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

Attached files

file	filename
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Western New England Bancorp, Inc.	ex32-1.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Western New England Bancorp, Inc.	ex31-2.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Western New England Bancorp, Inc.	ex31-1.htm
EX-32.2 - CERTIFICATION OF CHIEF 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, 2015

☐	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, 2015, the registrant had 18,495,624 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, 2015 and December 31, 2014	1

	Consolidated Statements of Net Income (Unaudited) Three and Six Months Ended June 30, 2015 and 2014	2

	Consolidated Statements of Comprehensive Income (Unaudited) Three and Six Months Ended June 30, 2015 and 2014	3

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) Six Months Ended June 30, 2015 and 2014	4

	Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2015 and 2014	5

	Notes to Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	41

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 3.	Defaults upon Senior Securities	42

Item 4.	Mine Safety Disclosures	42

Item 5.	Other Information	42

Item 6.	Exhibits	42

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 governmental legislation and regulation, including changes in accounting regulation or standards, the nature and timing of the adoption and effectiveness of new requirements under the Dodd-Frank Act, Basel guidelines, capital requirements and other applicable laws and regulations;

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,
	2015			2014
ASSETS
CASH AND DUE FROM BANKS	$	10,732		$	10,294
FEDERAL FUNDS SOLD		473			269
INTEREST-BEARING DEPOSITS AND OTHER SHORT-TERM INVESTMENTS		2,489			8,222
CASH AND CASH EQUIVALENTS		13,694			18,785

SECURITIES AVAILABLE FOR SALE – AT FAIR VALUE		245,004			215,750
SECURITIES HELD TO MATURITY (Fair value of $254,924, and $277,636 at June 30, 2015 and December 31, 2014, respectively)		256,303			278,080
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT COST		15,372			14,934
LOANS - Net of allowance for loan losses of $8,295 and $7,948 at June 30, 2015 and December 31, 2014, respectively		751,087			716,738
PREMISES AND EQUIPMENT, Net		13,680			11,703
ACCRUED INTEREST RECEIVABLE		4,200			4,213
BANK-OWNED LIFE INSURANCE		49,477			48,703
DEFERRED TAX ASSET, Net		10,522			8,819
OTHER ASSETS		2,347			2,371
TOTAL ASSETS	$	1,361,686		$	1,320,096

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
DEPOSITS :
Noninterest-bearing	$	147,784		$	136,186
Interest-bearing		749,930			698,032
Total deposits		897,714			834,218

SHORT-TERM BORROWINGS		111,251			93,997
LONG-TERM DEBT		195,772			232,479
OTHER LIABILITIES		17,124			16,859
TOTAL LIABILITIES		1,221,861			1,177,553

SHAREHOLDERS’ EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized, none outstanding at June 30, 2015 and December 31, 2014		—			—
Common stock - $.01 par value, 75,000,000 shares authorized, 18,495,624 shares issued and outstanding at June 30, 2015; 18,734,791 shares issued and outstanding at December 31, 2014		185			187
Additional paid-in capital		109,928			111,696
Unearned compensation - ESOP		(7,210	)		(7,469	)
Unearned compensation - Equity Incentive Plan		(380	)		(95	)
Retained earnings		47,344			45,699
Accumulated other comprehensive loss		(10,042	)		(7,475	)
Total shareholders’ equity		139,825			142,543
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,361,686		$	1,320,096

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,
	2015			2014		2015			2014
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans	$	5,715		$	5,419	$	11,310		$	10,666
Commercial and industrial loans		1,619			1,368		3,218			2,645
Consumer loans		37			34		73			67
Debt securities, taxable		2,832			2,994		5,491			6,154
Debt securities, tax-exempt		175			209		361			419
Equity securities		42			53		83			89
Other investments - at cost		69			63		137			128
Federal funds sold, interest-bearing deposits and other short-term investments		5			3		11			9
Total interest and dividend income		10,494			10,143		20,684			20,177
INTEREST EXPENSE:
Deposits		1,380			1,288		2,721			2,580
Long-term debt		1,092			1,071		2,162			2,081
Short-term borrowings		243			83		431			160
Total interest expense		2,715			2,442		5,314			4,821
Net interest and dividend income		7,779			7,701		15,370			15,356
PROVISION FOR LOAN LOSSES		350			450		650			550
Net interest and dividend income after provision for loan losses		7,429			7,251		14,720			14,806

NONINTEREST INCOME (LOSS):
Service charges and fees		840			632		1,477			1,303
Income from bank-owned life insurance		407			386		774			765
Loss on prepayment of borrowings		(278	)		—		(871	)		—
Gain on sales of securities, net		276			21		1,093			50
Total noninterest income		1,245			1,039		2,473			2,118
NONINTEREST EXPENSE:
Salaries and employee benefits		3,863			3,665		7,684			7,444
Occupancy		818			751		1,659			1,512
Computer operations		559			610		1,143			1,125
Professional fees		488			483		959			994
FDIC insurance assessment		188			177		381			342
Other		949			845		1,750			1,649
Total noninterest expense		6,865			6,531		13,576			13,066
INCOME BEFORE INCOME TAXES		1,809			1,759		3,617			3,858
INCOME TAX PROVISION		445			417		915			868
NET INCOME	$	1,364		$	1,342	$	2,702		$	2,990

EARNINGS PER COMMON SHARE:
Basic earnings per share	$	0.08		$	0.07	$	0.15		$	0.16
Weighted average shares outstanding		17,519,562			18,308,828		17,601,575			18,559,419
Diluted earnings per share	$	0.08		$	0.07	$	0.15		$	0.16
Weighted average diluted shares outstanding		17,519,562			18,308,828		17,601,575			18,559,419

See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED

(Dollars in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014

Net income	$	1,364		$	1,342		$	2,702		$	2,990

Other comprehensive income (loss):
Unrealized (loss) gains on securities:
Unrealized holding (loss) gains on available for sale securities		(2,934	)		1,703			(1,719	)		2,980
Reclassification adjustment for gains realized in income⁽¹⁾		(276	)		(21	)		(1,093	)		(50	)
Amortization of net unrealized loss on held-to-maturity securities⁽²⁾		(115	)		(11	)		(191	)		1
Net unrealized (losses) gains		(3,325	)		1,671			(3,003	)		2,931
Tax effect		1,148			(575	)		1,036			(1,009	)
Net-of-tax amount		(2,177	)		1,096			(1,967	)		1,922

Derivative instruments:
Change in fair value of derivatives used for cash flow hedges		1,492			(2,609	)		(1,277	)		(4,999	)
Reclassification adjustment for loss realized in interest expense⁽³⁾		137			48			268			94
Reclassification adjustment for termination fee realized in interest expense⁽⁴⁾		38			—			38			—
Net adjustments relating to derivative instruments		1,667			2,561			(971	)		(4,905	)
Tax effect		(567	)		871			330			1,668
Net-of-tax amount		1,100			(1,690	)		(641	)		(3,237	)

Defined benefit pension plans:
Losses arising during the period:		—			—			(62	)		—
Reclassification adjustments⁽⁵⁾:
Actuarial loss		93			—			124			—
Transition asset		—			(5	)		—			(10	)
Net adjustments pertaining to defined benefit plans		93			(5	)		62			(10	)
Tax effect		(30	)		2			(21	)		3
Net-of-tax amount		63			(3	)		41			(7	)

Other comprehensive loss		(1,014	)		(597	)		(2,567	)		(1,322	)

Comprehensive income	$	350		$	745		$	135		$	1,668

(1) Gain realized in income on available-for-sale securities is recognized as a component of noninterest income. The tax provision applicable to net realized gains was $95,000 and $7,000 for the three months ended June 30, 2015 and 2014, respectively. The tax provision applicable to net realized gains was $376,000 and $17,000 for the six months ended June 30, 2015 and 2014, respectively.

(2) Amortization of net unrealized loss on held-to-maturity securities is recognized as a component of interest income on debt securities. Income tax benefits associated with the reclassification adjustments were $40,000 and $4,000 for the three months ended June 30, 2015 and 2014, respectively. Income tax effects associated with the reclassification adjustments were a benefit of $65,000 and an expense of $-0- for the six months ended June 30, 2015 and 2014, respectively.

