	(2,314	)

4. SECURITIES

Securities are summarized as follows:

	September 30, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for sale:
Government-sponsored residential mortgage-backed securities	$	449,059	$	9,984	$	(1,488	)	$	457,555
U.S. Government guaranteed residential mortgage-backed securities		146,871		2,896		(342	)		149,425
Private-label residential mortgage-backed securities		9,721		11		(768	)		8,964
Government-sponsored enterprise obligations		9,991		602		-			10,593
Municipal bonds		38,534		2,358		-			40,892
Mutual funds		6,714		96		(44	)		6,766
Common and preferred stock		70		-		(26	)		44

Total	$	660,960	$	15,947	$	(2,668	)	$	674,239

	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses				Fair Value
	(In thousands)
Held to maturity:
Government-sponsored residential mortgage-backed securities	$	204,484	$	6,111		$	(184	)	$	210,411
U.S. Government guaranteed residential mortgage-backed securities		16,334		95			(143	)		16,286
Private-label residential mortgage-backed securities		4,949		44			(435	)		4,558
Government-sponsored enterprise obligations		34,884		1,776			-			36,660
Municipal bonds		34,360		1,353			(9	)		35,704

Total held to maturity		295,011		9,379			(771	)		303,619

Available for sale:
Government-sponsored residential mortgage-backed securities		289,840		2,696			(2,288	)		290,248
U.S. Government guaranteed residential mortgage-backed securities		1,030		17			-			1,047
Private-label residential mortgage-backed securities		10,368		-			(1,858	)		8,510
Government-sponsored residential mortgage-backed securities		11,000		-			(302	)		10,698
Municipal bonds		1,956		114			-			2,070
Mutual funds		6,561		1			(73	)		6,489
Common and preferred stock		70		-			(11	)		59

Total available for sale		320,825		2,828			(4,532	)		319,121

Total securities	$	615,836	$	12,207		$	(5,303	)	$	622,740

In August 2010, Westfield Financial transferred all of its held-to-maturity investments to the available-for-sale category. Management determined that it no longer had the positive intent to hold its securities classified as held-to-maturity for an indefinite period of time because of management’s desire to have more flexibility in managing the investment portfolio. The securities transferred had a total amortized cost of $287.1 million, fair value of $299.7 million and the net unrealized gain of $12.6 million was recorded as other comprehensive income at the time of transfer.

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

	September 30, 2010
	Amortized Cost		Fair Value
	(In thousands)
Available for sale:
Due in one year or less	$	2,082	$	514
Due after one year through five years		19,813		1,577
Due after five years through ten years		18,384		19,603
Due after ten years		8,246		8,709

Total available for sale	$	48,525	$	51,485

Gross realized gains and losses on sales of securities for the three and nine months ended September 30, 2010 and 2009 are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(In thousands)
Gross gains realized	$	2,620		$	1,439		$	4,576		$	1,650
Gross losses realized		(11	)		(2,213	)		(650	)		(2,215	)
Net gain (loss) realized	$	2,609		$	(774	)	$	3,926		$	(565	)

Proceeds from the sale of securities available for sale amounted $309.2 million and $44.3 million for the nine months ended September 30, 2010 and 2009, respectively.

The tax provision applicable to net realized gains and losses were $887,000 and $1.3 million for the three and nine months ended September 30, 2010, respectively. The tax benefit applicable to net realized gains and losses were $258,000 and $186,000 for the three and nine months ended September 30, 2009, respectively.

One security with a carrying value of $4.2 and $5.0 million at September 30, 2010 and December 31, 2009, respectively, was pledged as collateral to the Federal Reserve Bank of Boston to secure public deposits.

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

	September 30, 2010
	Less Than Twelve Months					Over Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)

Available for sale:
Government-sponsored residential mortgage-backed securities	$	(1,308	)	$	21,227	$	(180	)	$	10,089
U.S. Government guaranteed residential mortgage-backed securities		(342	)		29,113		-			-
Private-label residential mortgage-backed securities		-			-		(768	)		8,309
Mutual funds		-			-		(44	)		1,547
Common and preferred stock		-			-		(26	)		13

Total	$	(1,650	)	$	129,148	$	(1,018	)	$	19,958

	December 31, 2009
	Less Than Twelve Months					Over Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)

Held to maturity:
Government-sponsored residential mortgage-backed securities	$	(159	)	$	21,227	$	(25	)	$	1,677
U.S. Government guaranteed residential mortgage-backed securities		(143	)		9,760		-			-
Private-label residential mortgage-backed securities		-			-		(435	)		3,123
Municipal bonds		(9	)		356		-			-

Total held to maturity		(311	)		356		(460	)		4,800

Available for sale:
Government-sponsored residential mortgage-backed securities		(2,287	)		170,741		(1	)		128
Private-label residential mortgage-backed securities		-			-		(1,858	)		8,510
Government-sponsored enterprise obligations		(302	)		10,698		-			-
Mutual funds		(19	)		2,597		(54	)		1,479
Common and preferred stock		(11	)		28		-			-

Total available for sale		(2,619	)		184,064		(1,913	)		10,117

Total	$	(2,930	)	$	215,407	$	(2,373	)	$	14,917

At September 30, 2010, forty government-sponsored and U.S. government guaranteed mortgage-backed securities had gross unrealized losses with aggregate depreciation of 1.3% from our amortized cost basis existing for less than twelve months. At September 30, 2010, four government-sponsored securities had gross unrealized losses with aggregate depreciation of 1.8% from our amortized cost basis existing for more than twelve months. Because these losses relate to securities guaranteed by the U.S. government or an agency thereof, the declines are the result of interest rates and not credit quality. 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 September 30, 2010, one mutual fund had a gross unrealized loss with aggregate depreciation of 2.8% from our cost basis existing for greater than twelve months and was principally related to fluctuations in interest rates. This loss relates to a mutual fund which invests primarily in short-term debt instruments and adjustable rate mortgage-backed securities. Because we do not intend to sell the security and it is more likely than not that we will not be required to sell it prior to the recovery of its amortized cost basis, the loss is deemed temporary.

