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

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - Western New England Bancorp, Inc.	a6712604ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Western New England Bancorp, Inc.	a6712604ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Western New England Bancorp, Inc.	a6712604ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Western New England Bancorp, Inc.	a6712604ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

______________________

FORM 10-Q

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

For the quarterly period ended March 31, 2011

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

For the transition period from _____ to _____.

Commission file number 001-16767

Westfield Financial, Inc.

(Exact name of registrant as specified in its charter)

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

141 Elm Street, Westfield, Massachusetts 01086

(Address of principal executive offices)

(Zip Code)

(413) 568-1911

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer o	Accelerated filer x

Non-accelerated filer o	Smaller reporting company o

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

At May 2, 2011 the registrant had 28,045,510 shares of common stock, $0.01 par value, issued and outstanding.

TABLE OF CONTENTS

Page

FORWARD-LOOKING STATEMENTS

PART I – FINANCIAL INFORMATION

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

	Consolidated Balance Sheets (Unaudited) – March 31, 2011 and December 31, 2010	1

	Consolidated Statements of Income (Unaudited) – Three Months Ended March 31, 2011 and 2010	2

	Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Unaudited) – Three Months Ended March 31, 2011 and 2010	3

	Consolidated Statements of Cash Flows (Unaudited) – Three Months Ended March 31, 2011 and 2010	4

	Notes to Consolidated Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32

Item 4.	Controls and Procedures	33

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults upon Senior Securities	34

Item 4.	[Removed and Reserved]	34

Item 5.	Other Information	34

Item 6.	Exhibits	34

SIGNATURES

EXHIBITS

FORWARD – LOOKING STATEMENTS

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

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

PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(Dollars in thousands)

	March 31,			December 31,
	2011			2010
ASSETS
Cash and due from banks	$	9,151		$	9,247
Federal funds sold		10			13
Interest-bearing deposits and other short term investments		4,446			2,351
CASH AND CASH EQUIVALENTS		13,607			11,611

Securities available for sale - at fair value		623,414			642,467

FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT COST		12,354			12,282

LOANS - Net of allowance for loan losses of $6,999 at March 31, 2011 and $6,934 at December 31, 2010		518,357			502,392

PREMISES AND EQUIPMENT, Net		11,368			11,603

ACCRUED INTEREST RECEIVABLE		4,248			4,279

BANK-OWNED LIFE INSURANCE		42,860			40,494

DEFERRED TAX ASSET, Net		9,425			8,811

OTHER REAL ESTATE OWNED		223			223

OTHER ASSETS		4,959			5,327
TOTAL ASSETS	$	1,240,815		$	1,239,489

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
DEPOSITS :
Noninterest-bearing	$	85,471		$	85,217
Interest-bearing		622,064			615,118
Total deposits		707,535			700,335

SHORT-TERM BORROWINGS		55,138			62,937

LONG-TERM DEBT		250,230			238,151
SECURITIES PENDING SETTLEMENT		-			7,791
OTHER LIABILITIES		8,556			9,030
TOTAL LIABILITIES		1,021,459			1,018,244

SHAREHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized, None outstanding at March 31, 2011 and December 31, 2010		-			-
Common stock - $.01 par value, 75,000,000 shares authorized, 28,045,510 shares issued and outstanding at March 31, 2011; 28,166,419 shares issued and outstanding at December 31, 2010		280			282
Additional paid-in capital		181,044			181,842
Unearned compensation - ESOP		(9,556	)		(9,701	)
Unearned compensation - Equity Incentive Plan		(1,867	)		(2,158	)
Retained earnings		56,032			56,496
Accumulated other comprehensive loss		(6,577	)		(5,516	)
Total shareholders' equity		219,356			221,245
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,240,815		$	1,239,489

See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME – UNAUDITED

(Dollars in thousands, except per share data)

	Three Months
	Ended March 31,
	2011			2010
INTEREST AND DIVIDEND INCOME:
Debt securities, taxable	$	4,811		$	5,361
Residential and commercial real estate loans		4,674			4,476
Commercial and industrial loans		1,443			1,635
Debt securities, tax-exempt		419			371
Consumer loans		49			56
Equity securities		47			50
Federal funds sold, interest-bearing deposits and other investments		14			6
Total interest and dividend income		11,457			11,955
INTEREST EXPENSE:
Deposits		2,106			2,615
Long-term debt		1,645			1,586
Short-term borrowings		59			63
Total interest expense		3,810			4,264
Net interest and dividend income		7,647			7,691
PROVISION FOR LOAN LOSSES		339			500
Net interest and dividend income after provision for loan losses		7,308			7,191

NONINTEREST INCOME (LOSS):
Total other-than-temporary impairment losses on debt securities		(345	)		(1,071	)
Portion of other-than-temporary impairment losses recognized in accumulated other comprehensive loss on debt securities		313			971
Net other-than-temporary impairment losses recognized in income		(32	)		(100	)
Service charges and fees		441			492
Income from bank-owned life insurance		366			375
Gain on sales of securities, net		31			186
Gain on disposal of other real estate owned		-			7
Total noninterest income		806			960
NONINTEREST EXPENSE:
Salaries and employees benefits		3,953			3,817
Occupancy		678			660
Computer operations		486			485
Professional fees		439			423
OREO expense		8			243
FDIC insurance assessment		208			163
Other		768			604
Total noninterest expense		6,540			6,395
INCOME BEFORE INCOME TAXES		1,574			1,756
INCOME TAX PROVISION		288			402
NET INCOME	$	1,286		$	1,354

EARNINGS PER COMMON SHARE:
Basic earnings per share	$	0.05		$	0.05
Weighted average shares outstanding		26,746,102			28,186,887
Diluted earnings per share	$	0.05		$	0.05
Weighted average diluted shares outstanding		26,875,244			28,439,241

See accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

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

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(Dollars in thousands, except share data)

													Unearned						Accumulated
	Common Stock						Additional			Unearned			Compensation						Other
	Shares			Par Value			Paid-in Capital			Compensation - ESOP			- Equity Incentive Plan			Retained Earnings			Comprehensive Income (Loss)			Total
BALANCE AT DECEMBER 31, 2009		29,818,526		$	298		$	193,609		$	(10,299	)	$	(3,248	)	$	69,253		$	(2,314	)	$	247,299
Comprehensive income:
Net income		-			-			-			-			-			1,354			-			1,354
Net unrealized losses on securities available for sale arising during the period, net reclassification adjustment and tax effects		-			-			-			-			-			-			(384	)		(384	)
Change in pension gains or losses and transition assets, net of tax		-			-			-			-			-			-			18			18
Total comprehensive income																							988
Common stock held by ESOP committed to be released (89,040 shares)		-			-			35			150			-			-			-			185
Share-based compensation - stock options		-			-			199			-			-			-			-			199
Share-based compensation - equity incentive plan		-			-			-			-			289			-			-			289
Excess tax benefits from equity incentive plan		-			-			6			-			-			-			-			6
Common stock repurchased		(236,814	)		(2	)		(1,944	)		-			-			-			-			(1,946	)
Cash dividends declared ($0.05 per share)		-			-			-			-			-			(1,410	)		-			(1,410	)
BALANCE AT MARCH 31, 2010		29,581,712		$	296		$	191,905		$	(10,149	)	$	(2,959	)	$	69,197		$	(2,680	)	$	245,610