(3) Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term debt. Income tax benefits associated with the reclassification adjustment were $60,000 and $16,000 for the three months ended June 30, 2015 and 2014, respectively. Income tax benefits associated with the reclassification adjustment were $104,000 and $32,000 for the six months ended June 30, 2015 and 2014, respectively.

(4) Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term debt. Income tax benefits associated with the reclassification adjustment were $13,000 for the three and six months ended June 30, 2015, respectively.

(5) Amounts represent the reclassification of defined benefit plans amortization and have been recognized as a component of salaries and employee benefits expense. Income tax effects associated with the reclassification adjustments were a benefit of $32,000 and an expense of $2,000 for the three months ended June 30, 2015 and 2014, respectively. Income tax effects associated with the reclassification adjustments were a benefit of $21,000 and an expense of $3,000, for the six months ended June 30, 2015 and 2014, respectively.

See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED

SIX MONTHS ENDED JUNE 30, 2015 AND 2014

(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 Loss			Total

BALANCE AT DECEMBER 31, 2013		20,140,669		$	201		$	121,860		$	(8,003	)	$	(187	)	$	43,248		$	(2,975	)	$	154,144
Comprehensive income		—			—			—			—			—			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

BALANCE AT DECEMBER 31, 2014		18,734,791		$	187		$	111,696		$	(7,469	)	$	(95	)	$	45,699		$	(7,475	)	$	142,543
Comprehensive income		—			—			—			—			—			2,702			(2,567	)		135
Common stock held by ESOP committed to be released (76,888 shares)		—			—			25			259			—			—			—			284
Share-based compensation - equity incentive plan		—			—			—			—			64			—			—			64
Excess tax benefit from equity incentive plan		—			—			1			—			—			—			—			1
Common stock repurchased		(287,727	)		(3	)		(2,142	)		—			—			—			—			(2,145	)
Issuance of common stock in connection with equity incentive plan		48,560			1			348			—			(349	)		—			—			—
Cash dividends declared ($0.06 per share)		—			—			—			—			—			(1,057	)		—			(1,057	)
BALANCE AT JUNE 30, 2015		18,495,624		$	185		$	109,928		$	(7,210	)	$	(380	)	$	47,344		$	(10,042	)	$	139,825

See accompanying notes to unaudited consolidated financial statements

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

	Six Months Ended June 30,
	2015			2014
OPERATING ACTIVITIES:
Net income	$	2,702		$	2,990
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		650			550
Depreciation and amortization of premises and equipment		662			575
Net amortization of premiums and discounts on securities and mortgage loans		2,552			2,073
Net amortization of premiums on modified debt		221			313
Share-based compensation expense		64			49
ESOP expense		284			292
Excess tax benefits from equity incentive plan		(1	)		(1	)
Net gains on sales of securities		(1,093	)		(50	)
Loss on prepayment of borrowings		871			—
Income from bank-owned life insurance		(774	)		(765	)
Changes in assets and liabilities:
Accrued interest receivable		13			36
Other assets		(343	)		(159	)
Other liabilities		(633	)		(109	)
Net cash provided by operating activities		5,175			5,794
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases		(2,619	)		—
Proceeds from calls, maturities, and principal collections		22,863			5,610
Securities, available for sale:
Purchases		(132,193	)		(21,206	)
Proceeds from sales		77,783			60,690
Proceeds from calls, maturities, and principal collections		22,282			13,102
Purchase of residential mortgages		(32,007	)		(21,561	)
Loan originations and principal payments, net		(3,048	)		(26,490	)
(Purchase) redemption of Federal Home Loan Bank of Boston stock		(438	)		575
Purchases of premises and equipment		(2,662	)		(609	)
Proceeds from sale of premises and equipment		23			33
Net cash (used in) provided by investing activities		(50,016	)		10,144
FINANCING ACTIVITIES:
Net increase in deposits		63,496			1,478
Net change in short-term borrowings		17,254			11,554
Repayment of long-term debt		(37,871	)		—
Proceeds from long-term debt		72			70
Return of dividends issued in connection with equity incentive plan		—			121
Cash dividends paid		(1,057	)		(2,225	)
Common stock repurchased		(2,145	)		(7,317	)
Excess tax benefits in connection with equity incentive plan		1			1
Net cash provided by financing activities		39,750			3,682

NET CHANGE IN CASH AND CASH EQUIVALENTS:		(5,091	)		19,620
Beginning of period		18,785			19,742
End of period	$	13,694		$	39,362

Supplemental cash flow information:
Securities reclassified to loan portfolio	$	—		$	606
Interest paid		5,342			4,817
Taxes paid		1,155			41
Net cash due to broker for common stock repurchased		—			67

See the accompanying notes to unaudited consolidated financial statements

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2015

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 13 banking offices in western Massachusetts and Granby and Enfield, Connecticut, and its primary sources of revenue are income from securities and earnings on loans to small and middle-market businesses and to residential property homeowners.

Elm Street Securities Corporation and WFD Securities Corporation, Massachusetts-chartered security corporations, were formed by Westfield Financial for the primary purpose of holding qualified securities. 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, 2015, 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, 2015 are not necessarily indicative of the results of operations for the year ending December 31, 2015. 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, 2014, included in our Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 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. No dilutive potential shares were outstanding during the periods presented. Share-based compensation awards that qualify as participating securities (entitled to receive non-forfeitable dividends) are included in basic earnings per share.

Earnings per common share for the three and six months ended June 30, 2015 and 2014 have been computed based on the following:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
	(In thousands, except per share data)

Net income applicable to common stock	$	1,364		$	1,342		$	2,702		$	2,990

Average number of common shares issued		18,541			19,409			18,632			19,669
Less: Average unallocated ESOP Shares		(1,021	)		(1,100	)		(1,031	)		(1,110	)

Average number of common shares outstanding used to calculate basic and diluted earnings per common share		17,520			18,309			17,601			18,559

Basic and diluted earnings per share	$	0.08		$	0.07		$	0.15		$	0.16

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, 2015			December 31, 2014
	(In thousands)
Net unrealized (loss) gain on securities available for sale	$	(2,144	)	$	668
Tax effect		745			(226	)
Net-of-tax amount		(1,399	)		442

Net unrealized losses on securities transferred from available-for-sale to held-to-maturity		(1,978	)		(1,787	)
Tax effect		682			617
Net-of-tax amount		(1,296	)		(1,170	)

Fair value of derivatives used for cash flow hedges		(6,710	)		(5,739	)
Tax effect		2,281			1,951
Net-of-tax amount		(4,429	)		(3,788	)

Unrecognized deferred loss pertaining to defined benefit plan		(4,422	)		(4,484	)
Tax effect		1,504			1,525
Net-of-tax amount		(2,918	)		(2,959	)

Accumulated other comprehensive loss	$	(10,042	)	$	(7,475	)

The following table presents changes in accumulated other loss for the periods ended June 30, 2015 and 2014 by component:

	Securities			Derivatives			Defined Benefit Plans			Accumulated Other Comprehensive Loss
	(In thousands)
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	)

Balance at December 31, 2014	$	(728	)	$	(3,788	)	$	(2,959	)	$	(7,475	)
Current-period other comprehensive income (loss)		(1,967	)		(641	)		41			(2,567	)
Balance at June 30, 2015	$	(2,695	)	$	(4,429	)	$	(2,918	)	$	(10,042	)

4. SECURITIES

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

	June 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for sale securities:
Government-sponsored mortgage-backed securities	$	179,222	$	66	$	(2,464	)	$	176,824
U.S. government guaranteed mortgage-backed securities		8,489		—		(100	)		8,389
Corporate bonds		30,556		148		(144	)		30,560
State and municipal bonds		11,707		295		(1	)		12,001
Government-sponsored enterprise obligations		9,498		6		(56	)		9,448
Mutual funds		6,367		2		(158	)		6,211
Common and preferred stock		1,309		262		—			1,571

Total available for sale securities		247,148		779		(2,923	)		245,004

Held to maturity securities:
Government-sponsored mortgage-backed securities	$	156,187	$	1,450	$	(1,576	)	$	156,061
U.S. government guaranteed mortgage-backed securities		35,054		39		(594	)		34,499
Corporate bonds		24,361		151		(158	)		24,354
State and municipal bonds		7,252		42		(168	)		7,126
Government-sponsored enterprise obligations		33,449		270		(835	)		32,884