At September 30, 2010, four private label mortgage-backed securities have gross unrealized losses of 8.5% from our amortized cost basis which existed for greater than twelve months. Management uses a third party on a quarterly basis that is experienced in analyzing private-label mortgage-backed securities to determine if credit losses existed for these securities. The third party incorporated a number of factors to estimate the performance and possible credit loss of the underlying assets. These factors include but are not limited to: loans in various stages of delinquency i.e. 30, 60, 90 days delinquent, loans in foreclosure, projected prepayment rates (10 voluntary prepayment rate), severity of loss on defaulted loans (50% - 60%), current levels of subordination, current credit enhancement (4.21% - 8.01%), vintage (2006), geographic location and projected default rates. As a result of this analysis, two private label mortgage-backed securities were deemed to have other-than- temporary impairment losses as of September 30, 2010. We had no writedowns due to other-than-temporary impairment on mortgage-backed securities during the three months ended September 30, 2010. During the nine months ended September 30, 2010, we had writedowns of $1.1 million due to other-than-temporary impairment on mortgage-backed securities, of which $971,000 was recognized in accumulated other comprehensive loss and $100,000 was recognized as a credit loss and charged to income. During the nine months ended September 30, 2009, we had writedowns of $1.3 million due to other-than-temporary impairment on mortgage-backed securities, of which $1.2 million was recognized in accumulated other comprehensive loss and $186,000 was recognized as a credit loss and charged to income.

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:

	Nine Months Ended
	September 30, 2010
	(In thousands)

Balance as of December 31, 2009	$	278

Additional credit losses for which other-than-temporary impairment charge was previously recorded		100

Balance as of September 30, 2010	$	378

6. SHARE-BASED COMPENSATION

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

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

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

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

	Three Months Ended September 30,			Nine Months Ended September 30,
	2010			2010			2009
Expected dividend yield		7.04	%		7.04	%		6.07	%
Expected life		10	years		10	years		10	years
Expected volatility		35.83	%		35.83	%		35.70	%
Risk-free interest rate		2.48	%		2.48	%		2.59	%

The weighted average fair value of the options granted during the three and nine months ended 2010 was $1.27 per option. The weighted average fair value of the options granted during the nine months ended 2009 was $2.63 per option. No stock options were granted in the three months ended September 30, 2009.

All stock awards and stock options currently vest at 20% per year. At September 30, 2010, 34,941 stock awards and 134,232 stock options were available for future grants.

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

	Unvested Stock Awards Outstanding					Stock Options Outstanding
	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Exercise Price

Outstanding at December 31, 2009		358,573		$	10.00		2,223,012		$	8.36
Granted		9,000			7.67		25,000			10.04
Stock awards vested		(5,506	)		10.09		-			-
Stock options exercised		-			-		(336,527	)		4.39
Outstanding at September 30, 2010		362,067		$	9.94		1,911,485		$	9.08

Outstanding at December 31, 2008		465,192		$	10.04		2,276,223		$	8.15
Granted		14,000			9.89		39,000			9.89
Stock awards vested		(15,206	)		10.06		-			-
Stock options exercised		-			-		(59,721	)		4.39
Forfeited		(400	)		10.04		(2,500	)		10.04
Outstanding at September 30, 2009		463,586		$	10.03		2,253,002		$	8.28

We recorded compensation cost related to the stock awards of $289,000 and $868,000 for the three and nine months ended September 30, 2010, respectively, and $288,000 and $1.0 million for the three and nine months ended September 30, 2009, respectively.

We recorded compensation costs relating to stock options of $200,000 and $598,000, with related tax benefits of $53,000 and $159,000 for the three and nine months ended September 30, 2010, respectively. We recorded compensation costs relating to stock options of $197,000 and $703,000, with related tax benefits of $54,000 and $188,000 for the three and nine months ended September 30, 2009, 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 Federal Home Loan Bank (“FHLB”) advances with an original maturity of less than one year as well as customer repurchase agreements, which have an original maturity of one day. Short-term borrowings issued by the FHLB were $53.0 million and $58.0 million at September 30, 2010 and December 31, 2009, respectively. Customer repurchase agreements were $12.4 million at September 30, 2010, and $16.5 million at December 31, 2009. A customer repurchase agreement is an agreement by us to sell to and repurchase from the customer an interest in specific securities issued by or guaranteed by the United States government. This transaction settles immediately on a same day basis in immediately available funds. Interest paid is commensurate with other products of equal interest and credit risk. All of our customer repurchase agreements at September 30, 2010 and December 31, 2009 were held by commercial customers.

Long-term debt consists of FHLB advances, securities sold under repurchase agreements and customer repurchase agreements with an original maturity of one year or more. At September 30, 2010, we had $152.3 million in long-term debt with the FHLB and $81.3 million in securities sold under repurchase agreements with an approved broker-dealer. This compares to $127.5 million in long-term debt with FHLB advances and $81.3 million in securities sold under repurchase agreements with an approved broker-dealer at December 31, 2009. Customer repurchase agreements were $5.2 million at September 30, 2010 and $5.0 million at December 31, 2009. The securities sold under agreements to repurchase are callable at the issuer’s option beginning in the year 2011.

8. PENSION BENEFITS

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(In thousands)
Service cost	$	233		$	216		$	698		$	647
Interest cost		193			183			580			548
Expected return on assets		(196	)		(169	)		(587	)		(507	)
Transition obligation		(3	)		(3	)		(9	)		(9	)
Actuarial loss		23			34			69			103
Net periodic pension cost	$	250		$	261		$	751		$	782

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

9. FAIR VALUE OF ASSETS AND LIABILITIES

Determination of Fair Value

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

Fair Value Hierarchy

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

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

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

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

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

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

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

Securities and mortgage-backed securities – Fair value of securities are primarily measured using 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 stock - These investments are carried at cost which is their estimated redemption value.

