Western New England Bancorp, Inc. - Quarter Report: 2013 September (Form 10-Q)

a50743076.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, 2013

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

For the transition period from _____ to _____.

Commission file number 001-16767

Westfield Financial, Inc.

(Exact name of registrant as specified in its charter)

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

141 Elm Street, Westfield, Massachusetts 01086

(Address of principal executive offices)

(Zip Code)

(413) 568-1911

(Registrant’s telephone number, including area code)

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

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

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

	Large accelerated filer o		Accelerated filer x

	Non-accelerated filer o		Smaller reporting company o

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

At November 4, 2013, the registrant had 20,656,322 shares of common stock, $.01 par value, issued and outstanding.

TABLE OF CONTENTS


		Page

FORWARD-LOOKING STATEMENTS		i

PART I – FINANCIAL INFORMATION

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

	Consolidated Balance Sheets (Unaudited) – September 30, 2013 and December 31, 2012	1

	Consolidated Statements of Net Income (Unaudited) – Three and Nine Months Ended
	September 30, 2013 and 2012	2

	Consolidated Statements of Comprehensive Income (Loss) (Unaudited) –
	Three and Nine Months Ended September 30, 2013 and 2012	3

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) –
	Nine Months Ended September 30, 2013 and 2012	4

	Consolidated Statements of Cash Flows (Unaudited) –Nine Months Ended
	September 30, 2013 and 2012	5

	Notes to Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	43


PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 3.	Defaults upon Senior Securities	44

Item 4.	Mine Safety Disclosures	44

Item 5.	Other Information	44

Item 6.	Exhibits	44

FORWARD–LOOKING STATEMENTS

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

●

changes in the interest rate environment that reduce margins;

●

changes in the regulatory environment;

●

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

●

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

●

changes in business conditions and inflation;

●

changes in credit market conditions;

●

changes in the securities markets which affect investment management revenues;

●

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

●

changes in technology used in the banking business;

●

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

●

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

●

our controls and procedures may fail or be circumvented;

●

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

●

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

●

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

●

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

●

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

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

PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(Dollars in thousands)

	September 30,			December 31,
	2013			2012
ASSETS
CASH AND DUE FROM BANKS	$	12,545		$	9,847
FEDERAL FUNDS SOLD		121			459
INTEREST-BEARING DEPOSITS AND OTHER SHORT-TERM INVESTMENTS		15,752			1,455
CASH AND CASH EQUIVALENTS		28,418			11,761

SECURITIES AVAILABLE FOR SALE – AT FAIR VALUE		242,957			621,507
SECURITIES HELD TO MATURITY (Fair value of $291,089 at September 30, 2013)		298,988			-
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT COST		15,631			14,269
LOANS - Net of allowance for loan losses of $7,311 and $7,794 at September 30, 2013 and December 31, 2012, respectively		612,843			587,124
PREMISES AND EQUIPMENT, Net		11,217			11,077
ACCRUED INTEREST RECEIVABLE		4,164			4,602
BANK-OWNED LIFE INSURANCE		46,791			46,222
DEFERRED TAX ASSET, Net		6,644			123
OTHER REAL ESTATE OWNED		-			964
OTHER ASSETS		3,678			3,813
TOTAL ASSETS	$	1,271,331		$	1,301,462

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
DEPOSITS :
Noninterest-bearing	$	121,548		$	114,388
Interest-bearing		671,962			639,025
Total deposits		793,510			753,413

SHORT-TERM BORROWINGS		61,784			69,934
LONG-TERM DEBT		248,184			278,861
OTHER LIABILITIES		10,954			10,067
TOTAL LIABILITIES		1,114,432			1,112,275

SHAREHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized, none outstanding at September 30, 2013 and December 31, 2012		-			-
Common stock - $.01 par value, 75,000,000 shares authorized, 20,736,146 shares issued and outstanding at September 30, 2013; 22,843,722 shares issued and outstanding at December 31, 2012		207			228
Additional paid-in capital		126,263			144,718
Unearned compensation - ESOP		(8,141	)		(8,553	)
Unearned compensation - Equity Incentive Plan		(222	)		(265	)
Retained earnings		42,604			42,364
Accumulated other comprehensive income (loss)		(3,812	)		10,695
Total shareholders' equity		156,899			189,187
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,271,331		$	1,301,462
See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME – UNAUDITED

(Dollars in thousands, except per share data)

	Three Months					Nine Months
	Ended September 30,					Ended September 30,
	2013			2012		2013			2012
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans	$	5,037		$	5,190	$	15,039		$	15,313
Commercial and industrial loans		1,299			1,247		3,807			3,802
Consumer loans		35			39		104			119
Debt securities, taxable		3,659			3,934		10,985			11,827
Debt securities, tax-exempt		259			378		833			1,217
Equity securities		36			41		108			127
Other investments - at cost		20			23		60			70
Federal funds sold, interest-bearing deposits and other short-term investments		3			1		6			2
Total interest and dividend income		10,348			10,853		30,942			32,477
INTEREST EXPENSE:
Deposits		1,390			1,505		4,167			4,665
Long-term debt		1,094			1,618		3,540			4,872
Short-term borrowings		36			27		101			94
Total interest expense		2,520			3,150		7,808			9,631
Net interest and dividend income		7,828			7,703		23,134			22,846
(CREDIT) PROVISION FOR LOAN LOSSES		(71	)		218		(376	)		698
Net interest and dividend income after (credit) provision for loan losses		7,899			7,485		23,510			22,148

NONINTEREST INCOME (LOSS):
Service charges and fees		615			617		1,779			1,649
Income from bank-owned life insurance		388			390		1,161			1,052
Gain on bank-owned life insurance death benefit		-			-		563			80
Loss on prepayment of borrowings		(540	)		-		(3,370	)		-
Gain on sales of securities, net		546			174		2,796			1,856
Total noninterest income		1,009			1,181		2,929			4,637
NONINTEREST EXPENSE:
Salaries and employees benefits		4,059			4,188		11,684			12,593
Occupancy		733			663		2,167			2,072
Computer operations		602			544		1,754			1,595
Professional fees		499			432		1,536			1,401
OREO expense		-			11		22			48
FDIC insurance assessment		169			152		493			450
Other		789			808		2,498			2,317
Total noninterest expense		6,851			6,798		20,154			20,476
INCOME BEFORE INCOME TAXES		2,057			1,868		6,285			6,309
INCOME TAX PROVISION		476			481		1,339			1,609
NET INCOME	$	1,581		$	1,387	$	4,946		$	4,700

EARNINGS PER COMMON SHARE:
Basic earnings per share	$	0.08		$	0.06	$	0.24		$	0.19
Weighted average shares outstanding		19,583,632			24,391,585		20,315,076			24,992,245
Diluted earnings per share	$	0.08		$	0.06	$	0.24		$	0.19
Weighted average diluted shares outstanding		19,583,632			24,393,109		20,315,094			25,015,664
See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) – UNAUDITED

(Dollars in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012

Net income	$	1,581		$	1,387		$	4,946		$	4,700

Other comprehensive income (loss):
Unrealized (loss) gain on securities:
Unrealized holding (loss) gains on securities (1)		(1,462	)		7,354			(19,041	)		10,494
Reclassification adjustment for gains realized in income (2)		(546	)		(174	)		(2,796	)		(1,856	)
Amortization of unrealized holding gain upon transfer of available-for-sale to held to maturity (3)		(108	)		-			(231	)		-
Net unrealized (loss) gain		(2,116	)		7,180			(22,068	)		8,638
Tax effect		724			(2,474	)		7,588			(2,968	)
Net-of-tax amount		(1,392	)		4,706			(14,480	)		5,670

Derivative instruments:
Change in fair value of derivatives used for cash flow hedges		(79	)		-			(79	)		-
Tax effect		27			-			27			-
Net-of-tax amount		(52	)		-			(52	)		-

Defined benefit pension plans:
Reclassification adjustments (4) :
Actuarial loss		17			44			46			131
Transition asset		(3	)		(3	)		(9	)		(8	)
Net adjustments pertaining to defined benefit plans		14			41			37			123
Tax effect		(5	)		(14	)		(12	)		(42	)
Net-of-tax amount		9			27			25			81

Other comprehensive (loss) income		(1,435	)		4,733			(14,507	)		5,751

Comprehensive income (loss)	$	146		$	6,120		$	(9,561	)	$	10,451

See accompanying notes to unaudited consolidated financial statements.

