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Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2010

Commission File No.: 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 01085
(Address of principal executive offices, including zip code)

(413) 568-1911
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
 
Common Stock, $0.01 par value per share
The NASDAQ Global Select Market
(Title of each class)
(Name of each exchange on which registered)
 
Securities registered pursuant to Section 12(g) of the Act:    None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o   No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o   No x
 
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 12 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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the proceeding 12 months (or for such shorter period that the registrant was required to submit and post such filed).  Yes o   No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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 Act).  Yes o   No x

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2010, was $243,599,838.  This amount was based on the closing price as of June 30, 2010 on The NASDAQ Global Select Market for a share of the registrant’s common stock, which was $8.33 on June 30, 2010.

As of March 4, 2011, the registrant had 28,164,901 shares of common stock, $0.01 per value, issued and outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement for the 2010 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
 
 


 
 

 
 
 
WESTFIELD FINANCIAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2010

TABLE OF CONTENTS
 
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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 Annual Report on Form 10-K contains “forward-looking statements” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.”  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 real estate market or local economy;
 
  
changes in interest rates;
 
  
changes in laws and regulations to which we are subject; and
 
  
competition in our primary market area.
 
Any or all of our forward-looking statements in this Annual Report on Form 10-K, and in any other public statements we make may turn out to be wrong.  They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties.  Consequently, no forward-looking statements can be guaranteed.  We disclaim any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events.
 
Unless the context indicates otherwise, all references in this prospectus to “Westfield Financial,” “we,” “us,” “our company,” “corporation” and “our” refer to Westfield Financial, Inc. and its subsidiaries (including the Bank, Elm Street Securities Corporation, WFD Securities, Inc. and WB Real Estate Holdings, LLC).  References to the “Bank” are to Westfield Bank, our wholly owned bank subsidiary.
 
 
 
1

 
 
 
BUSINESS
 
General.  Westfield Financial is a Massachusetts-chartered stock holding company and the parent company of Westfield Bank (the “Bank”).  Westfield Financial was formed in 2001 in connection with its reorganization from a federally-chartered mutual holding company to a Massachusetts-chartered stock holding company with the second step conversion being completed in 2007.  The Bank was formed in 1853 and is a federally-chartered savings bank regulated by the Office of Thrift Supervision.  As a community bank, we focus on servicing commercial customers, including commercial and industrial lending and commercial deposit relationships.  We believe that this business focus is best for our long term success and viability, and complements our existing commitment to high quality customer service.
 
Elm Street Securities Corporation, a Massachusetts-chartered corporation, was formed by us for the primary purpose of holding qualified investment securities.  In February 2007, we formed WFD Securities, Inc., a Massachusetts-chartered corporation, for the primary purpose of holding qualified investment securities.  In October 2009, we formed WB Real Estate Holdings, LLC, a Massachusetts-chartered limited liability company, for the primary purpose of holding real property acquired as security for debts previously contracted by the Bank.
 
Market Area.  We operate 11 banking offices in Agawam, East Longmeadow, Holyoke, Southwick, Springfield, West Springfield and Westfield, Massachusetts. We also have twelve free-standing ATM locations in Feeding Hills, Holyoke, Springfield, West Springfield and Westfield, Massachusetts.  Our primary deposit gathering area is concentrated in the communities surrounding these locations and our primary lending area includes all of Hampden County in western Massachusetts.  In addition, we provide online banking services through our website located at www.westfieldbank.com.

The markets served by our branches are primarily suburban in character, as we operate only one office in Springfield, the Pioneer Valley’s primary urban market.  Westfield, Massachusetts, is located in the Pioneer Valley near the intersection of U.S. Interstates 90 (the Massachusetts Turnpike) and 91. The Pioneer Valley of western Massachusetts encompasses the fourth largest metropolitan area in New England.  The Springfield Metropolitan area covers a relatively diverse area ranging from densely populated urban areas, such as Springfield, to outlying rural areas.
 
Competition.  We face intense competition both in making loans and attracting deposits.  Our primary market area is highly competitive and we face direct competition from approximately 21 financial institutions, many with a local, state-wide or regional presence and, in some cases, a national presence.  Many of these financial institutions are significantly larger than us and have greater financial resources. Our competition for loans comes principally from commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms.  Historically, our most direct competition for deposits has come from savings and commercial banks. We face additional competition for deposits from internet-based institutions, credit unions, brokerage firms and insurance companies.
 
Lending Activities

Loan Portfolio Composition.  Our loan portfolio primarily consists of commercial real estate loans, commercial and industrial loans, residential real estate loans, home equity loans, and consumer loans.
 
At December 31, 2010, we had total loans of $508.6 million, of which 71.8% were adjustable rate loans and 28.2% were fixed rate loans.  Commercial real estate loans and commercial and industrial loans totaled $221.6 million and $135.3 million, respectively.  The remainder of our loans at December 31, 2010 consisted of residential real estate loans, home equity loans and consumer loans.  Residential real estate and home equity loans outstanding at December 31, 2010 totaled $148.8 million.  Consumer loans outstanding at December 31, 2010 were $2.9 million.