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

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

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

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

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

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

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

	September 30, 2010
	Level 1		Level 2		Level 3		Total
	(In thousands)
Securities available for sale:
Mutual funds	$	5,313	$	1,453	$	-	$	6,766
Common and preferred stock		44		-		-		44
U.S. government and federal agency debt securities		-		10,593		-		10,593
State and municipal bonds		-		40,892		-		40,892
Government sponsored residential mortgage-backed securities		-		457,555		-		457,555
U.S. government guaranteed residential mortgage-backed securities		-		149,425		-		149,425
Private label residential mortgage-backed securities		-		8,964		-		8,964
Total assets	$	5,357	$	668,882	$	-	$	674,239

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

Also, we may be required, from time to time, to measure certain other assets and liabilities on a non-recurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related assets at September 30, 2010 and 2009. Total losses represent the change in carrying value as a result of fair value adjustments related to assets still held at September 30, 2010 and 2009.

	At						Three Months Ended			Nine Months Ended
	September 30, 2010						September 30, 2010			September 30, 2010
							Total			Total
	Level 1		Level 2		Level 3		Gains (Losses)			Gains (Losses)
	(In thousands)
Impaired loans	$	-	$	-	$	1,681	$	(188	)	$	(1,051	)
Other real estate owned		-		-		276		-			(105	)

Total Assets	$	-	$	-	$	1,957	$	(188	)	$	(1,156	)

	At						Three Months Ended			Nine Months Ended
	September 30, 2009						September 30, 2009			September 30, 2009
							Total			Total
	Level 1		Level 2		Level 3		Gains (Losses)			Gains (Losses)
	(In thousands)
Impaired loans	$	-	$	-	$	1,271	$	(482	)	$	(879	)

Total Assets	$	-	$	-	$	1,271	$	(482	)	$	(879	)

The amount of loans represents the carrying value and related write-down and valuation allowance of impaired loans for which adjustments are based on the estimated fair value of the underlying collateral. The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on real estate appraisals performed by independent licensed or certified appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Management will discount appraisals as deemed necessary based on the date of the appraisal and new information deemed relevant to the valuation. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. The resulting losses were recognized in earnings through the provision for loan losses.

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

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

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

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

	September 30, 2010				December 31, 2009
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value
	(In thousands)
Assets:
Cash and cash equivalents	$	25,309	$	25,309	$	28,719	$	28,719

Securities:
Available for sale		674,239		674,239		319,121		319,121
Held to maturity		-		-		295,011		303,619

Federal Home Loan Bank of Boston and other restricted stock		12,194		12,194		10,339		10,339

Loans- net		478,397		480,108		469,149		474,554

Accrued interest receivable		4,665		4,665		5,198		5,198

Liabilities:
Deposits		693,282		690,884		647,975		649,473

Short-term borrowings		65,427		65,427		74,499		74,499

Long-term debt		238,820		247,566		213,845		214,669

Accrued interest payable		736		736		730		730

10. RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

In April 2010, the FASB issued ASU 2010-18, Effect of a Loan Modification When the Loan is Part of a Pool that is accounted for as a Single Asset (Topic 310), which is effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending after July 15, 2010. As a result of the amendments in this Update, modification of loans within the pool does not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a trouble debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. However, loans within the scope of Subtopic 310-30 that are accounted for individually will continue to be subject to the troubled debt restructuring accounting provisions. The provisions of this Update will be applied prospectively with early application permitted. Upon initial adoption of the guidance in this Update, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. The election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. Management is currently assessment the effects of adopting the provisions of this update.

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

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

Overview

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

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

●	grow our commercial and industrial and commercial real estate loan 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

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

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

●

Net income was $699,000, or $0.03 per diluted share, for the quarter ended September 30, 2010, compared to net income of $1.2 million, or $0.04 per diluted share for the same period in 2009. For the nine months ended September 30, 2010, net income was $1.7 million, or $0.06 per diluted share, compared to $3.5 million or $0.12 per diluted share for the same period in 2009.

●

The provision for loans losses was $3.9 million for the three months ended September 30, 2010 compared to $620,000 for the same period in 2009. For the nine months ended September 30, 2010, the provision for loan losses was $8.5 million compared to $2.4 million for the same period in 2009. The larger provision for loan losses in the 2010 periods was due to an increase in loan charge-offs, primarily pertaining to a single commercial real estate loan, and the continued weakening of the local and national economy.

●

Net interest income was $7.3 million for the three months ended September 30, 2010, compared to $8.2 million for the same period in 2009. For the nine months ended September 30, 2010, net interest income was $22.5 million compared to $24.1 million for the same period in 2009. The net interest margin, on a tax-equivalent basis, was 2.58% for the three months ended September 30, 2010, compared to 2.99% for the same period in 2009. For the nine months ended September 30, 2010, the net interest margin, on a tax-equivalent basis, was 2.72% compared to 3.07% for the same period in 2009. As securities and loans paid down, the funds were reinvested in a lower rate environment, thus reducing yields.

CRITICAL ACCOUNTING POLICIES

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

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. For additional information on our critical accounting policies, please refer to the information contained in Notes 1 and 10 of the accompanying consolidated financial statements and Note 1 of the consolidated financial statements included in our 2009 Annual Report.

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

Total assets increased $61.8 million to $1.3 billion at September 30, 2010. In August 2010, we transferred all held-to-maturity investments to the available-for-sale category. Management determined that it no longer had the positive intent to hold its securities classified as held-to-maturity for an indefinite period of time because of management’s desire to have more flexibility in managing the investment portfolio. The securities transferred had a total amortized cost of $287.1 million and a fair value of $299.7 million. The net unrealized gain of $12.6 million was recorded as other comprehensive income at the time of transfer. Securities increased $61.9 million to $686.4 million at September 30, 2010 from $624.5 million at December 31, 2009. The increase in securities was the result of reinvesting funds from deposits, short-term borrowings, long-term debt and pay downs of loans into securities.

