XNAS:WFD Westfield Financial Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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a50362973.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
______________________

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to _____.


Commission file number 001-16767

Westfield Financial, Inc.
 (Exact name of registrant as specified in its charter)

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

141 Elm Street, Westfield, Massachusetts 01086
(Address of principal executive offices)
(Zip Code)

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


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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
 
 
Large accelerated filer o
 
Accelerated filer x
       
 
Non-accelerated filer o
 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

At July 31, 2012, the registrant had 24,455,508 shares of common stock, $.01 par value, issued and outstanding.
 
 
 

 
 
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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.
 
 
i

 
 

 
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
(Dollars in thousands)
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
ASSETS
           
Cash and due from banks
  $ 12,552     $ 10,953  
Federal funds sold
    112       131  
Interest-bearing deposits and other short-term investments
    7,846       10,021  
             Cash and cash equivalents
    20,510       21,105  
                 
SECURITIES :
               
Available for sale - at fair value
    639,845       617,537  
                 
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT COST
    14,045       12,438  
                 
LOANS - Net of allowance for loan losses of $8,065 at June 30, 2012, and $7,764 at December 31, 2011
    575,941       546,392  
                 
PREMISES AND EQUIPMENT, Net
    11,178       10,997  
                 
ACCRUED INTEREST RECEIVABLE
    4,683       4,022  
                 
BANK-OWNED LIFE INSURANCE
    45,445       44,040  
                 
DEFERRED TAX ASSET, Net
    1,443       1,863  
                 
OTHER REAL ESTATE OWNED
    1,130       1,130  
                 
OTHER ASSETS
    4,413       3,740  
TOTAL ASSETS
  $ 1,318,633     $ 1,263,264  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
LIABILITIES:
               
DEPOSITS :
               
    Noninterest-bearing
  $ 104,497     $ 100,157  
    Interest-bearing
    643,054       632,801  
          Total deposits
    747,551       732,958  
                 
SHORT-TERM BORROWINGS
    58,574       52,985  
                 
LONG-TERM DEBT
    289,970       247,320  
SECURITIES PENDING SETTLEMENT
    -       363  
OTHER LIABILITIES
    11,108       10,650  
TOTAL LIABILITIES
    1,107,203       1,044,276  
                 
SHAREHOLDERS' EQUITY:
               
Preferred stock - $.01 par value, 5,000,000 shares authorized, none outstanding at June 30, 2012 and December
   31, 2011
    -       -  
Common stock - $.01 par value, 75,000,000 shares authorized, 25,962,274 shares issued and outstanding at
   June 30, 2012; 26,918,250 shares issued and outstanding at December 31, 2011
    259       269  
Additional paid-in capital
    167,204       173,615  
Unearned compensation - ESOP
    (8,836 )     (9,119 )
Unearned compensation - Equity Incentive Plan
    (652 )     (1,228 )
Retained earnings
    44,721       47,735  
Accumulated other comprehensive income
    8,734       7,716  
   Total shareholders' equity
    211,430       218,988  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 1,318,633     $ 1,263,264  
See accompanying notes to unaudited consolidated financial statements.
 
 
 
1

 
 
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
 
   
Three Months
   
Six Months
 
   
Ended June 30,
   
Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
INTEREST AND DIVIDEND INCOME:
                       
Debt securities, taxable
  $ 4,050     $ 4,653     $ 7,894     $ 9,463  
Residential and commercial real estate loans
    5,084       4,845       10,122       9,519  
Commercial and industrial loans
    1,253       1,420       2,555       2,863  
Debt securities, tax-exempt
    415       419       839       838  
Consumer loans
    40       47       80       96  
Equity securities
    42       47       86       94  
Other investments - at cost
    25       18       47       32  
Federal funds sold, interest-bearing deposits and other short-term investments
    1       -       1       1  
Total interest and dividend income
    10,910       11,449       21,624       22,906  
INTEREST EXPENSE:
                               
Deposits
    1,523       1,975       3,159       4,081  
Long-term debt
    1,623       1,710       3,254       3,355  
Short-term borrowings
    37       35       67       94  
Total interest expense
    3,183       3,720       6,480       7,530  
Net interest and dividend income
    7,727       7,729       15,144       15,376  
PROVISION FOR LOAN LOSSES
    260       175       480       514  
Net interest and dividend income after provision for loan losses
    7,467       7,554       14,664       14,862  
                                 