The interest rates we charge on loans are affected principally by the demand for loans, the supply of money available for lending purposes and the interest rates offered by our competitors.  These factors are, in turn, affected by general and local economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.  The following table presents the composition of our loan portfolio in dollar amounts and in percentages of the total portfolio at the dates indicated.
 
 
 
2

 
 
   
At December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
         
Percent of
         
Percent of
         
Percent of
         
Percent of
         
Percent of
 
   
Amount
   
Total
   
Amount
   
Total
   
Amount
   
Total
   
Amount
   
Total
   
Amount
   
Total
 
   
(Dollars in thousands)
 
Real estate loans:
                                                           
Commercial
  $ 221,578       43.57 %   $ 229,061       48.08 %   $ 223,857       46.61 %   $ 189,964       45.22 %   $ 174,556       44.74 %
Residential
    112,680       22.17       64,299       13.50       62,810       13.08       72,170       17.18       79,308       20.33  
Home equity
    36,116       7.09       34,755       7.29       35,562       7.40       35,940       8.56       30,232       7.75  
Total real estate loans
    370,374       72.83       328,115       68.87       322,229       67.09       298,074       70.96       284,096       72.82  
                                                                                 
Other loans
                                                                               
Commercial and industrial
    135,250       26.59       145,012       30.44       153,861       32.03       116,514       27.74       100,237       25.69  
Consumer, other
    2,960       0.58       3,307       0.69       4,248       0.88       5,479       1.30       5,841       1.49  
Total other loans
    138,210       27.17       148,319       31.13       158,109       32.91       121,993       29.04       106,078       27.18  
                                                                                 
Total loans
    508,584       100.00 %     476,434       100.00 %     480,338       100.00 %     420,067       100.00 %     390,174       100.00 %
                                                                                 
Unearned premiums and net deferred
                                                                               
loan fees and costs, net
    742               360               593               561               447          
Allowance for loan losses
    (6,934 )             (7,645 )             (8,796 )             (5,726 )             (5,437 )        
Total loans, net
  $ 502,392             $ 469,149             $ 472,135             $ 414,902             $ 385,184          
                                                                                 
 
 
3

 

 
Loan Maturity and Repricing.  The following table shows the repricing dates or contractual maturity dates as of December 31, 2010.  The table does not reflect prepayments or scheduled principal amortization.  Demand loans, loans having no stated maturity, and overdrafts are shown as due in within one year.

   
At December 31, 2010
 
   
Residential
         
Commercial
   
Commercial
             
   
Real Estate
   
Home Equity
   
Real Estate
   
and Industrial
   
Consumer
       
   
Loans
   
Loans
   
Loans
   
Loans
   
Loans
   
Totals
 
   
(In thousands)
 
Amount due:
                                   
Within one year
  $ 14,806     $ 18,050     $ 21,929     $ 76,355     $ 639     $ 131,779  
                                                 
After one year:
                                               
                                                 
One to three years
    3,062       437       51,961       30,025       916       86,401  
Three to five years
    722       1,604       114,873       19,872       980       138,051  
Five to ten years
    5,812       7,605       13,617       4,429       -       31,463  
Ten to twenty years
    33,752       8,420       15,354       -       -       57,526  
Over twenty years
    54,526       -       3,844       4,569       425       63,364  
Total due after one year
    97,874       18,066       199,649       58,895       2,321       376,805  
                                                 
Total amount due:
    112,680       36,116       221,578       135,250       2,960       508,584  
                                                 
                                                 
Net deferred loan origination
costs
    314       297       (150 )     275       6       742  
Allowance for loan losses
    (664 )     (213 )     (3,182 )     (2,849 )     (26 )     (6,934 )
                                                 
Loans, net
  $ 112,330     $ 36,200     $ 218,246     $ 132,676     $ 2,940     $ 502,392  


The following table presents, as of December 31, 2010, the dollar amount of all loans contractually due or scheduled to reprice after December 31, 2011, and whether such loans have fixed interest rates or adjustable interest rates.
 
   
Due After December 31, 2011
 
   
Fixed
   
Adjustable
   
Total
 
   
(In thousands)
 
Real estate loans:
                 
Residential
  $ 94,470     $ 3,404     $ 97,874  
Home equity
    18,066       -       18,066  
Commercial real estate
    48,500       151,149       199,649  
Total real estate loans
    161,036       154,553       315,589  
                         
Other loans:
                       
Commercial and industrial
    46,892       12,003       58,895  
Consumer
    2,321       -       2,321  
Total other loans
    49,213       12,003       61,216  
                         
Total loans
  $ 210,249     $ 166,556     $ 376,805  

 
 
4

 
 
The following table presents our loan originations, purchases and principal payments for the years indicated:
 
   
For the Years Ended December 31,
 
   
2010
   
2009
   
2008
 
   
(In thousands)
 
Loans:
                 
Balance outstanding at beginning of year
  $ 476,434     $ 480,338     $ 420,067  
                         
Originations:
                       
Real estate loans:
                       