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

	September 30,			December 31,
	2010			2009
	(In thousands)

Commercial real estate	$	218,931		$	229,061
Residential real estate		86,930			64,299
Home equity		36,307			34,755
Commercial and industrial		140,753			145,012
Consumer		3,037			3,307
Total loans		485,958			476,434
Unearned premiums and deferred loan fees and costs, net		607			360
Allowance for loan losses		(8,168	)		(7,645	)
	$	478,397		$	469,149

Net loans increased by $9.3 million to $478.4 million at September 30, 2010 from $469.1 million at December 31, 2009. The increase in net loans was primarily the result of increases in residential real estate loans and home equity loans, which were partially offset by decreases in commercial real estate and commercial and industrial loans. Residential real estate loans increased $22.6 million to $86.9 million while home equity loans increased $1.5 million to $36.3 million at September 30, 2010. We have begun to buy back more residential loans from a third-party mortgage company as a means of diversifying our loan portfolio.

Commercial real estate loans decreased $10.2 million to $218.9 million at September 30, 2010 from $229.1 million at December 31, 2009. In addition to normal loan payments and payoffs, the decrease in commercial real estate loans from December 31, 2009 included the full charge-off of $7.2 million related to one commercial real estate loan. During the second quarter of 2010, the initial $3.6 million of the loan was charged-off and the final $3.6 million was charged-off in the third quarter of 2010. The loan, a leasehold mortgage, was related to a retail building which lost its tenant, a national chain store, due to bankruptcy. We have minimal exposure to commercial real estate loans which involve similar leasehold mortgages. We are currently in the process of initiating a recovery action against the borrower. Owner occupied commercial real estate loans totaled $103.7 million at September 30, 2010 and $99.3 million at December 31, 2009, while non-owner occupied commercial real estate loans totaled $115.2 million at September 30, 2010 and $129.7 million at December 31, 2009.

Nonperforming loans decreased $1.5 million to $4.0 million at September 30, 2010 compared to $5.5 million at December 31, 2009. This represented 0.82% of total loans at September 30, 2010 and 1.15% of total loans at December 31, 2009. At September 30, 2010, nonperforming loans were primarily made up of three commercial relationships totaling $3.0 million.

The following table presents information regarding nonperforming mortgages, consumer and other loans and foreclosed real estate as of the dates indicated. All loans where the interest payment is 90 days or more in arrears as of the closing date of each month are placed on nonaccrual status. At September 30, 2010, we had $4.0 million of nonaccrual loans and $276,000 in foreclosed real estate. At December 31, 2009, we had $5.5 million of nonaccrual loans and $1.7 million in foreclosed real estate. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $167,000 and $94,000 for the nine months ended September 30, 2010 and the year ended December 31, 2009, respectively.

	September 30, 2010			December 31, 2009
	(Dollars in thousands)

Nonaccrual real estate loans:
Residential	$	834		$	784
Home equity		145			225
Commercial real estate		1,314			782
Total nonaccrual real estate loans		2,293			1,791
Other loans:
Commercial and industrial		1,687			3,675
Consumer		-			4
Total nonaccrual consumer and other loans		1,687			3,679
Total nonperforming loans		3,980			5,470
Foreclosed real estate, net		276			1,662
Total nonperforming assets	$	4,256		$	7,132
Nonperforming loans to total loans		0.82	%		1.15	%
Nonperforming assets to total assets		0.34			0.60

Asset growth was funded primarily through a $45.3 million increase in deposits to $693.3 million at September 30, 2010, from $648.0 million at December 31, 2009. The increase in deposits was due to an increase in regular savings accounts, checking accounts and time deposit accounts. Regular savings accounts increased $17.1 million to $121.8 million at September 30, 2010, from $104.7 million at December 31, 2009. The increase in savings accounts was primarily due to an account product that is part of a relationship-based product. Checking accounts increased $16.6 million to $167.1 million at September 30, 2010, from $150.5 million at December 31, 2009. The increase in checking accounts was primarily concentrated in an account that pays a higher rate than comparable products. Time deposit accounts increased $16.3 million, from $342.6 million at December 31, 2009. These increases were partially offset by a decrease in money market accounts of $4.8 million at September 30, 2010.

Short-term borrowings decreased $9.1 million to $65.4 million at September 30, 2010 from $74.5 million at December 31, 2009. Short-term borrowings are made up of FHLB advances with an original maturity of less than one year as well as customer repurchase agreements, which have an original maturity of one day. Short-term borrowings issued by the FHLB were $53.0 million and $58.0 million at September 30, 2010 and December 31, 2009, respectively. Customer repurchase agreements decreased $4.1 million to $12.4 million at September 30, 2010 from $16.5 million at December 31, 2009. A customer repurchase agreement is an agreement by us to sell to and repurchase from the customer an interest in specific securities issued by or guaranteed by the United States government or government-sponsored enterprises. This transaction settles immediately on a same day basis in immediately available funds. Interest paid is commensurate with other products of equal interest and credit risk. At September 30, 2010 and December 31, 2009, all of our customer repurchase agreements were held by commercial customers.

Long-term debt increased $25.0 million to $238.8 million from $213.8 million at December 31, 2009. Long-term debt consists of FHLB advances, securities sold under repurchase agreements and customer repurchase agreements with an original maturity of one year or more. Long-term debt issued by the FHLB was $152.3 million at September 30, 2010 and $127.5 million at December 31, 2009. Securities sold under repurchase agreements remained unchanged at $81.3 million while customer repurchase agreements were $5.2 million and $5.0 million at September 30, 2010 and December 31, 2009, respectively.