(1) Related tax effect of: $502; $(2,533); $6,553; $(3,609), respectively

(2) Related tax effect of: $185; $59; $956; $641, respectively

(3) Related tax effect of: $37; $0; $79; $0, respectively

(4) Amounts represent the reclassification of defined benefit plans amortization and have been recognized as a component of salaries and benefit expense

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED

NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Dollars in thousands)

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

BALANCE AT DECEMBER 31, 2011		26,918,250		$	269		$	173,615		$	(9,119	)	$	(1,228	)	$	47,735		$	7,716		$	218,988
Net income		-			-			-			-			-			4,700			-			4,700
Other comprehensive income		-			-			-			-			-			-			5,751			5,751
Common stock held by ESOP committed to be released (84,261 shares)		-			-			58			424			-			-			-			482
Share-based compensation - stock options		-			-			577			-			-			-			-			577
Share-based compensation - equity incentive plan		-			-			-			-			858			-			-			858
Excess tax benefits from equity incentive plan		-			-			11			-			-			-			-			11
Common stock repurchased		(1,858,708	)		(18	)		(13,928	)		-			-			-			-			(13,946	)
Issuance of common stock in connection with stock option exercises		237,313			2			1,943			-			-			(904	)		-			1,041
Excess tax benefits from stock option exercises		-			-			240			-			-			-			-			240
Cash dividends declared ($0.28 per share)		-			-			-			-			-			(7,045	)		-			(7,045	)
BALANCE AT SEPTEMBER, 30 2012		25,296,855		$	259		$	162,516		$	(8,695	)	$	(370	)	$	44,721		$	13,467		$	211,657

BALANCE AT DECEMBER 31, 2012		22,843,722		$	228		$	144,718		$	(8,553	)	$	(265	)	$	42,364		$	10,695		$	189,187
Net income		-			-			-			-			-			4,946			-			4,946
Other comprehensive loss		-			-			-			-			-			-			(14,507	)		(14,507	)
Common stock held by ESOP committed to be released (81,803 shares)		-			-			43			412			-			-			-			455
Share-based compensation - stock options		-			-			128			-			-			-			-			128
Share-based compensation - equity incentive plan		-			-			-			-			96			-			-			96
Excess tax benefit from equity incentive plan		-			-			3			-			-			-			-			3
Common stock repurchased		(2,107,576	)		(21	)		(15,965	)		-			-			-			-			(15,986	)
Issuance of common stock in connection with equity incentive plan		-			-			53			-			(53	)		-			-			-
Tender offer to purchase outstanding options		-			-			(2,717	)		-			-			-			-			(2,717	)
Cash dividends declared ($0.23 per share)		-			-			-			-			-			(4,706	)		-			(4,706	)
BALANCE AT SEPTEMBER, 30 2013		20,736,146		$	207		$	126,263		$	(8,141	)	$	(222	)	$	42,604		$	(3,812	)	$	156,899
See 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,
	2013			2012
OPERATING ACTIVITIES:
Net income	$	4,946		$	4,700
Adjustments to reconcile net income to net cash provided by operating activities:
(Credit) provision for loan losses		(376	)		698
Depreciation and amortization of premises and equipment		820			792
Net amortization of premiums and discounts on securities and mortgage loans		3,228			3,139
Net amortization of premiums on modified debt		469			376
Share-based compensation expense		224			1,435
Amortization of ESOP expense		455			482
Excess tax benefits from equity incentive plan		(3	)		(11	)
Excess tax benefits in connection with stock option exercises		-			(240	)
Excess tax expense in connection with tender offer completion		566			-
Net gains on sales of securities		(2,796	)		(1,856	)
Loss on sale of other real estate owned		6			-
Deferred income tax benefit		(35	)		(154	)
Income from bank-owned life insurance		(1,161	)		(1,052	)
Gain on bank-owned life insurance death benefit		(563	)		(80	)
Changes in assets and liabilities:
Accrued interest receivable		438			(534	)
Other assets		135			64
Other liabilities		1,399			1,216
Net cash provided by operating activities		7,752			8,975
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases		(2,636	)		-
Proceeds from calls, maturities, and principal collections		1,898			-
Securities, available for sale:
Purchases		(163,580	)		(308,680	)
Proceeds from sales		168,968			218,397
Proceeds from calls, maturities, and principal collections		52,460			64,889
Purchase of residential mortgages		(34,564	)		(56,559	)
Loan originations and principal payments, net		9,173			27,572
Purchase of Federal Home Loan Bank of Boston stock		(1,393	)		(1,802	)
Proceeds from redemption of other restricted stock		31			195
Proceeds from sale of other real estate owned		958			-
Purchases of premises and equipment		(960	)		(1,012	)
Purchase of banked-owned life insurance		-			(2,600	)
Surrender of bank-owned life insurance		-			1,585
Disbursement of bank-owned life insurance gain		(282	)		-
Proceeds from payout on bank-owned life insurance		1,437			-
Net cash provided (used) by investing activities		31,510			(58,015	)
FINANCING ACTIVITIES:
Net increase in deposits		40,097			21,450
Net change in short-term borrowings		(8,150	)		(11,633	)
Repayment of long-term debt		(63,250	)		(53,231	)
Proceeds from long-term debt		32,104			102,701
Tender offer to purchase outstanding options		(2,151	)		-
Excess tax expense in connection with tender offer completion		(566	)		-
Cash dividends paid		(4,706	)		(7,045	)
Common stock repurchased		(15,986	)		(13,946	)
Issuance of common stock in connection with stock option exercises		-			1,041
Excess tax benefits in connection with equity incentive plan		3			11
Excess tax benefits in connection with stock option exercises		-			240
Net cash (used) provided by financing activities		(22,605	)		39,588

NET CHANGE IN CASH AND CASH EQUIVALENTS:		16,657			(9,452	)
Beginning of period		11,761			21,105
End of period	$	28,418		$	11,653

Supplemental cashflow information:
Securities reclassified from available-for-sale to held-to-maturity	$	299,203		$	-
Interest paid		7,946			9,501
Taxes paid		743			2,014
Net cash paid to broker for common stock repurchased		-			352
See the accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

September 30, 2013

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The Bank’s deposits are insured to the limits specified by the Federal Deposit Insurance Corporation (“FDIC”). The Bank operates 11 branches in western Massachusetts and 1 branch in Granby, Connecticut. The Bank’s primary source of revenue is income from securities and earnings on loans to small and middle-market businesses and to residential property homeowners.

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

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

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

Basis of Presentation – In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial condition as of September 30, 2013, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results of operations for the year ending December 31, 2013. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2012, included in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Annual Report”).

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

2. EARNINGS PER SHARE

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

Earnings per common share for the three and nine months ended September 30, 2013 and 2012 have been computed based on the following:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
	(In thousands, except per share data)

Net income applicable to common stock	$	1,581		$	1,387		$	4,946		$	4,700

Average number of common shares issued		20,744			25,643			21,501			26,264
Less: Average unallocated ESOP Shares		(1,161	)		(1,244	)		(1,181	)		(1,265	)
Less: Average ungranted equity incentive plan shares		-			(7	)		(5	)		(7	)

Average number of common shares outstanding used
to calculate basic earnings per common share		19,583			24,392			20,315			24,992

Effect of dilutive stock options		-			1			-			24

Average number of common shares outstanding used
to calculate diluted earnings per common share		19,583			24,393			20,315			25,016

Basic earnings per share	$	0.08		$	0.06		$	0.24		$	0.19

Diluted earnings per share	$	0.08		$	0.06		$	0.24		$	0.19

Antidilutive shares (1)		-			1,670			1,110			1,665
___________________
(1) Shares outstanding but not included in the computation of earnings per share because they were anti-dilutive, meaning the exercise price of such options exceeded the market value of the Company’s common stock.

3. COMPREHENSIVE INCOME/LOSS

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

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

	September 30, 2013			December 31, 2012
	(In thousands)

Net unrealized (loss) gain on securities available for sale	$	(151	)	$	20,188
Tax effect		55			(6,935	)
Net-of-tax amount		(96	)		13,253

Net unrealized losses on securities resulting from the transfer of available-for-sale to held-to-maturity (1)		(1,729	)		-
Tax effect		598
Net-of-tax amount		(1,131	)		-

Fair value of derivatives used for cash flow hedges		(79	)
Tax effect		27
Net-of-tax amount		(52	)		-

Unrecognized transition asset pertaining to defined benefit plan		12			21
Unrecognized deferred gain pertaining to defined benefit plan		(3,851	)		(3,897	)
Net adjustments pertaining to defined benefit plans		(3,839	)		(3,876	)
Tax effect		1,306			1,318
Net-of-tax amount		(2,533	)		(2,558	)

Accumulated other comprehensive (loss) income	$	(3,812	)	$	10,695
_________________________________
(1) The net unrealized loss at the date of transfer before tax was $1.5 million for all securities transferred in 2013. The gains or losses on individual securities are amortized through comprehensive income over the remaining life of the security.

4. SECURITIES

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

	September 30, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for sale securities:
Government-sponsored mortgage-backed securities	$	106,146	$	897	$	(2,732	)	$	104,311
U.S. government guaranteed mortgage-backed securities		73,156		623		(69	)		73,710
Corporate bonds		26,225		551		(126	)		26,650
State and municipal bonds		20,413		707		(4	)		21,116
Government-sponsored enterprise obligations		9,752		115		(259	)		9,608
Mutual funds		6,107		10		(172	)		5,945
Common and preferred stock		1,309		308		-			1,617

Total available for sale securities		243,108		3,211		(3,362	)		242,957

Held to maturity securities:
Government-sponsored mortgage-backed securities	$	180,339	$	511	$	(4,314	)	$	176,536
U.S. government guaranteed mortgage-backed securities		39,937		91		(766	)		39,262
Corporate bonds		27,781		21		(653	)		27,149
State and municipal bonds		7,544		8		(336	)		7,216
Government-sponsored enterprise obligations		43,387		-		(2,461	)		40,926

Total held to maturity securities		298,988		631		(8,530	)		291,089

Total	$	542,096	$	3,842	$	(11,892	)	$	534,046

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

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

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

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

The amortized cost and fair value of securities available for sale and held to maturity at September 30, 2013, by maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or repay obligations.

