Western New England Bancorp, Inc. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - Western New England Bancorp, Inc.	Financial_Report.xls
EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - Western New England Bancorp, Inc.	ex32-1.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - Western New England Bancorp, Inc.	ex31-2.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - Western New England Bancorp, Inc.	ex31-1.htm
EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - Western New England Bancorp, Inc.	ex32-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

☒

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

For the quarterly period ended June 30, 2014

☐

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 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 ☒ No ☐

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

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

	Large accelerated filer ☐	Accelerated filer ☒

	Non-accelerated filer ☐	Smaller reporting company ☐

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

At July 31, 2014, the registrant had 19,170,195 shares of common stock, $.01 par value, issued and outstanding.

TABLE OF CONTENTS

		Page

FORWARD-LOOKING STATEMENTS		i

PART I – FINANCIAL INFORMATION

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

	Consolidated Balance Sheets (Unaudited) – June 30, 2014 and December 31, 2013	1

	Consolidated Statements of Net Income (Unaudited) – Three and Six Months Ended June 30, 2014 and 2013	2

	Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Three and Six Months Ended June 30, 2014 and 2013	3

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) – Six Months Ended June 30, 2014 and 2013	4

	Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30, 2014 and 2013	5

	Notes to Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

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)

	June 30,			December 31,
	2014			2013
ASSETS
CASH AND DUE FROM BANKS	$	12,590		$	14,112
FEDERAL FUNDS SOLD		453			521
INTEREST-BEARING DEPOSITS AND OTHER SHORT-TERM INVESTMENTS		26,319			5,109
CASH AND CASH EQUIVALENTS		39,362			19,742

SECURITIES AVAILABLE FOR SALE – AT FAIR VALUE		192,754			243,204
SECURITIES HELD TO MATURITY (Fair value of $285,041 and $282,555 at June 30, 2014 and December 31,2013, respectively)		288,199			295,013
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT COST		15,056			15,631
LOANS - Net of allowance for loan losses of $8,017 and $7,459 at June 30, 2014 and December 31, 2013, respectively		678,051			629,968
PREMISES AND EQUIPMENT, Net		10,996			10,995
ACCRUED INTEREST RECEIVABLE		4,165			4,201
BANK-OWNED LIFE INSURANCE		47,945			47,179
DEFERRED TAX ASSET, Net		7,419			6,334
OTHER ASSETS		2,371			4,574
TOTAL ASSETS	$	1,286,318		$	1,276,841

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
DEPOSITS :
Noninterest-bearing	$	136,423		$	145,040
Interest-bearing		682,167			672,072
Total deposits		818,590			817,112

SHORT-TERM BORROWINGS		59,751			48,197
LONG-TERM DEBT		248,760			248,377
SECURITIES PENDING SETTLEMENT		67			299
OTHER LIABILITIES		12,185			8,712
TOTAL LIABILITIES		1,139,353			1,122,697

SHAREHOLDERS’ EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized, none outstanding at June 30, 2014 and December 31, 2013		—			—
Common stock - $.01 par value, 75,000,000 shares authorized, 19,170,195 shares issued and outstanding at June 30, 2014; 20,140,669 shares issued and outstanding at December 31, 2013		192			201
Additional paid-in capital		114,810			121,860
Unearned compensation - ESOP		(7,736	)		(8,003	)
Unearned compensation - Equity Incentive Plan		(138	)		(187	)
Retained earnings		44,134			43,248
Accumulated other comprehensive loss		(4,297	)		(2,975	)
Total shareholders’ equity		146,965			154,144
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,286,318		$	1,276,841

See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME – UNAUDITED

(Dollars in thousands, except per share data)

	Three Months					Six Months
	Ended June 30,					Ended June 30,
	2014		2013			2014		2013
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans	$	5,419	$	5,006		$	10,666	$	10,002
Commercial and industrial loans		1,368		1,267			2,645		2,507
Consumer loans		34		34			67		69
Debt securities, taxable		2,994		3,611			6,154		7,327
Debt securities, tax-exempt		209		270			419		574
Equity securities		53		36			89		73
Other investments - at cost		63		21			128		40
Federal funds sold, interest-bearing deposits and other short-term investments		3		1			9		3
Total interest and dividend income		10,143		10,246			20,177		20,595
INTEREST EXPENSE:
Deposits		1,288		1,390			2,580		2,777
Long-term debt		1,071		1,188			2,081		2,446
Short-term borrowings		83		31			160		65
Total interest expense		2,442		2,609			4,821		5,288
Net interest and dividend income		7,701		7,637			15,356		15,307
PROVISION (CREDIT) FOR LOAN LOSSES		450		(70	)		550		(305	)
Net interest and dividend income after provision (credit) for loan losses		7,251		7,707			14,806		15,612

NONINTEREST INCOME (LOSS):
Service charges and fees		632		594			1,303		1,164
Income from bank-owned life insurance		386		387			765		773
Gain on bank-owned life insurance death benefit		—		563			—		563
Loss on prepayment of borrowings		—		(1,404	)		—		(2,830	)
Gain on sales of securities, net		21		823			50		2,250
Total noninterest income		1,039		963			2,118		1,920
NONINTEREST EXPENSE:
Salaries and employees benefits		3,665		3,817			7,444		7,625
Occupancy		751		730			1,512		1,434
Computer operations		610		602			1,125		1,152
Professional fees		483		527			994		1,037
Other real estate owned expense		—		—			—		22
FDIC insurance assessment		177		163			342		324
Other		845		950			1,649		1,709
Total noninterest expense		6,531		6,789			13,066		13,303
INCOME BEFORE INCOME TAXES		1,759		1,881			3,858		4,229
INCOME TAX PROVISION		417		297			868		863
NET INCOME	$	1,342	$	1,584		$	2,990	$	3,366

EARNINGS PER COMMON SHARE:
Basic earnings per share	$	0.07	$	0.08		$	0.16	$	0.16
Weighted average shares outstanding		18,308,828		20,276,261			18,559,419		20,686,860
Diluted earnings per share	$	0.07	$	0.08		$	0.16	$	0.16
Weighted average diluted shares outstanding		18,308,828		20,276,261			18,559,419		20,686,887

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 June 30,						Six Months Ended June 30,
	2014			2013			2014			2013

Net income	$	1,342		$	1,584		$	2,990		$	3,366

Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) on available for sale securities		1,703			(13,282	)		2,980			(17,701	)
Reclassification adjustment for gain realized in income		(21	)		(823	)		(50	)		(2,250	)
Amortization of net unrealized loss on securities transferred from available for sale to held to maturity		(11	)		—			1			—
Net unrealized gain (loss)		1,671			(14,105	)		2,931			(19,951	)
Tax effect		(575	)		4,857			(1,009	)		6,864
Net-of-tax amount		1,096			(9,248	)		1,922			(13,087	)

Derivative instruments:
Change in fair value of derivatives used for cash flow hedges		(2,609	)		—			(4,999	)		—
Reclassification adjustment for loss realized in interest expense		48						94
Tax effect		871			—			1,668			—
Net-of-tax amount		(1,690	)		—			(3,237	)		—

Defined benefit pension plans:
Reclassification adjustments ⁽¹⁾:
Actuarial loss		—			17			—			29
Transition asset		(5	)		(3	)		(10	)		(6	)
Net adjustments pertaining to defined benefit plans		(5	)		14			(10	)		23
Tax effect		2			(5	)		3			(8	)
Net-of-tax amount		(3	)		9			(7	)		15

Other comprehensive loss		(597	)		(9,239	)		(1,322	)		(13,072	)

Comprehensive income (loss)	$	745		$	(7,655	)	$	1,668		$	(9,706	)

(1)

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

See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(Dollars in thousands, except share data)

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

BALANCE, DECEMBER 31, 2012		22,843,722		$	228		$	144,718		$	(8,553	)	$	(265	)	$	42,364		$	10,695		$	189,187
Comprehensive income (loss)		—			—			—			—			—			3,366			(13,072	)		(9,706	)
Common stock held by ESOP committed to be released (81,803 shares)		—			—			32			275			—			—			—			307
Share-based compensation - stock options		—			—			27			—			—			—			—			27
Share-based compensation - equity incentive plan		—			—			—			—			55			—			—			55
Excess tax benefit from equity incentive plan		—			—			2			—			—			—			—			2
Common stock repurchased		(2,098,662	)		(21	)		(15,900	)		—			—			—			—			(15,921	)
Issuance of common stock in connection with equity incentive plan		—			—			53			—			(53	)		—			—			—
Cash dividends declared ($0.17 per share)		—			—			—			—			—			(3,534	)		—			(3,534	)
BALANCE AT JUNE, 30 2013		20,745,060		$	207		$	128,932		$	(8,278	)	$	(263	)	$	42,196		$	(2,377	)	$	160,417