BALANCE AT DECEMBER 31, 2010		28,166,419		$	282		$	181,842		$	(9,701	)	$	(2,158	)	$	56,496		$	(5,516	)	$	221,245
Comprehensive income:
Net income		-			-			-			-			-			1,286			-			1,286
Net unrealized losses on securities available for sale arising during the period, net of reclassification adjustment and tax effects		-			-			-			-			-			-			(1,078	)		(1,078	)
Change in pension gains or losses and transition assets, net of tax		-			-			-			-			-			-			17			17
Total comprehensive income																							225
Common stock held by ESOP committed to be released (86,586 shares)		-			-			46			145			-			-			-			191
Share-based compensation - stock options		-			-			200			-			-			-			-			200
Share-based compensation - equity incentive plan		-			-			-			-			291			-			-			291
Excess tax benefits from equity incentive plan		-			-			5			-			-			-			-			5
Common stock repurchased		(155,555	)		(2	)		(1,361	)		-			-			-			-			(1,363	)
Issuance of common stock in connection with stock option exercises		34,646			-			294			-			-			(141	)		-			153
Excess tax benefit in connection with stock option exercises		-			-			18			-			-			-			-			18
Cash dividends declared ($0.06 per share)		-			-			-			-			-			(1,609	)		-			(1,609	)
BALANCE AT MARCH 31, 2011		28,045,510		$	280		$	181,044		$	(9,556	)	$	(1,867	)	$	56,032		$	(6,577	)	$	219,356

See the accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED
(Dollars in thousands)
	Three Months Ended March 31,
	2011			2010
OPERATING ACTIVITIES:
Net income	$	1,286		$	1,354
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		339			500
Depreciation and amortization of premises and equipment		307			318
Net amortization of premiums and discounts on securities, mortgage-backed securities and mortgage loans		904			1,409
Share-based compensation expense		491			488
Amortization of ESOP expense		191			185
Excess tax benefits from equity incentive plan		(5	)		(6	)
Excess tax benefits in connection with stock option exercises		(18	)		-
Net gains on sales of securities		(31	)		(186	)
Other-than-temporary impairment losses of securities		32			100
Write-downs of other real estate owned		-			227
Net gain on sale of other real estate owned		-			(7	)
Deferred income tax benefit		(53	)		(53	)
Income from bank-owned life insurance		(366	)		(383	)
Changes in assets and liabilities:
Accrued interest receivable		22			(88	)
Other assets		386			349
Other liabilities		(378	)		445
Net cash provided by operating activities		3,089			4,652
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases		-			(13,182	)
Proceeds from calls, maturities, and principal collections		-			23,949
Securities, available for sale:
Purchases		(65,842	)		(116,720	)
Proceeds from sales		50,893			48,168
Proceeds from calls, maturities, and principal collections		23,671			25,509
Purchase of residential mortgages		(23,888	)		(2,901	)
Loan principal payments, net of originations		7,580			11,124
Purchase of Federal Home Loan Bank of Boston stock		(72	)		-
Proceeds from sale of other real estate owned		-			1,003
Purchases of premises and equipment		(72	)		(118	)
Purchase of bank-owned life insurance		(2,000	)		-
Net cash used in investing activities		(9,730	)		(23,168	)
FINANCING ACTIVITIES:
Net increase in deposits		7,200			13,343
Net change in short-term borrowings		(7,799	)		250
Repayment of long-term debt		(2,000	)		(4,000	)
Proceeds from long-term debt		14,032			31
Cash dividends paid		(1,609	)		(1,410	)
Common stock repurchased		(1,363	)		(1,946	)
Issuance of common stock in connection with stock option exercises		153			-
Excess tax benefits in connection with equity incentive plan		5			6
Excess tax benefits in connection with stock option exercises		18			-
Net cash provided by financing activities		8,637			6,274
NET CHANGE IN CASH AND CASH EQUIVALENTS:		1,996			(12,242	)
Beginning of period		11,611			28,719
End of period	$	13,607		$	16,477
Supplemental cash flow information:
Transfer of loans to other real estate owned	$	-		$	538
Interest paid		3,820			4,269
Taxes paid		51			70

See the accompanying notes to unaudited consolidated financial statements.

WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

Basis of Presentation – In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial condition as of March 31, 2011, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results of operations for the year ending December 31, 2011. 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, 2010, included in our Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report”).

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

2. EARNINGS PER SHARE

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

Earnings per common share for the three months ended March 31, 2011 and 2010 have been computed based on the following:

	Three Months Ended
	March 31,
	2011			2010
	(In thousands, except per share data)

Net income applicable to common stock	$	1,286		$	1,354

Average number of common shares issued		28,152			29,691
Less: Average unallocated ESOP Shares		(1,371	)		(1,460	)
Average ungranted equity incentive plan shares		(35	)		(44	)

Average number of common shares outstanding used
to calculate basic earnings per common share		26,746			28,187

Effect of dilutive stock options		129			252

Average number of common shares outstanding used
to calculate diluted earnings per common share		26,875			28,439

Basic earnings per share	$	0.05		$	0.05

Diluted earnings per share	$	0.05		$	0.05

Stock options that would have an antidilutive effect on diluted earnings per share are excluded from the calculation. At March 31, 2011 and 2010, 1,576,024 and 1,551,024 shares were antidilutive, respectively.