NONINTEREST INCOME (LOSS):
                               
Total other-than-temporary impairment losses on debt securities
    -       (433 )     -       (465 )
    Portion of other-than-temporary impairment losses recognized in accumulated
        other comprehensive loss on debt securities
    -       425       -       425  
Net other-than-temporary impairment losses recognized in income
    -       (8 )     -       (40 )
Service charges and fees
    521       521       1,032       962  
Income from bank-owned life insurance
    283       388       741       753  
Gain on sales of securities, net
    97       46       1,681       77  
Total noninterest income
    901       947       3,454       1,752  
NONINTEREST EXPENSE:
                               
Salaries and employees benefits
    4,127       3,759       8,404       7,713  
Occupancy
    703       657       1,408       1,335  
Computer operations
    523       478       1,050       965  
Professional fees
    532       563       969       1,001  
OREO expense
    21       13       38       20  
FDIC insurance assessment
    155       140       298       348  
Other
    772       823       1,510       1,591  
Total noninterest expense
    6,833       6,433       13,677       12,973  
INCOME BEFORE INCOME TAXES
    1,535       2,068       4,441       3,641  
INCOME TAX PROVISION
    561       503       1,128       790  
NET INCOME
  $ 974     $ 1,565     $ 3,313     $ 2,851  
                                 
EARNINGS PER COMMON SHARE:
                               
Basic earnings per share
  $ 0.04     $ 0.06     $ 0.13     $ 0.11  
Weighted average shares outstanding
    25,141,989       26,639,247       25,295,875       26,692,379  
Diluted earnings per share
  $ 0.04     $ 0.06     $ 0.13     $ 0.11  
Weighted average diluted shares outstanding
    25,158,171       26,755,667       25,330,242       26,815,160  
See accompanying notes to unaudited consolidated financial statements.
 
 
 
2

 
 
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
 
(In thousands)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net income
  $ 974     $ 1,565     $ 3,313     $ 2,851  
                                 
Other comprehensive income:
                               
Unrealized gains (losses) on securities:
                               
Unrealized holding gains on available for sale securities
    4,583       9,766       3,139       8,117  
Reclassification adjustment for gains realized in income
    (97 )     (46 )     (1,681 )     (77 )
    Other-than-temporary impairment losses on available-
           for-sale securities
    -       8       -       40  
Net unrealized gains
    4,486       9,728       1,458       8,080  
Tax effect
    (1,546 )     (3,337 )     (495 )     (2,767 )
Net-of-tax amount
    2,940       6,391       963       5,313  
                                 
Defined benefit pension plans:
                               
    Gains and losses arising during the period pertaining to
          defined benefit plans
    -       5       -       5  
Reclassification adjustment:
                               
Actuarial loss
    48       30       87       59  
Transition asset
    (3 )     (3 )     (5 )     (6 )
Net adjustments pertaining to defined benefit plans
    45       32       82       58  
Tax effect
    (15 )     (11 )     (27 )     (20 )
Net-of-tax amount
    30       21       55       38  
                                 
Other comprehensive income
    2,970       6,412       1,018       5,351  
                                 
Comprehensive income
  $ 3,944     $ 7,977     $ 4,331     $ 8,202  
 
 
3

 
 
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
 
 
SIX MONTHS ENDED JUNE 30, 2012 AND 2011
 
(Dollars in thousands, except share data)
 
   
   
Common Stock
                                     
   
Shares
   
Par Value
   
Additional Paid-in
Capital
   
Unearned Compensation- ESOP
   
Unearned Compensation- Equity Incentive Plan
   
Retained Earnings
   
Accumulated Other Comprehensive Income (Loss)
   