Residential
    1,830       1,378       2,807  
Home equity
    13,167       16,601       12,120  
Commercial
    19,174       39,805       40,367  
              Total mortgage originations
    34,171       57,784       55,294  
                         
     Commercial and industrial loans
    41,029       47,492       84,300  
     Consumer loans
    1,550       1,299       1,624  
                 Total originations
    76,750       106,575       141,218  
     Purchase of one-to-four family mortgage loans
    61,880       16,381       1,648  
      138,630       122,956       142,866  
                         
Less:
                       
Principal repayments, unadvanced funds and other, net
    96,846       121,809       82,212  
Loan charge-offs, net
    9,634       5,051       383  
Total deductions
    106,480       126,860       82,595  
Ending balance
  $ 508,584     $ 476,434     $ 480,338  

 
Commercial and Industrial Loans.  We offer commercial and industrial loan products and services which are designed to give business owners borrowing opportunities for modernization, inventory, equipment, construction, consolidation, real estate, working capital, vehicle purchases and the financing of existing corporate debt.  We offer business installment loans, vehicle and equipment financing, lines of credit, and other commercial loans.  At December 31, 2010, our commercial and industrial loan portfolio consisted of 986 loans, totaling $135.3 million or 26.6 % of our total loans.  Since 2006, commercial and industrial loans have grown $35.1 million, or 35.0%, from $100.2 million at December 31, 2006 to $135.3 million at December 31, 2010.  Our commercial loan team includes nine commercial loan officers, one business development manager, five credit analysts and one portfolio manager.  We may hire additional commercial loan officers on an as needed basis.

As part of our strategy of increasing our emphasis on commercial lending, we seek to attract our business customers’ entire banking relationship.  Most commercial borrowers also maintain commercial deposits.  We provide complementary commercial products and services, a variety of commercial deposit accounts, cash management services, internet banking, sweep accounts, a broad ATM network and night deposit services.  We offer a remote deposit capture product whereby commercial customers can receive credit for check deposits by electronically transmitting check images from their own locations.  Commercial loan officers are based in our main and branch offices, and we view our potential branch expansion as a means of facilitating these commercial relationships.  We intend to continue to expand the volume of our commercial business products and services within our current underwriting standards.
 
 
 
5

 
 
 
Our commercial and industrial loan portfolio does not have any significant loan concentration by type of property or borrower. The largest concentration of loans was for manufacturing, which comprises approximately 5.32% of the total loan portfolio as of December 31, 2010. At December 31, 2010, our largest commercial and industrial loan relationship was $24.8 million to a private New England college. The loan relationship is secured by business assets and financial instruments.  The loans to this borrower have performed to contractual terms.

Commercial and industrial loans generally have terms of seven years or less, however, on an occasional basis, may have terms of up to ten years.  Among the $135.3 million we have in our commercial and industrial loan portfolio as of December 31, 2010, $81.7 million have adjustable interest rates and $53.6 million have fixed interest rates.  Whenever possible, we seek to originate adjustable rate commercial and industrial loans.  Borrower activity and market conditions, however, may influence whether we are able to originate adjustable rate loans rather than fixed rate loans.  We generally require the personal guarantee of the business owner.  Interest rates on commercial and industrial loans generally have higher yields than residential or commercial real estate loans.

Commercial and industrial loans are generally considered to involve a higher degree of risk than residential or commercial real estate loans because the collateral may be in the form of intangible assets and/or inventory subject to market obsolescence.  Please see “Risk Factors – Our loan portfolio includes loans with a higher risk of loss.”  Commercial and industrial loans may also involve relatively large loan balances to single borrowers or groups of related borrowers, with the repayment of such loans typically dependent on the successful operation and income stream of the borrower.  These risks can be significantly affected by economic conditions.  In addition, business lending generally requires substantially greater oversight efforts by our staff compared to residential or commercial real estate lending.  In order to mitigate this risk, we monitor our loan concentration and our loan policies generally to limit the amount of loans to a single borrower or group of borrowers.  We also utilize the services of an outside consultant to conduct credit quality reviews of the commercial and industrial loan portfolio.

Commercial Real Estate Loans.  We originate commercial real estate loans to finance the purchase of real property, which generally consists of apartment buildings, business properties, multi-family investment properties and construction loans to developers of commercial and residential properties.  In underwriting commercial real estate loans, consideration is given to the property’s historic cash flow, current and projected occupancy, location and physical condition.  At December 31, 2010, our commercial real estate loan portfolio consisted of 393 loans, totaling $221.6 million, or 43.6 %, of total loans.  Since 2006, commercial real estate loans have grown by $47.0 million, or 26.9 %, from $174.6 million at December 31, 2006 to $221.6 million at December 31, 2010.

The majority of the commercial real estate portfolio consists of loans which are collateralized by properties in the Pioneer Valley of Massachusetts and northern Connecticut.  Our commercial real estate loan portfolio is diverse, and does not have any significant loan concentration by type of property or borrower.  We generally lend up to a loan-to-value ratio of 75% on commercial properties. We, however, will lend up to a maximum of 85% loan-to-value ratio but will generally require a minimum debt coverage ratio of 1.15.  Our largest non-owner occupied commercial real estate loan relationship had an outstanding balance of $11.7 million at December 31, 2010, which is secured by one commercial investment property located in Rhode Island.  The loans of this borrower have performed to contractual terms.
 