	September 30, 2013
	Securities				Securities
	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Mortgage-backed securities:
Due after five years through ten years	$	34,778	$	33,328	$	44,571	$	41,956
Due after ten years		144,524		144,693		175,705		173,842
Total	$	179,302	$	178,021	$	220,276	$	215,798

Debt securities:
Due in one year or less	$	1,580	$	1,593	$	-	$	-
Due after one year through five years		31,887		32,473		12,820		12,531
Due after five years through ten years		22,738		23,113		50,600		48,433
Due after ten years		185		195		15,292		14,327
Total	$	56,390	$	57,374	$	78,712	$	75,291

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
	(In thousands)

Gross gains realized	$	1,086		$	175		$	3,407		$	2,909
Gross losses realized		(540	)		(1	)		(611	)		(1,053	)
Net gain realized	$	546		$	174		$	2,796		$	1,856

Proceeds from the sale of securities available for sale amounted to $169.0 million and $218.4 million for the nine months ended September 30, 2013 and 2012, respectively.

The tax provision applicable to net realized gains was $185,000 and $956,000 for the three and nine months ended September 30, 2013, respectively. The tax provision applicable to net realized gains was $59,000 and $641,000 for the three and nine months ended September 30, 2012, respectively.

During the second quarter of 2013, securities with an amortized cost of $172.1 million were reclassified from available-for-sale to held-to-maturity. In addition, during the third quarter of 2013, securities with an amortized cost of $132.8 million were reclassified from available-for-sale to held-to-maturity. The transfers of securities into the held-to-maturity category from the available-for-sale category were made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer was retained in accumulated other comprehensive loss and in the carrying value of the held-to-maturity securities. Such amounts will be amortized from comprehensive income over the remaining life of the securities.

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

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

Available for sale:
Government-sponsored mortgage-backed securities	$	2,573	$	70,141	$	159	$	1,435
U.S. government guaranteed mortgage-backed securities		69		9,198		-		-
Corporate bonds		126		8,939		-		-
State and municipal bonds		4		254		-		-
Government-sponsored enterprise obligations		259		7,241		-		-
Mutual funds		35		3,230		137		1,659

Total available for sale		3,066		99,003		296		3,094

Held to maturity:
Government-sponsored mortgage-backed securities		4,061		86,391		253		3,444
U.S. government guaranteed mortgage-backed securities		766		32,471		-		-
Corporate bonds		653		22,179		-		-
State and municipal bonds		336		5,389		-		-
Government-sponsored enterprise obligations		2,461		40,926		-		-

Total held to maturity		8,277		187,356		253		3,444

Total	$	11,343	$	286,359	$	549	$	6,538

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

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

At September 30, 2013, 43 mortgage-backed securities had gross unrealized losses with aggregate depreciation of 3.6% from our amortized cost basis existing for less than 12 months. At September 30, 2013, three mortgage-backed securities had gross unrealized losses with aggregate depreciation of 7.8% from our amortized cost basis existing for greater than 12 months. At September 30, 2013, 14 government-sponsored enterprise obligations had gross unrealized loss with aggregate depreciation of 5.3% from our amortized cost basis existing for less than 12 months. At September 30, 2013, 13 corporate bonds had gross unrealized loss of 2.4% from our amortized cost basis existing for less than 12 months. At September 30, 2013, 10 municipal bonds had gross unrealized loss of 5.7% from our amortized cost basis existing for less than 12 months. These unrealized losses are the result of changes in interest rates and not credit quality. Because we do not intend to sell the securities and it is more likely than not that we will not be required to sell the investments before recovery of their amortized cost basis, no declines are deemed to be other-than-temporary.

At September 30, 2013, one mutual fund had a gross unrealized loss with aggregate depreciation of 1.1% from our amortized cost basis existing for less than 12 months. At September 30, 2013, one mutual fund had a gross unrealized loss with depreciation of 7.6% from our cost basis existing for greater than 12 months and was principally related to fluctuations in interest rates. These losses relate to mutual funds that invest primarily in short-term debt instruments and adjustable rate mortgage-backed securities. Because we do not intend to sell the securities and it is more likely than not that we will not be required to sell these prior to the recovery of the amortized cost basis, the losses are deemed temporary.

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

	Nine Months Ended September 30, 2012
	(In thousands)

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

5. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consisted of the following amounts:	September 30,			December 31,
	2013			2012
	(In thousands)

Commercial real estate	$	257,401		$	245,764
Residential real estate:
Residential		198,277			185,345
Home equity		35,490			34,352
Commercial and industrial		126,408			126,052
Consumer		1,852			2,431
Total Loans		619,428			593,944
Unearned premiums and deferred loan fees and costs, net		726			974
Allowance for loan losses		(7,311	)		(7,794	)
	$	612,843		$	587,124

During the nine months ended September 30, 2013 and 2012, we purchased residential real estate loans aggregating $34.6 million and $56.6 million, respectively.

We have transferred a portion of our originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in our accompanying unaudited consolidated balance sheets. We share ratably with our participating lenders in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. We continue to service the loans on behalf of the participating lenders and, as such, collect cash payments from the borrowers, remit payments (net of servicing fees) to participating lenders and disburse required escrow funds to relevant parties. At September 30, 2013 and December 31, 2012, we serviced loans for participants aggregating $10.9 million and $7.8 million, respectively.

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

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

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

General component

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

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

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

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

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

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

Allocated component

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

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

Unallocated component

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

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

	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer			Unallocated			Total
	(In thousands)
Three Months Ended
September 30, 2013
Beginning Balance	$	3,244		$	1,807		$	2,072		$	12		$	338		$	7,473
(Credit) provision		162			36			45			-			(314	)		(71	)
Charge-offs		-			(23	)		(79	)		(14	)		-			(116	)
Recoveries		-			1			9			15			-			25
Ending Balance	$	3,406		$	1,821		$	2,047		$	13		$	24		$	7,311

September 30, 2012
Beginning Balance	$	3,517		$	1,800		$	2,734		$	14		$	-		$	8,065
Provision (credit)		(43	)		106			150			5			-			218
Charge-offs		-			(115	)		-			(8	)		-			(123	)
Recoveries		14			-			-			2			-			16
Ending Balance	$	3,488		$	1,791		$	2,884		$	13		$	-		$	8,176

Nine Months Ended
September 30, 2013
Beginning Balance	$	3,406		$	1,746		$	2,167		$	13		$	462		$	7,794
(Credit) provision		(134	)		154			33			9			(438	)		(376	)
Charge-offs		(20	)		(80	)		(208	)		(28	)		-			(336	)
Recoveries		154			1			55			19			-			229
Ending Balance	$	3,406		$	1,821		$	2,047		$	13		$	24		$	7,311

September 30, 2012
Beginning Balance	$	3,504		$	1,531		$	2,712		$	17		$	-		$	7,764
Provision		115			410			167			6			-			698
Charge-offs		(195	)		(155	)		-			(19	)		-			(369	)
Recoveries		64			5			5			9			-			83
Ending Balance	$	3,488		$	1,791		$	2,884		$	13		$	-		$	8,176

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

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

Allowance for loan losses:
Individually evaluated for loss potential	$	148	$	-	$	19	$	-	$	-	$	167
Collectively evaluated for loss potential		3,258		1,821		2,028		13				7,144
Total	$	3,406	$	1,821	$	2,047	$	13	$	24	$	7,311

Loans outstanding:
Individually evaluated for loss potential	$	15,073	$	239	$	1,367	$	-	$	-	$	16,679
Collectively evaluated for loss potential		242,328		233,528		125,041		1,852		-		602,749
Total	$	257,401	$	233,767	$	126,408	$	1,852	$	-	$	619,428

December 31, 2012

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

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

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

	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Past Due 90 Days or More and Still Accruing		Loans on Non-Accrual
	(In thousands)
September 30, 2013
Commercial real estate	$	117	$	469	$	798	$	1,384	$	-	$	1,477
Residential real estate:
Residential		723		168		316		1,207		-		975
Home equity		249		3		-		252		-		87
Commercial and industrial		43		70		140		253		-		394
Consumer		6		12		-		18		-		-
Total	$	1,138	$	722	$	1,254	$	3,114	$	-	$	2,933

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

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

							Three Months Ended				Nine Months Ended
	At September 30, 2013						September 30, 2013				September 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Impaired loans without a valuation allowance:
Commercial real estate	$	1,477	$	1,767	$	-	$	1,489	$	-	$	1,515	$	-
Residential real estate		239		307		-		239		-		252		-
Commercial and industrial		394		490		-		415		-		407		-
Total		2,110		2,564		-		2,143		-		2,174		-

Impaired loans with a valuation allowance:
Commercial real estate		13,596		13,596		148		13,637		145		13,719		438
Commercial and industrial		973		973		19		976		10		982		31
Total		14,569		14,569		167		14,613		155		14,701		469