BALANCE, DECEMBER 31, 2013		20,140,669		$	201		$	121,860		$	(8,003	)	$	(187	)	$	43,248		$	(2,975	)	$	154,144
Comprehensive income (loss)		—			—			—			—			—			2,990			(1,322	)		1,668
Common stock held by ESOP committed to be released (79,345 shares)		—			—			25			267			—			—			—			292
Share-based compensation - equity incentive plan		—			—			—			—			49			—			—			49
Excess tax benefit from equity incentive plan		—			—			1			—			—			—			—			1
Common stock repurchased		(970,474	)		(9	)		(7,076	)		—			—			—			—			(7,085	)
Return of dividends issued in connection with equity incentive plan		—			—			—			—			—			121			—			121
Cash dividends declared ($0.12 per share)		—			—			—			—			—			(2,225	)		—			(2,225	)
BALANCE AT JUNE, 30 2014		19,170,195		$	192		$	114,810		$	(7,736	)	$	(138	)	$	44,134		$	(4,297	)	$	146,965

See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(Dollars in thousands)

	Six Months Ended June 30,
	2014			2013
OPERATING ACTIVITIES:
Net income	$	2,990		$	3,366
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan losses		550			(305	)
Depreciation and amortization of premises and equipment		575			530
Net amortization of premiums and discounts on securities and mortgage loans		2,073			2,307
Net amortization of premiums on modified debt		313			312
Share-based compensation expense		49			82
ESOP expense		292			307
Excess tax benefits from equity incentive plan		(1	)		(2	)
Net gains on sales of securities		(50	)		(2,250	)
Gain on sale of other real estate owned		—			6
Deferred income tax benefit		—			(8	)
Income from bank-owned life insurance		(765	)		(773	)
Gain on bank-owned life insurance death benefit		—			(563	)
Changes in assets and liabilities:
Accrued interest receivable		36			141
Other assets		(159	)		842
Other liabilities		(109	)		531
Net cash provided by operating activities		5,794			4,523
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases		—			(2,636	)
Proceeds from calls, maturities, and principal collections		5,610			363
Securities, available for sale:
Purchases		(21,206	)		(150,972	)
Proceeds from sales		60,690			122,092
Proceeds from calls, maturities, and principal collections		13,102			41,654
Purchase of residential mortgages		(21,561	)		(28,491	)
Loan originations and principal payments, net		(26,490	)		16,751
Purchase of Federal Home Loan Bank of Boston stock		575			(1,391	)
Proceeds from redemption of Federal Home Loan Bank of Boston stock		—			31
Proceeds from sale of other real estate owned		—			958
Purchases of premises and equipment		(609	)		(764	)
Proceeds from sale of premises and equipment		33			—
Disbursement of bank-owned life insurance gain		—			(282	)
Proceeds from payout on bank-owned life insurance		—			1,437
Net cash provided by (used in) investing activities		10,144			(1,250	)
FINANCING ACTIVITIES:
Net increase in deposits		1,478			29,269
Net change in short-term borrowings		11,554			38
Repayment of long-term debt		—			(41,250	)
Proceeds from long-term debt		70			32,068
Return of dividends issued in connection with equity incentive plan		121			—
Cash dividends paid		(2,225	)		(3,534	)
Common stock repurchased		(7,317	)		(15,921	)
Excess tax shortfalls benefits in connection with equity incentive plan		1			2
Net cash provided by financing activities		3,682			672

NET CHANGE IN CASH AND CASH EQUIVALENTS:		19,620			3,945
Beginning of period		19,742			11,761
End of period	$	39,362		$	15,706

Supplemental cashflow information:
Securities reclassified from available-for-sale to held-to-maturity	$	—		$	172,091
Securities reclassified to loan portfolio		606			—
Interest paid		4,817			5,359
Taxes paid		41			313
Net cash due to (from) broker for common stock repurchased		67			—

See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

Basis of Presentation – In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial condition as of June 30, 2014, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results of operations for the year ending December 31, 2014. 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, 2013, included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Annual Report”).

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

2. EARNINGS PER SHARE

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

Earnings per common share for the three and six months ended June 30, 2014 and 2013 have been computed based on the following:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(In thousands, except per share data)

Net income applicable to common stock	$	1,342		$	1,584		$	2,990		$	3,366

Average number of common shares issued		19,409			21,464			19,669			21,885
Less: Average unallocated ESOP Shares		(1,100	)		(1,181	)		(1,110	)		(1,191	)
Less: Average ungranted equity incentive plan shares		—			(7	)		—			(7	)

Average number of common shares outstanding used to calculate basic earnings per common share		18,309			20,276			18,559			20,687

Effect of dilutive stock options		—			—			—			—

Average number of common shares outstanding used to calculate diluted earnings per common share		18,309			20,276			18,559			20,687

Basic earnings per share	$	0.07		$	0.08		$	0.16		$	0.16

Diluted earnings per share	$	0.07		$	0.08		$	0.16		$	0.16

Antidilutive shares ⁽¹⁾		—			1,669			—			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. At June 30, 2014, there were no stock options outstanding.

3. COMPREHENSIVE INCOME/LOSS

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

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

	June 30, 2014			December 31, 2013
	(In thousands)

Net unrealized gain (loss) on securities available for sale	$	520		$	(2,410	)
Tax effect		(171	)		837
Net-of-tax amount		349			(1,573	)

Net unrealized losses on securities transferred from available-for-sale to held-to-maturity ⁽¹⁾		(1,731	)		(1,732	)
Tax effect		598			599
Net-of-tax amount		(1,133	)		(1,133	)

Fair value of derivatives used for cash flow hedges		(3,150	)		1,755
Tax effect		1,071			(597	)
Net-of-tax amount		(2,079	)		1,158

Unrecognized transition asset pertaining to defined benefit plan		—			10
Unrecognized deferred loss pertaining to defined benefit plan		(2,172	)		(2,172	)
Net adjustments pertaining to defined benefit plans		(2,172	)		(2,162	)
Tax effect		738			735
Net-of-tax amount		(1,434	)		(1,427	)

Accumulated other comprehensive loss	$	(4,297	)	$	(2,975	)

⁽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.

The following table presents changes in accumulated other comprehensive (loss) income for the periods ended June 30, 2014 and 2013 by component:

	Securities			Derivatives			Defined Benefit Plans			Accumulated Other Comprehensive (Loss) Income
	(In thousands)
Balance at December 31, 2012	$	13,253		$	—		$	(2,558	)	$	10,695
Current-period other comprehensive (loss) income		(13,087	)		—			15			(13,072	)
Balance at June 30, 2013	$	166		$	—		$	(2,543	)	$	(2,377	)

Balance at December 31, 2013	$	(2,706	)	$	1,158		$	(1,427	)	$	(2,975	)
Current-period other comprehensive income (loss)		1,922			(3,237	)		(7	)		(1,322	)
Balance at June 30, 2014	$	(784	)	$	(2,079	)	$	(1,434	)	$	(4,297	)

4. SECURITIES

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

	June 30, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for sale securities:
Government-sponsored mortgage-backed securities	$	128,333	$	394	$	(1,503	)	$	127,224
U.S. government guaranteed mortgage-backed securities		793		—		(15	)		778
Corporate bonds		28,579		1,000		(9	)		29,570
State and municipal bonds		16,491		693		—			17,184
Government-sponsored enterprise obligations		10,507		40		(190	)		10,357
Mutual funds		6,222		7		(149	)		6,080
Common and preferred stock		1,309		252		—			1,561

Total available for sale securities		192,234		2,386		(1,866	)		192,754

Held to maturity securities:
Government-sponsored mortgage-backed securities	$	171,085	$	1,401	$	(2,384	)	$	170,102
U.S. government guaranteed mortgage-backed securities		39,223		56		(721	)		38,558
Corporate bonds		27,132		178		(194	)		27,116
State and municipal bonds		7,318		57		(148	)		7,227
Government-sponsored enterprise obligations		43,441		114		(1,517	)		42,038

Total held to maturity securities		288,199		1,806		(4,964	)		285,041

Total	$	480,433	$	4,192	$	(6,830	)	$	477,795

	December 31, 2013
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for sale securities:
Government-sponsored mortgage-backed securities	$	135,981	$	419	$	(4,028	)	$	132,372
U.S. government guaranteed mortgage-backed securities		46,225		240		(137	)		46,328
Corporate bonds		26,716		766		(93	)		27,389
State and municipal bonds		18,240		659		(2	)		18,897
Government-sponsored enterprise obligations		10,992		18		(310	)		10,700
Mutual funds		6,150		8		(239	)		5,919
Common and preferred stock		1,310		289		—			1,599

Total available for sale securities		245,614		2,399		(4,809	)		243,204

Held to maturity securities:
Government-sponsored mortgage-backed securities		176,986		—		(6,819	)		170,167
U.S. government guaranteed mortgage-backed securities		39,705		—		(1,391	)		38,314
Corporate bonds		27,566		30		(567	)		27,029
State and municipal bonds		7,351		5		(345	)		7,011
Government-sponsored enterprise obligations		43,405		—		(3,371	)		40,034

Total held to maturity securities		295,013		35		(12,493	)		282,555

Total	$	540,627	$	2,434	$	(17,302	)	$	525,759

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

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

The amortized cost and fair value of securities available for sale and held to maturity at June 30, 2014, by maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or repay obligations.