Shareholders’ equity at September 30, 2010 and December 31, 2009 was $239.2 million and $247.3 million, respectively, which represented 19.1% of total assets as of September 30, 2010 and 20.8% of total assets as of December 31, 2009. The decrease in shareholders’ equity reflects the repurchase of 1,813,237 shares for $14.7 million related to the stock repurchase plan, and dividends amounting to $8.7 million. This was partially offset by a $9.7 million increase in other comprehensive income, net income of $1.7 million and $3.9 million related to the recognition of share-based compensation and the exercise of stock options.

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

General

Net income was $699,000, or $0.03 per diluted share, for the quarter ended September 30, 2010, as compared to $1.2 million, or $0.04 per diluted share, for the same period in 2009. Net interest and dividend income was $7.3 million for the three months ended September 30, 2010 and $8.2 million for the same period in 2009.

Net Interest and Dividend Income

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

	Three Months Ended September 30,
	2010								2009
	Average					Avg Yield/			Average					Avg Yield/
	Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans(1)(2)	$	490,283	$	6,273			5.12	%	$	480,950	$	6,530			5.43	%
Securities(2)		658,857		5,479			3.33			618,599		6,913			4.47
Short-term investments(3)		11,481		2			0.07			12,459		2			0.06
Total interest-earning assets		1,160,621		11,754			4.05			1,112,008		13,445			4.84
Total non-interest-earning assets		77,988								73,550

Total assets	$	1,238,609							$	1,185,558

LIABILITIES AND EQUITY:
Interest-bearing liabilities
NOW accounts	$	78,329		233			1.19		$	80,674		392			1.94
Savings accounts		123,033		216			0.70			89,869		254			1.13
Money market accounts		47,485		51			0.43			52,194		113			0.87
Time certificates of deposit		346,304		1,881			2.17			341,443		2,462			2.88
Total interest bearing deposits		595,151		2,381						564,180		3,221
Short-term borrowings and long-term debt		310,853		1,820			2.34			271,615		1,835			2.70
Interest-bearing liabilities		906,004		4,201			1.85			835,795		5,056			2.42
Noninterest-bearing deposits		83,714								81,421
Other noninterest-bearing liabilities		8,580								11,270
Total noninterest-bearing liabilities		92,294								92,691

Total liabilities		998,298								928,486
Total equity		240,311								257,072
Total liabilities and equity	$	1,238,609							$	1,185,558
Less: Tax-equivalent adjustment(2)				(204	)							(147	)
Net interest and dividend income			$	7,349							$	8,242
Net interest rate spread(4)							2.20	%							2.42	%
Net interest margin(5)							2.58	%							2.99	%
Ratio of average interest-earning
assets to average interest-bearing liabilities							128.1								133.0

(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 September 30, 2010 compared
	to Three Months Ended September 30, 2009
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest-earning assets	(Dollars in thousands)
Loans (1)	$	127		$	(384	)	$	(257	)
Securities (1)		450			(1,884	)		(1,434	)
Short-term investments		-			-			-
Total interest-earning assets		577			(2,268	)		(1,691	)

Interest-bearing liabilities
NOW accounts		(11	)		(148	)		(159	)
Savings accounts		94			(132	)		(38	)
Money market accounts		(10	)		(52	)		(62	)
Time deposits		35			(616	)		(581	)
Short-term borrowing and long-time debt		265			(280	)		(15	)
Total interest-bearing liabilities		373			(1,228	)		(855	)
Change in net interest and dividend income	$	204		$	(1,040	)	$	(836	)

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

Net interest and dividend income decreased $893,000 to $7.3 million for the three months ended September 30, 2010, from $8.2 million for the same period in 2009. Interest and dividend income, on a tax-equivalent basis, decreased $1.7 million to $11.7 million for the three months ended September 30, 2010, from $13.4 million for the same period in 2009. The net interest margin, on a tax-equivalent basis, was 2.58% for the three months ended September 30, 2010, as compared to 2.99% for the same period in 2009. The margin decreased because the yield on interest-earning assets decreased more than the cost of interest-bearing liabilities.

The average yield on interest-earning assets decreased 79 basis points to 4.05% for the three months ended September 30, 2010, from 4.84% for the same period in 2009. The primary reason for the decrease in the average yield on interest-earning assets was a decrease of 114 basis points in the average yield on securities. For the three months ended September 30, 2010, the average yield on securities was 3.33% compared to 4.47% for the three months ended September 30, 2009. The average yield on securities decreased primarily due to larger than normal principal payments on our mortgage-backed securities, particularly during the first quarter of 2010, which consequently impacted the yield. The cash flows from these pay downs were subsequently reinvested in securities having a lower yield that is reflective of the current market rate environment. In addition, the average balance of securities increased $40.3 million for the three months ended September 30, 2010. The new securities were purchased in a lower rate environment.

The decrease in interest income was partially offset by a decrease in interest expense. Interest expense decreased $855,000 to $4.2 million for the three months ended September 30, 2010, from $5.1 million for the same period in 2009. The average cost of interest-bearing liabilities decreased 57 basis points to 1.85% for the three months ended September 30, 2010, from 2.42% for the same period in 2009. The decrease in the cost of interest-bearing liabilities was primarily due to a decrease in rates on time deposits, repurchase agreements and borrowings.

Provision for Loan Losses

The amount that we provided for loan losses during the three months ended September 30, 2010 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio, described in detail below, include an increase in charge-offs, primarily related to one commercial real estate loan, and the continued weakening of the local and national economy. After evaluating these factors, we provided $3.9 million for loan losses for the three months ended September 30, 2010, compared to $620,000 for the same period in 2009. The allowance was $8.2 million at September 30, 2010 and $7.8 million at June 30, 2010. The allowance for loan losses was 1.68% of total loans at September 30, 2010 and 1.64% at June 30, 2010.