Total held to maturity securities		256,303		1,952		(3,331	)		254,924

Total	$	503,451	$	2,731	$	(6,254	)	$	499,928

		December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
		(In thousands)
Available for sale securities:
Government-sponsored mortgage-backed securities	$	139,637	$	423	$	(847	)	$	139,213
U.S. government guaranteed mortgage-backed securities		1,591		7		(12	)		1,586
Corporate bonds		25,711		532		(20	)		26,223
State and municipal bonds		16,472		562		—			17,034
Government-sponsored enterprise obligations		24,066		69		(156	)		23,979
Mutual funds		6,296		8		(128	)		6,176
Common and preferred stock		1,309		230		—			1,539

Total available for sale securities		215,082		1,831		(1,163	)	$	215,750

Held to maturity securities:
Government-sponsored mortgage-backed securities	$	164,001	$	2,384	$	(1,453	)		164,932
U.S. government guaranteed mortgage-backed securities		38,566		34		(607	)		37,993
Corporate bonds		24,751		76		(248	)		24,579
State and municipal bonds		7,285		59		(94	)		7,250
Government-sponsored enterprise obligations		43,477		257		(852	)		42,882

Total held to maturity securities		278,080		2,810		(3,254	)		277,636

Total	$	493,162	$	4,641	$	(4,417	)	$	493,386

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, 2015, 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, 2015
	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	$	4,994	$	5,035	$	—	$	—
Due after five years through ten years		16,434		16,179		46,073		45,265
Due after ten years		166,283		163,999		145,168		145,295
Total	$	187,711	$	185,213	$	191,241	$	190,560

Debt securities:
Due in one year or less	$	2,241	$	2,259	$	378	$	377
Due after one year through five years		31,158		31,354		19,659		19,503
Due after five years through ten years		18,176		18,195		40,816		40,429
Due after ten years		186		201		4,209		4,055
Total	$	51,761	$	52,009	$	65,062	$	64,364

Gross realized gains and losses on sales of securities available for sale for the three and six months ended June 30, 2015 and 2014 are as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2015		2014			2015			2014
	(In thousands)

Gross gains realized	$	276	$	338		$	1,163		$	531
Gross losses realized		—		(317	)		(70	)		(481	)
Net gain realized	$	276	$	21		$	1,093		$	50

Proceeds from the sale of securities available for sale amounted to $77.8 million and $60.7 million for the six months ended June 30, 2015 and 2014, respectively.

The tax provision applicable to net realized gains was $95,000 and $376,000 for the three and six months ended June 30, 2015, respectively. The tax provision applicable to net realized gains was $7,000 and $17,000 for the three and six months ended June 30, 2014, respectively.

Information pertaining to securities with gross unrealized losses at June 30, 2015, and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

	June 30, 2015
	Less Than Twelve Months				Over Twelve Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
	(In thousands)

Available for sale:
Government-sponsored mortgage-backed securities	$	2,249	$	154,561	$	215	$	10,309
U.S. government guaranteed mortgage-backed securities		83		7,761		17		628
Corporate bonds		137		21,708		7		1,493
State and municipal bonds		1		456		—		—
Government-sponsored enterprise obligations		36		3,964		20		3,480
Mutual funds		17		3,379		141		1,758

Total available for sale		2,523		191,829		400		17,668

Held to maturity:
Government-sponsored mortgage-backed securities		1,334		61,710		242		10,258
U.S. government guaranteed mortgage-backed securities		511		7,158		83		11,168
Corporate bonds		67		8,484		91		10,838
State and municipal bonds		18		1,520		150		3,895
Government-sponsored enterprise obligations		—		—		835		23,173

Total held to maturity		1,930		78,872		1,401		59,332

Total	$	4,453	$	270,701	$	1,801	$	77,000

	December 31, 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	$	47	$	20,637	$	800	$	56,830
U.S. government guaranteed mortgage-backed securities		—		—		12		677
Corporate bonds		17		4,438		3		1,497
Government-sponsored enterprise obligations		52		9,189		104		7,396
Mutual funds		—		—		128		5,103

Total available for sale		116		34,264		1,047		71,503

Held to maturity:
Government-sponsored mortgage-backed securities		200		10,292		1,253		65,526
U.S. government guaranteed mortgage-backed securities		—		—		607		31,951
Corporate bonds		128		5,684		120		13,918
State and municipal bonds		—		—		94		4,853
Government-sponsored enterprise obligations		—		—		852		33,224

Total held to maturity		328		15,976		2,926		149,472

Total	$	444	$	50,240	$	3,973	$	220,975

	June 30, 2015
	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		58	$	219,855	$	3,583		1.6	%		8	$	21,024	$	457		2.2	%
U.S. government guaranteed mortgage-backed securities		3		15,513		594		3.8			3		11,896		100		0.8
Corporate bonds		13		30,396		204		0.7			4		12,429		98		0.8
State and municipal bonds		4		1,995		19		1.0			8		4,045		150		3.7
Government-sponsored enterprise obligations		2		4,000		36		0.9			6		27,508		855		3.1
Mutual funds		1		3,396		17		0.5			1		1,899		141		7.4
			$	275,155	$	4,453						$	78,801	$	1,801

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,
	2015			2014
	(In thousands)
Commercial real estate	$	288,059		$	278,405
Residential real estate:
Residential		256,135			237,436
Home equity		41,090			40,305
Commercial and industrial		171,028			165,728
Consumer		1,464			1,542
Total Loans		757,776			723,416
Unearned premiums and deferred loan fees and costs, net		1,606			1,270
Allowance for loan losses		(8,295	)		(7,948	)
	$	751,087		$	716,738

During the six months ended June 30, 2015 and 2014, we purchased residential real estate loans aggregating $32.0 million and $21.6 million, respectively.

We have transferred a portion of our originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in our accompanying unaudited consolidated balance sheets. We share ratably with our participating lenders in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. We continue to service the loans on behalf of the participating lenders and, as such, collect cash payments from the borrowers, remit payments (net of servicing fees) to participating lenders and disburse required escrow funds to relevant parties. At June 30, 2015 and December 31, 2014, we serviced loans for participants aggregating $19.4 million and $20.5 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, if any, 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, 2015 and 2014 is as follows:

	Commercial Real Estate		Residential Real Estate			Commercial and Industrial			Consumer			Unallocated			Total
	(In thousands)
Three Months Ended
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

Balance at March 31, 2015	$	3,839	$	1,978		$	2,211		$	22		$	(15	)	$	8,035
Provision (credit)		11		149			191			14			(15	)		350
Charge-offs		—		(15	)		(70	)		(16	)		—			(101	)
Recoveries		—		5			2			4			—			11
Balance at June 30, 2015	$	3,850	$	2,117		$	2,334		$	24		$	(30	)	$	8,295

Six Months Ended
Balance at December 31, 2013	$	3,549	$	1,707		$	2,192		$	13		$	(2	)	$	7,459
Provision		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

Balance at December 31, 2014	$	3,705	$	2,053		$	2,174		$	15		$	1		$	7,948
Provision (credit)		145		73			438			25			(31	)		650
Charge-offs		—		(15	)		(282	)		(29	)		—			(326	)
Recoveries		—		6			4			13			—			23
Balance at June 30, 2015	$	3,850	$	2,117		$	2,334		$	24		$	(30	)	$	8,295

Further information pertaining to the allowance for loan losses by segment at June 30, 2015 and December 31, 2014 follows:

	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer		Unallocated			Total
	(In thousands)
June 30, 2015

Amount of allowance for loans individually evaluated and deemed impaired	$	—	$	—	$	—	$	—	$	—		$	—
Amount of allowance for loans collectively or individually evaluated for impairment and not deemed impaired		3,850		2,117		2,334		24		(30	)		8,295
Total allowance for loan losses	$	3,850	$	2,117	$	2,334	$	24	$	(30	)	$	8,295

Loans individually evaluated and deemed impaired	$	3,074	$	284	$	4,029	$	—	$	—		$	7,387
Loans collectively or individually evaluated and not deemed impaired		284,985		296,941		166,999		1,464		—			750,389
Total loans	$	288,059	$	297,225	$	171,028	$	1,464	$	—		$	757,776