	June 30, 2014
	Securities				Securities
	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Mortgage-backed securities:
Due after one year through five years	$	5,181	$	5,218	$	—	$	—
Due after five years through ten years		28,389		27,796		46,769		45,404
Due after ten years		95,556		94,988		163,539		163,256
Total	$	129,126	$	128,002	$	210,308	$	208,660

Debt securities:
Due in one year or less	$	2,025	$	2,056	$	—	$	—
Due after one year through five years		33,719		34,765		22,777		22,597
Due after five years through ten years		19,647		20,085		39,989		39,179
Due after ten years		186		205		15,125		14,605
Total	$	55,577	$	57,111	$	77,891	$	76,381

Gross realized gains and losses on sales of securities available for sale for the three and six months ended June 30, 2014 and 2013 are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(In thousands)

Gross gains realized	$	338		$	879		$	531		$	2,321
Gross losses realized		(317	)		(56	)		(481	)		(71	)
Net gain realized	$	21		$	823		$	50		$	2,250

Proceeds from the sale of securities available for sale amounted to $60.7 million and $122.1 million for the six months ended June 30, 2014 and 2013, respectively.

The tax provision applicable to net realized gains was $9,000 and $17,000 for the three and six months ended June 30, 2014, respectively. The tax provision applicable to net realized gains was $283,000 and $771,000 for the three and six months ended June 30, 2013, respectively.

Information pertaining to securities with gross unrealized losses at June 30, 2014, and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

	June 30, 2014
	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	$	74	$	21,566	$	1,429	$	57,177
U.S. government guaranteed mortgage-backed securities		—		—		15		778
Corporate bonds		1		1,164		8		1,493
Government-sponsored enterprise obligations		—		—		190		7,309
Mutual funds		—		—		149		5,015

Total available for sale		75		22,730		1,791		71,772

Held to maturity:
Government-sponsored mortgage-backed securities		17		7,294		2,367		72,534
U.S. government guaranteed mortgage-backed securities		—		—		721		21,467
Corporate bonds		194		19,052		—		—
State and municipal bonds		—		—		148		4,537
Government-sponsored enterprise obligations		—		—		1,517		32,563

Total held to maturity		211		26,346		4,753		131,101

Total	$	286	$	49,076	$	6,544	$	202,873

	December 31, 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	$	3,717	$	118,846	$	311	$	2,761
U.S. government guaranteed mortgage-backed securities		137		15,045		—		—
Corporate bonds		93		4,659		—		—
State and municipal bonds		2		256		—		—
Government-sponsored enterprise obligations		310		7,189		—		—
Mutual funds		84		3,205		155		1,656

Total available for sale		4,343		149,200		466		4,417

Held to maturity:
Government-sponsored mortgage-backed securities		5,866		145,438		953		24,729
U.S. government guaranteed mortgage-backed securities		1,391		38,314		—		—
Corporate bonds		567		22,059		—		—
State and municipal bonds		345		5,852		—		—
Government-sponsored enterprise obligations		3,330		38,228		41		1,806

Total held to maturity		11,499		249,891		994		26,535

Total	$	15,842	$	399,091	$	1,460	$	30,952

	June 30, 2014
	Less Than 12 Months									Over 12 Months
	Number of Securities		Amortized Cost Basis		Gross Loss		Depreciation from Amortized Cost Basis (%)			Number of Securities		Amortized Cost Basis		Gross Loss		Depreciation from Amortized Cost Basis (%)
	(Dollars in thousands)

Government sponsored mortgage-backed securities		8	$	28,951	$	91		0.3	%		34	$	133,507	$	3,796		2.8	%
U.S. government guaranteed mortgage-backed securities		0		—		—		—			4		22,981		736		3.2
Government sponsored enterprise obligations		0		—		—		—			9		41,579		1,707		4.1
Corporate Bonds		6		20,411		195		1.0			1		1,501		8		0.5
State and municipal bonds		0		—		—		—			8		4,685		148		3.2
Mutual funds		0		—		—		—			2		5,164		149		2.9

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.

5. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consisted of the following amounts:

	June 30,			December 31,
	2014			2013
	(In thousands)
Commercial real estate	$	286,009		$	264,476
Residential real estate:
Residential		213,078			198,686
Home equity		36,866			35,371
Commercial and industrial		147,623			135,555
Consumer		1,503			2,572
Total Loans		685,079			636,660
Unearned premiums and deferred loan fees and costs, net		989			767
Allowance for loan losses		(8,017	)		(7,459	)
	$	678,051		$	629,968

During the six months ended June 30, 2014 and 2013, we purchased residential real estate loans aggregating $21.6 million and $28.5 million, respectively.

We have transferred a portion of our originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in our accompanying unaudited consolidated balance sheets. We share ratably with our participating lenders in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. We continue to service the loans on behalf of the participating lenders and, as such, collect cash payments from the borrowers, remit payments (net of servicing fees) to participating lenders and disburse required escrow funds to relevant parties. At June 30, 2014 and December 31, 2013, we serviced loans for participants aggregating $18.2 million and $14.3 million, respectively.

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

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

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

General component

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

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

Residential real estate – We require private mortgage insurance for all loans originated with a loan-to-value ratio greater than 80% and we 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 can be adversely impacted by a downturn in the economy due to increased vacancy rates or diminished cash flows, which in turn, would 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 may be maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

An analysis of changes in the allowance for loan losses by segment for the periods ended June 30, 2014 and 2013 is as follows:

	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer			Unallocated			Total
	(In thousands)
Three Months Ended
Balance at March 31, 2013	$	3,289		$	1,722		$	2,077		$	11		$	466		$	7,565
Provision (credit)		(45	)		85			9			9			(128	)		(70	)
Charge-offs		—			—			(56	)		(10	)		—			(66	)
Recoveries		—			—			42			2			—			44
Balance at June 30, 2013	$	3,244		$	1,807		$	2,072		$	12		$	338		$	7,473

Balance at March 31, 2014	$	3,689		$	1,812		$	2,049		$	13		$	4		$	7,567
Provision (credit)		209			36			202			8			(5	)		450
Charge-offs		—			—			—			(13	)		—			(13	)
Recoveries		—			—			7			6			—			13
Balance at June 30, 2014	$	3,898		$	1,848		$	2,258		$	14		$	(1	)	$	8,017

Six Months Ended
Balance at December 31, 2012	$	3,406		$	1,746		$	2,167		$	13		$	462		$	7,794
Provision (credit)		(297	)		118			(12	)		10			(124	)		(305	)
Charge-offs		(20	)		(57	)		(129	)		(14	)		—			(220	)
Recoveries		155			—			46			3			—			204
Balance at June 30, 2013	$	3,244		$	1,807		$	2,072		$	12		$	338		$	7,473

Balance at December 31, 2013	$	3,549		$	1,707		$	2,192		$	13		$	(2	)	$	7,459
Provision (credit)		349			155			30			15			1			550
Charge-offs		—			(15	)		(74	)		(23	)		—			(112	)
Recoveries		—			1			110			9			—			120
Balance at June 30, 2014	$	3,898		$	1,848		$	2,258		$	14		$	(1	)	$	8,017

Further information pertaining to the allowance for loan losses by segment at June 30, 2014 and December 31, 2013 follows:

	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer		Unallocated			Total
	(In thousands)
June 30, 2014

Amount of allowance for loans individually evaluated and deemed impaired	$	9	$	—	$	10	$	—	$	—		$	19
Amount of allowance for loans collectively or individually evaluated for impairment and not deemed impaired		3,889		1,848		2,248		14		(1	)		7,998
Total allowance for loan losses	$	3,898	$	1,848	$	2,258	$	14	$	(1	)	$	8,017

Loans individually evaluated and deemed impaired	$	14,746	$	209	$	1,704	$	—	$	—		$	16,659
Loans collectively or individually evaluated and not deemed impaired		271,263		249,735		145,919		1,503		—			668,420
Total loans	$	286,009	$	249,944	$	147,623	$	1,503	$	—		$	685,079

December 31, 2013

Amount of allowance for loans individually evaluated and deemed impaired	$	82	$	—	$	15	$	—	$	—		$	97
Amount of allowance for loans collectively or individually evaluated for impairment and not deemed impaired		3,467		1,707		2,177		13		(2	)		7,362
Total allowance for loan losses	$	3,549	$	1,707	$	2,192	$	13	$	(2	)	$	7,459

Loans individually evaluated and deemed impaired	$	14,962	$	234	$	1,352	$	—	$	—		$	16,548
Loans collectively or individually evaluated and not deemed impaired		249,514		233,823		134,203		2,572		—			620,112
Total loans	$	264,476	$	234,057	$	135,555	$	2,572	$	—		$	636,660

The following is a summary of past due and non-accrual loans by class at June 30, 2014 and December 31, 2013:

	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Past Due 90 Days or More and Still Accruing		Loans on Non-Accrual
	(In thousands)
June 30, 2014
Commercial real estate	$	3,050	$	322	$	517	$	3,889	$	—	$	1,284
Residential real estate:
Residential		1,524		285		585		2,394		—		1,023
Home equity		79		128		22		229		—		22
Commercial and industrial		106		14		346		466		—		894
Consumer		27		4		2		33		—		2
Total	$	4,786	$	753	$	1,472	$	7,011	$	—	$	3,225

December 31, 2013
Commercial real estate	$	430	$	146	$	793	$	1,369	$	—	$	1,449
Residential real estate:
Residential		1,004		325		311		1,640		—		712
Home equity		217		—		2		219		—		38
Commercial and industrial		516		780		140		1,436		—		386
Consumer		25		16		1		42		—		1
Total	$	2,192	$	1,267	$	1,247	$	4,706	$	—	$	2,586

The following is a summary of impaired loans by class at June 30, 2014 and December 31, 2013:

							Three Months Ended				Six Months Ended
	At June 30, 2014						June 30, 2014				June 30, 2014
	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	$	1,402	$	1,738	$	—	$	1,417	$	—	$	1,429		—
Residential real estate		209		304		—		211		—		217		—
Commercial and industrial		749		782		—		758		—		667		—
Total		2,360		2,824		—		2,386		—		2,313		—

Impaired loans with a valuation allowance:
Commercial real estate		13,344		13,344		9		13,386		143		13,428		286
Commercial and industrial		955		955		10		958		10		961		20
Total		14,299		14,299		19		14,344		153		14,389		306

Total impaired loans	$	16,659	$	17,123	$	19	$	16,730	$	153	$	16,702	$	306

							Three Months Ended				Six Months Ended
	At December 31, 2013						June 30, 2013				June 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Impaired loans without a valuation allowance:
Commercial real estate	$	1,449	$	1,756	$	—	$	1,513	$	—	$	1,528		—
Residential real estate		234		306		—		243		—		258		—
Commercial and industrial		385		487		—		416		—		404		—
Total		2,068		2,549		—		2,172		—		2,190		—

Impaired loans with a valuation allowance:
Commercial real estate		13,513		13,513		82		13,719		146		13,760		293
Commercial and industrial		967		967		15		982		10		985		21
Total		14,480		14,480		97		14,701		156		14,745		314

Total impaired loans	$	16,548	$	17,029	$	97	$	16,873	$	156	$	16,935	$	314

All interest income recognized for impaired loans was recognized on the accrual basis during the three and six months ended June 30, 2014 and 2013.

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

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

Nonperforming TDRs are shown as nonperforming assets. No loans were modified as a TDR during the three and six months ended June 30, 2014 and 2013.

A default occurs when a loan is 30 days or more past due and is within 12 months of restructuring. No TDRs defaulted during the three and six months ended June 30, 2014 and 2013.

As of June 30, 2014, we have committed to lend an additional $140,000 to one customer with outstanding loans that are classified as TDRs. This loan will be used to provide working capital and has a maturity of 90 days. There were no charge-offs on TDRs during the three and six months ended June 30, 2014. There were $0 and $36,000 in charge-offs on TDRs during the three and six months ended June 30, 2013.

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 $27.7 million and $23.4 million at June 30, 2014 and December 31, 2013, respectively. We engage an independent third party to review a significant portion of loans within these segments on a semi-annual basis. We use the results of these reviews as part of our annual review process.

The following table presents our loans by risk rating at June 30, 2014 and December 31, 2013:

	Commercial Real Estate		Residential 1-4 Family		Home Equity		Commercial and Industrial		Consumer		Total
	(In thousands)
June 30, 2014
Loans rated 1 – 3	$	234,292	$	212,055	$	36,844	$	126,710	$	1,501	$	611,402
Loans rated 4		42,209		—		—		9,021		—		51,230
Loans rated 5		1,626		—		—		781		—		2,407
Loans rated 6		7,882		1,023		22		11,111		2		20,040
	$	286,009	$	213,078	$	36,866	$	147,623	$	1,503	$	685,079

December 31, 2013
Loans rated 1 – 3	$	213,985	$	197,974	$	35,333	$	108,671	$	2,571	$	558,534
Loans rated 4		41,459		—		—		15,722		—		57,181
Loans rated 5		1,972		—		—		3,509		—		5,481
Loans rated 6		7,060		712		38		7,653		1		15,464
	$	264,476	$	198,686	$	35,371	$	135,555	$	2,572	$	636,660

6. SHARE-BASED COMPENSATION

Under our 2007 Recognition and Retention Plan and our 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.

During the third quarter of 2013, we 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, which resulted in a decrease to cash and shareholders’ equity. A deferred tax asset of $566,000 was charged to shareholders’ equity as a result of the tender offer. As of December 31, 2013, 57,232 stock options that had been available for future grants were returned to the 2007 Stock Option Plan reserve and the 2002 and 2007 Stock Option Plans were frozen.

Stock awards are recorded as unearned compensation based on the market price at the date of grant. Unearned compensation is amortized over the vesting period. No stock awards were granted during the three and six months ended June 30, 2014. At June 30, 2014, no stock awards were available for future grants.

No stock options were granted during the three and six months ended June 30, 2014.

Our stock award and stock option plans activity for the six months ended June 30, 2014 and 2013 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, 2013		25,720	$	7.93		—		—
No activity		—		—		—		—
Outstanding at June 30, 2014		25,720	$	7.93		—		—

Outstanding at December 31, 2012		33,800	$	8.23		1,669,431	$	10.02
Shares Granted		7,440		7.08		—		—
Outstanding at June 30, 2013		41,240	$	8.02		1,669,431	$	10.02

We recorded compensation cost related to the stock options of $14,000 with a related tax benefit of $4,000 for the three months ended June 30, 2013. We recorded compensation cost related to the stock options of $27,000 with a related tax benefit of $7,000 for the six months ended June 30, 2013.

We recorded compensation cost related to the stock awards of $25,000 and $30,000 for the three months ended June 30, 2014 and 2013, respectively. We recorded compensation cost related to the stock awards of $49,000 and $55,000 with related tax benefits of $1,000 and 2,000 for the six months ended June 30, 2014 and 2013, respectively.

In May 2014, our shareholders approved a new stock based compensation plan under which up to 516,000 shares of our common stock have been reserved for future grants of stock awards, including stock options and restricted stock, which may be granted to any officer, key employee or non-employee director of Westfield Financial. At June 30, 2014, no awards had been granted under this plan.

7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

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

Short-term borrowings are made up of FHLBB advances with an original maturity of less than one year as well as customer repurchase agreements, which have an original maturity of one day. Short-term borrowings issued by the FHLBB were $20.0 million at June 30, 2014 and December 31, 2013, respectively. Outstanding line of credit with the FHLBB was $8.0 million at June 30, 2014 while there were no outstanding lines at December 31, 2013. Customer repurchase agreements were $31.7 million at June 30, 2014 and $28.2 million at December 31, 2013. A customer repurchase agreement is an agreement by us to sell to and repurchase from the customer an interest in specific securities issued by or guaranteed by the U.S. government. This transaction settles immediately on a same day basis in immediately available funds. Interest paid is commensurate with other products of equal interest and credit risk. All of our customer repurchase agreements at June 30, 2014 and December 31, 2013, were held by commercial customers. In addition, we have lines of credit of $4.0 million and $50.0 million with Bankers Bank Northeast (“BBN”) and PNC Bank, respectively. The interest rates on these lines are determined and reset on a daily basis by each respective bank. There were no advances outstanding under these lines of credit at June 30, 2014 or December 31, 2013. As part of our contract with BBN, we are required to maintain a reserve balance of $300,000 with BBN for our use of this line of credit.

Long-term debt consists of FHLBB advances, securities sold under repurchase agreements and customer repurchase agreements with an original maturity of one year or more. At June 30, 2014, we had $233.1 million in long-term debt with the FHLBB and $10.0 million in securities sold under repurchase agreements with an approved broker-dealer. This compares to $232.7 million in long-term debt with FHLBB advances and $10.0 million in securities sold under repurchase agreements with an approved broker-dealer at December 31, 2013. The securities sold under agreement to repurchase are callable quarterly at the issuer’s option. Customer repurchase agreements were $5.7 million and $5.6 million at June 30, 2014 and December 31, 2013, respectively. All FHLBB advances are collateralized by a blanket lien on our owner occupied residential real estate loans and certain mortgage-backed securities.

For the six months ended June 30, 2014, we did not prepay any repurchase agreements. Likewise, there were no prepayments of repurchase agreements as of December 31, 2013.

8. PENSION BENEFITS

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

	Three Months Ended						Six Months Ended,
	June 30,						June 30,
	2014			2013			2014			2013
	(In thousands)
Service cost	$	250		$	269		$	500		$	538
Interest cost		208			178			417			355
Expected return on assets		(240	)		(232	)		(480	)		(464	)
Transition obligation		(5	)		(3	)		(10	)		(6	)
Actuarial loss		—			20			—			40
Net periodic pension cost	$	213		$	232		$	427		$	463

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 2014. No contributions have been made to the plan for the six months ended June 30, 2014. The pension plan assets are invested in group annuity contracts with the Principal Financial Group, who also acts as our 401(k) plan provider.