Net charge-offs were $3.6 million for the three months ended September 30, 2010. This was comprised of charge-offs of $3.6 million for the three months ended September 30, 2010, partially offset by recoveries of $17,000 for the same period. Management downgraded a loan to a doubtful status at June 30, 2010, establishing a 50% reserve against the loan. During this time, management was evaluating various workout scenarios for the property. During the third quarter of 2010, we reserved for and subsequently charged-off the remaining balance of $3.6 million related to a single commercial real estate loan. For the nine months ended September 30, 2010, a total of $7.2 million was charged off for this loan. The loan, a leasehold mortgage, was related to a retail building which lost its tenant, a national chain store, due to bankruptcy. We have minimal exposure to commercial real estate loans which involve similar leasehold mortgages. We are currently in the process of initiating a recovery action against the borrower.

Net charge-offs were $100,000 for the three months ended September 30, 2009. This was comprised of charge-offs of $117,000 for the three months ended September 30, 2009, partially offset by recoveries of $17,000 for the same period.

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

Noninterest Income

Noninterest income increased $3.3 million to $3.4 million for the three months ended September 30, 2010, from $(119,000) for the same period in 2009. Net gains on the sales of securities were $2.6 million for the three months ended September 30, 2010, compared to a net loss of $774,000 for the same period in 2009. We incurred losses on the sale of securities of $2.2 million for the three months ended September 30, 2009, due to a loss on the sale of a single security. The credit quality of the security had deteriorated and management opted to sell it in the third quarter of 2009. The losses were partially offset by gains on the sale of other securities of $1.4 million for the three months ended September 30, 2009.

Service charge and fee income decreased $124,000 to $456,000 for the three months ended September 30, 2010, compared to the same period in 2009. This was primarily the result of a decrease of $61,000 in fees received from the third-party mortgage program. In the 2009 period, we experienced a higher level of mortgage referrals due to a decrease in interest rates. In the 2010 period, residential loan demand has moderated but of greater significance, we have begun to buy back more loans from the third-party mortgage company. As a result, we forgo receiving referral fee income on these loans but instead earn interest income for the life of the loans. In addition, net checking account processing fee income decreased $61,000 for the three months ended September 30, 2010, primarily due to a decrease in overdraft fee income.

Noninterest Expense

Noninterest expense increased $110,000 for the three months ended September 30, 2010 to $6.2 million from $6.1 million in the comparable 2009 period. FDIC insurance increased by $121,000 to $223,000 for the three months ended September 30, 2010 from $102,000 for the same period in 2009, primarily the result of an increase in our average deposit balance assessment base. Salaries and benefits decreased $166,000 to $3.7 million for the three months ended September 30, 2010. This was primarily the result of a decrease of $112,000 in the accrual for deferred compensation.

Income Taxes

For the three months ended September 30, 2010, we had a tax benefit of $17,000 as compared to a tax provision of $197,000 for the same period in 2009. The effective tax rate was 2.5% for the three months ended September 30, 2010 and 13.7% for the same period in 2009. The change in effective tax rate from September 30, 2009 is due primarily to the lower income before taxes while maintaining the same level of tax-advantaged income such as bank-owned life insurance (“BOLI”) and tax-exempt municipal obligations.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND SEPTEMBER 30, 2009

General

Net income was $1.7 million or $0.06 per diluted share, for the nine months ended September 30, 2010, as compared to $3.5 million, or $0.12 per diluted share, for the same period in 2009. Net interest and dividend income was $22.5 million for the nine months ended September 30, 2010 and $24.1 million for the same period in 2009.

Net Interest and Dividend Income

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

	Nine Months Ended September 30,
	2010								2009
	Average					Avg Yield/			Average					Avg Yield/
	Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans(1)(2)	$	477,710	$	18,642			5.20	%	$	476,945	$	19,497			5.45	%
Securities(2)		640,959		17,048			3.55			573,971		20,302			4.72
Short-term investments(3)		14,158		5			0.05			17,507		11			0.08
Total interest-earning assets		1,132,827		35,695			4.20			1,068,423		39,810			4.97
Total non-interest-earning assets		79,401								72,389

Total assets	$	1,212,228							$	1,140,812

LIABILITIES AND EQUITY:
Interest-bearing liabilities
NOW accounts	$	74,572		691			1.24		$	67,451		967			1.91
Savings accounts		117,462		672			0.76			80,913		682			1.12
Money market accounts		48,382		230			0.63			53,876		369			0.91
Time certificates of deposit		344,687		5,897			2.28			335,699		7,767			3.08
Total interest bearing deposits		585,103		7,490						537,939		9,785
Short-term borrowings and long-term debt		293,456		5,146			2.34			252,492		5,522			2.92
Interest-bearing liabilities		878,559		12,636			1.92			790,431		15,307			2.58
Noninterest-bearing deposits		82,207								79,650
Other noninterest-bearing liabilities		8,299								11,486
Total noninterest-bearing liabilities		90,506								91,136

Total liabilities		969,065								881,567
Total equity		243,163								259,245
Total liabilities and equity	$	1,212,228							$	1,140,812
Less: Tax-equivalent adjustment(2)				(594	)							(434	)
Net interest and dividend income			$	22,465							$	24,069
Net interest rate spread(4)							2.28	%							2.39	%
Net interest margin(5)							2.72	%							3.07	%
Ratio of average interest-earning
assets to average interest-bearing liabilities							128.9								135.2

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

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

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

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

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

●	Interest income changes attributable to changes in volume (changes in volume multiplied by prior rate);

●	Interest income changes attributable to changes in rate (changes in rate multiplied by current volume); and

●	The net change.