Total
 
                                                 
BALANCE, DECEMBER 31, 2010
    28,166,419     $ 282     $ 181,842     $ (9,701 )   $ (2,158 )   $ 56,496     $ (5,516 )   $ 221,245  
Net income
    -       -       -       -       -       2,851       -       2,851  
Other comprehensive income
    -       -       -       -       -       -       5,351       5,351  
Common stock held by ESOP committed to be released (86,585 shares)
    -       -       90       290       -       -       -       380  
Share-based compensation - stock options
    -       -       399       -       -       -       -       399  
Share-based compensation - equity incentive plan
    -       -       -       -       581       -       -       581  
Excess tax benefits from equity incentive plan
    -       -       23       -       -       -       -       23  
Common stock repurchased
    (330,394 )     (3 )     (2,788 )     -       -       -       -       (2,791 )
Issuance of common stock in connection with stock option exercises
    34,646       -       293       -       -       (142 )     -       151  
Issuance of common stock in connection with equity incentive plan
    -       -       227       -       (227 )     -       -       -  
Excess tax benefits in connection with stock option exercises
    -       -       18       -       -       -       -       18  
Cash dividends declared ($0.27 per share)
    -       -       -       -       -       (7,209 )     -       (7,209 )
BALANCE, JUNE 30, 2011
    27,870,671     $ 279     $ 180,104     $ (9,411 )   $ (1,804 )   $ 51,996     $ (165 )   $ 220,999  
                                                                 
BALANCE, DECEMBER 31, 2011
    26,918,250     $ 269     $ 173,615     $ (9,119 )   $ (1,228 )   $ 47,735     $ 7,716     $ 218,988  
Net income
    -       -       -       -       -       3,313       -       3,313  
Other comprehensive income
    -       -       -       -       -       -       1,018       1,018  
Common stock held by ESOP committed to be released (84,261 shares)
    -       -       44       283       -       -       -       327  
Share-based compensation - stock options
    -       -       392       -       -       -       -       392  
Share-based compensation - equity incentive plan
    -       -       -       -       576       -       -       576  
Excess tax benefits from equity incentive plan
    -       -       12       -       -       -       -       12  
Common stock repurchased
    (1,150,632 )     (12 )     (8,660 )     -       -       -       -       (8,672 )
Issuance of common stock in connection with stock option exercises
    194,656       2       1,598       -       -       (746 )     -       854  
Excess tax benefits in connection with stock option exercises
    -       -       203       -       -       -       -       203  
Cash dividends declared ($0.22 per share)
    -       -       -       -       -       (5,581 )     -       (5,581 )
BALANCE, JUNE 30, 2012
    25,962,274     $ 259     $ 167,204     $ (8,836 )   $ (652 )   $ 44,721     $ 8,734     $ 211,430  
See accompanying notes to unaudited consolidated financial statements
 
 
 
4

 
 
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
 
 
(Dollars in thousands)
 
   
Six Months Ended June 30,
 
   
2012
   
2011
 
OPERATING ACTIVITIES:
           
Net income
  $ 3,313     $ 2,851  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    480       514  
Depreciation and amortization of premises and equipment
    532       589  
Net amortization of premiums and discounts on securities and mortgage loans
    1,937       1,701  
Net amortization of premiums on modified debt
    214       -  
Share-based compensation expense
    968       980  
Amortization of ESOP expense
    327       380  
Excess tax benefits from equity incentive plan
    (12 )     (23 )
Excess tax benefits in connection with stock option exercises
    (203 )     (18 )
Net gains on sales of securities
    (1,681 )     (77 )
Other-than-temporary impairment losses on securities
    -       40  
Deferred income tax benefit
    (102 )     (105 )
Income from bank-owned life insurance
    (741 )     (753 )
Changes in assets and liabilities:
               
Accrued interest receivable
    (661 )     104  
Other assets
    (322 )     890  
Other liabilities
    755       234  
Net cash provided by operating activities
    4,804       7,307  
INVESTING ACTIVITIES:
               
Securities, available for sale:
               
Purchases
    (255,877 )     (95,529 )
Proceeds from sales
    189,949       90,249  
Proceeds from calls, maturities, and principal collections
    44,884       38,927  
Purchase of residential mortgages
    (45,690 )     (38,581 )
Loan originations and principal payments, net
    15,588       2,974  
Purchase of Federal Home Loan Bank of Boston stock
    (1,802 )     (156 )
Proceeds from redemption of Federal Home Loan Bank of Boston stock
    195       -  
Purchases of premises and equipment
    (713 )     (253 )
Purchase of bank-owned life insurance
    (2,600 )     (2,000 )
Surrender of bank-owned life insurance
    1,585       -  
Net cash used in investing activities
    (54,481 )     (4,369 )
FINANCING ACTIVITIES:
               