9. DERIVATIVES 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 June 30, 2014 and December 31, 2013.

June 30, 2014	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(In thousands)

Interest rate swaps	N/A	$	—	Other Liabilities	$	3,150
Total derivatives designated as hedging instruments		$	—		$	3,150

December 31, 2013	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(In thousands)

Interest rate swaps	Other Assets	$	1,755	N/A	$	—
Total derivatives designated as hedging instruments		$	1,755		$	—

At June 30, 2014, we held no derivatives that were not designated as hedging instruments.

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 June 30, 2014, we had six forward-starting interest rate swaps with a notional amount of $155.0 million related to our cash outflows associated with various FHLB advances. The forward-starting interest rate swaps are effective between October 2013 and September 2016, and they mature between October 2017 and September 2022.

The following table presents information about our cash flow hedges at June 30, 2014 and December 31, 2013:

June 30, 2014	Notional		Weighted Average		Weighted Average Rate						Estimated Fair
	Amount		Maturity		Receive			Pay			Value
	(In thousands)		(In years)								(In thousands)
Interest rate swaps on FHLBB borrowings	$	20,000		3.3		0.24	%		1.17	%	$	(50	)
Forward starting interest rate swaps on FHLBB borrowings		135,000		6.7		—			2.93	%		(3,100	)
Total cash flow hedges	$	155,000		6.3							$	(3,150	)

December 31, 2013	Notional		Weighted Average		Weighted Average Rate						Estimated Fair
	Amount		Maturity		Receive			Pay			Value
	(In thousands)		(In years)								(In thousands)
Interest rate swaps on FHLBB borrowings	$	20,000		3.8		0.24	%		1.17	%	$	40
Forward starting interest rate swaps on FHLBB borrowings		135,000		7.2		—			2.93	%		1,715
Total cash flow hedges	$	155,000		6.8							$	1,755

The five forward-starting interest rate swaps will become effective in 2014, 2015, and 2016 with notional amounts of $20.0 million, $47.5 million and $67.5 million, respectively.

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 on any of the interest rate swaps since inception.

We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of six years (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. The amount reclassified from accumulated comprehensive income into income for the effective portion of interest rate swaps was $48,000 and $94,000 during the three and six months ended June 30, 2014, respectively. We had no gain or loss reclassified from accumulated comprehensive income into income during the three and six months ended June 30, 2014. During the next 12 months, we estimate that $499,000 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 June 30,					Six Months Ended June 30,
	2014			2013		2014			2013
	(In thousands)
Interest rate swaps	$	(2,609	)	$	—	$	(4,999	)	$	—

Credit-risk-related Contingent Features

By using derivative financial instruments, we expose ourselves 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 June 30, 2014, 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 $3.2 million. As of June 30, 2014, 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 June 30, 2014, 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 and liabilities measured at fair value on a recurring basis are summarized below:

	June 30, 2014
	Level 1		Level 2		Level 3		Total
Assets:	(In thousands)

Securities available for sale:
Government-sponsored residential mortgage-backed securities	$	—	$	127,224	$	—	$	127,224
U.S. government guaranteed residential mortgage-backed securities		—		778		—		778
Corporate bonds		—		29,570		—		29,570
State and municipal bonds		—		17,184		—		17,184
Government-sponsored enterprise obligations		—		10,357		—		10,357
Mutual funds		6,080		—		—		6,080
Common and preferred stock		1,561		—		—		1,561
Total assets	$	7,641	$	185,113	$	—	$	192,754

Liabilities:
Interest rate swaps, net	$	—	$	3,150	$	—	$	3,150

	December 31, 2013
	Level 1		Level 2		Level 3		Total
Securities available for sale:	(In thousands)
Government-sponsored residential mortgage-backed securities	$	—	$	132,372	$	—	$	132,372
U.S. government guaranteed residential mortgage-backed securities		—		46,328		—		46,328
Corporate bonds		—		27,389		—		27,389
State and municipal bonds		—		18,897		—		18,897
Government-sponsored enterprise obligations		—		10,700		—		10,700
Mutual funds		5,919		—		—		5,919
Common and preferred stock		1,599		—		—		1,599
Total securities available for sale		7,518		235,686		—		243,204
Interest rate swaps		—		1,755		—		1,755
Total assets	$	7,518	$	237,441	$	—	$	244,959

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 June 30, 2014 and 2013. Total losses represent the change in carrying value as a result of fair value adjustments related to assets still held at June 30, 2014 and 2013.

	At						Three Months Ended		Six Months Ended
	June 30, 2014						June 30, 2014		June 30, 2014
	Level 1		Level 2		Level 3				Total Losses
	(In thousands)						(In thousands)		(In thousands)
Impaired loans	$	—	$	—	$	91	$	—	$	15
Total assets	$	—	$	—	$	91	$	—	$	15

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

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

There were no transfers to or from Level 1 and 2 during the three and six months ended June 30, 2014 and 2013. We did not measure any liabilities at fair value on a recurring or non-recurring basis on the consolidated balance sheets.

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

	June 30, 2014
	Carrying Value		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents	$	39,362	$	39,362	$	—	$	—	$	39,362
Securities available for sale		192,754		7,641		185,113		—		192,754
Securities held to maturity		288,199		—		285,041		—		285,041
Federal Home Loan Bank of Boston and other restricted stock		15,056		—		—		15,056		15,056
Loans - net		678,051		—		—		684,004		684,004
Accrued interest receivable		4,165		—		—		4,165		4,165

Liabilities:
Deposits		818,590		—		—		819,866		819,866
Short-term borrowings		59,751		—		59,751		—		59,751
Long-term debt		248,760		—		253,355		—		253,355
Accrued interest payable		396		—		—		396		396
Derivative liabilities, net		3,150		—		3,150		—		3,150

	December 31, 2013
	Carrying Value		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents	$	19,742	$	19,742	$	—	$	—	$	19,742
Securities available for sale		243,204		7,518		235,686		—		243,204
Securities held to maturity		295,013		—		282,555		—		282,555
Federal Home Loan Bank of Boston and other restricted stock		15,631		—		—		15,631		15,631
Loans - net		629,968		—		—		631,417		631,417
Accrued interest receivable		4,201		—		—		4,201		4,201
Derivative assets		1,755		—		1,755		—		1,755

Liabilities:
Deposits		817,112		—		—		819,109		819,109
Short-term borrowings		48,197		—		48,197		—		48,197
Long-term debt		248,377		—		251,678		—		251,678
Accrued interest payable		392		—		—		392		392

11. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2014, FASB issued ASU 2014-04- Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure.” This ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (i) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar agreement. In addition, the amendments require disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure in accordance with local requirements of the applicable jurisdiction. An entity can elect to adopt the amendments using either a modified retrospective method or a prospective transition method. The amendments are effective for annual and interim periods beginning after December 15, 2014. We do not expect the application of this guidance to have a material impact on our consolidated financial statements.

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

Overview

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

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

•

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

•

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

•

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

You should read the following financial results for the three and six months ended June 30, 2014 in the context of this strategy.

•

Net income was $1.3 million, or $0.07 per diluted share, for the three months ended June 30, 2014, compared to $1.6 million, or $0.08 per diluted share, for the same period in 2013. For the six months ended June 30, 2014, net income was $3.0 million, or $0.16 per diluted share, as compared to net income of $3.4 million, or $0.16 per diluted share, for the same period in 2013.

•

The provision (credit) for loan losses was $450,000 and $(70,000) for the three months ended June 30, 2014 and 2013, respectively, and $550,000 and $(305,000) for the six months ended June 30, 2014 and 2013, respectively. The credit for loan losses in both 2013 periods was the result of continued improvement in the overall risk profile of the commercial loan portfolio. Classified loans that previously carried higher allowances showed considerable improvement, resulting in a lower allowance requirement.

•

Net interest income was $7.7 million and $7.6 million for the three months ended June 30, 2014 and 2013, respectively. The net interest margin, on a tax-equivalent basis, was 2.61% for the three months ended June 30, 2014, compared to 2.55% for the same period in 2013. For the six months ended June 30, 2014 and 2013, net interest income was $15.4 million and $15.3 million, respectively. The net interest margin, on a tax-equivalent basis, was 2.62% and 2.57% for the six months ended June 30, 2014 and 2013, respectively. The increase in net interest income for both the three and six months ended June 30, 2014 was due to a decrease in the cost of average interest-bearing liabilities along with a shift in average interest-earning assets out of securities and into loans, which tend to carry a higher average yield.

CRITICAL ACCOUNTING POLICIES

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

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. There have been no material changes to our critical accounting policies during the three and six months ended June 30, 2014. 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 2013 Annual Report.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2014 AND DECEMBER 31, 2013

Total assets were stable at $1.3 billion at June 30, 2014 and December 31, 2013. Securities decreased $57.8 million to $496.0 million at June 30, 2014 from $553.8 million at December 31, 2013 primarily due to sales of securities.