Total impaired loans	$	16,679	$	17,133	$	167	$	16,756	$	155	$	16,875	$	469

							Three Months Ended				Nine Months Ended
	At December 31, 2012						September 30, 2012				September 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Impaired loans without a valuation allowance:
Commercial real estate	$	1,011	$	1,177	$	-	$	1,610	$	-	$	1,572	$	-
Residential real estate		118		125		-		118		-		119		-
Commercial and industrial		203		212		-		23		-		-		-
Total		1,332		1,514		-		1,751		-		1,699		-

Impaired loans with a valuation allowance:
Commercial real estate		14,387		14,454		377		13,959		149		14,019		496
Residential real estate		184		184		57		186		-		186		-
Home equity		-		-		-		58		-		96		-
Commercial and industrial		1,176		1,178		104		1,365		11		1,237		32
Total		15,747		15,816		538		15,568		160		15,538		528

Total impaired loans	$	17,079	$	17,330	$	538	$	17,319	$	160	$	17,237	$	528

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

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

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

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

	Three Months Ended						Nine Months Ended
	September 30, 2012						September 30, 2012
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(In thousands)						(In thousands)
Troubled Debt Restructurings
Commercial Real Estate		-	$	-	$	-		5	$	14,887	$	14,887
Commercial and Industrial		1		45		45		3		1,184		1,184
Total		1	$	45	$	45		8	$	16,071	$	16,071

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

	September 30, 2013				September 30, 2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
	(In thousands)				(In thousands)
Troubled Debt Restructurings
Commercial Real Estate		-	$	-		4	$	966
Commercial and Industrial		-		-		1		142
Total		-	$	-		5	$	1,108

As of September 30, 2013, we have not committed to lend to any customer with outstanding loans that are classified as TDRs. There were $38,000 and $74,000 in charge-offs on TDRs during the three and nine months ended September 30, 2013, respectively. There were no charge-offs on TDRs during the three and nine months ended September 30, 2012.

Credit Quality Information

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

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

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

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

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

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

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

On an annual basis, or more often if needed, we formally review the ratings on all commercial real estate and commercial and industrial loans. Construction loans are reported within commercial real estate loans and total $18.2 and $16.3 million at September 30, 2013 and December 31, 2012, respectively. We engage an independent third party to review a significant portion of loans within these segments on a semi-annual basis. We use the results of these reviews as part of our annual review process.

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

	Commercial Real Estate		Residential 1-4 Family		Home Equity		Commercial and Industrial		Consumer		Total
	(In thousands)
September 30, 2013
Loans rated 1 – 3	$	210,514	$	197,302	$	35,403	$	95,984	$	1,852	$	541,055
Loans rated 4		25,227		-		-		20,599		-		45,826
Loans rated 5		874		-		-		1,290		-		2,164
Loans rated 6		20,786		975		87		8,535		-		30,383
	$	257,401	$	198,277	$	35,490	$	126,408	$	1,852	$	619,428

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

6. SHARE-BASED COMPENSATION

Under our 2007 Recognition and Retention Plan and 2007 Stock Option Plan, we may grant up to 624,041 stock awards and 1,560,101 stock options, respectively, to our directors, officers and employees.

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

We may grant both incentive and non-statutory stock options. The exercise price of each option equals the market price of our stock on the date of grant with a maximum term of 10 years. The fair value of each option grant is estimated on the date of grant using the binomial option pricing model.

During the third quarter of 2013, the Company completed a tender offer to purchase for cancellation 1,665,415 outstanding options to purchase common stock. The recipients of each eligible option tendered received a cash payment equal to the current fair valuation of the option as measured under the binomial model. The total cash paid to purchase the options was $2.1 million and resulted in a decrease to cash and shareholders’ equity. As of September 30, 2013, 4,016 vested outstanding options and 57,232 stock options that had been available for future grants were cancelled and the 2002 and 2007 Stock Option Plans were terminated.

Our stock award and stock option plans activity for the nine months ended September 30, 2013 and 2012 is summarized below:

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


Outstanding at December 31, 2012		33,800		$	8.23		1,669,431		$	10.02
Shared granted		7,440			7.08		-			-
Tender offer to purchase outstanding options		-			-		(1,665,415	)		-
Cancelled		-			-		(4,016	)		-
Outstanding at September 30, 2013		41,240		$	8.02		-		$	-

Outstanding at December 31, 2011		155,206		$	9.54		1,907,744		$	9.32
Stock options exercised		-			-		(237,313	)		4.39
Stock award vested		(4,006	)		10.11		-			-
Outstanding at September 30, 2012		151,200		$	9.52		1,670,431		$	10.02

We recorded compensation costs relating to stock options of $101,000 and $185,000 with related tax benefits of $27,000 and $51,000 for the three months ended September 30, 2013 and 2012, respectively. We recorded compensation costs relating to stock options of $128,000 and $577,000 with related tax benefits of $34,000 and $153,000 for the nine months ended September 30, 2013 and 2012, respectively. The completion of the tender offer caused the acceleration of vesting of certain stock options and resulted in $97,000 of the total option expense with a related tax benefit of $26,000 for the three and nine months ended September 30, 3013.

We recorded compensation cost related to the stock awards of $41,000 and $282,000 for the three months ended September 30, 2013 and 2012, respectively. We recorded compensation cost related to the stock awards of $96,000 and $858,000 for the nine months ended September 30, 2013 and 2012, respectively.

7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

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

Short-term borrowings are made up of FHLBB advances with an original maturity of less than one year as well as customer repurchase agreements, which have an original maturity of one day. Short-term borrowings issued by the FHLBB were $23.0 million and $33.0 million at September 30, 2013, and December 31, 2012, respectively. The outstanding balance on our line of credit with the FHLBB was $1.1million and $8.7 million at September 30, 2013, and December 31, 2012, respectively. Customer repurchase agreements were $37.7 million at September 30, 2013, and $24.2 million at December 31, 2012. A customer repurchase agreement is an agreement by us to sell to and repurchase from the customer an interest in specific securities issued by or guaranteed by the U.S. government. This transaction settles immediately on a same day basis in immediately available funds. Interest paid is commensurate with other products of equal interest and credit risk. All of our customer repurchase agreements at September 30, 2013, and December 31, 2012, were held by commercial customers. In addition, we have a $4.0 million line of credit with Bankers Bank Northeast (“BBN”) at an interest rate determined and reset by BBN on a daily basis. At December 31, 2012, we had $4.0 million outstanding under this line of credit. There were no advances outstanding under this line of credit at September 30, 2013. As part of our contract with BBN, we are required to maintain a reserve balance of $300,000 with BBN for our use of this line of credit.

Long-term debt consists of FHLBB advances, securities sold under repurchase agreements and customer repurchase agreements with an original maturity of one year or more. At September 30, 2013, we had $232.6 million in long-term debt with the FHLBB and $10 million in securities sold under repurchase agreements with an approved broker-dealer. This compares to $220.1 million in long-term debt with FHLBB advances and $53.3 million in securities sold under repurchase agreements with an approved broker-dealer at December 31, 2012. The securities sold under agreements to repurchase are callable at the issuer’s option beginning in the year 2013. Customer repurchase agreements were $5.6 million and $5.4 million at September 30, 2013 and December 31, 2012, respectively.

For the nine months ended September 30, 2013, we prepaid repurchase agreements in the amount $43.3 million and incurred a prepayment expense of $3.4 million. The repurchase agreements had a weighted average cost of 3.02%. During the last week of December 2012, we prepaid repurchase agreements in the amount $28.0 million, which had a weighted average cost of 3.06%. The prepayments of repurchase agreements resulted in a decrease to the cost of funds and an increase to the net interest margin.

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

8. PENSION BENEFITS

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

	Three Months Ended						Nine Months Ended,
	September 30,						September 30,
	2013			2012			2013			2012
	(In thousands)
Service cost	$	272		$	279		$	817		$	815
Interest cost		178			200			533			600
Expected return on assets		(232	)		(218	)		(696	)		(649	)
Transition obligation		(3	)		(3	)		(8	)		(8	)
Actuarial loss		17			44			76			131
Net periodic pension cost	$	232		$	302		$	722		$	889

We maintain a pension plan for our eligible employees. We plan to contribute to the pension plan the amount required to meet the minimum funding standards under Section 412 of the Internal Revenue Code of 1986, as amended. Additional contributions will be made as deemed appropriate by management in conjunction with the pension plan’s actuaries. We have not yet determined how much we expect to contribute to our pension plan in 2013. No contributions have been made to the plan for the three months ended September 30, 2013. Effective June 15, 2013, Principal Financial Group, who also acts as our 401(k) plan provider, was appointed as the trustee for the pension plan. The pension plan assets are invested in group annuity contracts with the Principal Financial Group.

9. DERIVATES AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

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

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of our derivative financial instruments designated as hedging instruments as well as our classification on the balance sheet as of September 30, 2013.