The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

	Nine Months Ended September, 2010 compared
	to Nine Months Ended September 30, 2009
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest-earning assets	(Dollars in thousands)
Loans (1)	$	31		$	(886	)	$	(855	)
Securities (1)		2,369			(5,623	)		(3,254	)
Short-term investments		(2	)		(4	)		(6	)
Total interest-earning assets		2,398			(6,513	)		(4,115	)

Interest-bearing liabilities
NOW accounts		102			(378	)		(276	)
Savings accounts		308			(318	)		(10	)
Money market accounts		(38	)		(101	)		(139	)
Time deposits		208			(2,078	)		(1,870	)
Short-term borrowing and long-time debt		896			(1,272	)		(376	)
Total interest-bearing liabilities		1,476			(4,147	)		(2,671	)
Change in net interest and dividend income	$	922		$	(2,366	)	$	(1,444	)

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

Net interest and dividend income decreased $1.6 million to $22.5 million for the nine months ended September 30, 2010, from $24.1 million for the same period in 2009. Interest and dividend income, on a tax-equivalent basis, decreased $4.1 million to $35.7 million for the nine months ended September 30, 2010, from $39.8 million for the same period in 2009. The net interest margin, on a tax-equivalent basis, was 2.72% for the nine months ended September 30, 2010, as compared to 3.07% for the same period in 2009. The margin decreased because the yield on interest-earning assets decreased more than the cost of interest-bearing liabilities. The average yield on interest-earning assets decreased 77 basis points to 4.20% for the nine months ended September 30, 2010, from 4.97% for the same period in 2009.

The primary reason for the decrease in the average yield on interest-earning assets was a decrease of 117 basis points in the average yield on securities. For the nine months ended September 30, 2010, the average yield on securities was 3.55% compared to 4.72% for the nine months ended September 30, 2009. We experienced larger than normal amortization on our securities, particularly in the first quarter of 2010, which decreased the yield on securities. The cash flows from these pay downs were subsequently reinvested in securities having a lower yield that is reflective of the current market rate environment. In addition, the average balance of securities increased $67.0 million for the nine months ended September 30, 2010. The new securities were purchased in a lower rate environment.

The decrease in interest income was partially offset by a decrease in interest expense. Interest expense decreased $2.7 million to $12.6 million for the nine months ended September 30, 2010, from $15.3 million for the same period in 2009. The average cost of interest-bearing liabilities decreased 66 basis points to 1.92% for the nine months ended September 30, 2010, from 2.58% for the same period in 2009. The decrease in the cost of interest-bearing liabilities was primarily due to a decrease in rates on time deposits, repurchase agreements and borrowings.

Provision for Loan Losses

The amount that we provided for loan losses during the nine months ended September 30, 2010 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio, described in detail below, include an increase in charge-offs, primarily related to one commercial real estate loan, and the continued weakening of the local and national economy. After evaluating these factors, we provided $8.5 for loan losses for the nine months ended September 30, 2010, compared to $2.4 million for the same period in 2009. The allowance was $8.2 million at September 30, 2010 and $7.6 million at December 31, 2009. The allowance for loan losses was 1.68% of total loans at September 30, 2010 and 1.60% at December 31, 2009.

Net charge-offs were $8.0 million for the nine months ended September 30, 2010. This was comprised of charge-offs of $8.1 million for the nine months ended September 30, 2010, partially offset by recoveries of $56,000 for the same period. During the second quarter of 2010, we reserved for and subsequently charged-off the initial $3.6 million related to a single commercial real estate loan. Management downgraded the loan to a doubtful status at June 30, 2010, establishing a 50% reserve against the loan. During this time, management was evaluating various workout scenarios for the property. During the third quarter of 2010, we reserved for and subsequently charged-off the remaining $3.6 million balance of the loan. For the nine months ended September 30, 2010, a total of $7.2 million was charged off for this loan. The loan, a leasehold mortgage, was related to a retail building which lost its tenant, a national chain store, due to bankruptcy. We have minimal exposure to commercial real estate loans which involve similar leasehold mortgages. We are currently in the process of initiating a recovery action against the borrower.

Net charge-offs were $3.3 million for the nine months ended September 30, 2009. This was comprised of charge-offs of $3.3 million offset by recoveries of $41,000. The increase in charge-offs was the related to a single commercial manufacturing relationship of $5.5 million. The business was sold in 2009 and resulted in a charge-off of $3.1 million.

Noninterest Income

Noninterest income increased $4.3 million to $6.4 million for the nine months ended September 30, 2010, from $2.1 million for the same period in 2009. Net gains on the sales of securities were $3.9 million for the nine months ended September 30, 2010, compared to a net loss of $565,000 for the same period in 2009. We incurred losses on the sale of securities of $2.2 million for the nine months ended September 30, 2009, due to a loss on the sale of a single security. The credit quality of the security had deteriorated and management opted to sell it in the third quarter of 2009. The loss was partially offset by gains on the sale of other securities of $1.6 million, for the nine months ended September 30, 2009.

Service charge and fee income decreased $583,000 to $1.4 million for the nine months ended September 30, 2010, compared to the same period in 2009. This was primarily the result of a decrease of $446,000 in fees received from the third-party mortgage program. In the 2009 period, we experienced a higher level of mortgage referrals due to a decrease in interest rates. In the 2010 period, residential loan demand has moderated but of greater significance, we have begun to buy back more loans from the third-party mortgage company. As a result, we forgo receiving referral fee income on these loans but instead earn interest income for the life of the loans. In addition, net checking account processing fee income decreased $127,000 to $741,000 for the nine months ended September 30, 2010, primarily due to a decrease in overdraft fee income.

Noninterest Expense

Noninterest expense decreased $1.0 million for the nine months ended September 30, 2010 to $18.5 million from $19.5 million in the comparable 2009 period. Salaries and benefits decreased $914,000 to $10.9 million for the nine months ended September 30, 2010. This was primarily the result of a decrease of $437,000 in the accrual for deferred compensation. In addition, share-based compensation expense decreased $315,000 for the nine months ended September 30, 2010 from the comparable 2009 period. The 2009 period included $243,000 in expense related to the acceleration of vesting for employees that reached retirement eligibility age. FDIC insurance decreased by $395,000 to $555,000 for the nine months ended September 30, 2010 from $950,000 for the same period in 2009. The nine months ended September 30, 2009 included the accrual for a special assessment that was imposed upon all banks at June 30, 2009, which for Westfield Bank amounted to $453,000.