We also offer construction loans to finance the construction of commercial properties located in our primary market area.  At December 31, 2010, we had $309,000 in commercial construction loans and commitments that are committed to refinance into permanent mortgages at the end of the construction period and $4.0 million in commercial construction loans and commitments that are not committed to permanent financing at the end of the construction period.
 
Commercial real estate lending involves additional risks compared with one-to-four family residential lending.  Payments on loans secured by commercial real estate properties often depend on the successful management of the properties, on the amount of rent from the properties, or on the level of expenses needed to maintain the properties.  Repayment of such loans may therefore be adversely affected by conditions in the real estate market or the general economy.  Also, commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers.  In order to mitigate this risk, we monitor our loan concentration risk on a quarterly basis and our loan policies generally limit the amount of loans to a single borrower or group of borrowers.
 

 
6

 

Because of increased risks associated with commercial real estate loans, our commercial real estate loans generally have higher rates than residential real estate loans.  Please see “Risk Factors – Our loan portfolio includes loans with a higher risk of loss.”  Commercial real estate loans generally have adjustable rates with repricing dates of five years or less; however, occasionally repricing dates may be as long as ten years.  Whenever possible, we seek to originate adjustable rate commercial real estate loans.  Borrower activity and market conditions, however, may influence whether we are able to originate adjustable rate loans rather than fixed rate loans.

Residential Real Estate Loans and Originations.  We process substantially all of our originations of residential real estate loans through a third-party mortgage company.  Residential real estate borrowers submit applications to us, but the loan is approved by and closed on the books of the mortgage company.  The third-party mortgage company owns the servicing rights and services the loans.  We retain no residual ownership interest in these loans.  We receive a fee for each of these loans originated by the third-party mortgage company.

Even though substantially all residential real estate loan originations are referred to a third-party mortgage company, we still hold residential real estate loans in our loan portfolio.  The loans consist primarily of loans originated by us prior to the commencement of the third-party residential mortgage referral program in September 2001, or are loans we purchased.  We occasionally purchase adjustable rate mortgages, which are serviced by the originating institutions, from other banks located in Massachusetts.  At December 31, 2010, loans on one-to-four family residential properties, including home equity lines, accounted for $148.8 million, or 29.3%, of our total loan portfolio.

Our residential adjustable rate mortgage loans generally are fully amortizing loans with contractual maturities of up to 30 years, payments due monthly.  Our adjustable rate mortgage loans generally provide for specified minimum and maximum interest rates, with a lifetime cap and floor, and a periodic adjustment on the interest rate over the rate in effect on the date of origination.  As a consequence of using caps, the interest rates on these loans are not generally as rate sensitive as our cost of funds.  The adjustable rate mortgage loans that we originate generally are not convertible into fixed rate loans.
 
Adjustable rate mortgage loans generally pose different credit risks than fixed rate loans, primarily because as interest rates rise, the borrower’s payments rise, increasing the potential for default.  To date, we have not experienced difficulty with payments for these loans.  At December 31, 2010, our residential real estate and home equity loan portfolio included $35.9 million in adjustable rate loans, or 7.1%, of our total loan portfolio, and $112.9 million in fixed rate loans, or 22.2%, of our total loan portfolio.

Our home equity loans totaled $36.1 million, or 7.1%, of total loans at December 31, 2010.  Home equity loans include $18.1 million in fixed rate loans, or 3.6%, of total loans, and $18.0 million in adjustable rate loans, or 3.5%, of total loans.  These loans may be originated in amounts of the existing first mortgage, or up to 80% of the value of the property securing the loan.  The term to maturity on our home equity and home improvement loans may be up to 15 years.

Consumer Loans.  Consumer loans are generally originated at higher interest rates than residential and commercial real estate loans, but they also generally tend to have a higher credit risk than residential real estate loans because they are usually unsecured or secured by rapidly depreciable assets. Management, however, believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.

We offer a variety of consumer loans to retail customers in the communities we serve.  Examples of our consumer loans include automobile loans, secured passbook loans, credit lines tied to deposit accounts to provide overdraft protection, and unsecured personal loans.  At December 31, 2010, the consumer loan portfolio totaled $2.9 million, or 0.6%, of total loans.  Our consumer lending will allow us to diversify our loan portfolio while continuing to meet the needs of the individuals and businesses that we serve.

Loans collateralized by rapidly depreciable assets such as automobiles or that are unsecured entail greater risks than residential real estate loans.  In such cases, repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance, since there is a greater likelihood of damage, loss or depreciation of the underlying collateral.  The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment.  Further, collections on these loans
 
 
 
7

 
 
 
are dependent on the borrower’s continuing financial stability and, therefore, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  There was no repossessed collateral relating to consumer loans at December 31, 2010.  Finally, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans if a borrower defaults.