Asset Derivatives

Liability Derivatives

Balance Sheet

Location

Fair Value

Balance Sheet

Location

Fair Value

(In thousands)

Interest rate swaps

N/A

Other Liabilities

Total derivatives designated as hedging

instruments

At September 30, 2013, we held no derivatives that were not designated as hedging instruments. We had no derivative financial instruments at December 31, 2012.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest income and expense and to manage our exposure to interest rate movements. To accomplish this objective, we entered into interest rate swaps in September 2013 as part of our interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for our making fixed payments. As of September 30, 2013, we had six forward-starting interest rate swaps with a notional amount of $155.0 million associated with our cash outflows associated with various FHLB advances. The forward-starting interest rate swaps will become effective between October 2013 and September 2016, and they mature between October 2017 and September 2022.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. We assess the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. We did not recognize any hedge ineffectiveness in earnings during the three months ended September 30, 2013.

We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of 36 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).

Amounts reported in accumulated other comprehensive loss related to these derivatives will be reclassified to interest expense as interest payments are made on our rate sensitive assets/liabilities. During the period ended September 30, 2013, we had no reclassifications to interest expense. During the next twelve months, we estimate that $166,000 will be reclassified as an increase in interest expense.

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

	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
	(In thousands)
Interest rate swaps	$	(79	)	$	-	$	(79	)	$	-

During the three and nine months ended September 30, 2013 and 2012, no gains or losses were reclassified from accumulated other comprehensive loss into income for the effective portion or ineffective portions of cash flow hedges.

Credit-risk-related Contingent Features

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

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

As of September 30, 2013, the termination value of derivatives in a net liability position related to these agreements, which includes accrued interest but excludes any adjustment for nonperformance risk, was $79,000. As of September 30, 2013, we have minimum collateral posting thresholds with certain of our derivative counterparties and have no collateral posted against our obligations under these agreements. If we had breached any of these provisions at September 30, 2013, we could have been required to settle our obligations under the agreements at the termination value.

10. FAIR VALUE OF ASSETS AND LIABILITIES

Determination of Fair Value

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

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

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

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

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

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

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

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

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

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

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

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

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

Interest rate swaps - The valuation of our interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. We have determined that the majority of the inputs used to value our interest rate derivatives fall within Level 2 of the fair value hierarchy.

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, 2013
	Level 1		Level 2		Level 3		Total
Assets:	(In thousands)

Securities available for sale:
Government-sponsored mortgage-backed securities	$	-	$	104,311	$	-	$	104,311
U.S. government guaranteed mortgage-backed securities		-		73,710		-		73,710
Corporate bonds		-		26,650		-		26,650
State and municipal bonds		-		21,116		-		21,116
Government-sponsored enterprise obligations		-		9,608		-		9,608
Mutual funds		5,945		-		-		5,945
Common and preferred stock		1,617		-		-		1,617
Total assets	$	7,562	$	235,395	$	-	$	242,957

Liabilities:
Interest rate swaps	$	-	$	79	$	-	$	79

	December 31, 2012
	Level 1		Level 2		Level 3		Total
Securities available for sale:	(In thousands)

Government-sponsored mortgage-backed securities	$	-	$	328,023	$	-	$	328,023
U.S. government guaranteed mortgage-backed securities		-		130,735		-		130,735
Private-label residential mortgage-backed securities		-		52,337		-		52,337
State and municipal bonds		-		40,846		-		40,846
Government-sponsored enterprise obligations		-		62,060		-		62,060
Mutual funds		6,046		-		-		6,046
Common and preferred stock		1,460		-		-		1,460
Total assets	$	7,506	$	614,001	$	-	$	621,507

No liabilities were measured at fair value on a recurring basis at December 31, 2012.

Also, we may be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related assets at September 30, 2013 and 2012. Total losses represent the change in carrying value as a result of fair value adjustments related to assets still held at September 30, 2013 and 2012.

	At						Three Months Ended			Nine Months Ended
	September 30, 2013						September 30, 2013			September 30, 2013
	Level 1		Level 2		Level 3		Total Losses			Total Gains (Losses)
	(In thousands)						(In thousands)			(In thousands)

Impaired loans	$	-	$	-	$	2,109	$	(38	)	$	31
Total assets	$	-	$	-	$	2,109	$	(38	)	$	31

	At						Three Months Ended			Nine Months Ended
	September 30, 2012						September 30, 2012			September 30, 2012
	Level 1		Level 2		Level 3		Total Losses			Total Losses
	(In thousands)						(In thousands)			(In thousands)

Impaired loans	$	-	$	-	$	1,100	$	(352	)	$	(196	)
Total assets	$	-	$	-	$	1,100	$	(352	)	$	(196	)

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

There were no transfers to or from Level 1 and 2 during the three and nine months ended September 30, 2013 and 2012. We did not measure any liabilities at fair value on a recurring or non-recurring basis on the consolidated balance sheets.

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

	September 30, 2013
	Carrying Value		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents	$	28,418	$	28,418	$	-	$	-	$	28,418
Securities available for sale		242,957		7,562		235,395		-		242,957
Securities held to maturity		298,988		-		291,089		-		291,089
Federal Home Loan Bank of Boston and other restricted stock		15,631		-		-		15,631		15,631
Loans - net		612,843		-		-		615,973		615,973
Accrued interest receivable		4,164		-		-		4,164		4,164

Liabilities:
Deposits		793,510		-		-		795,876		795,876
Short-term borrowings		61,784		-		61,784		-		61,784
Long-term debt		248,184		-		251,612		-		251,612
Accrued interest payable		333		-		-		333		333
Derivative liabilities		79		-		79		-		79

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

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

11. RECENT ACCOUNTING PRONOUNCEMENTS

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

In July 2013, FASB issued ASU No. 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus of the FASB Emerging Issues Task Force). The guidance permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes. This guidance is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013 and is not expected to have a significant impact on our financial statements.

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

Overview

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

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

●

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

●

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

●

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

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

●

Net income was $1.6 million, or $0.08 per diluted share, for the three months ended September 30, 2013, compared to $1.4 million, or $0.06 per diluted share, for the same period in 2012. For the nine months ended September 30, 2013, net income was $4.9 million, or $0.24 per diluted share, as compared to net income of $4.7 million, or $0.19 per diluted share, for the same period in 2012.

●

The (credit) provision for loan losses was $(71,000) and $218,000 for the three months ended September 30, 2013 and 2012, respectively, and $(376,000) and $698,000 for the nine months ended September 30, 2013 and 2012, respectively. The credit for loan losses is the result of continued improvement in the overall risk profile of the commercial loan portfolio. Classified loans that previously carried higher allowances showed considerable improvement, resulting in a lower allowance requirement.

●

Net interest income was $7.8 million and $7.7 million for the three months ended September 30, 2013 and 2012, respectively. The net interest margin, on a tax-equivalent basis, was 2.62% for the three months ended September 30, 2013, compared to 2.52% for the same period in 2012. For the nine months ended September 30, 2013 and 2012, net interest income was $23.1 million and $22.8 million, respectively. The net interest margin, on a tax-equivalent basis, was 2.59% for the nine months ended September 30, 2013 and 2.55% for the nine months ended September 30, 2012.

REGULATORY DEVELOPMENTS

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

CRITICAL ACCOUNTING POLICIES

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

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

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

Total assets were stable at $1.3 billion at September 30, 2013 and December 31, 2012. Securities decreased $78.2 million to $557.6 million at September 30, 2013, from $635.8 million at December 31, 2012. Cash flow received from payoffs and pay downs on the securities portfolio were used to fund loan originations and share repurchases. During the second quarter of 2013, securities with an amortized cost of $172.1 million were reclassified from available-for-sale to held-to-maturity. In addition, during the third quarter of 2013, securities with an amortized cost of $132.8 million were reclassified from available-for-sale to held-to-maturity. The transfers of securities into the held-to-maturity category from the available-for-sale category were made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer was retained in accumulated other comprehensive loss and in the carrying value of the held-to-maturity securities. Such amounts will be amortized from comprehensive income over the remaining life of the securities.

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

As of September 30, 2013, we entered into several forward-starting interest rate swap contracts with a combined notional value of $155.0 million. The swap contracts have start dates ranging from the fourth quarter 2013 to the third quarter 2016 and have durations ranging from four to six years. This hedge strategy converts the LIBOR based rate of interest on certain FHLB advances to fixed interest rates, thereby protecting us from floating interest rate variability. On a stand-alone basis, the interest rate swaps introduce potential future volatility in tangible book value and accumulated other comprehensive income (AOCI), however the valuation of the swaps are expected to change in the opposite direction of the valuations on the available-for-sale securities portfolio. This is consistent with Management’s objective to reduce total volatility in tangible book value and AOCI.

Total loans increased by $25.3 million to $620.2 million at September 30, 2013, from $594.9 million at December 31, 2012. Residential loans increased $14.1 million to $233.8 million at September 30, 2013, from $219.7 million at December 31, 2012. Through our long standing relationship with a third-party mortgage company, we originated and purchased a total of $34.6 million in residential loans within and contiguous to our market area. While management has used residential loan growth to supplement the loan portfolio, the long-term strategy remains focused on commercial lending.