We have 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 of 2013 to the third quarter of 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 is expected to change in the opposite direction of the valuations on the available-for-sale securities portfolio. This is consistent with our objective to reduce total volatility in tangible book value and AOCI.

Total loans increased by $48.7 million to $686.1 million at June 30, 2014 from $637.4 million at December 31, 2013. Commercial real estate loans increased $21.5 million to $286.0 million at June 30, 2014 from $264.5 at December 31, 2013. Non-owner occupied commercial real estate loans increased $23.0 million to $174.9 million at June 30, 2014 from $151.9 million at December 31, 2013, while owner occupied commercial real estate loans decreased $1.4 million to $111.1 million at June 30, 2014 from $112.5 million at December 31, 2013. Commercial and industrial loans increased $12.0 million to $147.6 million at June 30, 2014 from $135.6 million at December 31, 2013.

Residential loans increased $15.8 million to $249.9 million at June 30, 2014 from $234.1 million at December 31, 2013. Through our long standing relationship with a third-party mortgage company, we purchased a total of $9.9 million in residential loans within and contiguous to our market area. In addition, we purchased $11.7 million in residential loans from a New England-based bank as a means of supplementing our purchased mortgage relationships. While in prior quarters management has used residential loan growth to supplement the loan portfolio, the long-term strategy remains focused on commercial lending.

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 were $3.2 million at June 30, 2014 and $2.6 million at December 31, 2013. The increase in nonaccrual loans for the six months ended June 30, 2014 was primarily due to two commercial loan relationships totaling $597,000. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $84,000 and $88,000 for the six months ended June 30, 2014 and 2013, respectively. At June 30, 2014 and December 31, 2013, there was no real estate in foreclosure. At June 30, 2014 and December 31, 2013, our nonperforming loans to total loans were 0.47% and 0.41%, respectively, while our nonperforming assets to total assets were 0.25% and 0.20%, 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 $1.5 million to $818.6 million at June 30, 2014 from $817.1 million at December 31, 2013. The increase in deposits was due to a $15.8 million increase in money market accounts, which were $220.3 million and $204.5 million at June 30, 2014 and December 31, 2013, respectively. Checking accounts decreased $12.3 million to $177.7 million at June 30, 2014 from $190.0 million at December 31, 2013. Time deposit accounts decreased $1.4 million to $340.0 million at June 30, 2014 from $341.4 million at December 31, 2013. Regular savings accounts decreased $641,000 to $80.6 million at June 30, 2014. We modified the interest rate structure on consumer checking accounts, which resulted in some funds from consumer checking shifting to the relationship-based money market account.

Borrowings increased $12.0 million to $308.5 million at June 30, 2014 from $296.5 million at December 31, 2013. Short-term borrowings increased $11.5 million to $59.7 million at June 30, 2014 from $48.2 million at December 31, 2013. Long-term debt increased $383,000 to $248.8 million at June 30, 2014from $248.3 million at December 31, 2013. The change in our short-term debt and long-term borrowings was to take advantage of short-term, low cost FHLBB funding in this interest rate environment. Our short-term borrowings and long-term debt are discussed in Note 7 of the accompanying unaudited consolidated financial statements.

Shareholders’ equity was $147.0 million and $154.1 million, which represented 11.4% and 12.1% of total assets at June 30, 2014 and December 31, 2013, respectively. The decrease in shareholders’ equity during the six months ended June 30, 2014 reflects the repurchase of 970,474 shares of our common stock at a cost of $7.1 million pursuant to our stock repurchase program, the payment of regular dividends amounting to $2.2 million and a decrease in other comprehensive income of $1.3 million due to changes in the market value of our securities and swaps. This was partially offset by net income of $3.0 million for the six months ended June 30, 2014.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2014 AND JUNE 30, 2013

General

Net income was $1.3 million, or $0.07 per diluted share, for the quarter ended June 30, 2014, compared to $1.6 million, or $0.08 per diluted share, for the same period in 2013. Net interest income was $7.7 million and $7.6 million for the three months ended June 30, 2014 and 2013, respectively.

Net Interest and Dividend Income

The following tables set forth the information relating to our average balance and net interest income for the three months ended June 30, 2014 and 2013, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned from making changes in loan rates and terms and fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.

	Three Months Ended June 30,
	2014								2013
	Average					Avg Yield/			Average					Avg Yield/
	Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans⁽¹⁾⁽²⁾	$	665,024	$	6,857			4.12	%	$	599,149	$	6,345			4.24	%
Securities⁽²⁾		501,132		3,357			2.68			608,404		4,045			2.66
Other investments - at cost		16,546		63			1.52			17,276		21			0.49
Short-term investments⁽³⁾		19,912		3			0.06			3,280		1			0.12
Total interest-earning assets		1,202,614		10,280			3.42			1,228,109		10,412			3.39
Total noninterest-earning assets		72,051								66,393

Total assets	$	1,274,665							$	1,294,502

LIABILITIES AND EQUITY:
Interest-bearing liabilities

Interest-bearing accounts	$	41,797		26			0.25		$	47,533		35			0.29
Savings accounts		81,144		21			0.10			89,994		35			0.16
Money market accounts		213,227		208			0.39			195,885		193			0.39
Time certificates of deposit		341,041		1,033			1.21			327,036		1,127			1.38
Total interest-bearing deposits		677,209		1,288						660,448		1,390
Short-term borrowings and long-term debt		308,757		1,154			1.50			334,035		1,219			1.46
Interest-bearing liabilities		985,966		2,442			0.99			994,483		2,609			1.05
Noninterest-bearing deposits		130,033								116,479
Other noninterest-bearing liabilities		10,679								9,992
Total noninterest-bearing liabilities		140,712								126,471

Total liabilities		1,126,678								1,120,954
Total equity		147,987								173,548
Total liabilities and equity	$	1,274,665							$	1,294,502
Less: Tax-equivalent adjustment⁽²⁾				(137	)							(166	)
Net interest and dividend income			$	7,701							$	7,637
Net interest rate spread⁽⁴⁾							2.43	%							2.34	%
Net interest margin⁽⁵⁾							2.61	%							2.55	%
Ratio of average interest-earning assets to average interest-bearing liabilities							121.97								123.49

(1)

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

(2)

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

(3)

Short-term investments include federal funds sold.

(4)

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

(5)

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

The following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to:

•

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

•

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

•

the net change.

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

	Three Months Ended June 30, 2014 compared to Three Months Ended June 30, 2013
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest-earning assets	(In thousands)
Loans ⁽¹⁾	$	698		$	(186	)	$	512
Securities ⁽¹⁾		(713	)		25			(688	)
Other investments - at cost		(1	)		43			42
Short-term investments		5			(3	)		2
Total interest-earning assets		(11	)		(121	)		(132	)

Interest-bearing liabilities
Interest-bearing accounts		(4	)		(5	)		(9	)
Savings accounts		(3	)		(11	)		(14	)
Money market accounts		17			(2	)		15
Time deposits		48			(142	)		(94	)
Short-term borrowing and long-time debt		(92	)		27			(65	)
Total interest-bearing liabilities		(34	)		(133	)		(167	)
Change in net interest and dividend income	$	23		$	12		$	35

(1)

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

The increase in net interest income was primarily driven by a reduction in the cost of interest-bearing liabilities in addition to a favorable shift in average interest-earnings assets out of securities and into loans. Interest expense decreased $167,000 to $2.4 million for the three months ended June 30, 2014 from $2.6 million for the same period in 2013. The average cost of interest-bearing liabilities decreased 6 basis points to 0.99% for the three months ended June 30, 2014 from 1.05% for the same period in 2013. The decrease in the cost of interest-bearing liabilities was primarily due to a decrease in rates on time deposits along with a decrease in the volume of short-term borrowings and long-term debt. The cost of time deposits decreased 17 basis points to 1.21% for the three months ended June 30, 2014 from 1.38% for the three months ended June 30, 2013, primarily due to time deposit balances maturing and being reinvested into lower rates. In addition, the average balance of short-term borrowings and long-term debt decreased $25.3 million to $308.8 million at June 30, 2014. During 2013, we prepaid a total of $43.3 million in repurchase agreements that had a weighted average cost of 2.99% and their prepayment resulted in a decrease to the cost of funds and an increase to the net interest margin for the three months ended June 30, 2014.

While the average yield on interest-earning assets increased 3 basis points to 3.42% for the three months ended June 30, 2014 from 3.39% for the same period in 2013, interest on earning-assets, on a tax-equivalent basis, decreased $132,000 to $10.3 million for the three months ended June 30, 2014 from $10.4 million for the same period in 2013. The average balance of interest-earning assets decreased $25.5 million to $1.2 billion for June 30, 2014. While the average balance of interest-earning assets decreased, the asset mix showed a favorable shift from securities into loans, which helped to increase the average yield on interest-earning assets due to the higher average yield on loans.