3. COMPREHENSIVE INCOME/LOSS

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

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

	Three Months Ended March 31,
	2011			2010
	(In thousands)

Unrealized holding losses on available-for-sale securities	$	(1,649	)	$	(470	)
Reclassification adjustment for gains realized in income		(31	)		(186	)
Other-than-temporary impairment losses on available-for-sale securities charged to earnings		32			100
Net unrealized losses on available-for-sale securities		(1,648	)		(556	)
Tax effect		570			172
Net-of-tax amount		(1,078	)		(384	)

Gains and losses arising during the period pertaining to defined benefit plans		-			7
Reclassification adjustments for items reflected in earnings:
Actuarial loss		29			23
Transition asset		(3	)		(3	)
Net adjustments pertaining to defined benefit plan		26			27
Tax effect		(9	)		(9	)
Net-of-tax amount		17			18

Net accumulated other comprehensive income	$	(1,061	)	$	(366	)

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

	March 31,			December 31,
	2011			2010
	(In thousands)

Net unrealized loss on securities available for sale	$	(6,933	)	$	(5,299	)
Tax effect		2,383			1,817
Net-of-tax amount		(4,550	)		(3,482	)

Noncredit portion of other-than-temporary impairment losses on available-for-sale securities		(457	)		(443	)
Tax effect		155			151
Net-of-tax amount		(302	)		(292	)

Unrecognized transition asset pertaining to defined benefit plan		41			44
Unrecognized deferred loss pertaining to defined benefit plan		(2,653	)		(2,682	)
Net components pertaining to defined benefit plan		(2,612	)		(2,638	)
Tax effect		887			896
Net-of-tax amount		(1,725	)		(1,742	)

Net accumulated other comprehensive loss	$	(6,577	)	$	(5,516	)

4. SECURITIES

Securities are summarized as follows:

	March 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for sale:
Government-sponsored residential mortgage-backed securities	$	356,536	$	3,740	$	(6,086	)	$	354,190
U.S. government guaranteed residential mortgage-backed securities		192,375		431		(5,306	)		187,500
Private-label residential mortgage-backed securities		7,665		-		(584	)		7,081
Government-sponsored enterprise obligations		26,785		203		(900	)		26,088
Municipal bonds		42,049		1,318		(121	)		43,246
Mutual funds		5,355		13		(79	)		5,289
Common and preferred stock		39		-		(19	)		20

Total	$	630,804	$	5,705	$	(13,095	)	$	623,414

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for sale:
Government-sponsored residential mortgage-backed securities	$	381,436	$	4,967	$	(5,419	)	$	380,984
U.S. government guaranteed residential mortgage-backed securities		192,609		396		(5,329	)		187,676
Private-label residential mortgage-backed securities		8,251		-		(673	)		7,578
Government-sponsored enterprise obligations		18,447		193		(776	)		17,864
Municipal bonds		42,119		1,298		(340	)		43,077
Mutual funds		5,308		25		(61	)		5,272
Common and preferred stock		39		-		(23	)		16

Total	$	648,209	$	6,879	$	(12,621	)	$	642,467

The amortized cost and fair value of debt securities, excluding mortgage-backed securities, at March 31, 2011, by maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or repay obligations.

	March 31, 2011
	Amortized Cost		Fair Value
	(In thousands)
Available for sale:
Due in one year or less	$	270	$	272
Due after one year through five years		20,414		20,977
Due after five years through ten years		29,148		29,780
Due after ten years		19,002		18,305

Total available for sale	$	68,834	$	69,334

Gross realized gains and losses on sales of securities for the three months ended March 31, 2011 and 2010 are as follows:

	Three Months Ended March 31,
	2011			2010
	(In thousands)

Gross gains realized	$	562		$	645
Gross losses realized		(531	)		(459	)
Net gain (loss) realized	$	31		$	186

Proceeds from the sale of securities available for sale amounted $50.9 million and $48.2 million for the three months ended March 31, 2011 and 2010, respectively.

The tax provision applicable to net realized gains and losses were $12,000 and $63,000 for the three months ended March 31, 2011 and 2010, respectively.

One security with a carrying value of $2.2 million at December 31, 2010, was pledged as collateral to the Federal Reserve Bank of Boston to secure public deposits. No securities were pledged to secure public deposits at March 31, 2011.

Information pertaining to securities with gross unrealized losses at March 31, 2011and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	March 31, 2011
	Less Than Twelve Months					Over Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)

Available for sale:
Government-sponsored residential mortgage-backed securities	$	(6,086	)	$	242,757	$	-		$	-
U.S. government guaranteed residential mortgage-backed securities		(5,306	)		155,554		-			-
Private-label residential mortgage-backed securities		-			-		(584	)		7,080
Government-sponsored enterprise obligations		(900	)		4,098		-			-
Municipal bonds		(121	)		17,174		-			-
Mutual funds		(3	)		2,727		(76	)		1,552
Common and preferred stock		(19	)		20		-			-

Total	$	(12,435	)	$	422,330	$	(660	)	$	8,632

	December 31, 2010
	Less Than Twelve Months					Over Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for sale:
Government-sponsored residential mortgage-backed securities	$	(5,419	)	$	225,105	$	-		$	-
U.S. government guaranteed residential mortgage-backed securities		(5,329	)		145,430		-			-
Private-label residential mortgage-backed securities		-			-		(673	)		7,578
Government-sponsored enterprise obligations		(776	)		15,674		-			-
Municipal bonds		(340	)		8,856		-			-
Mutual funds		-			-		(61	)		1,548
Common and preferred stock		-			-		(23	)		16

Total	$	(11,864	)	$	395,065	$	(757	)	$	9,142

At March 31, 2011, fifty-five government-sponsored and U.S. government guaranteed mortgage-backed securities had gross unrealized losses with aggregate depreciation of 2.8% from our amortized cost basis existing for less than twelve months. At March 31, 2011, three government-sponsored enterprise obligations had gross unrealized losses with aggregate depreciation of 5.0% from our amortized cost basis existing for less than twelve months. At March 31, 2011, eight municipal bonds had gross unrealized losses with aggregate depreciation of 2.9% from our amortized cost basis existing for less than twelve months. These losses are the result of interest rates and not credit quality. Because we do not intend to sell the securities and it is more likely than not that we will not be required to sell the investments before recovery of their amortized cost basis, no declines are deemed to be other-than-temporary.

At March 31, 2011, one mutual fund had a gross unrealized loss with aggregate depreciation of 4.7% from our cost basis existing for greater than twelve months and was principally related to fluctuations in interest rates. This loss relates to a mutual fund which invests primarily in short-term debt instruments and adjustable rate mortgage-backed securities. Because we do not intend to sell the security and it is more likely than not that we will not be required to sell it prior to the recovery of its amortized cost basis, the loss is deemed temporary.

At March 31, 2011, four private label mortgage-backed securities have gross unrealized losses of 7.6% from our amortized cost basis which existed for greater than twelve months. Management uses a third party on a quarterly basis that is experienced in analyzing private-label mortgage-backed securities to determine if credit losses existed for these securities. The third party incorporated a number of factors to estimate the performance and possible credit loss of the underlying assets. These factors include but are not limited to: loans in various stages of delinquency i.e. 30, 60, 90 days delinquent, loans in foreclosure, projected prepayment rates (10 - 20 voluntary prepayment rate), severity of loss on defaulted loans (40% - 55%), current levels of subordination, current credit enhancement (2.62% - 7.47%), vintage (2006), geographic location and projected default rates. As a result of this analysis, two private label mortgage-backed securities were deemed to have other-than- temporary impairment losses as of March 31, 2011. During the three months ended March 31, 2011, we had writedowns of $345,000 due to other-than-temporary impairment on mortgage-backed securities, of which $313,000 was recognized in accumulated other comprehensive loss and $32,000 was recognized as a credit loss and charged to income. During the three months ended March 31, 2010, we had writedowns of $1.1 million due to other-than-temporary impairment on mortgage-backed securities, of which $971,000 million was recognized in accumulated other comprehensive loss and $100,000 was recognized as a credit loss and charged to income.