Commercial real estate loans increased $11.6 million to $257.4 million at September 30, 2013, from $245.8 at December 31, 2012. Non-owner occupied commercial real estate loans increased $11.0 million to $143.8 million at September 30, 2013, from $132.8 million at December 31, 2012, while owner occupied commercial real estate loans increased $572,000 to $113.6 million at September 30, 2013, from $113.0 million at December 31, 2012. The increase in commercial real estate loans was due to new loan originations during the year. Commercial and industrial loans increased $356,000 to $126.4 million at September 30, 2013, from $126.1 million at December 31, 2012. Increases of $2.5 million within commercial and industrial loans were offset by a decrease in customer’s line of credit usage of $2.2 million.

All loans where the interest payment is 90 days or more in arrears as of the closing date of each month are placed on nonaccrual status. Nonperforming loans decreased $76,000 to $2.9 million at September 30, 2013, from $3.0 million at December 31, 2012. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $125,000 and $379,000 for the nine months ended September 30, 2013 and 2012, respectively. At September 30, 2013, there was no foreclosed real estate, as compared to $964,000 in foreclosed real estate at December 31, 2012. During the first quarter of 2013, we sold this property and did not retain the financing. At September 30, 2013 and December 31, 2012, our nonperforming loans to total loans were 0.47% and 0.51%, respectively, while our nonperforming assets to total assets were 0.23% and 0.31%, respectively. A summary of our nonaccrual and past due loans by class are listed in Note 5 of the accompanying unaudited consolidated financial statements.

Total deposits increased $40.1 million to $793.5 million at September 30, 2013, from $753.4 million at December 31, 2012. The increase in deposits was due to a $37.4 million increase in money market accounts, which were $205.6 million and $168.2 million at September 30, 2013 and December 31, 2012, respectively. This was the result of a relationship-based money market product established in second half of 2012 which continues to grow. Time deposit accounts increased $9.2 million to $335.2 million at September 30, 2013, from $326.0 million at December 31, 2012. Checking accounts increased $2.2 million to $169.2 million at September 30, 2013 from $167.0 million at December 31, 2012. Savings accounts decreased $8.7 million to $83.5 million at September 30, 2013 from $92.2 million at December 31, 2012.

Borrowings decreased $38.8 million to $310.0 million at September 30, 2013, from $348.8 million at December 31, 2012. Short-term borrowings decreased $8.1 million to $61.8 million at September 30, 2013 from $69.9 million at December 31, 2012, respectively. Long-term debt decreased $30.7 million to $248.2 million from $278.9 million at December 31, 2012. The decrease in our long-term borrowings was due to prepayments of repurchase agreements, which was partially offset by an increase in funds from the FHLBB in order to take advantage of long-term, low cost FHLBB funding in this interest rate environment. We prepaid repurchase agreements in the amount $43.3 million and incurred a prepayment expense of $3.4 million for the nine months ended September 30, 2013. The repurchase agreements had a weighted average cost of 3.02%. During the last week of December 2012, we prepaid repurchase agreements in the amount $28.0 million, which had a weighted average cost of 2.99%. The prepayments of repurchase agreements resulted in a decrease to the cost of funds and an increase to the net interest margin. Long-term FHLBB borrowings increased $12.5 million to $232.6 million at September 30, 2013 from $220.1 million at December 31, 2012. Our short-term borrowings and long-term debt are discussed in Note 7 of the accompanying unaudited consolidated financial statements.

Shareholders’ equity was $156.9 million and $189.2 million, which represented 12.3% and 14.5% of total assets at September 30, 2013 and December 31, 2012, respectively. The decrease in shareholders’ equity during the nine months reflects the repurchase of 2,107,576 shares of our common stock at a cost of $16.0 million pursuant to our stock repurchase program, the payment of regular dividends amounting to $4.7 million, a decrease in accumulated other comprehensive income of $14.5 million due to changes in the fair value of securities and a tender offer to repurchase outstanding options amounting to $2.7 million. This was partially offset by net income of $4.9 million for the nine months ended September 30, 2013.

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

General

Net income was $1.6 million, or $0.08 per diluted share, for the quarter ended September 30, 2013, compared to $1.4 million, or $0.06 per diluted share, for the same period in 2012. Net interest income was $7.8 million and $7.7 million for the three months ended September 30, 2013 and 2012, respectively.

Net Interest and Dividend Income

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

	Three Months Ended September 30,
	2013								2012
	Average					Avg Yield/			Average					Avg Yield/
	Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans(1)(2)	$	609,876	$	6,409			4.20	%	$	585,612	$	6,517			4.45	%
Securities(2)		573,955		4,077			2.84			643,701		4,521			2.81
Other investments - at cost		17,537		20			0.46			15,920		23			0.58
Short-term investments(3)		9,373		3			0.13			5,220		1			0.08
Total interest-earning assets		1,210,741		10,509			3.47			1,250,453		11,062			3.54
Total noninterest-earning assets		73,123								66,183

Total assets	$	1,283,864							$	1,316,636

LIABILITIES AND EQUITY:
Interest-bearing liabilities
NOW accounts	$	45,756		34			0.30		$	58,845		54			0.37
Savings accounts		85,960		26			0.12			93,831		39			0.17
Money market accounts		206,674		206			0.40			176,729		197			0.45
Time certificates of deposit		330,222		1,124			1.36			316,612		1,215			1.54
Total interest-bearing deposits		668,612		1,390						646,017		1,505
Short-term borrowings and long-term debt		326,785		1,130			1.38			343,696		1,645			1.91
Interest-bearing liabilities		995,397		2,520			1.01			989,713		3,150			1.27
Noninterest-bearing deposits		119,462								104,402
Other noninterest-bearing liabilities		10,676								11,075
Total noninterest-bearing liabilities		130,138								115,477

Total liabilities		1,125,535								1,105,190
Total equity		158,329								211,446
Total liabilities and equity	$	1,283,864							$	1,316,636
Less: Tax-equivalent adjustment(2)				(161	)							(209	)
Net interest and dividend income			$	7,828							$	7,703
Net interest rate spread(4)							2.46	%							2.27	%
Net interest margin(5)							2.62	%							2.52	%
Ratio of average interest-earning
assets to average interest-bearing liabilities							121.63								126.35

________________________

(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 consolidated statements of net 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, 2013 Compared to Three Months Ended September 30, 2012
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest-earning assets	(In thousands)
Loans (1)	$	268		$	(376	)	$	(108	)
Securities (1)		(489	)		45			(444	)
Other investments - at cost		2			(5	)		(3	)
Short-term investments		1			1			2
Total interest-earning assets		(218	)		(335	)		(553	)

Interest-bearing liabilities
NOW accounts		(12	)		(8	)		(20	)
Savings accounts		(2	)		(11	)		(13	)
Money market accounts		36			(27	)		9
Time deposits		56			(147	)		(91	)
Short-term borrowing and long-time debt		(85	)		(430	)		(515	)
Total interest-bearing liabilities		(7	)		(623	)		(630	)
Change in net interest and dividend income	$	(211	)	$	288		$	77

__________________________

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

Interest on earning-assets, on a tax-equivalent basis, decreased $553,000 to $10.5 million for the three months ended September 30, 2013, from $11.1 million for the same period in 2012. The average yield on interest-earning assets decreased 7 basis points to 3.47% for the three months ended September 30, 2013, from 3.54% for the same period in 2012. The average yield on interest-earning assets decreased primarily due to decreases in the average yield on loans. The average yield on loans decreased 25 basis points to 4.20% for the three months ended September 30, 2013, from 4.45% for the same period in 2012 due to the lower interest rate environment. This was partially mitigated by a $24.3 million increase in the average balance of loans to $609.9 million for the three months ended September 30, 2013, from $585.6 million for the same period in 2012. Cash flows from payoffs and pay downs within the loan portfolio were reinvested in loans having a lower yield, which is reflective of the current market rate environment. The average yield on securities increased 3 basis points to 2.84% for the three months ended September 30, 2013, compared to 2.81% for the same period in 2012, however, this was offset by a decrease in the average balance of securities of $69.7 million to $574.0 million for the three months ended September 30, 2013, from $643.7 million for the same period in 2012.

Interest expense decreased $630,000 to $2.5 million for the three months ended September 30, 2013, from $3.2 million for the same period in 2012. The average cost of interest-bearing liabilities decreased 26 basis points to 1.01% for the three months ended September 30, 2013, from 1.27% for the same period in 2012. The decrease in the cost of interest-bearing liabilities was primarily due to a decrease in rates on short-term borrowings and long-term debt. We prepaid repurchase agreements in the amount $9.5 million and incurred a prepayment expense of $540,000 for the three months ended September 30, 2013. The repurchase agreements had a weighted average cost of 2.86%. The prepayments of repurchase agreements resulted in a decrease to the cost of funds and an increase to the net interest margin.

Provision for Loan Losses

The amount that we provided for loan losses during the three months ended September 30, 2013 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio for the quarter, described in detail below, include the continuous improvement of the overall risk profile of the commercial loan portfolio, increase in commercial real estate loans, residential real estate loans and a decrease in commercial and industrial loans. After evaluating these factors, we recorded a credit of $(71,000) for loan losses for the three months ended September 30, 2013, compared to a provision of $218,000 for the same period in 2012. The allowance was $7.3 million at September 30, 2013, and $7.5 million at June 30, 2013. The allowance for loan losses was 1.18% of total loans at September 30, 2013 and 1.23% at June 30, 2013.