The average balance of securities decreased $107.3 million to $501.1 million from $608.4 million, while the average balance of loans increased $65.9 million to $665.0 million from $599.1 million for the three months ended June 30, 2014 from the same period in 2013. For the three months ended June 30, 2014, we reduced our securities portfolio earlier in the quarter while we closed on a substantial portion of the loan growth later in the quarter. This timing difference was a primary cause of the difference in average balances of securities and loans. Our strategy is to gradually shift our asset mix out of securities and into loans, which should continue to have a favorable impact on our net interest margin in future periods due to the higher average yield on loans.

Provision for Loan Losses

The amount that we provided for loan losses during the three months ended June 30, 2014 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio for the three months ended June 30, 2014, described in detail below, include an increase in commercial and industrial loans, commercial real estate loans and residential real estate loans along with the continuous improvement of the overall risk profile of the commercial loan portfolio. After evaluating these factors, we recorded a provision of $450,000 for loan losses for the three months ended June 30, 2014, compared to a credit of $70,000 for the same period in 2013. The allowance was $8.0 million and $7.6 million and 1.17% of total loans at June 30, 2014 and March 31, 2014, respectively.

Commercial and industrial loans increased $14.5 million to $147.6 million at June 30, 2014 from $133.1 million at March 31, 2014. Commercial real estate loans increased $11.9 million to $286.0 million at June 30, 2014 from $274.1 at March 31, 2014. Non-owner occupied commercial real estate loans increased $11.9 million to $174.9 million at June 30, 2014 from $163.0 million at March 31, 2014, while owner occupied commercial real estate loans remained unchanged at $111.1 million at June 30, 2014 and March 31, 2014. Residential loans increased $11.3 million to $249.9 million at June 30, 2014 from $238.6 million at March 31, 2014. We consider residential real estate loans to contain less credit risk and market risk than both commercial and industrial and commercial real estate loans.

During the 2013 period, 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 improvement resulting in allowances on impaired loans decreasing $70,000 to $238,000 at June 30, 2013. 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 $0 for the three months ended June 30, 2014. This comprised charge-offs of $13,000 for the three months ended June 30, 2014, offset by recoveries of $13,000.

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

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

Noninterest Income

Noninterest income increased $76,000 to $1.0 million for the three months ended June 30, 2014, compared to $963,000 for the same period in 2013. The three months ended June 30, 2013 included a loss on prepayment of borrowings of $1.4 million, partially offset by securities gains of $823,000 and net bank-owned life insurance (“BOLI”) income of $563,000. Service charges and fees increased $38,000 to $632,000 at June 30, 2014 from $594,000 at June 30, 2013.

Noninterest Expense

Noninterest expense decreased $258,000 to $6.5 million for the three months ended June 30, 2014 from $6.8 million for the same period in 2013. Salaries and benefits decreased $152,000 to $3.7 million for the three months ended June 30, 2014 from $3.8 million for the same period in 2013, primarily due to a $105,000 decrease in employee benefits costs. Other noninterest expense decreased $105,000 to $845,000 for the three months ended June 30, 2014, primarily due to a $40,000 decrease in advertising expenses for the period.

Income Taxes

For the three months ended June 30, 2014, we had a tax provision of $417,000 as compared to $297,000 for the same period in 2013. The effective tax rate was 23.7% for the three months ended June 30, 2014 and 15.8% for the same period in 2013. The change in effective tax rate is primarily due to the net gain on BOLI death benefits recognized during the three months ended June 30, 2013. In addition, the three months ended June 30, 2014 reflects slightly lower levels of tax-advantaged income such as BOLI and tax-exempt municipal obligations.

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND JUNE 30, 2013

General

Net income was $3.0 million, or $0.16 per diluted share, for the six months ended June 30, 2014, compared to $3.4 million, or $0.16 per diluted share, for the same period in 2013. Net interest income was $15.4 million and $15.3 million for the six months ended June 30, 2014 and 2013, respectively.

Net Interest and Dividend Income

The following tables set forth the information relating to our average balance and net interest income for the six months ended June 30, 2014 and 2013, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned from making changes in loan rates and terms and fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.

	Six Months Ended June 30,
	2014								2013
	Average					Avg Yield/			Average					Avg Yield/
	Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans⁽¹⁾⁽²⁾	$	653,007	$	13,452			4.12	%	$	594,745	$	12,656			4.26	%
Securities⁽²⁾		515,509		6,861			2.66			610,832		8,246			2.70
Other investments - at cost		17,035		128			1.50			16,975		40			0.47
Short-term investments⁽³⁾		16,483		9			0.11			5,635		3			0.11
Total interest-earning assets		1,202,034		20,450			3.40			1,228,187		20,945			3.41
Total noninterest-earning assets		72,520								66,122

Total assets	$	1,274,554							$	1,294,309

LIABILITIES AND EQUITY:
Interest-bearing liabilities
NOW accounts	$	42,342		55			0.26		$	48,857		72			0.29
Savings accounts		80,805		41			0.10			90,877		72			0.16
Money market accounts		212,062		401			0.38			185,111		358			0.39
Time certificates of deposit		340,736		2,083			1.22			326,712		2,275			1.39
Total interest-bearing deposits		675,945		2,580						651,557		2,777
Short-term borrowings and long-term debt		308,700		2,241			1.45			340,174		2,511			1.48
Interest-bearing liabilities		984,645		4,821			0.98			991,731		5,288			1.07
Noninterest-bearing deposits		129,730								114,723
Other noninterest-bearing liabilities		9,883								10,021
Total noninterest-bearing liabilities		139,613								124,744

Total liabilities		1,124,258								1,116,475
Total equity		150,296								177,834
Total liabilities and equity	$	1,274,554							$	1,294,309
Less: Tax-equivalent adjustment⁽²⁾				(273	)							(350	)
Net interest and dividend income			$	15,356							$	15,307
Net interest rate spread⁽⁴⁾							2.42	%							2.34	%
Net interest margin⁽⁵⁾							2.62	%							2.57	%
Ratio of average interest-earning assets to average interest-bearing liabilities							122.08								123.84

(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.

	Six Months Ended June 30, 2014 compared to Six Months Ended June 30, 2013
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest-earning assets	(In thousands)
Loans ⁽¹⁾	$	1,240		$	(444	)	$	796
Securities ⁽¹⁾		(1,287	)		(98	)		(1,385	)
Other investments - at cost		—			88			88
Short-term investments		6			—			6
Total interest-earning assets		(41	)		(454	)		(495	)

Interest-bearing liabilities
NOW accounts		(10	)		(7	)		(17	)
Savings accounts		(8	)		(23	)		(31	)
Money market accounts		52			(9	)		43
Time deposits		98			(290	)		(192	)
Short-term borrowing and long-time debt		(232	)		(38	)		(270	)
Total interest-bearing liabilities		(100	)		(367	)		(467	)
Change in net interest and dividend income	$	59		$	(87	)	$	(28	)

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

Net interest income was $15.3 million and $15.3 million for the six months ended June 30, 2014 and 2013, respectively. The net interest margin, on a tax-equivalent basis, was 2.62% and 2.57% for the six months ended June 30, 2014 and 2013, respectively.

For the six months ended June 30, 2014, the primary reason for the $49,000 increase in net interest income and the 5 basis point increase in net interest margin was a decrease in the cost of interest-bearing liabilities coupled with a favorable shift in average interest-earning assets out of securities and into loans. Despite a decrease in the average yield on interest-earning assets, this asset shift helped to stabilize the average yield on interest-earning assets due to the higher average yield on loans.

Interest expense decreased $467,000 to $4.8 million for the six months ended June 30, 2014 from $5.3 million for the same period in 2013. The average cost of interest-bearing liabilities decreased 9 basis points to 0.98% for the six months ended June 30, 2014 from 1.07% for the same period in 2013. The decrease in the cost of interest-bearing liabilities was primarily due to a decrease in rates on short-term borrowings, long-term debt and time deposits. We prepaid repurchase agreements in the amount $33.8 million and incurred a prepayment expense of $2.8 million for the six months ended June 30, 2013. The repurchase agreements had a weighted average cost of 3.02%. During the last week of December 2012, we prepaid repurchase agreements in the amount $28.0 million, which had a weighted average cost of 3.06%. The prepayments of repurchase agreements resulted in a decrease to the cost of funds and an increase to the net interest margin.

Interest on earning-assets, on a tax-equivalent basis, decreased $495,000 to $20.5 million for the six months ended June 30, 2014 from $20.9 million for the same period in 2013. The average yield on interest-earning assets decreased 1 basis point to 3.40% for the six months ended June 30, 2014 from 3.41% for the same period in 2013. In addition, average interest-earning assets decreased $26.2 million to $1.2 billion for the six months ended June 30, 2014. The average yield on interest-earning assets decreased primarily due to a reduction in our securities portfolio earlier in the second quarter of 2014 while we closed on a substantial portion of the loan growth later in the quarter, which created a timing difference that affected the average balances of securities and loans for the six months ended June 30, 2014. The average balance of securities decreased $95.3 million to $515.5 million, while the average balance of loans increased $58.3 million to $653.0 million for the six months ended June 30, 2014. Our strategy is to gradually shift our asset mix out of securities and into loans, which should continue to have a favorable impact on our net interest margin in future periods due to the higher average yield on loans.