December 31, 2014

Amount of allowance for loans individually evaluated and deemed impaired	$	—	$	—	$	—	$	—	$	—		$	—
Amount of allowance for loans collectively or individually evaluated for impairment and not deemed impaired		3,705		2,053		2,174		15		1			7,948
Total allowance for loan losses		3,705		2,053		2,174		15		1			7,948

Loans individually evaluated and deemed impaired		3,104		291		4,436		—		—			7,831
Loans collectively or individually evaluated and not deemed impaired		275,301		277,450		161,292		1,542		—			715,585
Total loans	$	278,405	$	277,741	$	165,728	$	1,542	$	—		$	723,416

The following is a summary of past due and non-accrual loans by class at June 30, 2015 and December 31, 2014:

	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, 2015
Commercial real estate	$	241	$	541	$	515	$	1,297	$	—	$	2,795
Residential real estate:
Residential		448		88		754		1,290		—		1,397
Home equity		209		—		1		210		—		1
Commercial and industrial		104		98		568		770		—		3,808
Consumer		15		—		—		15		—		12
Total	$	1,017	$	727	$	1,838	$	3,582	$	—	$	8,013

December 31, 2014
Commercial real estate	$	3,003	$	—	$	529	$	3,532	$	—	$	3,257
Residential real estate:
Residential		314		61		1,158		1,533		—		1,323
Home equity		252		—		1		253		—		1
Commercial and industrial		169		—		394		563		—		4,233
Consumer		22		—		3		25		—		16
Total	$	3,760	$	61	$	2,085	$	5,906	$	—	$	8,830

The following is a summary of impaired loans by class at June 30, 2015 and December 31, 2014:

							Three Months Ended				Six Months Ended
	At June 30, 2015						June 30, 2015				June 30, 2015
	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	$	3,074	$	3,659	$	—	$	3,067	$	—	$	3,075		—
Residential real estate		284		406		—		285		—		287		—
Commercial and industrial		4,029		5,133		—		4,020		—		4,121		—
Total		7,387		9,198		—		7,372		—		7,483		—

Total impaired loans	$	7,387	$	9,198	$	—	$	7,372	$	—	$	7,483	$	—

							Three Months Ended				Six Months Ended
	At December 31, 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	$	3,104	$	3,662	$	—	$	1,417	$	—	$	1,429	$	—
Residential real estate		291		407		—		211		—		217		—
Commercial and industrial		4,436		5,181		—		758		—		667		—
Total		7,831		9,250		—		2,386		—		2,313		—
Impaired loans with a valuation allowance:
Commercial real estate		—		—		—		13,386		143		13,428		286
Commercial and industrial		—		—		—		958		10		961		20
Total		—		—		—		14,344		153		14,389		306

Total impaired loans	$	7,831	$	9,250	$	—	$	16,730	$	153	$	16,702	$	306

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

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 classified as impaired.

When we modify loans in a TDR, we measure 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, 2015 and 2014.

A default occurs when a loan is 30 days or more past due. No TDRs defaulted within 12 months of restructuring during the three and six months ended June 30, 2015 and 2014.

There were $0 and $70,000 in charge-offs on TDRs during the three and six months ended June 30, 2015. There were no charge-offs on TDRs during the three and six months ended June 30, 2014.

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 $4.2 million and $16.8 million at June 30, 2015 and December 31, 2014, 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. In addition, management utilizes delinquency reports, the watch list and other loan reports to monitor credit quality in other segments.

The following table presents our loans by risk rating at June 30, 2015 and December 31, 2014:

	Commercial Real Estate		Residential 1-4 family		Home Equity		Commercial and Industrial		Consumer		Total
	(Dollars in thousands)
June 30, 2015
Loans rated 1 – 3	$	245,194	$	254,738	$	41,089	$	140,988	$	1,452	$	683,461
Loans rated 4		35,082		—		—		8,361		—		43,443
Loans rated 5		541		—		—		12,961		—		13,502
Loans rated 6		7,242		1,397		1		8,663		12		17,315
Loans rated 7		—		—		—		55		—		55
	$	288,059	$	256,135	$	41,090	$	171,028	$	1,464	$	757,776

December 31, 2014
Loans rated 1 – 3	$	234,010	$	236,113	$	40,282	$	139,109	$	1,526	$	651,040
Loans rated 4		33,305		—		—		16,841		—		50,146
Loans rated 5		7,833		—		22		5,545		—		13,400
Loans rated 6		3,257		1,323		1		4,233		16		8,830
Loans rated 7		—		—		—		—		—		—
	$	278,405	$	237,436	$	40,305	$	165,728	$	1,542	$	723,416

6. SHARE-BASED COMPENSATION

Restricted Stock Awards – During 2002 and 2007, we adopted equity incentive plans under which 652,664 and 624,041 shares, respectively, were reserved for issuance as restricted stock awards to directors and employees, all of which are currently issued and outstanding as of June 30, 2015.

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. Shares issued upon vesting may be either authorized but unissued shares or reacquired shares held by us. Any shares not issued because vesting requirements are not met will again be available for issuance under the plans.

Restricted shares awarded vest ratably over five years. The fair market value of shares awarded, based on the market price at the date of grant, is recorded as unearned compensation and amortized over the applicable vesting period. At June 30, 2015, 48,560 shares had been granted under this plan.

Our stock award and stock option plans activity for the six months ended June 30, 2015 and 2014 is summarized below:

	Unvested Stock Awards Outstanding
	Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2014		13,000	$	8.07
Shares granted		48,560		7.18
Outstanding at June 30, 2015		61,560	$	7.37

Outstanding at December 31, 2013		25,720	$	7.93
No activity		—		—
Outstanding at June 30, 2014		25,720	$	7.93

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, a line of credit with the FHLBB and customer repurchase agreements, which have an original maturity of one day. Short-term borrowings issued by the FHLBB were $75.0 and $62.8 million at June 30, 2015 and December 31, 2014, respectively. There were no advances outstanding on the line of credit as of June 30, 2015. At December 31, 2014, there was a $1.8 million advance outstanding under this line. Customer repurchase agreements were $31.3 million at June 30, 2015 and $31.2 million at December 31, 2014. 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. 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 December 31, 2014. At June 30, 2015, there was a $5.0 million advance outstanding at PNC Bank with a rate of 0.45%. There were no advances outstanding under the BBN line of credit at June 30, 2015. 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 with an original maturity of one year or more and customer repurchase agreements linked to deposit accounts with no stated maturity. At June 30, 2015, we had $189.9 million in long-term debt with the FHLBB. This compares to $216.7 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, 2014. Long-term customer repurchase agreements were $5.8 million at both June 30, 2015 and December 31, 2014.

Customer repurchase agreements are collateralized by government-sponsored enterprise obligations with fair value of $11.7 million and $21.6 million, and mortgage backed securities with a fair value of $58.5 million and $44.4 million, at June 30, 2015 and December 31, 2014, respectively. The securities collateralizing repurchase agreements are subject to fluctuations in fair value. We monitor the fair value of the collateral on a periodic basis, and would pledge additional collateral if necessary based on changes in fair value of collateral or the balances of the repurchase agreements.

During the first quarter of 2015, we prepaid a repurchase agreement in the amount of $10.0 million and incurred a prepayment expense of $593,000. The repurchase agreement had a cost of 2.65%. During the second quarter of 2015, we prepaid FHLBB borrowings in the amount of $10.0 million and incurred a prepayment expense of $278,000. The FHLBB borrowings had a weighted average cost of 2.77%. The prepayment of these borrowings should result in a decrease to the cost of funds and an increase to the net interest margin. There were no such prepayments on any FHLBB borrowings for the six months ended December 31, 2014.

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

8. PENSION BENEFITS

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

	Three Months Ended						Six Months Ended,
	June 30,						June 30,
	2015			2014			2015			2014
	(In thousands)
Service cost	$	305		$	250		$	614		$	500
Interest cost		225			208			451			417
Expected return on assets		(283	)		(240	)		(567	)		(480	)
Transition obligation		—			(5	)		—			(10	)
Actuarial loss		31			—			62			—
Net periodic pension cost	$	278		$	213		$	560		$	427

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 2015. No contributions have been made to the plan for the six months ended June 30, 2015. The pension plan assets are invested in group annuity contracts with the Principal Financial Group, who also acts as our 401(k) plan third-party administrator.

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, 2015 and December 31, 2014.