Loan Approval Procedures and Authority.  Individuals authorized to make loans on our behalf are designated by our Senior Lending Officer and approved by the Board of Directors.  Each loan officer has loan approval authority up to prescribed limits that depend upon the officer’s level of experience.

Upon receipt of a completed loan application from a prospective borrower, we order a credit report and verify other information.  If necessary, we obtain additional financial or credit related information.  We also require an appraisal for all commercial real estate loans greater than $250,000, which is performed by licensed or certified third-party appraisal firms and reviewed by our lending department.

Appraisals for home equity loans are required for loans in excess of $100,000; otherwise, a designated employee conducts an inspection of the property.  We require title insurance on most commercial real estate loans.  We also require borrowers to obtain flood insurance, if applicable, prior to closing, for all loans secured by real estate within a designated flood zone.

Commercial and Industrial Loans and Commercial Real Estate Loans.  We lend up to a maximum loan-to-value ratio of 85% on commercial properties and the majority of these loans require a minimum debt coverage ratio of 1.15.  Commercial real estate lending involves additional risks compared with one-to-four-family residential lending.  Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, and/or the collateral value of the commercial real estate securing the loan, repayment of such loans may be subject, to a greater extent, to adverse conditions in the real estate market or the economy.  Also, commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers.  Our loan policies limit the amounts of loans to a single borrower or group of borrowers to reduce this risk.

Our lending policies permit our underwriting department to review and approve commercial and industrial loans and commercial real estate loans up to $1.0 million.  Any commercial and industrial or commercial real estate loan application that exceeds $1.0 million or that would result in the borrower’s total credit exposure with us to exceed $1.0 million, or whose approval requires an exception to our standard loan approval procedures, requires approval of the Executive Committee of the Board of Directors.  An example of an exception to our standard loan approval procedures would be if a borrower was located outside our primary lending area.  For loans requiring Board approval, management is responsible for presenting to the Board information about the creditworthiness of a borrower and the estimated value of the subject equipment or property.  Generally, these determinations are based on financial statements, corporate and personal tax returns, as well as any other necessary information, including real estate and or equipment appraisals.

Home Equity Loans.  We originate and fund our home equity loans.  These loans may be originated in amounts of the existing first mortgage, or up to 80% of the value of the property securing the loan.  Our underwriting department may approve home equity loans up to $200,000.  Home equity loans in amounts greater than $200,000 and up to $350,000 may be approved by certain officers who have been approved by the Board of Directors.  Home equity loans over $350,000, or whose approval requires an exception to our standard loan approval procedures, are reviewed and approved by the Executive Committee of the Board of Directors.

Asset Quality
 
One of our key operating objectives has been and continues to be the achievement of a high level of asset quality.  We maintain a large proportion of loans secured by residential and commercial properties, set sound credit standards for new loan originations and follow careful loan administration procedures.  We also utilize the services of an outside consultant to conduct credit quality reviews of our commercial and industrial and commercial real estate loan portfolio on at least an annual basis.

 
 
8

 
 
Nonaccrual Loans and Foreclosed Assets.  Our policies require that management continuously monitor the status of the loan portfolio and report to the Board of Directors on a monthly basis.  These reports include information on nonaccrual loans and foreclosed real estate, as well as our actions and plans to cure the nonaccrual status of the loans and to dispose of the foreclosed property.
 
The following table presents information regarding nonperforming mortgage, consumer and other loans, and foreclosed real estate as of the dates indicated.  All loans where the interest payment is 90 days or more in arrears as of the closing date of each month are placed on non-accrual status.  At December 31, 2010, 2009 and 2008, we had $3.2 million, $5.5 million, and $8.8 million, respectively, of nonaccrual loans.  If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $159,000   $94,000, and $200,000 for the years ended December 31, 2010, 2009 and 2008, respectively.  Included in nonperforming loans at December 31, 2010 is one loan in the amount of $125,000 which was modified in a troubled debt restructuring (“TDR”).  We had no TDR’s at December 31, 2009 or 2008.
 

 
   
At December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(Dollars in thousands)
 
Nonaccrual real estate loans:
                             
Residential
  $ 629     $ 784     $ 905     $ 820     $ 803  
Home equity
    144       225       239       175       103  
Commercial real estate
    1,892       782       1,460       177       69  
Total nonaccrual real estate loans
    2,665       1,791       2,604       1,172       975  
Other loans:
                                       
Commercial and industrial
    539       3,675       6,195       19       44  
Consumer
    -       4       6       11       9  
Total nonaccrual other loans
    539       3,679       6,201       30       53  
Total nonperforming loans
    3,204       5,470       8,805       1,202       1,028  
Foreclosed real estate, net
    223       1,662       -       -       -  
Total nonperforming assets
  $ 3,427     $ 7,132     $ 8,805     $ 1,202     $ 1,028  
Nonperforming loans to total loans
    0.63 %     1.15 %     1.83 %     0.29 %     0.26 %
Nonperforming assets to total assets
    0.28       0.60       0.79       0.12       0.10  
 
 
 
 
9

 

 
 
Allowance for Loan Losses.  The following table presents the activity in our allowance for loan losses and other ratios at or for the dates indicated.
 