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

	Three Months Ended March 31,
	2011		2010
	(In thousands)

Balance, beginning of period	$	425	$	278

Additional credit losses for which other-than-temporary impairment charge was previously recorded		32		100

Balance, end of period	$	457	$	378

5. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consisted of the following amounts:	March 31,			December 31,
	2011			2010
	(In thousands)
Commercial real estate	$	220,307		$	221,578
Residential real estate		134,007			112,680
Home equity		36,380			36,116
Commercial and industrial		130,999			135,250
Consumer		2,795			2,960
Total loans		524,488			508,584
Unearned premiums and deferred loan fees and costs, net		868			742
Allowance for loan losses		(6,999	)		(6,934	)
	$	518,357		$	502,392

During the three months ended March 31, 2011 and 2010, we purchased residential real estate loans aggregating $23.9 million and $2.9 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 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 March 31, 2011 and December 31, 2010, we serviced loans for participants aggregating $5.1 million and $5.2 million, respectively.

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balances of these loans totaled $3.5 million and $3.9 million at March 31, 2011 and December 31, 2010, respectively. Net service fee income of $2,000, and $3,000 was recorded for three months ended March 31, 2011 and 2010, and is included in service charges and fees on the consolidated statements of income.

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 collectible. 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 when subsequent performance reduces 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 and allocated 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, 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 2010.

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

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

Commercial real estate – Loans in this segment are primarily income-producing investment properties throughout New England. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management obtains rent rolls and tax returns 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 generally 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.

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”). All TDRs are initially classified as impaired.

An analysis of changes in the allowance for loan losses for the three months ended March 31, 2011 and 2010 is as follows:

	Residential Real Estate			Commercial Real Estate			Commercial and Industrial			Consumer			Total
	(In thousands)
March 31, 2011
Balance, beginning of period	$	877		$	3,182		$	2,849		$	26		$	6,934
Provision		127			(9	)		234			(13	)		339
Charge-offs		-			-			(355	)		(4	)		(359	)
Recoveries		1			4			69			11			85
Balance, end of period	$	1,005		$	3,177		$	2,797		$	20		$	6,999

March 31, 2010
Balance, beginning of period	$	487		$	2,371		$	4,748		$	39		$	7,645
Provision		43			84			385			(12	)		500
Charge-offs		(1	)		-			(607	)		(8	)		(616	)
Recoveries		1			-			8			13			22
Balance, end of period	$	530		$	2,455		$	4,534		$	32		$	7,551

Further information pertaining to the allowance for loan losses by segment at March 31, 2011 and December 31, 2010 follows:

	Residential Real Estate		Commercial Real Estate		Commercial and Industrial		Consumer		Total
	(In thousands)
March 31, 2011
Allowance for loan and lease losses:
Individually evaluated for loss potential	$	-	$	419	$	36	$	-	$	455
Collectively evaluated for loss potential		1,005		2,758		2,761		20		6,544
Total	$	1,005	$	3,177	$	2,797	$	20	$	6,999

Loans and leases outstanding:
Individually evaluated for loss potential	$	123	$	15,859	$	2,349	$	-	$	18,331
Collectively evaluated for loss potential		170,264		204,448		128,650		2,795		506,157
Total	$	170,387	$	220,307	$	130,999	$	2,795	$	524,488

December 31, 2010
Allowance for loan and lease losses:
Individually evaluated for loss potential	$	-	$	-	$	19	$	-	$	19
Collectively evaluated for loss potential		877		3,182		2,830		26		6,915
Total	$	877	$	3,182	$	2,849	$	26	$	6,934

Loans and leases outstanding:
Individually evaluated for loss potential	$	125	$	1,891	$	539	$	-	$	2,555
Collectively evaluated for loss potential		148,671		219,687		134,711		2,960		506,029
Total	$	148,796	$	221,578	$	135,250	$	2,960	$	508,584

The following is a summary of past due and non-accrual loans by class at March 31, 2011 and December 31, 2010:


	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 in Non- Accrual
	(In thousands)
March 31, 2011
Residential real estate:
Residential 1-4 family	$	410	$	238	$	51	$	699	$	-	$	617
Home equity		203		-		117		320		-		121
Commercial real estate		14,465		283		640		15,388		-		1,859
Commercial and industrial		4,959		-		150		5,109		-		1,349
Consumer		6		-		-		6		-		-
Total	$	20,043	$	521	$	958	$	21,522	$	-	$	3,946

December 31, 2010
Residential real estate:
Residential 1-4 family	$	196	$	459	$	172	$	827	$	-	$	629
Home equity		121		-		138		259		-		144
Commercial real estate		14,797		-		919		15,716		-		1,891
Commercial and industrial		204		1,000		150		1,354		-		539
Consumer		7		-		-		7		-		1
Total	$	15,325	$	1,459	$	1,379	$	18,163	$	-	$	3,204

At March 31, 2011 and December 31, 2010, no loans were delinquent for ninety days or more and still accruing.

The following table summary of impaired loans by class:

							Three Months Ended
	At March 31, 2011						March 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Impaired loans without a valuation allowance:
Residential real estate	$	123	$	127	$	-	$	124	$	-
Commercial real estate		1,639		1,696		-		795		-
Commercial and industrial		1,200		1,200		-		1,765		-
Total		2,962		3,023		-		2,684		-

Impaired loans with a valuation allowance:
Commercial real estate		14,220		14,236		419		6,900		195
Commercial and industrial		1,149		1,150		36		622		15
Total		15,369		15,386		455		7,522		210

Total impaired loans	$	18,331	$	18,409	$	455	$	10,206	$	210

							Three Months Ended
	At December 31, 2010						March 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Impaired loans without a valuation allowance:
Residential real estate	$	125	$	127	$	-	$	96	$	-
Commercial real estate		1,891		1,939		-		778		-
Commercial and industrial		389		1,374		-		617		-
Total		2,405		3,440		-		1,491		-

Impaired loans with a valuation allowance:
Commercial and industrial		150		150		19		1,933		-

Total impaired loans	$	2,555	$	3,590	$	19	$	3,424	$	-

No interest income was recognized for impaired loans on a cash basis during the three months ended March 31, 2011 or 2010.

Included in impaired loans at March 31, 2011 is one commercial real estate loan in the amount of $14.0 million, one commercial and industrial loan in the amount of $1.0 million and one residential real estate loan in the amount of $123,000, which were modified in TDRs. Included in nonperforming loans at December 31, 2010 is one loan in the amount of $125,000 which was modified in a TDR. No additional funds are committed to be advanced in connection with impaired loans.