June 30, 2015	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(In thousands)

Interest rate swaps	N/A	$	—	Other Liabilities	$	5,094
Total derivatives designated as hedging instruments		$	—		$	5,094

December 31, 2014	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(In thousands)

Interest rate swaps	Other Assets	$	9	Other Liabilities	$	5,748
Total derivatives designated as hedging instruments		$	9		$	5,748

At June 30, 2015, 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.

The following table presents information about our cash flow hedges at June 30, 2015 and December 31, 2014:

June 30, 2015	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	$	40,000		2.8		0.29	%		1.52	%	$	(435	)
Forward starting interest rate swaps on FHLBB borrowings		80,000		6.7		—			3.34	%		(4,659	)
Total cash flow hedges	$	120,000		5.4							$	(5,094	)

December 31, 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	$	40,000		3.3		0.23	%		1.52	%	$	(268	)
Forward starting interest rate swaps on FHLBB borrowings		115,000		6.7		—			3.11	%		(5,471	)
Total cash flow hedges	$	155,000		5.8							$	(5,739	)

The forward-starting interest rate swaps will become effective in 2015 and 2016 with notional amounts of $12.5 million and $67.5 million, respectively.

During the second quarter of 2015, we terminated a forward-starting interest rate swap with a notional amount of $35.0 million and incurred a termination fee of $1.6 million. The fee will be amortized monthly over a five-year period as a component of interest expense and other comprehensive income over the term of the previously hedged borrowing.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. We assess the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. We did not recognize any hedge ineffectiveness in earnings during the three and six months ended June 30, 2015 and 2014.

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 $175,000 and $48,000 during the three months ended June 30, 2015 and 2014, respectively. The amount reclassified from accumulated comprehensive income into income for the effective portion of interest rate swaps was $306,000 and $94,000 during the six months ended June 30, 2015 and 2014.

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,
	2015		2014			2015			2014
	(In thousands)
Interest rate swaps	$	1,492	$	(2,609	)	$	(1,277	)	$	(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, 2015, 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 $5.1 million. As of June 30, 2015, 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, 2015, 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 or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. 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, 2015
	Level 1		Level 2		Level 3		Total
Assets:	(In thousands)

Securities available for sale:
Government-sponsored residential mortgage-backed securities	$	—	$	176,824	$	—	$	176,824
U.S. Government guaranteed residential mortgage-backed securities		—		8,389		—		8,389
Corporate bonds		—		30,560		—		30,560
State and municipal bonds		—		12,001		—		12,001
Government-sponsored enterprise obligations		—		9,448		—		9,448
Mutual funds		6,211		—		—		6,211
Common and preferred stock		1,571		—		—		1,571
Total assets	$	7,782	$	237,222	$	—	$	245,004

Liabilities:
Interest rate swaps	$	—	$	5,094	$	—	$	5,094

	December 31, 2014
	Level 1		Level 2		Level 3		Total
Assets:	(In thousands)
Government-sponsored residential mortgage-backed securities	$	—	$	139,213	$	—	$	139,213
U.S. Government guaranteed residential mortgage-backed securities		—		1,586		—		1,586
Corporate bonds		—		26,223		—		26,223
State and municipal bonds		—		17,034		—		17,034
Government-sponsored enterprise obligations		—		23,979		—		23,979
Mutual funds		6,176		—		—		6,176
Common and preferred stock		1,539		—		—		1,539
Total securities available for sale		7,715		208,035		—		215,750
Interest rate swaps		—		9		—		9
Total assets	$	7,715	$	208,044	$	—	$	215,759

Liabilities:
Interest rate swaps	$	—	$	5,748	$	—	$	5,748

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, 2015 and 2014. Total losses represent the change in carrying value as a result of fair value adjustments related to assets still held at June 30, 2015 and 2014.

	At							Three Months Ended		Six Months Ended
	June 30, 2015							June 30, 2015		June 30, 2015
	Level 1		Level 2		Level 3			Total Losses		Total Losses
	(In thousands)							(In thousands)		(In thousands)
Impaired loans	$	—	$	—	$	158	$	70	$	282

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

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, 2015 and 2014. We did not measure any liabilities at fair value on a 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, 2015
	Carrying Value		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents	$	13,694	$	13,694	$	—	$	—	$	13,694
Securities available for sale		245,004		7,782		237,222		—		245,004
Securities held to maturity		256,303		—		254,924		—		254,924
Federal Home Loan Bank of Boston and other restricted stock		15,372		—		—		15,372		15,372
Loans - net		751,087		—		—		756,140		756,140
Accrued interest receivable		4,200		—		—		4,200		4,200

Liabilities:
Deposits		897,714		—		—		898,757		898,757
Short-term borrowings		111,251		—		109,497		—		109,497
Long-term debt		195,772		—		199,040		—		199,040
Accrued interest payable		472		—		—		472		472
Derivative liabilities		5,094		—		5,094		—		5,094

	December 31, 2014
	Carrying Value		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents	$	18,785	$	18,785	$	—	$	—	$	18,785
Securities available for sale		215,750		7,715		208,035		—		215,750
Securities held to maturity		278,080		—		277,636		—		277,636
Federal Home Loan Bank of Boston and other restricted stock		14,934		—		—		14,934		14,934
Loans - net		716,738		—		—		721,818		721,818
Accrued interest receivable		4,213		—		—		4,213		4,213
Derivative assets		9		—		9		—		9

Liabilities:
Deposits		834,218		—		—		834,838		834,838
Short-term borrowings		93,997		—		93,997		—		93,997
Long-term debt		232,479		—		236,457		—		236,457
Accrued interest payable		501		—		—		501		501
Derivative liabilities		5,748		—		5,748		—		5,748

11. RECENT ACCOUNTING PRONOUNCEMENTS

There are no new accounting pronouncements issued but not yet effective that will 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. This may include purchasing loans from a New England-based bank as a means of supplementing loans originated by us within our market area.

You should read the following financial results for the three and six months ended June 30, 2015 in the context of this strategy.

Net income was $1.4 million, or $0.08 per diluted share, for the three months ended June 30, 2015, compared to $1.3 million, or $0.07 per diluted share, for the same period in 2014. For the six months ended June 30, 2015, net income was $2.7 million, or $0.15 per diluted share, as compared to net income of $3.0 million, or $0.16 per diluted share, for the same period in 2014.

The provision for loan losses was $350,000 and $450,000 for the three months ended June 30, 2015 and 2014, respectively, and $650,000 and $550,000 for the six months ended June 30, 2015 and 2014, respectively. The increase in provision expense from the comparable 2014 period was primarily driven by new loan growth.

Net interest income was $7.8 million and $7.7 million for the three months ended June 30, 2015 and 2014, respectively. The net interest margin, on a tax-equivalent basis, was 2.50% for the three months ended June 30, 2015, compared to 2.61% for the same period in 2014. Net interest income was $15.4 million for the six months ended June 30, 2015 and 2014. The net interest margin, on a tax-equivalent basis, was 2.51% and 2.62% for the six months ended June 30, 2015 and 2014, respectively. The increase in net interest income for the three months ended June 30, 2015 and stable net interest income for the six months ended June 30, 2015 was due to an increase in total average interest-earning assets, partially offset by a decrease in yield on average interest-earnings assets and an increase in the average volume of and cost of interest-bearing liabilities.

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, 2015. 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 2014 Annual Report.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2015 AND DECEMBER 31, 2014

Total assets were $1.4 billion at June 30, 2015 and $1.3 billion at December 31, 2014. Securities increased $7.9 million to $516.7 million at June 30, 2015 from $508.8 million at December 31, 2014.

Total loans increased by $34.7 million to $759.4 million at June 30, 2015 from $724.7 million at December 31, 2014. Residential loans increased $19.5 million to $297.2 million at June 30, 2015 from $277.7 million at December 31, 2014. We purchased $30.3 million in residential loans from a New England-based bank and $1.7 million from a third-party mortgage company as a means of supplementing our purchased mortgage relationships. While management uses residential loan growth to supplement the loan portfolio, the long-term strategy remains focused on commercial lending.

Commercial real estate loans increased $9.7 million to $288.1 million at June 30, 2015 from $278.4 at December 31, 2014. Non-owner occupied commercial real estate loans increased $9.3 million to $178.4 million at June 30, 2015 from $169.1 million at December 31, 2014, while owner occupied commercial real estate loans increased $353,000 to $109.6 million at June 30, 2015 from $109.3 million at December 31, 2014. Commercial and industrial loans increased $5.3 million to $171.0 million at June 30, 2015 from $165.7 million at December 31, 2014.