 
   
At or for Years Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(Dollars in thousands)
 
       
Balance at beginning of year
  $ 7,645     $ 8,796     $ 5,726     $ 5,437     $ 5,422  
                                         
Charge-offs:
                                       
Residential
    (36 )     -       (131 )     -       -  
Commercial real estate
    (7,536 )     (50 )     -       -       -  
Home equity loans
    -       (117 )     -       -       -  
Commercial and industrial
    (2,129 )     (4,910 )     (284 )     (255 )     (505 )
Consumer
    (16 )     (22 )     (34 )     (62 )     (79 )
Total charge-offs
    (9,717 )     (5,099 )     (449 )     (317 )     (584 )
                                         
Recoveries:
                                       
Residential
    7       -       -       -       4  
Commercial real estate
    8       -       -       -       -  
Home equity loans
    4       6       4       3       3  
Commercial and industrial
    21       2       4       54       7  
Consumer
    43       40       58       149       195  
Total recoveries
    83       48       66       206       209  
                                         
Net charge-offs
    (9,634 )     (5,051 )     (383 )     (111 )     (375 )
                                         
Provision for loan losses
    8,923       3,900       3,453       400       390  
                                         
Balance at end of year
  $ 6,934     $ 7,645     $ 8,796     $ 5,726     $ 5,437  
                                         
Total loans receivable (1)
  $ 508,584     $ 476,434     $ 480,338     $ 420,067     $ 390,174  
                                         
Average loans outstanding
  $ 482,215     $ 476,214     $ 444,492     $ 398,281     $ 386,039  
                                         
Allowance for loan losses as a
                                       
percent of total loans receivable
    1.36 %     1.60 %     1.83 %     1.36 %     1.39 %
                                         
Net loans charged-off as a percent
                                       
of average loans outstanding
    2.00       1.06       0.09       0.03       0.10  
_________________________
                                       
(1) Does not include unearned premiums, deferred costs and fees, or allowance for loan losses.
                 

We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio based on ongoing quarterly assessments of the estimated losses. Our methodology for assessing the appropriateness of the allowance consists of a review of the components, which include a specific valuation allowance for impaired loans and a general allowance for non-impaired loans. The specific valuation allowance incorporates the results of measuring impairment for specifically identified non-homogenous problem loans.  The specific allowance reduces the carrying amount of the impaired loans to their estimated fair value if collateral dependent.  A loan is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the loan’s contractual terms.  The general allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined.  As part of this analysis, each quarter we prepare an allowance for loan losses worksheet which categorizes the loan portfolio by risk characteristics such as loan type and loan grade.  The general allowance is inherently subjective as it requires material estimates that may be susceptible to significant
 
 
 
10

 
 
 
change. There are a number of factors that are considered when evaluating the appropriate level of the allowance.  These factors include current economic and business conditions that affect our key lending areas, new loan products, collateral values, loan volumes and concentrations, credit quality trends such as nonperforming loans, delinquency and loan losses, and specific industry concentrations within the portfolio segments that may impact the collectability of the loan portfolio.  For information on our methodology for assessing the appropriateness of the allowance for loan losses please see Footnote 1 – “Summary of Significant Accounting Policies” of our notes to consolidated financial statements.

In addition, management employs an independent third-party to perform an annual review of all of our commercial and industrial loans and owner occupied commercial real estate loans with balances or commitments equal to or greater than $750,000.  The third-party also reviews all commercial investment real estate loans in excess of $750,000, as well as all adversely rated loans.
 
Our methodologies include several factors that are intended to reduce the difference between estimated and actual losses; however, because these are management’s best estimates based on information known at the time, estimates may differ from actual losses incurred.  The loss factors that are used to establish the allowance for pass graded loans are designated to be self-correcting by taking into account changes in loan classification, loan concentrations and loan volumes and by permitting adjustments based on management’s judgments of qualitative factors as of the evaluation date.  Similarly, by basing the pass graded loan loss factors on loss experience over the prior six years, the methodology is designed to take loss experience into account.

Our allowance methodology has been applied on a consistent basis.  Based on this methodology, we believe that we have established and maintained the allowance for loan losses at appropriate levels.  Future adjustments to the allowance for loan losses, however, may be necessary if economic, real estate and other conditions differ substantially from the current operating environment resulting in estimated and actual losses differing substantially.  Adjustments to the allowance for loan losses are charged to income through the provision for loan losses.
 