Credit Quality Information

We utilize an eight-grade internal loan rating system for commercial real estate and commercial and industrial loans as follows:

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

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

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

Loans rated 6: Loans in this category 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: Loans in this category 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: Loans in this category are considered uncollectible (“Loss”) 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 $1.0 and $4.3 million at March 31, 2011 and December 31, 2010, respectively. We engage an independent third-party to review a significant portion of loans within these segments on at least an annual basis. We use the results of these reviews as part of our annual review process.

The following table presents our loans by risk rating at March 31, 2011 and December 31, 2010.

	Commercial Real Estate		Commercial and Industrial
	(In thousands)
March 31, 2011
Loans rated 1 – 3	$	169,307	$	77,081
Loans rated 4		27,453		33,412
Loans rated 5		2,204		7,547
Loans rated 6		21,124		12,959
Loans rated 7		219		-
	$	220,307	$	130,999

December 31, 2010
Loans rated 1 – 3	$	174,137	$	83,650
Loans rated 4		24,149		32,723
Loans rated 5		3,164		7,424
Loans rated 6		20,128		11,453
Loans rated 7		-		-
	$	221,578	$	135,250

6. SHARE-BASED COMPENSATION

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

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

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

All stock awards and stock options currently vest at 20% per year. At March 31, 2011, 34,941 stock awards and 134,232 stock options were available for future grants.

Our stock award and stock option plans activity for the three months ended March 31, 2011 and 2010 is summarized below:

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

Outstanding at December 31, 2010		248,612	$	9.92		1,911,485		$	9.08
Stock options exercised		-		-		(34,646	)		4.39
Outstanding at March 31, 2011		248,612	$	9.92		1,876,839		$	9.17

Outstanding at December 31, 2009		358,573	$	10.00		2,223,012		$	8.36
Outstanding at March 31, 2010		358,573	$	10.00		2,253,012		$	8.36

We recorded compensation cost related to the stock awards of $291,000 and $289,000 for the three months ended March 31, 2011 and 2010, respectively.

We recorded compensation costs relating to stock options of $200,000 and $199,000 for the three months ended March 31, 2011 and 2010, respectively. Tax benefits related to stock option compensation were $53,000 for both the three months ended March 31, 2011 and 2010.

No stock awards or stock options were granted during the three months ended March 31, 2011 or 2010.

7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

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

Short-term borrowings are made up of Federal Home Loan Bank (“FHLB”) advances with an original maturity of less than one year as well as customer repurchase agreements, which have an original maturity of one day. Short-term borrowings issued by the FHLB were $38.8 million and $50.6 million at March 31, 2011 and December 31, 2010, respectively. Customer repurchase agreements were $16.3 million at March 31, 2011, and $12.3 million at December 31, 2010. A customer repurchase agreement is an agreement by us to sell to and repurchase from the customer an interest in specific securities issued by or guaranteed by the United States government. This transaction settles immediately on a same day basis in immediately available funds. Interest paid is commensurate with other products of equal interest and credit risk. All of our customer repurchase agreements at March 31, 2011 and December 31, 2010 were held by commercial customers.

Long-term debt consists of FHLB advances, securities sold under repurchase agreements and customer repurchase agreements with an original maturity of one year or more. At March 31, 2011, we had $163.6 million in long-term debt with the FHLB and $81.3 million in securities sold under repurchase agreements with an approved broker-dealer. This compares to $151.6 million in long-term debt with FHLB advances and $81.3 million in securities sold under repurchase agreements with an approved broker-dealer at December 31, 2010. Customer repurchase agreements were $5.3 million at March 31, 2011 and $5.2 million at December 31, 2010. The securities sold under agreements to repurchase are callable at the issuer’s option beginning in the year 2012.

All FHLB advances are collateralized by a blanket lien on our residential real estate loans and certain mortgage-back securities.

8. PENSION BENEFITS

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

	Three Months Ended March 31,
	2011			2010
	(In thousands)
Service cost	$	247		$	233
Interest cost		223			193
Expected return on assets		(219	)		(196	)
Transition obligation		(3	)		(3	)
Actuarial loss		29			23
Net periodic pension cost	$	277		$	250

We maintain a pension plan for our eligible employees. We plan to contribute to the pension plan the amount required to meet the minimum funding standards under Section 412 of the Internal Revenue Code. Additional contributions will be made as deemed appropriate by management in conjunction with the pension plan’s actuaries. We have not yet determined how much we expect to contribute to our pension plan in 2011. No contributions have been made to the plan for the three months ended March 31, 2011.

9. FAIR VALUE OF ASSETS AND LIABILITIES

Determination of Fair Value

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

Fair Value Hierarchy

We group our assets generally 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 or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

	March 31, 2011
	Level 1		Level 2		Level 3		Total
Securities available for sale:	(In thousands)
Mutual funds	$	5,289	$	-	$	-	$	5,289
Common and preferred stock		20		-		-		20
U.S. government and federal agency debt securities		-		26,088		-		26,088
State and municipal bonds		-		43,246		-		43,246
Government sponsored residential mortgage-backed securities		-		354,190		-		354,190
U.S. government guaranteed residential mortgage-backed securities		-		187,500		-		187,500
Private label residential mortgage-backed securities		-		7,081		-		7,081
Total assets	$	5,309	$	618,105	$	-	$	623,414

	December 31, 2010
	Level 1		Level 2		Level 3		Total
Securities available for sale:	(In thousands)
Mutual funds	$	5,272	$	-	$	-	$	5,272
Common and preferred stock		16		-		-		16
U.S. government and federal agency debt securities		-		17,864		-		17,864
State and municipal bonds		-		43,077		-		43,077
Government sponsored residential mortgage-backed securities		-		380,984		-		380,984
U.S. government guaranteed residential mortgage-backed securities		-		187,676		-		187,676
Private label residential mortgage-backed securities		-		7,578		-		7,578
Total assets	$	5,288	$	637,179	$	-	$	642,467

Also, we may be required, from time to time, to measure certain other assets 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 March 31, 2011 and 2010. Total losses represent the change in carrying value as a result of fair value adjustments related to assets still held at March 31, 2011 and 2010.

	At						Three Months Ended
	March 31, 2011						March 31, 2011
							Total
	Level 1		Level 2		Level 3		Gains (Losses)
	(In thousands)
Impaired loans	$	-	$	-	$	1,036	$	(219	)
Other real estate owned		-		-		223		-

Total assets	$	-	$	-	$	1,259	$	(219	)

	At						Three Months Ended
	March 31, 2010						March 31, 2010
							Total
	Level 1		Level 2		Level 3		Gains (Losses)
	(In thousands)
Impaired loans	$	-	$	-	$	3,080	$	507
Other real estate owned		-		-		977		227

Total assets	$	-	$	-	$	4,057	$	734

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

The amount of other real estate owned represents the carrying value of the collateral based on the appraised value of the underlying collateral using a market approach less selling costs. During the three months ended March 31, 2011 there were no recognized losses on other real estate owned. During the three months ended March 31, 2010, we incurred charges of $227,000 to reduce other real estate owned to fair value.