Nonperforming loans were $8.0 million at June 30, 2015 and $8.8 million at December 31, 2014. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $232,000 and $84,000 for the six months ended June 30, 2015 and 2014, respectively. At June 30, 2015 and December 31, 2014, there was no real estate in foreclosure. At June 30, 2015 and December 31, 2014, our nonperforming loans to total loans were 1.06% and 1.22%, respectively, while our nonperforming assets to total assets were 0.59% and 0.67%, 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 $63.5 million to $897.7 million at June 30, 2015 from $834.2 million at December 31, 2014. The increase in deposits was due to a $43.3 million increase in time deposit accounts, which were $401.0 million and $357.7 million at June 30, 2015 and December 31, 2014, respectively. Money market accounts increased $11.2 million to $238.5 million at June 30, 2015 from $227.3 million at December 31, 2014. Checking account increased $8.7 million to $182.9 million at June 30, 2015 from $174.2 million at December 31, 2014. Regular savings accounts increased $324,000 to $75.3 million at June 30, 2015 from $75.0 million at December 31, 2014, respectively.

In 2013, we entered into several forward-starting interest rate swap contracts with a combined notional value of $155.0 million. The swap contracts have start dates through the third quarter 2016 and have durations ranging from four to six years. This hedge strategy converts the LIBOR based rate of interest on certain FHLB advances to fixed interest rates, thereby protecting us from floating interest rate variability. On a stand-alone basis, the interest rate swaps introduce potential future volatility in tangible book value and accumulated other comprehensive income (“AOCI”); however, the valuation of the swaps 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. During the second quarter of 2015, we terminated a forward-starting interest rate swap with a notional amount of $35.0 million and incurred a termination fee of $1.6 million, which will be amortized monthly over a five-year period as a component of interest expense and other comprehensive income over the term of the previously hedged borrowing.

Borrowings decreased $19.5 million to $307.0 million at June 30, 2015 from $326.5 million at December 31, 2014. Long-term debt decreased $36.8 million to $195.7 million at June 30, 2015 from $232.5 million at December 31, 2014. We prepaid a $10.0 million repurchase agreement with a cost of 2.65% and incurred a prepayment expense of $593,000 for the first quarter 2015. During the second quarter of 2015, we prepaid FHLBB borrowings in the amount of $10.0 million and incurred a prepayment expense of $278,000. The FHLBB borrowings had a weighted average cost of 2.77%. Short-term borrowings increased $17.3 million to $111.3 million at June 30, 2015 from $94.0 million at December 31, 2014 primarily due to an increase in short-term FHLBB funding. Our short-term borrowings and long-term debt are discussed in Note 7 of the accompanying unaudited consolidated financial statements.

Shareholders’ equity was $139.8 million and $142.5 million, which represented 10.3% and 10.8% of total assets at June 30, 2015 and December 31, 2014, respectively. The decrease in shareholders’ equity during the six months ended June 30, 2015 reflects the repurchase of 287,727 shares of our common stock at a cost of $2.1 million pursuant to our stock repurchase program, the payment of regular dividends amounting to $1.1 million and a decrease in accumulated other comprehensive loss of $2.6 million primarily due to changes in the market value of our securities. This was partially offset by net income of $2.7 million for the six months ended June 30, 2015.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2015 AND JUNE 30, 2014

General

Net income was $1.4 million, or $0.08 per diluted share, for the quarter ended June 30, 2015, compared to $1.3 million, or $0.07 per diluted share, for the same period in 2014. Net interest income was $7.8 million and $7.7 million for the three months ended June 30, 2015 and 2014, 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, 2015 and 2014, 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,
	2015								2014
	Average					Avg Yield/			Average					Avg Yield/
	Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans⁽¹⁾⁽²⁾	$	742,475	$	7,401			3.99	%	$	665,024	$	6,857			4.12	%
Securities⁽²⁾		498,093		3,135			2.52			501,132		3,357			2.68
Other investments - at cost		16,460		69			1.68			16,546		63			1.52
Short-term investments⁽³⁾		11,231		5			0.18			19,912		3			0.06
Total interest-earning assets		1,268,259		10,610			3.35			1,202,614		10,280			3.42
Total noninterest-earning assets		80,303								72,051

Total assets	$	1,348,562							$	1,274,665

LIABILITIES AND EQUITY:
Interest-bearing liabilities
Interest-bearing accounts	$	35,954		20			0.22		$	41,797		26			0.25
Savings accounts		75,669		20			0.11			81,144		21			0.10
Money market accounts		236,322		208			0.35			213,227		208			0.39
Time certificates of deposit		390,616		1,132			1.16			341,041		1,033			1.21
Total interest-bearing deposits		738,561		1,380						677,209		1,288
Short-term borrowings and long-term debt		307,892		1,335			1.73			308,757		1,154			1.50
Interest-bearing liabilities		1,046,453		2,715			1.04			985,966		2,442			0.99
Noninterest-bearing deposits		143,323								130,033
Other noninterest-bearing liabilities		18,302								10,679
Total noninterest-bearing liabilities		161,625								140,712

Total liabilities		1,208,078								1,126,678
Total equity		140,484								147,987
Total liabilities and equity	$	1,348,562							$	1,274,665
Less: Tax-equivalent adjustment⁽²⁾				(116	)							(137	)
Net interest and dividend income			$	7,779							$	7,701
Net interest rate spread⁽⁴⁾							2.31	%							2.43	%
Net interest margin⁽⁵⁾							2.50	%							2.61	%
Ratio of average interest-earning assets to average interest-bearing liabilities							121.20								121.97

________________________

(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 net income.

(3)

Short-term investments include federal funds sold.

(4)

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

(5)

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

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

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

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

the net change.

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

	Three Months Ended June 30, 2015 compared to Three Months Ended June 30, 2014
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest-earning assets	(In thousands)
Loans ⁽¹⁾	$	799		$	(255	)	$	544
Securities ⁽¹⁾		(20	)		(202	)		(222	)
Other investments - at cost		—			6			6
Short-term investments		(1	)		3			2
Total interest-earning assets		778			(448	)		330

Interest-bearing liabilities
Interest-bearing accounts		(4	)		(2	)		(6	)
Savings accounts		(1	)		—			(1	)
Money market accounts		23			(23	)		—
Time deposits		150			(51	)		99
Short-term borrowing and long-term debt		(3	)		184			181
Total interest-bearing liabilities		165			108			273
Change in net interest and dividend income	$	613		$	(556	)	$	57

__________________________

(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 an increase in the volume of our average interest-earnings assets, which was partially offset by a decrease in the yield on average interest-earning assets along with an increase in the average volume of and cost of interest-bearing liabilities. The average balance of interest-earning assets increased $65.6 million to $1.3 billion for the three months ended June 30, 2015, compared to $1.2 billion for the same period in 2014. This was primarily driven by a $77.5 million increase in the average balance of loans to $742.5 million for the three months ended June 30, 2015, from $665.0 million in the comparable 2014 period. The average yield on interest-earning assets decreased 7 basis points to 3.35% for the three months ended June 30, 2015 from 3.42% for the same period in 2014. The decrease in the yield on interest-earning assets was primarily driven by a 13 basis point decrease in the average yield on loans, which was 3.99% for the three months ended June 30, 2015, compared to 4.12% for the comparable 2014 period. The primary reason for the decrease in the average yield on loans was due to growth primarily centered in residential real estate, which tends to carry a lower average yield than both commercial real estate and commercial and industrial loans, along with increases in shorter-term commercial and industrial loans. Interest on earning-assets increased $351,000 to $10.5 million for the three months ended June 30, 2015 from $10.1 million for the same period in 2014.