Provision for Loan Losses

The amount that we provided for loan losses during the six months ended June 30, 2014 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio for the six months ended June 30, 2014, described in detail below, include increases in commercial real estate loans, residential real estate loans and commercial and industrial loans along with the continuous improvement of the overall risk profile of the commercial loan portfolio. After evaluating these factors, we recorded a provision of $550,000 for loan losses for the six months ended June 30, 2014, compared to a credit of $305,000 for the same period in 2013. The allowance was $8.0 million at June 30, 2014 and $7.5 million at December 31, 2013. The allowance for loan losses was 1.17% of total loans at June 30, 2014 and December 31, 2013, respectively.

Commercial real estate loans increased $21.5 million to $286.0 million at June 30, 2014 from $264.5 million at December 31, 2013. Residential real estate loans increased $15.8 million to $249.9 million at June 30, 2014 compared to $234.1 million at December 31, 2013. Commercial and industrial loans increased $12.0 million to $147.6 million at June 30, 2014 from $135.6 million at December 31, 2013. We consider residential real estate loans to contain less credit risk and market risk than both commercial and industrial and commercial real estate loans. During the 2013 period, the credit for loan losses was the result of continued improvement in the overall risk profile of the commercial loan portfolio. Impaired loans that previously carried higher allowances showed considerable improvement resulting in allowances on impaired loans decreasing $300,000 to $238,000 at June 30, 2013. A summary of our provision for loan losses by loan segment is listed in Note 5 of the accompanying unaudited consolidated financial statements.

Net recoveries were $8,000 for the six months ended June 30, 2014. This comprised recoveries of $120,000 for the six months ended June 30, 2014, partially offset by charge-offs of $112,000.

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

Noninterest Income

Noninterest income increased $198,000 to $2.1 million for the six months ended June 30, 2014, compared to $1.9 million for the same period in 2013. Service charges and fees increased $139,000 to $1.3 million at June 30, 2014 from $1.2 million at June 30, 2013. This was primarily due to the collection of $97,000 in prepayment fees on a commercial loan relationship that paid off early during the first quarter of 2014. Fees collected from card-based transactions increased $42,000 for the six months ended June 30, 2014, which reflects an increase in customer debit card and automated teller machine transactions. In addition, fee income from wealth management was $27,000 for the six months ended June 30, 2014. We began offering wealth management services during the first quarter of 2014.

During the six months ended June 30, 2013, we recorded income on the proceeds of BOLI death benefits of $563,000 and $2.3 million in gains on sales of securities. For the six months ended June 30, 2013, the income on BOLI death benefits and sales of securities were offset by $2.8 million in expense on the prepayment of borrowings.

Noninterest Expense

Noninterest expense decreased $237,000 to $13.1 million for the six months ended June 30, 2014 from $13.3 million for the same period in 2013. Salaries and benefits decreased $181,000 to $7.4 million for the six months ended June 30, 2014 from $7.6 million for the same period in 2013 mainly resulting from a reduction in employee benefits costs. Other expenses decreased $60,000 to $$1.6 million for the six months ended June 30, 2014, primarily due to a decrease of $44,000 in charitable contributions due to the timing of when the expenses are incurred and a decrease of $25,000 in net ATM/debit card expense resulting from changes in interchange fees.

Income Taxes

For the six months ended June 30, 2014, we had a tax provision of $868,000 as compared to $863,000 for the same period in 2013. The effective tax rate was 22.5% for the six months ended June 30, 2014 and 20.4% for the same period in 2013. The change in effective tax rate is primarily due to the net income on BOLI death benefits recognized during the six months ended June 30, 2013.

LIQUIDITY AND CAPITAL RESOURCES

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, withdrawals of deposits and operating expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of securities and funds provided by operations. We also can borrow funds from the FHLBB based on eligible collateral of loans and securities. Our maximum additional borrowing capacity from the FHLBB at June 30, 2014, was $67.7 million. In addition, we have lines of credit of $4.0 million and $50.0 million with Bankers Bank Northeast (“BBN”) and PNC Bank, respectively. The interest rates on these lines are determined and reset on a daily basis by each respective bank. As of June 30, 2014, our additional borrowing capacity from BBN and PNC Bank was $4.0 million and $50.0 million, respectively.

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

At June 30, 2014, we exceeded each of the applicable regulatory capital requirements. As of June 30, 2014, the most recent notification from the Office of Comptroller of the Currency categorized us as “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized” we must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There is also a requirement to maintain a ratio of 1.5% tangible capital to tangible assets. There are no conditions or events since that notification that management believes would change our category. Our actual capital ratios of June 30, 2014, and December 31, 2013, are also presented in the following table.

	Actual					Minimum For Capital Adequacy Purpose					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
June 30, 2014
Total Capital (to Risk Weighted Assets):
Consolidated	$	159,328		19.42	%	$	65,618		8.00	%		N/A		—
Bank		151,531		18.51			65,490		8.00		$	81,862		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	151,262		18.44			32,809		4.00			N/A		—
Bank		143,454		17.52			32,745		4.00			49,117		6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated	$	151,262		11.72			51,625		4.00			N/A		—
Bank		143,454		11.13			51,545		4.00			64,432		5.00
Tangible Equity (to Tangible Assets):
Consolidated		N/A		—			N/A		—			N/A		—
Bank		143,454		11.13			19,329		1.50			N/A		—

December 31, 2013
Total Capital (to Risk Weighted Assets):
Consolidated	$	164,605		21.17	%	$	62,207		8.00	%		N/A		—
Bank		157,484		20.30			62,073		8.00		$	77,591		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	157,119		20.21			31,104		4.00			N/A		—
Bank		149,965		19.33			31,036		4.00			46,555		6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated	$	157,119		12.28			51,193		4.00			N/A		—
Bank		149,965		11.73			51,121		4.00			63,901		5.00
Tangible Equity (to Tangible Assets):
Consolidated		N/A		—			N/A		—			N/A		—
Bank		149,965		11.73			19,170		1.50			N/A		—

We also have outstanding, at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. We are obligated under leases for certain of our branches and equipment. The following table summarizes the contractual obligations and credit commitments at June 30, 2014:

	Within 1 Year		After 1 Year But Within 3 Years		After 3 Year But Within 5 Years		After 5 Years		Total
	(In thousands)
Lease Obligations
Operating lease obligations	$	704	$	1,153	$	926	$	9,188	$	11,971

Borrowings and Debt
Federal Home Loan Bank		66,526		113,534		58,000		23,000		261,060
Securities sold under agreements to repurchase		37,451		—		10,000		—		47,451
Total borrowings and debt		103,977		113,534		68,000		23,000		308,511

Credit Commitments
Available lines of credit		69,006		—		—		25,364		94,370
Other loan commitments		49,511		—		—		40		49,551
Letters of credit		1,458		374		—		271		2,103
Total credit commitments		119,975		374		—		25,675		146,024

Total Obligations	$	224,656	$	115,061	$	68,926	$	57,863	$	466,506

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 2013 Annual Report. Please refer to Item 7A of the 2013 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 2013 Annual Report. There are no material changes in the risk factors relevant to our operations.

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

The following table sets forth information with respect to purchases made by us of our common stock during the three months ended June 30, 2014.

Period	Total Number of Shares Purchased		Average Price Paid per Share ($)		Total Number of Shares Purchased as Part of Publicly Announced Programs		Maximum Number of Shares that May Yet Be Purchased Under the Program
April 1 - 30, 2014		346,040		7.26		346,040		1,701,988	(1)(2)
May 1 - 31, 2014		140,711		7.18		140,711		1,561,277
June 1 - 30, 2014		127,797		7.18		127,797		1,433,480
Total		614,548		7.23		614,548		1,433,480

(1)

On September 17, 2013, the Board of Directors voted to authorize the commencement of a new repurchase program, authorizing the repurchase of 1,037,000 shares, or 5% of our outstanding common stock. This repurchase program commenced upon the completion of the previously announced program. We completed the stock repurchase program on April 14, 2014.

(2)

On March 13, 2014, the Board of Directors voted to authorize a stock repurchase program under which we may repurchase up to 1,970,000 shares, or 10% of our outstanding common stock. As of June 30, 2014, there were 1,433,480 shares remaining to be purchased under the new repurchase program.

There were no sales by us of unregistered securities during the three months ended June 30, 2014.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURE.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 7, 2014.

	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).

10.1^		2014 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-16767), filed with the Commission on May 19, 2014).

10.2^		Form of Incentive Stock Option Agreement under 2014 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-8 (File No. 333-197928), filed with the Commission on August 7, 2014).

10.3^		Form of Non-Qualified Option Agreement under 2014 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-8 (File No. 333-197928), filed with the Commission on August 7, 2014).

10.4^		Form of Restricted Stock Agreement under 2014 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-8 (File No. 333-197928), filed with the Commission on August 7, 2014).

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

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

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

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

101**		Financial statements from the quarterly report on Form 10-Q of Westfield Financial, Inc. for the quarter ended June 30, 2014, 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.

^		Management contract or compensatory arrangement or agreement.
*		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 Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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