There were no transfers to or from Level 1 and 2 during the three months ended March 31, 2011.

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

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

	March 31, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value
	(In thousands)
Assets:
Cash and cash equivalents	$	13,607	$	13,607	$	11,611	$	11,611

Securities available for sale		623,414		623,414		642,467		642,467

Federal Home Loan Bank of Boston and other restricted stock		12,354		12,354		12,282		12,282

Loans- net		518,357		520,512		502,392		505,791

Accrued interest receivable		4,248		4,248		4,279		4,279

Liabilities:
Deposits		707,535		709,288		700,335		697,815

Short-term borrowings		55,138		55,138		62,937		62,936

Long-term debt		250,230		254,490		238,151		243,800

Accrued interest payable		710		710		720		720

10. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2010, the Financial Accounting Standards Board (“FASB”) ASU No. 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires an entity to provide disclosures that facilitate financial statement users’ evaluation of (1) the nature of credit risk inherent in the entity’s loan portfolio (2) how that risk is analyzed and assessed in arriving at the allowance for loan and lease losses and (3) the changes and reasons for those changes in the allowance for loan and lease losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The disclosure requirement in this ASU pertaining to Troubled Debt Restructuring was deferred by ASU No. 2011-01 issued in January 2011. We have provided the required disclosures in Note 5.

In January 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-01, Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in ASU No. 2010-20. The amendments in this ASU temporarily delay the effective date of disclosures about troubled debt restructurings as required by ASU No. 2010-20 for public entities in order to allow FASB to complete deliberations on what constitutes troubled debt restructuring. At that point, the effective date for such disclosures and guidance for determining what constitutes troubled debt restructurings will be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. We do not believe the adoption of this ASU will have a material impact on our consolidated financial statements.

In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“TDR”). This ASU provides additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. Early adoption is permitted. We intend to adopt the methodologies prescribed by this ASU by the date required. We are evaluating the impact of adoption of this ASU.

In April 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements. This update revises the criteria for assessing effective control for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The update will be effective for interim and annual reporting periods beginning on or after December 15, 2011, early adoption is prohibited, and the amendments will be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The adoption of this guidance is not expected to have a material impact on our financial condition or results of operations.

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

Overview

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

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

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

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

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

You should read the following financial results for the quarter ended March 31, 2011 in the context of this strategy.

Net income was $1.3 million, or $0.05 per diluted share, for the three months ended March 31, 2011, compared to net income of $1.4 million, or $0.05 per diluted share for the same period in 2010.

The provision for loans losses was $339,000 for the three months ended March 31, 2011 compared to $500,000 for the same period in 2010. The decrease in provision for loan losses was due to a decrease in loan charge-offs and positive trends in the national and local economy.

Net interest income decreased $44,000 to $7.6 million for the three months ended March 31, 2011, compared to $7.7 million for the same period in 2010. The net interest margin, on a tax-equivalent basis, was 2.72% for the three months ended March 31, 2011, compared to 2.81% for the same period in 2010.

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. For additional information on our critical accounting policies, please refer to the information contained in Notes 1 and 10 of the accompanying consolidated financial statements and Note 1 of the consolidated financial statements included in our 2010 Annual Report.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2011 AND DECEMBER 31, 2010

Total assets increased $1.3 million to $1.2 billion at March 31, 2011. Securities decreased $18.9 million to $635.8 million at March 31, 2011 from $654.7 million at December 31, 2010. The decrease in securities was the result of using cash flow from securities to fund the loan portfolio as discussed below.

Net loans increased by $16.0 million to $518.4 million at March 31, 2011 from $502.4 million at December 31, 2010. The increase in net loans was primarily the result of an increase in residential real estate loans, which was partially offset by decreases in commercial and industrial real estate and commercial real estate loans. Residential real estate loans increased $21.3 million to $134.0 million at March 31, 2011. We purchased $23.9 million of residential loans within and contiguous to our market area as a means of diversifying our loan portfolio and improve net interest income.

Commercial and industrial loans decreased $4.3 million to $131.0 million at March 31, 2011 from $135.3 million at December 31, 2010. Commercial real estate loans decreased $1.3 million to $220.3 million at March 31, 2011 from $221.6 million at December 31, 2010. The decreases in commercial and industrial loans and commercial real estate loans were primarily the result of customers decreasing their balances on lines of credit and normal loan payments and payoffs. Owner occupied commercial real estate loans totaled $104.4 million at March 31, 2011 and $107.0 million at December 31, 2010, while non-owner occupied commercial real estate loans totaled $115.9 million at March 31, 2011 and $114.6 million at December 31, 2010.

Nonperforming loans increased $700,000 to $3.9 million at March 31, 2011 compared to $3.2 million at December 31, 2010. This represented 0.75% of total loans at March 31, 2011 and 0.63% of total loans at December 31, 2010. At March 31, 2011, nonperforming loans were primarily made up of four commercial relationships totaling $3.2 million.

All loans where the interest payment is 90 days or more in arrears as of the closing date of each month are placed on nonaccrual status. At March 31, 2011, we had $3.9 million of nonaccrual loans and $223,000 in foreclosed real estate. At December 31, 2010, we had $3.2 million of nonaccrual loans and $223,000 in foreclosed real estate. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $188,000 and $61,000 for the three months ended March 31, 2011 and 2010, respectively. At March 31, 2011 and December 31, 2010, our nonperforming loans to total loans were 0.75% and 0.63%, respectively, while our nonperforming assets to total assets were 0.34% and 0.28%, respectively. A summary of our nonaccrual and past due loans by class are listed in Note 5 of the accompanying consolidated financial statements.

Total deposits increased $7.2 million to $707.5 million at March 31, 2011, from $700.3 million at December 31, 2010. The increase in deposits was due to an increase in savings and money market accounts and checking accounts. Savings and money market accounts increased $10.8 million to $188.3 million at March 31, 2011, from $177.5 million at December 31, 2010. Checking accounts increased $8.6 million to $177.4 million at March 31, 2011, from $168.8 million at December 31, 2010. The increases in savings and money market accounts and checking accounts were primarily due to a relationship-based product set introduced in 2010 which continues to show growth in 2011. Time deposit accounts decreased $12.2 million to $341.8 million at March 31, 2011, from $354.0 million at December 31, 2010.