A summary of the components of the allowance for loan losses is as follows:
 
   
December 31, 2010
   
December 31, 2009
   
December 31, 2008
 
   
Specific
   
General
   
Total
   
Specific
   
General
   
Total
   
Specific
   
General
   
Total
 
   
(In thousands)
 
Real estate mortgage:
                                                     
 Residential and home equity
  $ -     $ 877     $ 877     $ -     $ 487     $ 487     $ -     $ 462     $ 462  
 Commercial
    -       3,182       3,182       -       2,371       2,371       -       2,216       2,216  
                                                                         
Commercial and industrial
    19       2,830       2,849       875       3,873       4,748       2,286       3,776       6,062  
                                                                         
Consumer
    -       26       26       -       39       39       -       56       56  
Total
  $ 19     $ 6,915     $ 6,934     $ 875     $ 6,770     $ 7,645     $ 2,286     $ 6,510     $ 8,796  
                                                                         
                                                                         
   
December 31, 2007
   
December 31, 2006
                         
   
Specific
   
General
   
Total
   
Specific
   
General
   
Total
                         
   
(In thousands)
                         
Real estate mortgage:
                                                                       
 Residential and home equity
  $ -     $ 456     $ 456     $ -     $ 422     $ 422                          
 Commercial
    -       1,756       1,756       13       2,004       2,017                          
                                                                         
Commercial and industrial
    -       3,436       3,436       7       2,912       2,919                          
                                                                         
Consumer
    -       78       78       -       79       79                          
Total
  $ -     $ 5,726     $ 5,726     $ 20     $ 5,417     $ 5,437                          

 
 
11

 

In addition, the Office of Thrift Supervision (“OTS”), as an integral part of its examination process, periodically reviews our loan and foreclosed real estate portfolios and the related allowance for loan losses and valuation allowance for foreclosed real estate.  The OTS may require us to adjust the allowance for loan losses or the valuation allowance for foreclosed real estate based on their judgment of information available to them at the time of their examination, thereby adversely affecting our results of operations.

For the year ended December 31, 2010, we provided $8.9 million to the allowance for loan losses based on our evaluation of the items discussed above.  We believe that the allowance for loan losses accurately reflects the level of incurred losses in the current loan portfolio as of December 31, 2010.
 
 
 
 
 
12

 
 
 
Allocation of Allowance for Loan Losses.  The following tables set forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans.
 
   
December 31, 2010
 
December 31, 2009
 
December 31, 2008
 
Loan Category
 
Amount of
Loan Loss
   
Loan
Balances by
Category
   
Percent of
Loans in
Each
Category
to Total
Loans
 
Amount of
Loan Loss
   
Loan
Balances by
Category
   
Percent of
Loans in
Each
Category
to Total
Loans
 
Amount of
Loan Loss
   
Loan
Balances by
Category
   
Percent of
Loans in
Each
Category
to Total
Loans
 
   
(In thousands)
 
Real estate mortgage:
                                                     
 Commercial
  $ 3,182     $ 221,578       43.57 %   $ 2,371     $ 229,061       48.08 %   $ 2,216     $ 223,857       46.61 %
 Residential and home equity
    877       148,796       29.26       487       99,054       20.79       462       98,372       20.48  
Commercial loans
    2,849       135,250       26.59       4,748       145,012       30.44       6,062       153,861       32.03  
Consumer loans
    26       2,960       0.58       39       3,307       0.69       56       4,248       0.88  
Total allowances for loan losses
  $ 6,934     $ 508,584       100.00 %   $ 7,645     $ 476,434       100.00 %   $ 8,796     $ 480,338       100.00 %
                                                                         
                                                                         
   
December 31, 2007
 
December 31, 2006
                       
   
Amount of
Loan Loss
   
Loan
Balances by
Category
   
Percent of
Loans in
Each
Category
to Total
Loans
 
Amount of
Loan Loss
   
Loan
Balances by
Category
   
Percent of
Loans in
Each
Category
to Total
Loans
                       
   
(In thousands)
                         
Real estate mortgage:
                                                                       
 Commercial
  $ 1,756     $ 189,964       45.22 %   $ 2,017     $ 174,556       44.74 %                        
 Residential and home equity
    456       108,110       25.74       422       109,540       28.08                          
Commercial loans
    3,436       116,514       27.74       2,919       100,237       25.69                          
Consumer loans
    78       5,479       1.30       79       5,841       1.49                          
Total allowances for loan losses
  $ 5,726     $ 420,067       100.00 %   $ 5,437     $ 390,174       100.00 %                        
 
 

 
 
13

 

Potential Problem Loans.  We have a commercial and industrial term loan of $1.2 million with a borrower primarily engaged in the production and distribution of machine parts.   This potential problem loan was not delinquent as of December 31, 2010.  In February of 2011, however, the Bank was notified that a major contract to produce machined parts was in jeopardy and is not expected to be obtained by our customer.  We intend to modify the term loan and work with the borrower to sell equipment and pay off the term loan.  A collateral analysis has been performed and no impairment is evident at this time.  The loan has been classified as a TDR for the first quarter of 2011.
 
Investment Activities. The Board of Directors review and approve our investment policy on an annual basis. The Chief Executive Officer and Chief Financial Officer, as authorized by the Board of Directors, implement this policy based on the established guidelines within the written policy.
 
Our investment policy is designed primarily to manage the interest rate sensitivity of our assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement our lending activities and to provide and maintain liquidity within the range established by policy.  In determining our investment strategies, we consider our interest rate sensitivity, yield, credit risk factors, maturity and amortization schedules, and other characteristics of the securities to be held.
 