Interest expense increased $273,000 to $2.7 million for the three months ended June 30, 2015 from $2.4 million for the same period in 2014. The average cost of interest-bearing liabilities increased 5 basis points to 1.04% for the three months ended June 30, 2015 from 0.99% for the same period in 2014. The increase in the cost of interest-bearing liabilities was primarily due to an increase in rates on short-term borrowings and long-term debt along with an increase in the average volume of time deposits. The cost of short-term borrowings and long-term debt increased 23 basis points to 1.73% for the three months ended June 30, 2015 from 1.50% for the three months ended June 30, 2014, primarily due to the conversion of LIBOR based rates of interest on certain FHLBB advances to fixed interest rates in conjunction with our interest rate swaps. This increase was partially mitigated by the prepayment of $10.0 million in FHLBB borrowings with a weighted average rate of 2.77% during the three months ended June 30, 2015. In addition, the average balance of time deposits increased $49.6 million to $390.6 million at June 30, 2015 from $341.0 million for the comparable 2014 period. Interest expense on time deposits increased $99,000 to $1.1 million for the three months ended June 30, 2015 from $1.0 million for the comparable 2014 period.

Provision for Loan Losses

The amount that we provided for loan losses during the three months ended June 30, 2015 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, 2015, described in detail below, include an increase in residential real estate loans, commercial and industrial loans and commercial real estate loans. After evaluating these factors, we recorded a provision of $350,000 for loan losses for the three months ended June 30, 2015, compared to $450,000 for the same period in 2014. The allowance was $8.3 million and $8.0 million and 1.09% and 1.10% of total loans at June 30, 2015 and March 31, 2015, respectively.

Residential loans increased $19.7 million to $297.2 million at June 30, 2015 from $277.5 million at March 31, 2015. We consider residential real estate loans to contain less credit risk and market risk than both commercial and industrial and commercial real estate loans. Commercial and industrial loans increased $8.1 million to $171.0 million at June 30, 2015 from $162.9 million at March 31, 2015. Commercial real estate loans increased $976,000 to $288.1 million at June 30, 2015 from $287.1 million at March 31, 2015. Non-owner occupied commercial real estate loans increased $870,000 to $178.4 million at June 30, 2015 from $177.6 million at March 31, 2015, while owner occupied commercial real estate loans increased $105,000 to $109.6 million at June 30, 2015 and $109.5 million at March 31, 2015.

Net charge-offs were $90,000 for the three months ended June 30, 2015. This comprised charge-offs of $101,000 for the three months ended June 30, 2015, offset by recoveries of $11,000.

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.

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 $206,000 to $1.2 million for the three months ended June 30, 2015, compared to $1.0 million for the same period in 2014. Service charges and fees increased $208,000 to $840,000 at June 30, 2015 from $632,000 at June 30, 2014. Fees collected from card-based transactions increased $40,000 for the three months ended June 30, 2015, which reflects an increase in customer debit card and automated teller machine transactions. In addition, fee income for the three months ended June 30, 2015 includes a one-time receipt pertaining to a vendor contract negotiation, which resulted in a net increase of $130,000. The three months ended June 30, 2015 included a loss on prepayment of borrowings of $278,000, partially offset by securities gains of $276,000.

Noninterest Expense

Noninterest expense increased $334,000 to $6.9 million for the three months ended June 30, 2015 from $6.5 million for the same period in 2014. Salaries and benefits increased $198,000 to $3.9 million for the three months ended June 30, 2015 from $3.7 million for the same period in 2014, primarily due to an increase in employee benefits costs. Other noninterest expense increased $104,000 to $949,000 for the three months ended June 30, 2015, primarily due to a $69,000 increase in advertising, marketing and sponsorships expenses for the period.

Income Taxes

For the three months ended June 30, 2015, we had a tax provision of $445,000 as compared to $417,000 for the same period in 2014. The effective tax rate was 24.6% for the three months ended June 30, 2015 and 23.7% for the same period in 2014. The change in effective tax rate reflects lower forecasted levels of tax-advantaged income such as BOLI and lower levels of tax-exempt municipal obligations.

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND JUNE 30, 2014

General

Net income was $2.7 million, or $0.15 per diluted share, for the six months ended June 30, 2015, compared to $3.0 million, or $0.16 per diluted share, for the same period in 2014. Net interest income was $15.4 million for each of the six months ended June 30, 2015 and 2014.

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, 2015 and 2014, 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,
	2015								2014
	Average					Avg Yield/			Average					Avg Yield/
	Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans⁽¹⁾⁽²⁾	$	735,003	$	14,662			3.99	%	$	653,007	$	13,452			4.12	%
Securities⁽²⁾		490,051		6,109			2.49			515,509		6,861			2.66
Other investments - at cost		16,347		138			1.69			17,035		128			1.50
Short-term investments⁽³⁾		13,475		11			0.16			16,483		9			0.11
Total interest-earning assets		1,254,876		20,920			3.33			1,202,034		20,450			3.40
Total noninterest-earning assets		79,197								72,520

Total assets	$	1,334,073							$	1,274,554

LIABILITIES AND EQUITY:
Interest-bearing liabilities
NOW accounts	$	37,011		41			0.22		$	42,342		55			0.26
Savings accounts		75,697		39			0.10			80,805		41			0.10
Money market accounts		234,878		429			0.37			212,062		401			0.38
Time certificates of deposit		379,600		2,212			1.17			340,736		2,083			1.22
Total interest-bearing deposits		727,186		2,721						675,945		2,580
Short-term borrowings and long-term debt		308,134		2,593			1.68			308,700		2,241			1.45
Interest-bearing liabilities		1,035,320		5,314			1.03			984,645		4,821			0.98
Noninterest-bearing deposits		139,136								129,730
Other noninterest-bearing liabilities		18,384								9,883
Total noninterest-bearing liabilities		157,520								139,613

Total liabilities		1,192,840								1,124,258
Total equity		141,233								150,296
Total liabilities and equity	$	1,334,073							$	1,274,554
Less: Tax-equivalent adjustment⁽²⁾				(236	)							(273	)
Net interest and dividend income			$	15,370							$	15,356
Net interest rate spread⁽⁴⁾							2.30	%							2.42	%
Net interest margin⁽⁵⁾							2.51	%							2.62	%
Ratio of average interest-earning assets to average interest-bearing liabilities							121.21								122.08

________________________

(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, 2015 compared to Six Months Ended June 30, 2014
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest-earning assets	(In thousands)
Loans ⁽¹⁾	$	1,689		$	(479	)	$	1,210
Securities ⁽¹⁾		(339	)		(413	)		(752	)
Other investments - at cost		(5	)		15			10
Short-term investments		(2	)		4			2
Total interest-earning assets		1,343			(873	)		470

Interest-bearing liabilities
NOW accounts		(7	)		(7	)		(14	)
Savings accounts		(3	)		1			(2	)
Money market accounts		43			(15	)		28
Time deposits		238			(109	)		129
Short-term borrowing and long-term debt		(4	)		356			352
Total interest-bearing liabilities		267			226			493
Change in net interest and dividend income	$	1,076		$	(1,099	)	$	(23	)

__________________________

(1)

Net interest income was $15.4 million for each of the six months ended June 30, 2015 and 2014. The net interest margin, on a tax-equivalent basis, was 2.51% and 2.62% for the six months ended June 30, 2015 and 2014, respectively.

For the six months ended June 30, 2015, the primary reason for the stable net interest income was an increase in the volume of our average interest-earnings assets, which was partially offset by a decrease in the yield on average interest-earning assets along with an increase in the average volume of and cost of interest-bearing liabilities. Average interest-earning assets increased $52.8 million to $1.3 billion for the six months ended June 30, 2015. The average balance of loans increased $82.0 million to $735.0 million for the six months ended June 30, 2015 compared to $653.0 million for the comparable 2014 period. Interest on earning-assets increased $507,000 to $20.7 million for the six months ended June 30, 2015 from $20.2 million for the same period in 2014. The average yield on interest-earning assets decreased 7 basis point to 3.33% for the six months ended June 30, 2015 from 3.40% for the same period in 2014. The decrease in the yield on interest-earning assets was primarily driven by a 13 basis point decrease in the average yield on loans, which was 3.99% for the six months ended June 30, 2015, compared to 4.12% for the comparable 2014 period. The primary reason for the decrease in the average yield on loans was due to growth primarily centered in residential real estate, which tends to carry a lower average yield than both commercial real estate and commercial and industrial loans, along with increases in shorter-term commercial and industrial loans.