Short-term borrowings decreased $7.8 million to $55.1 million at March 31, 2011 from $62.9 million at December 31, 2010. Long-term debt increased $12.1 million to $250.2 million from $238.1 million at December 31, 2010. Our short-term borrowings and long-term debt are discussed in Note 7 of the accompanying consolidated financial statements.

Shareholders’ equity at March 31, 2011 and December 31, 2010 was $219.4 million and $221.2 million, respectively, which represented 17.7% of total assets as of March 31, 2011 and 17.8% of total assets as of December 31, 2010. The decrease in shareholders’ equity reflects the payment of regular dividends amounting to $1.6 million, the repurchase of 155,555 shares of our common stock at a cost of $1.4 million, pursuant to our current stock repurchase plan and a decrease in other comprehensive income of $1.1 million. This was partially offset by an increase of $858,000 related to the recognition of share-based compensation and the exercise of 34,646 stock options, and net income of $1.3 million for the three months ended March 31, 2011.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND MARCH 31, 2010

General

Net income was $1.3 million, or $0.05 per diluted share, for the three months ended March 31, 2011, as compared to $1.4 million, or $0.05 per diluted share, for the same period in 2010. Net interest and dividend income was $7.6 million for the three months ended March 31, 2011 and $7.7 million for the same period in 2010.

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 March 31, 2011 and 2010, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned from making changes in loan rates and terms and fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilities comparison between taxable and tax-exempt assets.

	Three Months Ended March 31,
	2011								2010
	Average					Avg. Yield/			Average					Avg. Yield/
	Balance		Interest			Cost			Balance		Interest			Cost
	(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans(1)(2)	$	518,397	$	6,206			4.79	%	$	471,127		6,199			5.26	%
Securities(2)		632,678		5,453			3.45			619,473		5,924			3.83
Other investments - at cost		13,948		14			0.40			11,829		5			0.17
Short-term investments(3)		6,007		1			0.07			17,035		1			0.02
Total interest-earning assets		1,171,030		11,674			3.99			1,119,464		12,129			4.33
Total noninterest-earning assets		72,029								70,946

Total assets	$	1,243,059							$	1,190,410

LIABILITIES AND EQUITY:
Interest-bearing liabilities
NOW accounts	$	85,767		227			1.06			71,500		232			1.30
Savings accounts		105,345		157			0.60			110,708		230			0.83
Money market accounts		77,815		118			0.61			49,184		90			0.73
Time certificates of deposit		348,198		1,604			1.84			344,392		2,063			2.40
Total interest-bearing deposits		617,125		2,106						575,784		2,615
Short-term borrowings and long-term debt		312,153		1,704			2.18			280,019		1,649			2.36
Interest-bearing liabilities		929,278		3,810			1.64			855,803		4,264			1.99
Noninterest-bearing deposits		84,358								79,848
Other noninterest-bearing liabilities		9,464								8,101
Total noninterest-bearing liabilities		93,822								87,949

Total liabilities		1,023,100								943,752
Total equity		219,959								246,658
Total liabilities and equity	$	1,243,059							$	1,190,410
Less: Tax-equivalent adjustment(2)				(217	)							(174	)
Net interest and dividend income			$	7,647							$	7,691
Net interest rate spread(4)							2.35	%							2.34	%
Net interest margin(5)							2.72	%							2.81	%
Ratio of average interest-earning
assets to average interest-bearing liabilities							126.0								130.8

(1)	Loans, including non-accrual loans, are net of deferred loan origination costs, and unadvanced funds.
(2)	Securities and loan income are presented on a tax-equivalent basis using a tax rate of 34%. The tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported in the statements of income.
(3)	Short-term investments include federal funds sold.
(4)	Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(5)	Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest earning assets.

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

·	Interest income changes attributable to changes in volume (changes in volume multiplied by prior rate);
·	Interest income changes attributable to changes in rate (changes in rate multiplied by current volume); and
·	The net change.

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

	Three Months Ended March 31, 2011 compared
	to Three Months Ended March 31, 2010
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest-earning assets	(Dollars in thousands)
Loans (1)	$	622		$	(615	)	$	7
Securities (1)		126			(597	)		(471	)
Other investments - at cost		1			8			9
Short-term investments		(1	)		1			-
Total interest-earning assets		748			(1,203	)		(455	)

Interest-bearing liabilities
NOW accounts		46			(51	)		(5	)
Savings accounts		(11	)		(62	)		(73	)
Money market accounts		52			(24	)		28
Time deposits		23			(482	)		(459	)
Short-term borrowing and long-time debt		189			(134	)		55
Total interest-bearing liabilities		299			(753	)		(454	)
Change in net interest and dividend income	$	449		$	(450	)	$	(1	)

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

Net interest and dividend income decreased $44,000 to $7.6 million for the three months ended March 31, 2011, from $7.7 million for the same period in 2010. Interest and dividend income, on a tax-equivalent basis, decreased $455,000 to $11.7 million for the three months ended March 31, 2011, from $12.1 million for the same period in 2010. The net interest margin, on a tax-equivalent basis, was 2.72% for the three months ended March 31, 2011, as compared to 2.81% for the same period in 2010.

The average yield on interest-earning assets decreased 34 basis points to 3.99% for the three months ended March 31, 2011, from 4.33% for the same period in 2010. The average yield on interest-earning assets decreased because the cash flows from their pay downs were subsequently reinvested in products having a lower yield that is reflective of the current market rate environment. The decrease in average yield was partially mitigated by increases in the average balances of loans and investments. The average balance of loans increased $47.3 million while the average balance of securities increased $13.2 million for the three months ended March 31, 2011.

The decrease in interest income was partially offset by a decrease in interest expense. Interest expense decreased $454,000 to $3.8 million for the three months ended March 31, 2011, from $4.3 million for the same period in 2010. The average cost of interest-bearing liabilities decreased 35 basis points to 1.64% for the three months ended March 31, 2011, from 1.99% for the same period in 2010. The decrease in the cost of interest-bearing liabilities was primarily due to a decrease in rates on time deposits, repurchase agreements and borrowings.

Provision for Loan Losses

The amount that we provided for loan losses during the three months ended March 31, 2011 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio, described in detail below, include a decrease in net loan charge-offs, partially offset by decreases in commercial and industrial and commercial real estate loans and an increase in residential real estate loans. After evaluating these factors, we provided $339,000 for loan losses for the three months ended March 31, 2011, compared to $500,000 for the same period in 2010. The allowance was $7.0 million at March 31, 2011 and $6.9 million at December 31, 2010. The allowance for loan losses was 1.33% of total loans at March 31, 2011 and 1.36% at December 31, 2010.

Net charge-offs were $274,000 for the three months ended March 31, 2011. This was comprised of charge-offs of $359,000 for the three months ended March 31, 2011, partially offset by recoveries of $85,000 for the same period.