Federally-chartered savings banks have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various government-sponsored enterprises, mortgage-backed securities, certain certificates of deposit of insured financial institutions, repurchase agreements, overnight and short-term loans to other banks and corporate debt instruments.
 
Securities Portfolio. In August 2010, we transferred all of our held-to-maturity securities to the available-for-sale category.  We determined that we no longer had the positive intent to hold our securities classified as held-to-maturity for an indefinite period of time because of our desire to have more flexibility in managing the investment portfolio.  The securities transferred had a total amortized cost of $287.1 million and a fair value of $299.7 million, and the net unrealized gain of $12.6 million was recorded as other comprehensive income at the time of transfer.  Available for sale securities are reported at fair value.  At December 31, 2010, the entire securities portfolio was classified as available-for-sale and totaled $644.1 million.

We invest in government-sponsored enterprise debt securities, the majority of which have average lives of less than five years.  We also invest in municipal bonds issued by cities and towns in Massachusetts that are rated as investment grade by Moody’s, Standard and Poor’s, or Fitch, the majority of which are also independently insured.  These securities generally have maturities between seven and 20 years; however, many have earlier call dates.  In addition, we have investments in Federal Home Loan Bank stock and mutual funds that invest only in securities allowed by the OTS.

Our mortgage-backed securities, the majority of which are directly or indirectly insured or guaranteed by Freddie Mac, Ginnie Mae or Fannie Mae, consist of both fixed rate and adjustable rate securities primarily with average lives of less than five years.  At December 31, 2010, we owned $7.6 million in private-label residential mortgage-backed securities.
 
 
 
14

 
 
 
The following table sets forth the composition of our securities portfolio at the dates indicated.
 
 
   
At December 31,
 
   
2010
   
2009
   
2008
 
   
Amortized
   
Fair
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
Cost
   
Value
   
Cost
   
Value
   
Cost
   
Value
 
   
(In thousands)
 
Debt securities:
                                   
Government-sponsored enterprises
  $ 18,447     $ 17,864     $ 45,884     $ 47,358     $ 60,924     $ 64,105  
Municipal bonds
    42,119       43,077       36,316       37,774       36,354       36,655  
Total debt securities
    60,566       60,941       82,200       85,132       97,278       100,760  
                                                 
Mortgage-backed securities:
                                               
Government sponsored residential mortgage-backed
    381,436       380,984       494,324       500,659       315,903       318,158  
U.S. government guaranteed residential mortgage-backed
    192,609       187,676       17,364       17,333       48,293       47,977  
Private label residential mortgage-backed
    8,251       7,578       15,317       13,068       48,916       36,328  
Total mortgage-backed securities
    582,296       576,238       527,005       531,060       413,112       402,463  
                                                 
Marketable equity securities
                                               
Mutual funds
    6,949       6,913       6,561       6,489       6,231       6,088  
Common and preferred stock
    70       47       70       59       70       39  
Total marketable equity securities
    7,019       6,960       6,631       6,548       6,301       6,127  
                                                 
Total securities
  $ 649,881     $ 644,139     $ 615,836     $ 622,740     $ 516,691     $ 509,350  
                                                 
                                                 
 
 
 
15

 
 
Mortgage-Backed Securities.  The following table sets forth the amortized cost and fair value of our mortgage-backed securities, which are classified as available for sale or held to maturity at the dates indicated.
 
 
    At December 31,  
     2010      2009      2008  
    Amortized
Cost
    Percent of
Total
    Fair
Value
    Amortized
Cost
    Percent of
Total
    Fair
Value
     Amortized
Cost
    Percent of
Total
    Fair
Value
 
    (Dollars in thousands)  
Available for sale:
                                                     
Government sponsored residential
  $ 381,436       65.50 %   $ 380,984     $ 289,840       55.00 %   $ 290,248     $ 161,926       39.20 %   $ 162,276  
U.S. government guaranteed residential
    192,609       33.08       187,676       1,030       0.19       1,047       40,401       9.78       40,424  
Private label residential
    8,251       1.42       7,578       10,368       1.97       8,510       42,453       10.28       31,047  
Total available for sale
    582,296       100.00       576,238       301,238       57.16       299,805       244,780       59.26       233,747  
                                                                         
Held to maturity:
                                                                       
Government sponsored residential
    -       -       -       204,484       38.80       210,411       153,977       37.27       155,882  
U.S. government guaranteed residential
    -       -       -       16,334       3.10       16,286       7,892       1.91       7,553  
Private label residential
    -       -       -       4,949       0.94       4,558       6,463       1.56       5,281  
Total held to maturity
    -       -       -       225,767       42.84       231,255       168,332       40.74       168,716  
                                                                         
Total mortgage-backed securities
  $ 582,296       100.00 %   $ 576,238     $ 527,005       100.00 %   $ 531,060     $ 413,112       100.00 %   $ 402,463  
                                                                         
 
 
16

 
 
Securities Portfolio Maturities.  The composition and maturities of the debt securities portfolio and the mortgage-backed securities portfolio at December 31, 2010 are summarized in the following table.  Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or redemptions that may occur.

 
    One Year or Less    
More than One Year
through Five Years
    More than Five Years
through Ten Years