The credit for loan losses was the result of continued improvement in the overall risk profile of the commercial loan portfolio. Allowances on impaired loans decreased $71,000 to $167,000 at September 30, 2013, while balances on impaired loans decreased $100,000 to $16.7 million at September 30, 2013 from $16.8 million at June 30, 2013. In addition, commercial real estate loans increased $13.7 million to $257.4 million at September 30, 2013, from $243.7 million at June 30, 2013. Residential real estate loans increased $1.9 million to $233.8 million compared to $231.9 million at June 30, 2013. We consider residential real estate loans to contain less credit risk and market risk than both commercial and industrial and commercial real estate loans. A summary of our provision for loan losses by loan segment is listed in Note 5 of the accompanying unaudited consolidated financial statements.

Net charge-offs were $91,000 for the three months ended September 30, 2013. This comprised charge-offs of $116,000 for the three months ended September 30, 2013, offset by recoveries of $25,000 for the same period.

Net charge-offs were $107,000 for the three months ended September 30, 2012. This comprised charge-offs of $123,000 for the three months ended September 30, 2012, offset by recoveries of $16,000.

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

Noninterest Income

Noninterest income decreased $172,000 to $1.0 million for the three months ended September 30, 2013, compared to $1.2 million for the same period in 2012. We recorded $546,000 in gains on sales of securities for the three months ended September 30, 2013, as compared to $174,000 for the comparable 2012 period. The gains recorded during the three months ended September 30, 2013 were offset by $540,000 in expense on the prepayment of borrowings for the same period.

Noninterest Expense

Noninterest expense increased $53,000 to $6.9 million for the three months ended September 30, 2013. Occupancy expense increased $70,000 to $733,000 for the three months ended September 30, 2013. Professional fees increased $67,000 to $499,000 for the three months ended September 30, 2013 primarily as a result of fees paid to various third parties for ongoing consulting services. Salaries and benefits decreased $129,000 to $4.1 million for the three months ended September 30, 2013. This was mainly the result of the completion of vesting of certain stock-based compensation during the fourth quarter of 2012.

Income Taxes

For the three months ended September 30, 2013, we had a tax provision of $476,000 as compared to $481,000 for the same period in 2012. The effective tax rate was 23.1% for the three months ended September 30, 2013 and 25.7% for the same period in 2012. The change in effective tax rate from September 2012 is primarily the result of maintaining the same level of tax advantaged income such as BOLI and tax-exempt municipal obligations.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND SEPTEMBER 30, 2012

General

Net income was $4.9 million, or $0.24 per diluted share, for the nine months ended September 30, 2013, compared to $4.7 million, or $0.19 per diluted share, for the same period in 2012. Net interest income was $23.1 million and $22.8 million for the nine months ended September 30, 2013 and 2012, respectively.

Net Interest and Dividend Income

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

	Nine Months Ended September 30,
	2013								2012
	Average					Avg Yield/			Average					Avg Yield/
	Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans(1)(2)	$	599,844	$	19,063			4.24	%	$	569,820	$	19,353			4.53	%
Securities(2)		598,405		12,322			2.75			637,095		13,712			2.87
Other investments - at cost		17,164		60			0.47			15,072		70			0.62
Short-term investments(3)		6,895		6			0.12			9,773		2			0.03
Total interest-earning assets		1,222,308		31,451			3.43			1,232,760		33,137			3.59
Total noninterest-earning assets		68,481								65,905

Total assets	$	1,290,789							$	1,297,665

LIABILITIES AND EQUITY:
Interest-bearing liabilities
NOW accounts	$	47,812		106			0.30		$	63,019		221			0.47
Savings accounts		89,220		98			0.15			96,034		147			0.20
Money market accounts		192,378		564			0.39			167,758		619			0.49
Time certificates of deposit		327,894		3,399			1.38			316,001		3,678			1.55
Total interest-bearing deposits		657,304		4,167						642,812		4,665
Short-term borrowings and long-term debt		335,662		3,641			1.45			327,797		4,966			2.02
Interest-bearing liabilities		992,966		7,808			1.05			970,609		9,631			1.32
Noninterest-bearing deposits		116,320								101,874
Other noninterest-bearing liabilities		10,242								10,758
Total noninterest-bearing liabilities		126,562								112,632

Total liabilities		1,119,528								1,083,241
Total equity		171,261								214,424
Total liabilities and equity	$	1,290,789							$	1,297,665
Less: Tax-equivalent adjustment(2)				(509	)							(660	)
Net interest and dividend income			$	23,134							$	22,846
Net interest rate spread(4)							2.38	%							2.26	%
Net interest margin(5)							2.59	%							2.55	%
Ratio of average interest-earning
assets to average interest-bearing liabilities							123.10								126.91

________________________

(1)

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

(2)

(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 30, 2013 Compared to Nine Months Ended September 30, 2012
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest-earning assets	(In thousands)
Loans (1)	$	1,027		$	(1,317	)	$	(290	)
Securities (1)		(831	)		(559	)		(1,390	)
Other investments - at cost		10			(20	)		(10	)
Short-term investments		-			4			4
Total interest-earning assets		206			(1,892	)		(1,686	)

Interest-bearing liabilities
NOW accounts		(52	)		(63	)		(115	)
Savings accounts		(13	)		(36	)		(49	)
Money market accounts		88			(143	)		(55	)
Time deposits		134			(413	)		(279	)
Short-term borrowing and long-time debt		119			(1,444	)		(1,325	)
Total interest-bearing liabilities		276			(2,099	)		(1,823	)
Change in net interest and dividend income	$	(70	)	$	207		$	137

__________________________

(1)

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

Net interest income was $23.1 million and $22.8 million for the nine months ended September 30, 2013 and 2012, respectively. The net interest margin, on a tax-equivalent basis, was 2.59% for the nine months ended September 30, 2013 and 2.55% for the nine months ended September 30, 2012, respectively.

The primary reason for the increase of $288,000 in net interest income and net interest margin for the nine months ended September 30, 2013 was that the decrease in the cost of interest-bearing liabilities outpaced the decrease in the yield on average interest-earning assets offset by the decrease in average interest-earning assets. Interest expense decreased $1.8 million to $7.8 million for the nine months ended September 30, 2013, from $9.6 million for the same period in 2012. The average cost of interest-bearing liabilities decreased 27 basis points to 1.05% for the nine months ended September 30, 2013, from 1.32% for the same period in 2012. The decrease in the cost of interest-bearing liabilities was primarily due to a decrease in rates on short-term borrowings and long-term debt. We prepaid repurchase agreements in the amount $43.3 million and incurred a prepayment expense of $3.4 million for the nine months ended September 30, 2013. The repurchase agreements had a weighted average cost of 2.99%. During the last week of December 2012, we prepaid repurchase agreements in the amount $28.0 million, which had a weighted average cost of 3.06%. The prepayments of repurchase agreements resulted in a decrease to the cost of funds and an increase to the net interest margin.

Interest on earning-assets, on a tax-equivalent basis, decreased $1.6 million to $31.5 million for the nine months ended September 30, 2013, from $33.1 million for the same period in 2012. The average yield on interest-earning assets decreased 16 basis points to 3.43% for the nine months ended September 30, 2013, from 3.59% for the same period in 2012. The average yield on interest-earning assets decreased primarily due to decreases in the average yield on loans and investments. The average yield on loans decreased 29 basis points to 4.24% for the nine months ended September 30, 2013, from 4.53% for the same period in 2012 due to the lower interest rate environment. This was partially mitigated by a $30.0 million increase in the average balance of loans to $599.8 million for the nine months ended September 30, 2013, from $569.8 million for the same period in 2012. Cash flows from payoffs and pay downs within the loan portfolio were reinvested in loans having a lower yield, which is reflective of the current market rate environment. In addition, the average yield on securities decreased 12 basis points to 2.75% for the nine months ended September 30, 2013 compared to 2.87% for the same period in 2012. The average balance of securities decreased $38.7 million to $598.4 million for September 30, 2013 from $637.1 million for the same period in 2012.

Provision for Loan Losses

The amount that we provided for loan losses during the nine months ended September 30, 2013 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio for the nine months ended September 30, 2013, described in detail below, include the continuous improvement of the overall risk profile of the commercial loan portfolio, increases in commercial real estate loans, residential real estate loans, commercial and industrial loans and a decrease in net charge-offs. After evaluating these factors, we recorded a credit of $(376,000) for loan losses for the nine months ended September 30, 2013, compared to a provision of $698,000 for the same period in 2012. The allowance was $7.3 million at September 30, 2013 and $7.8 million at December 31, 2012. The allowance for loan losses was 1.18% of total loans at September 30, 2013 and 1.31% at December 31, 2012.

The credit for loan losses was the result of continued improvement in the overall risk profile of the commercial loan portfolio. Impaired loans that previously carried higher allowances showed considerable improvement resulting in allowances on impaired loans decreasing $371,000 to $167,000 at September 30, 2013 from $538,000 at December 31, 2012. In addition, commercial real estate loans increased $11.6 million to $257.4 million at September 30, 2013, from $245.8 million at December 31, 2012. Residential real estate loans increased $14.1 million to $233.8 million compared to $219.7 million at December 31, 2012. We consider residential real estate loans to contain less credit risk and market risk than both commercial and industrial and commercial real estate loans. Commercial and industrial loan increased $355,000 to $126.4 million at September 30, 2013 from $126.1 million at December 31, 2012. A summary of our provision for loan losses by loan segment is listed in Note 5 of the accompanying unaudited consolidated financial statements.