Net increase in deposits
    14,593       10,756  
Net change in short-term borrowings
    5,589       (13,768 )
Repayment of long-term debt
    (48,231 )     (2,000 )
Proceeds from long-term debt
    90,667       14,065  
Cash dividends paid
    (5,581 )     (7,209 )
Common stock repurchased
    (9,024 )     (2,747 )
Issuance of common stock in connection with stock option exercises
    854       151  
Excess tax benefits in connection with equity incentive plan
    12       23  
Excess tax benefits in connection with stock option exercises
    203       18  
Net cash provided by (used in) financing activities
    49,082       (711 )
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS:
    (595 )     2,227  
Beginning of period
    21,105       11,611  
End of period
  $ 20,510     $ 13,838  
                 
Supplemental cashflow information:
               
Interest paid
    6,408       7,568  
Taxes paid
    1,604       76  
Settlement of common stock repurchased
    352       -  
See the accompanying notes to consolidated financial statements
 
 
 
5

 
 
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES



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”).

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

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

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

Estimates – The preparation of 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 June 30, 2012, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented.  The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results of operations for the year ending December 31, 2012.  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, 2011, included in our Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report”).

Reclassifications - Certain amounts in the prior period financial statements have been reclassified to conform to the current year presentation.
 
 
6

 
 
2.  EARNINGS PER SHARE

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

Earnings per common share for the three and six months ended June 30, 2012 and 2011 have been computed based on the following:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In thousands, except per share data)
 
                         
Net income applicable to common stock
  $ 974     $ 1,565     $ 3,313     $ 2,851  
                                 
Average number of common shares outstanding
    26,414       28,012       26,578       28,081  
Less: Average unallocated ESOP Shares
    (1,265 )     (1,349 )     (1,275 )     (1,360 )
         Average ungranted equity incentive plan shares
    (7 )     (23 )     (7 )     (29 )
                                 
Average number of common shares outstanding used to calculate basic earnings per common share
    25,142       26,640       25,296       26,692  
                                 
Effect of dilutive stock options
    16       116       34       123  
                                 
Average number of common shares outstanding used to calculate diluted earnings per common share
    25,158       26,756       25,330       26,815  
                                 
Basic earnings per share
  $ 0.04     $ 0.06     $ 0.13     $ 0.11  
                                 
Diluted earnings per share
  $ 0.04     $ 0.06     $ 0.13     $ 0.11  
                                 
Antidilutive shares (1)
    1,670       1,654       1,662       1,615  
____________________
(1)
Shares outstanding but not included in the computation of earnings per share because they were anti-dilutive, meaning the exercise price of such options exceeded the market value of the Company’s common stock.
 
 
7

 
 
3.  COMPREHENSIVE INCOME/LOSS

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

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

   
June 30,
2012
   
December 31,
2011
 
   
(In thousands)
 
             
Net unrealized gain on securities available for sale
  $ 17,182     $ 16,225  
Tax effect
    (5,898 )     (5,573 )
Net-of-tax amount
    11,284       10,652  
                 
Noncredit portion of other-than-temporary impairment losses on
   available-for-sale securities
  $ -     $ (501 )
Tax effect
    -       170  
Net-of-tax amount
    -       (331 )
                 
Unrecognized transition asset pertaining to defined benefit plans
    27       32  
Unrecognized deferred loss pertaining to defined benefit plans
    (3,891 )     (3,978 )
Net adjustments pertaining to defined benefit plans
    (3,864 )     (3,946 )
Tax effect
    1,314       1,341  
         Net-of-tax amount
    (2,550 )     (2,605 )
                 
    $ 8,734     $ 7,716  

The following table presents changes in accumulated other comprehensive income (loss) for the six months ended June 30, 2012 and 2011 by component:

   
Securities
   
Defined
Benefit
Plans
   
Accumulated
Other
Comprehensive
Income (Loss)
 
   
(In thousands)
 
Balance at December 31, 2011
  $ 10,321     $ (2,605 )   $ 7,716  
Current-period other comprehensive income
    963       55       1,018  
Balance at June 30, 2012
  $ 11,284     $ (2,550 )   $ 8,734  
                         
Balance at December 31, 2010
  $ (3,774 )   $ (1,742 )   $ (5,516 )
Current-period other comprehensive income
    5,313       38       5,351  
Balance at June 30, 2011
  $ 1,539     $ (1,704 )   $ (165 )
 
 
8

 
 
4.      SECURITIES

Securities available for sale are summarized as follows:
   