Income Taxes

For the nine months ended September 30, 2010, we had a tax provision of $137,000 as compared to $804,000 for the same period in 2009. The effective tax rate was 7.6% for the nine months ended September 30, 2010 and 18.6% for the same period in 2009. The decrease in effective tax rate from September 30, 2009 is due primarily to a lower income before taxes while maintaining the same level of tax-advantaged income such as BOLI and tax-exempt municipal obligations.

LIQUIDITY AND CAPITAL RESOURCES

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, withdrawals of deposits and operating expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of securities and funds provided by operations. We also can borrow funds from the FHLB based on eligible collateral of loans and securities. Our maximum additional borrowing capacity from the FHLB at September 30, 2010 was $60.5 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 September 30, 2010, we exceeded each of the applicable regulatory capital requirements. As of September 30, 2010, the most recent notification from the Office of Thrift Supervision (the “OTS”) categorized us as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” we must maintain minimum total risk-based, Tier 1 risk based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes would change our category. Our actual capital ratios of September 30, 2010 and December 31, 2009 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)
September 30, 2010
Total Capital (to Risk Weighted Assets):
Consolidated	$	240,001		35.74	%	$	53,724		8.00	%		N/A		-
Bank		229,809		34.38			53,474		8.00		$	66,842		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		231,833		34.52			26,862		4.00			N/A		-
Bank		222,901		33.35			26,737		4.00			40,150		6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated		231,833		18.71			49,560		4.00			N/A		-
Bank		222,901		18.08			49,309		4.00			61,637		5.00
Tangible Equity (to Tangible Assets):
Consolidated		N/A		-			N/A		-			N/A		-
Bank		222,901		18.08			18,491		1.50			N/A		-

December 31, 2009
Total Capital (to Risk Weighted Assets):
Consolidated	$	257,209		38.07	%	$	54,052		8.00	%		N/A		-
Bank		236,940		35.29			53,706		8.00		$	67,132		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		249,564		36.94			27,026		4.00			N/A		-
Bank		230,109		34.28			26,853		4.00			40,279		6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated		249,564		20.92			47,713		4.00			N/A		-
Bank		230,109		19.56			47,059		4.00			58,824		5.00
Tangible Equity (to Tangible Assets):
Consolidated		N/A		-			N/A		-			N/A		-
Bank		230,109		19.56			17,647		1.50			N/A		-

We also have outstanding, at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. We are obligated under leases for certain of our branches and equipment. A summary of lease obligations and credit commitments at September 30, 2010 follows:

			After 1 Year		After 3 Years
	Within		But Within		But Within		After
	1 Year		3 Years		5 Years		5 Years		Total
	(In thousands)

Lease Obligations
Operating lease obligations	$	556	$	940	$	884	$	10,244	$	12,624

Borrowings and Debt
Federal Home Loan ank		64,650		59,800		57,000		24,000		205,450
Securities sold under agreements to repurchase		17,618		5,000		37,800		38,500		98,918
Total borrowings and debt		82,268		64,800		94,800		62,500		304,368

Credit Commitments
Available lines of credit		61,337		-		-		19,803		81,140
Other loan commitments		13,505		-		50		-		13,555
Letters of credit		2,527		-		-		255		2,782
Total credit commitments		77,369		-		50		20,058		97,444

Total Obligations	$	160,193	$	65,740	$	95,734	$	92,802	$	414,469

OFF-BALANCE SHEET ARRANGEMENTS

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

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our assessment of our sensitivity to market risk since its presentation in our 2009 Annual Report. Please refer to Item 7A of the 2009 Annual Report for additional information.

ITEM 4: CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.

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

Changes in Internal Control Over Financial Reporting.

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

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 1A. RISK FACTORS.

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

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

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

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

The following table sets forth information with respect to purchases made by us of our common stock during the three months ended September 30, 2010.

Period	Total number of shares purchased		Average price paid per share ($)		Total number of shares purchased as part of publicly announced programs		Maximum number of shares that may yet be purchased under the program (1)

July 1 - 31, 2010		108,038		8.34		108,038		2,816,329
August 1 - 31, 2010		859,413		8.04		859,413		1,956,916
September 1 - 30, 2010		256,938		7.77		256,938		1,699,978

Total		1,224,389		8.01		1,224,389		1,699,978

(1)	On May 25, 2010, the Board of Directors voted to authorize the commencement of a repurchase program, authorizing the repurchase of 2,924,367 shares, or ten percent of its outstanding shares of common stock.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. [REMOVED AND RESERVED.]

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 November 5, 2010.

	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

2.1	Amended and Restated Plan of Conversion and Stock Issuance of Westfield Mutual Holding Company, Westfield Financial, Inc. and Westfield Bank (incorporated by reference to Exhibit 2.1 of the Registration Statement No. 333-137024 on Form S-1 filed with the Securities and Exchange Commission on August 31, 2006.)

3.1	Articles of Organization of Westfield Financial, Inc. (incorporated by reference to Exhibit 3.3 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 5, 2007.)

3.2	Bylaws of Westfield Financial, Inc. (incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 5, 2007.)

3.3	Amendment to the Bylaws of Westfield Financial, Inc. (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 30, 2010.)

4.1	Form of Stock Certificate of Westfield Financial, Inc. (incorporated by reference to Exhibit 4.1 of the Registration Statement No. 333-137024 on Form S-1 filed with the Securities and Exchange Commission on August 31, 2006.)

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

* Filed herewith.