Net charge-offs were $107,000 for the nine months ended September 30, 2013. This comprised charge-offs of $336,000 for the nine months ended September 30, 2013, offset by recoveries of $229,000 for the same period.

Net charge-offs were $286,000 for the nine months ended September 30, 2012. This comprised charge-offs of $369,000 for the nine months ended September 30, 2012, offset by recoveries of $83,000.

Noninterest Income

Noninterest income decreased $1.7 million to $2.9 million for the nine months ended September 30, 2013, compared to $4.6 million for the same period in 2012. During the nine months ended September 30, 2013, we recorded gains on the proceeds of BOLI death benefits of $563,000, as compared to $80,000 in the comparable 2012 period. In addition, we had $2.8 million in gains on sales of securities, compared to $1.9 million for the comparable 2012 period. For the nine months ended September 30, 2013, the gains on BOLI death benefits and sales of securities were offset by $3.4 million in expense on the prepayment of borrowings, which resulted in the overall decrease in noninterest income.

Service charges and fees increased $130,000 to $1.8 million at September 30, 2013, from $1.6 million at September 30, 2012. Fees collected from card-based transactions increased $128,000 for the nine months ended September 30, 2013 which reflects an increase in customer debit card and automated teller machine transactions. Income from BOLI increased $109,000 to $1.2 million for the nine month ended September 30, 2013, compared to $1.1 million for the same period in 2012. During the second quarter of 2012, management redeemed certain BOLI policies because of a sudden downgrade in the credit ratings of the insurance carrier and the carrier’s decision to close out its individual life policies to new sales. The lower income from BOLI for the nine months ended September 30, 2012 was primarily the result of a $102,000 charge associated with transferring the policies to a different carrier.

Noninterest Expense

Noninterest expense decreased $322,000 to $20.2 million for the nine months ended September 30, 2013. Salaries and benefits decreased $909,000 to $11.7 million for the nine months ended September 30, 2013. This was mainly the result of the completion of vesting of certain stock-based compensation during the fourth quarter of 2012. Other expenses increased $181,000, primarily due to an increase of $156,000 in net ATM/Debit card expense resulting from changes in interchange fees. Data processing fees increased $159,000 due to increased use of technology in customer delivery channels and general bank operations. Professional fees expense increased $135,000 primarily due to legal expenses associated with filing the stock option tender offer.

Income Taxes

For the nine months ended September 30, 2013, we had a tax provision of $1.3 million as compared to $1.6 million for the same period in 2012. The effective tax rate was 21.3% for the nine months ended September 30, 2013 and 25.5% for the same period in 2012. The change in effective tax rate is primarily due to the net gain on BOLI death benefits recognized during the nine months ended September 30, 2013, while the nine months ended September 30, 2012 showed an additional income tax provision of $160,000, or 2.5% of income before income taxes, due to the redemption of BOLI.

LIQUIDITY AND CAPITAL RESOURCES

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, withdrawals of deposits and operating expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of securities and funds provided by operations. We also can borrow funds from the FHLBB based on eligible collateral of loans and securities. Our maximum additional borrowing capacity from the FHLBB at September 30, 2013, was $67.7 million. We also have a $4.0 million line of credit with BBN at an interest rate determined and reset by BBN on a daily basis. As of September 30, 2013, our additional borrowing capacity from the BBN was $4.0 million.

Liquidity management is both a daily and long-term function of business management. The measure of a company’s liquidity is its ability to meet its cash commitments at all times with available cash or by conversion of other assets to cash at a reasonable price. Loan repayments and maturing securities are a relatively predictable source of funds. However, deposit flow, calls of securities and repayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds. Management believes that we have sufficient liquidity to meet its current operating needs.

At September 30, 2013, we exceeded each of the applicable regulatory capital requirements. As of September 30, 2013, the most recent notification from the Office of Comptroller of the Currency categorized us as “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized” we must maintain minimum total risk-based, Tier 1 risk based, and Tier 1 leverage ratios as set forth in the following table. There is also a requirement to maintain a ratio of 1.5% tangible capital to tangible assets. There are no conditions or events since that notification that management believes would change our category. Our actual capital ratios of September 30, 2013, and December 31, 2012, are also presented in the following table.

	Actual					Minimum For Capital Adequacy Purpose					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
September 30, 2013
Total Capital (to Risk Weighted Assets):
Consolidated	$	168,148		22.24	%	$	60,476		8.00	%		N/A		-
Bank		160,591		21.30			60,315		8.00		$	75,394		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	160,711		21.26			30,238		4.00			N/A		-
Bank		153,220		20.32			30,158		4.00			45,236		6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated	$	160,711		12.60			51,006		4.00			N/A		-
Bank		153,220		12.04			50,917		4.00			63,646		5.00
Tangible Equity (to Tangible Assets):
Consolidated		N/A		-			N/A		-			N/A		-
Bank		153,220		12.04			19,094		1.50			N/A		-

December 31, 2012
Total Capital (to Risk Weighted Assets):
Consolidated	$	186,084		25.41	%	$	58,586		8.00	%		N/A		-
Bank		176,904		24.24			58,390		8.00		$	72,988		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		178,201		24.33			29,293		4.00			N/A		-
Bank		169,191		23.18			29,195		4.00			43,793		6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated		178,201		13.91			51,239		4.00			N/A		-
Bank		169,191		13.25			51,090		4.00			63,862		5.00
Tangible Equity (to Tangible Assets):
Consolidated		N/A		-			N/A		-			N/A		-
Bank		169,191		13.25			19,159		1.50			N/A		-

We also have outstanding, at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. We are obligated under leases for certain of our branches and equipment. The following table summarizes the contractual obligations and credit commitments at September 30, 2013:

	Within 1 Year		After 1 Year But Within 3 Years		After 3 Years But Within 5 Years		After 5 Years		Total
	(In thousands)
Lease Obligations
Operating lease obligations	$	660	$	1,179	$	806	$	9,166	$	11,811

Borrowings and Debt
Federal Home Loan Bank		31,194		103,015		94,500		28,000		256,709
Securities sold under agreements to repurchase		37,664		5,595		10,000		-		53,259
Total borrowings and debt		68,858		108,610		104,500		28,000		309,968

Credit Commitments
Available lines of credit		65,436		-		-		22,434		87,870
Other loan commitments		27,754		3,200		-		52		31,006
Letters of credit		1,570		-		-		517		2,087
Total credit commitments		94,760		3,200		-		23,003		120,963

Total Obligations	$	164,278	$	112,989	$	105,306	$	60,169	$	442,742

OFF-BALANCE SHEET ARRANGEMENTS

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

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There have been no material changes in our assessment of our sensitivity to market risk since its presentation in our 2012 Annual Report. Please refer to Item 7A of the 2012 Annual Report for additional information.

ITEM 4: CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures.

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

Changes in Internal Control Over Financial Reporting.

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

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

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

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

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

Period	Total Number of Shares Purchased		Average Price Paid per Share ($)		Total Number of Shares Purchased as Part of Publicly Announced Programs		Maximum Number of Shares that May Yet Be Purchased Under the Program
July 1- 31, 2013		-		-		-		-
August 1 - 31, 2013		-		-		-		-
September 1 - 30, 2013		8,914		7.29		8,914		1,028,086	(1	)
Total		8,914		7.29		8,914		1,028,086

___________________

(1)	On September 17, 2013, the Board of Directors voted to authorize a stock repurchase program under which the Company may repurchase up to 1,037,000 shares of 5% of our outstanding common stock.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURE.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 12, 2013.

	Westfield Financial, Inc.


	By:	/s/ James C. Hagan
		James C. Hagan
		President and Chief Executive Officer

	By:	/s/ Leo R. Sagan, Jr.
		Leo R. Sagan, Jr.
		Vice President and Chief Financial Officer

EXHIBIT INDEX

Exhibit Number		Description
3.1		Articles of Organization of New Westfield Financial, Inc. (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1 (No. 333-137024) filed with the Securities and Exchange Commission on August 31, 2006).
3.2		Articles of Amendment of New Westfield Financial, Inc. (incorporated by reference to Exhibit 3.3 of the Form 8-K filed with the Securities and Exchange Commission on January 5, 2007).
3.3		Amended and Restated Bylaws of Westfield Financial, Inc. (incorporated by reference to Exhibit 3.2 of the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2011).
4.1		Form of Stock Certificate of Westfield Financial, Inc. (incorporated by reference to Exhibit 4.1 of the Registration Statement No. 333-137024 on Form S-1 filed with the Securities and Exchange Commission on August 31, 2006).
31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101**		Financial statements from the quarterly report on Form 10-Q of Westfield Financial, Inc. for the quarter ended September 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Shareholders’ Equity and Comprehensive Income, (iv) the Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.

_______________________________

*	Filed herewith.

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