Interest expense increased $493,000 to $5.3 million for the six months ended June 30, 2015 from $4.8 million for the same period in 2014. The average cost of interest-bearing liabilities increased 5 basis points to 1.03% for the six months ended June 30, 2015 from 0.98% for the same period in 2014. The increase in the cost of interest-bearing liabilities was primarily due to an increase in rates on short-term borrowings and long-term debt along with an increase in the average volume of time deposits. The cost of short-term borrowings and long-term debt increased 23 basis points to 1.68% for the six months ended June 30, 2015 from 1.45% for the six months ended June 30, 2014, primarily due to the conversion of LIBOR based rates of interest on certain FHLBB advances to fixed interest rates in conjunction with our interest rate swaps. Interest expense on short-term borrowings and long-term debt increased $352,000 to $2.6 million for the six months ended June 30, 2015 from $2.2 million for the comparable 2014 period. This increase was partially mitigated by the prepayment of $10.0 million in repurchase agreements with a rate of 2.65% during the first quarter 2015 and $10.0 million in FHLBB borrowings with a weighted average rate of 2.77% during the second quarter 2015. In addition, the average balance of time deposits increased $38.9 million to $379.6 million at June 30, 2015 from $340.7 million for the comparable 2014 period. Interest expense on time deposits increased $129,000 to $2.2 million for the six months ended June 30, 2015 from $2.1 million for the comparable 2014 period.

Provision for Loan Losses

The amount that we provided for loan losses during the six months ended June 30, 2015 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, 2015, described in detail below, include increases in residential real estate loans, commercial real estate loans and commercial and industrial loans. After evaluating these factors, we recorded a provision of $650,000 for loan losses for the six months ended June 30, 2015, compared to $550,000 for the same period in 2014. The allowance was $8.3 million at June 30, 2015 and $7.9 million at December 31, 2014. The allowance for loan losses was 1.09% and 1.10% of total loans at June 30, 2015 and December 31, 2014, respectively.

Residential real estate loans increased $19.5 million to $297.2 million at June 30, 2015 compared to $277.7 million at December 31, 2014. Commercial real estate loans increased $9.7 million to $288.1 million at June 30, 2015 from $278.4 million at December 31, 2014. Commercial and industrial loans increased $5.3 million to $171.0 million at June 30, 2015 from $165.7 million at December 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.

Net charge-offs were $303,000 for the six months ended June 30, 2015. This comprised charge-offs of $326,000 for the six months ended June 30, 2015, partially offset by recoveries of $23,000.

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.

Noninterest Income

Noninterest income increased $355,000 to $2.5 million for the six months ended June 30, 2015, compared to $2.1 million for the same period in 2014. Service charges and fees increased $174,000 to $1.5 million at June 30, 2015 from $1.3 million at June 30, 2014. Fees collected from card-based transactions increased $74,000 for the six months ended June 30, 2015, which reflects an increase in customer debit card and automated teller machine transactions. Net gains on the sale of securities increased $1.0 million to $1.1 million for the six months ended June 30, 2015, however, we also incurred $871,000 in expense on the prepayment of borrowings during the six months ended June 30, 2015.

Noninterest Expense

Noninterest expense increased $510,000 to $13.6 million for the six months ended June 30, 2015 from $13.1 million for the same period in 2014. Salaries and benefits increased $240,000 to $7.7 million for the six months ended June 30, 2015 from $7.4 million for the same period in 2014. Occupancy expense increased $147,000 to $1.7 million for the six months ended June 30, 2015 from $1.5 million for the same period in 2014. Both increases were the result of the opening of a new branch in November 2014 along with normal increases in this area.

Income Taxes

For the six months ended June 30, 2015, we had a tax provision of $915,000 as compared to $868,000 for the same period in 2014. The effective tax rate was 25.3% for the six months ended June 30, 2015 and 22.5% for the same period in 2014. The change in effective tax rate reflects lower forecasted levels of tax-advantaged income such as BOLI and lower levels of tax-exempt municipal obligations.

LIQUIDITY AND CAPITAL RESOURCES

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, withdrawals of deposits and operating expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of securities and funds provided by operations. We also can borrow funds from the FHLBB based on eligible collateral of loans and securities. Our maximum additional borrowing capacity from the FHLBB at June 30, 2015, 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, 2015, our additional borrowing capacity from BBN and PNC Bank was $4.0 million and $45.0 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, 2015, we exceeded each of the applicable regulatory capital requirements. As of June 30, 2015, 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, 2015, and December 31, 2014, are also presented in the following table.

	Actual					Minimum For Capital Adequacy Purpose					Minimum To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
June 30, 2015
Total Capital (to Risk Weighted Assets):
Consolidated	$	158,269		17.14	%	$	73,851		8.00	%		N/A		N/A
Bank		150,524		16.33			73,741		8.00		$	92,176		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		149,867		16.23			55,388		6.00			N/A		N/A
Bank		142,169		15.42			55,306		6.00			73,741		8.00
Common Equity Tier 1 Capital (to Risk Weighted Assets)
Consolidated		149,867		16.23			41,541		4.50			N/A		N/A
Bank		142,169		15.42			41,479		4.50			59,914		6.50
Tier 1 Leverage Ratio (to Adjusted Average Assets):
Consolidated		149,867		11.12			53,925		4.00			N/A		N/A
Bank		142,169		10.56			53,869		4.00			67,337		5.00
Tangible Equity (to Adjusted Total Assets):
Consolidated		N/A		N/A			N/A		N/A			N/A		N/A
Bank		142,169		10.38			27,404		2.00			N/A		N/A

December 31, 2014
Total Capital (to Risk Weighted Assets):
Consolidated	$	158,016		18.68	%	$	67,675		8.00	%		N/A		—
Bank		150,392		17.81			67,549		8.00		$	84,436		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		150,018		17.73			33,838		4.00			N/A		—
Bank		142,383		16.86			33,775		4.00			50,662		6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated		150,018		11.30			53,103		4.00			N/A		—
Bank		142,383		10.74			53,035		4.00			66,293		5.00
Tangible Equity (to Tangible Assets):
Consolidated		N/A		—			N/A		—			N/A		—
Bank		142,383		10.74			19,888		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, 2015:

	Within 1 Year		After 1 Year But Within 3 Years		After 3 Year But Within 5 Years		After 5 Years		Total
	(Dollars in thousands)
Lease Obligations
Operating lease obligations	$	614	$	904	$	739	$	3,712	$	5,969

Borrowings and Debt
Federal Home Loan Bank		131,470		93,458		40,000		—		264,928
PNC Bank		5,000		—		—		—		5,000
Securities sold under agreements to repurchase		37,095		—		—		—		37,095
Total borrowings and debt		173,565		93,458		40,000		0		307,023

Credit Commitments
Available lines of credit		80,478		—		6		26,846		107,330
Other loan commitments		76,924		14,820		—		34		91,778
Letters of credit		2,351		240		392		256		3,239
Total credit commitments		159,753		15,060		398		27,136		202,347

Other Obligations
Vendor Contracts		999		1,696		186		—		2,881

Total Obligations	$	334,931	$	111,118	$	41,323	$	30,848	$	518,220

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 2014 Annual Report. Please refer to Item 7A of the 2014 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 2014 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, 2015.

Period		Total Number of Shares Purchased		Average Price Paid per Share ($)		Total Number of Shares Purchased as Part of Publicly Announced Programs		Maximum Number of Shares that May Yet Be Purchased Under the Program (1)
	April 1 - 30, 2015		—		—		—		774,419
	May 1 - 31, 2015		19,665		7.55		19,665		754,754
	June 1 - 30, 2015		43,021		7.47		43,021		711,733
	Total		62,686		7.50		62,686		711,733

(1)

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.

There were no sales by us of unregistered securities during the three months ended June 30, 2015.

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, 2015.

	Westfield Financial, Inc.

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

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

EXHIBIT INDEX

Exhibit Number		Description
3.1		Articles of Organization of New Westfield Financial, Inc. (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1 (No. 333-137024) filed with the Securities and Exchange Commission on August 31, 2006).

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

3.3		Amended and Restated Bylaws of Westfield Financial, Inc. (incorporated by reference to Exhibit 3.2 of the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2011).

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

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

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

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

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

101**		Financial statements from the quarterly report on Form 10-Q of Westfield Financial, Inc. for the quarter ended June 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Shareholders’ Equity and Comprehensive Income, (iv) the Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.

_______________________________

Filed herewith.

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of 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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