Net charge-offs were $594,000 for the three months ended March 31, 2010. This was comprised of charge-offs of $616,000 for the three months ended March 31, 2010, partially offset by recoveries of $22,000.

At March 31, 2011, commercial and industrial loans decreased $4.3 million to $131.0 million at March 31, 2011 compared to December 31, 2010, while commercial real estate loans decreased $1.3 million to $220.3 million compared to December 31, 2010. Residential real estate loans increased $21.6 million to $170.4 million compared to December 31, 2010. We consider these types of loans to contain less credit risk and market risk than both commercial and industrial and commercial real estate loans. A summary of our provision for loan losses by loan segment is listed in Note 5 of the accompanying consolidated financial statements.

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

Noninterest Income

Noninterest income decreased $154,000 to $806,000 for the three months ended March 31, 2011, from $960,000 for the same period in 2010. This was primarily due to a decrease in net gains on the sales of securities. Net gains on the sales of securities were $31,000 for the three months ended March 31, 2011, compared to net gains of $186,000 for the same period in 2010.

Noninterest Expense

Noninterest expense increased $145,000 for the three months ended March 31, 2011 to $6.5 million from $6.4 million in the comparable 2010 period. Salaries and benefits increased $136,000 to $4.0 million for the three months ended March 31, 2011. This was primarily the result of normal increases in this category. In addition, other expenses increased $164,000 to $768,000 for the three months ended March 31, 2011. This was the result of an increase of $109,000 in advertising and marketing expenses for the three months ended March 31, 2011, due to new advertising initiatives in electronic and print media. These increases were partially offset by a $235,000 decrease in OREO expense. This was primarily due to write downs on foreclosed properties of $227,000 for the three months ended March 31, 2010, which did not reoccur in 2011.

Income Taxes

For the three months ended March 31, 2011, we had a tax provision of $288,000 as compared to $402,000 for the same period in 2010. The effective tax rate was 18.3% for the three months ended March 31, 2011 and 22.9% for the same period in 2010. The change in effective tax rate from March 31, 2010 is due primarily to the lower pre-tax income while maintaining the same level of tax-advantaged income such as BOLI and tax-exempt municipal obligations.

LIQUIDITY AND CAPITAL RESOURCES

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, withdrawals of deposits and operating expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of securities and funds provided by operations. We also can borrow funds from the FHLB based on eligible collateral of loans and securities. Our maximum additional borrowing capacity from the FHLB at March 31, 2011 was $77.1 million.

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

At March 31, 2011, we exceeded each of the applicable regulatory capital requirements. As of March 31, 2011, the most recent notification from the Office of Thrift Supervision (the “OTS”) categorized us as “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized” we must maintain minimum total risk-based, Tier 1 risk based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes would change our category. Our actual capital ratios of March 31, 2011 and December 31, 2010 are also presented in the following table.

	Actual					Minimum for Capital Adequacy Purposes					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
March 31, 2011

Total Capital (to Risk Weighted Assets):
Consolidated	$	229,888		33.58	%	$	54,773		8.00	%		N/A		-
Bank		221,355		32.42			55,112		8.00		$	68,890		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		222,889		32.55			27,387		4.00			N/A		-
Bank		214,751		31.45			27,556		4.00			41,334		6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated		224,889		17.91			49,768		4.00			N/A		-
Bank		214,751		17.32			49,850		4.00			62,312		5.00
Tangible Equity (to Tangible Assets):
Consolidated		N/A		-			N/A		-			N/A		-
Bank		214,751		17.32			24,925		2.00			N/A		-

December 31, 2010

Total Capital (to Risk Weighted Assets):
Consolidated	$	231,272		34.05	%	$	54,339		8.00	%		N/A		-
Bank		221,643		32.69			54,238		8.00		$	67,797		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated		224,338		33.03			27,169		4.00			N/A		-
Bank		214,668		31.66			27,119		4.00			40,678		6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated		224,338		18.07			49,662		4.00			N/A		-
Bank		214,668		17.37			49,434		4.00			61,793		5.00
Tangible Equity (to Tangible Assets):
Consolidated		N/A		-			N/A		-			N/A		-
Bank		214,668		17.37			24,717		2.00			N/A		-

We also have outstanding, at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. We are obligated under leases for certain of our branches and equipment. A summary of contractual obligations and credit commitments at March 31, 2011 follows:

	Within 1 Year		After 1 Year But Within 3 Years		After 3 Year But Within 5 Years		After 5 Years		Total
	(In thousands)
Contractual Obligations:
Lease Obligations
Operating lease obligations	$	620	$	1,241	$	1,181	$	10,142	$	13,184

Borrowings and Debt
Federal Home Loan Bank		46,981		67,761		73,764		14,000		202,506
Securities sold under agreements to repurchase		21,562		29,800		13,000		38,500		102,862
Total borrowings and debt		68,543		97,561		86,764		52,500		305,368

Credit Commitments:
Available lines of credit		60,241		-		-		20,186		80,427
Other loan commitments		6,519		-		50		-		6,569
Letters of credit		5,109		-		-		505		5,614
Total credit commitments		71,869		-		50		20,691		92,610

Total Obligations	$	141,032	$	98,802	$	87,995	$	83,333	$	411,162

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.

REGULATORY ORDER

On April 28, 2011, the board of directors of the Bank stipulated and consented to an Order to Cease and Desist (the “Order”) issued by the Office of Thrift Supervision (the “OTS”). The Order was issued as a result of findings identified in the course of a regular examination of the Bank relating to non-compliance with certain laws and regulations, including the Bank Secrecy Act and Anti-Money Laundering. The Bank has responded to the OTS indicating the actions taken, or to be taken, to address the matters specified in the Order.

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 2010 Annual Report. Please refer to Item 7A of the 2010 Annual Report for additional information.

ITEM 4: CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.

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

Changes in Internal Control Over Financial Reporting.

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

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 1A. RISK FACTORS.

For a summary of risk factors relevant to our operations, see Part 1, Item 1A, “Risk Factors” in our 2010 Annual Report on Form 10-K. There are no material changes in the risk factors relevant to our operations.

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

The following table sets forth information with respect to purchases made by us of our common stock during the three months ended March 31, 2011.

Period	Tota 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)

January 1 - 31, 2011		-		-		-		1,552,516

February 1 - 28, 2011		7,697		8.83		7,697		1,544,819

March 1 - 31, 2011		147,858		8.75		147,858		1,396,961

Total		155,555		8.76		155,555		1,396,961

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

There were no sales by us of unregistered securities during the three months ended March 31, 2011.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. [REMOVED AND RESERVED.]

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 6, 2011.

	Westfield Financial, Inc.


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



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

EXHIBIT INDEX

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

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

3.2	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

_______________________________

* Filed herewith.

Attached files

Stock widget

Investing forum

Western New England Bancorp, Inc. Reports

Also read