June 30, 2012
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In thousands)
 
                         
Government-sponsored mortgage-
   backed securities
  $ 362,911     $ 8,295     $ (166 )   $ 371,040  
U.S. government guaranteed  mortgage-
   backed securities
    132,933       5,566       -       138,499  
Corporate bonds
    47,169       165       (260 )     47,074  
State and municipal bonds
    39,492       2,262       -       41,754  
Government-sponsored enterprise
   obligations
    32,916       1,216       (1 )     34,131  
Mutual funds
    5,899       133       (60 )     5,972  
Common and preferred stock
    1,343       32       -       1,375  
                                 
Total
  $ 622,663     $ 17,669     $ (487 )   $ 639,845  
                                 
                                 
                                 
   
December 31, 2011
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In thousands)
 
                                 
Government-sponsored mortgage-
   backed securities
  $ 377,447     $ 8,802     $ (22 )   $ 386,227  
U.S. government guaranteed  mortgage-
   backed securities
    148,938       3,937       -       152,875  
Private-label residential mortgage-
   backed securities
    2,068       -       (501 )     1,567  
State and municipal bonds
    43,393       2,481       -       45,874  
Government-sponsored enterprise
  obligations
    23,761       991       -       24,752  
Mutual funds
    5,813       99       (58 )     5,854  
Common and preferred stock
    393       6       (11 )     388  
                                 
Total
  $ 601,813     $ 16,316     $ (592 )   $ 617,537  
                                 
U.S. government guaranteed mortgage-backed securities are collateralized by both residential and multifamily loans.
                                 
Our repurchase agreements and advances from the Federal Home Loan Bank (“FHLB”) of Boston are collateralized by government-sponsored enterprise obligations and certain mortgage-backed securities (see Note 7).
 
 
9

 
 
The amortized cost and fair value of securities available for sale at June 30, 2012, by maturity, are shown below.  Actual maturities may differ from contractual maturities because certain issuers have the right to call or repay obligations.

   
June 30, 2012
 
   
Amortized
Cost
   
Fair Value
 
   
(In thousands)
 
Mortgage-backed securities:
           
     Due after five years through ten years
  $ 30,020     $ 30,931  
     Due after ten years
    465,824       478,608  
Total
  $ 495,844     $ 509,539  

Debt securities:
           
     Due after one year through five years
  $ 38,854     $ 40,110  
     Due after five years through ten years
    60,282       61,620  
     Due after ten years
    20,441       21,229  
Total
  $ 119,577     $ 122,959  

Gross realized gains and losses on sales of securities for the three months ended June 30, 2012 and 2011 are as follows:

   
Three Months Ended
   
Six Months Ended
 
   
June 31,
   
June 31,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In thousands)
 
                         
Gross gains realized
  $ 594     $ 317     $ 2,734     $ 880  
Gross losses realized
    (497 )     (271 )     (1,053 )     (803 )
Net gain (loss) realized
  $ 97     $ 46     $ 1,681     $ 77  

Proceeds from the sale of securities available for sale amounted to $189.9 million and $90.2 million for the six months ended June 30, 2012 and 2011, respectively.

The tax provision applicable to net realized gains and losses was $32,000 and $582,000 for the three and six months ended June 30, 2012, respectively.  The tax provision applicable to net realized gains and losses was $16,000 and $28,000 for the three and six months ended June 30, 2011, respectively.
 
 
10

 
 
Information pertaining to securities with gross unrealized losses at June 30, 2012, and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
 
   
June 30, 2012
 
   
Less Than Twelve Months
   
Over Twelve Months
 
   
Gross
Unrealized
Losses
   
Fair Value
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In thousands)
 
                         
Government-sponsored mortgage-backed securities
  $ (166 )   $ 35,375     $ -     $ -  
Corporate bonds
    (260 )     24,038       -       -  
Government-sponsored enterprise obligations
    (1 )     2,499       -       -  
Mutual funds
    -       -       (60 )     1,660  
                                 
Total
  $ (427 )   $ 61,912     $ (60 )   $ 1,660  

   
December 31, 2011
 
   
Less Than Twelve Months
   
Over Twelve Months
 
   
Gross
Unrealized
Losses
   
Fair Value
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In thousands)
 
                         
Government-sponsored  mortgage-backed securities
  $ (22 )   $ 14,652     $ -     $ -  
Private-label residential mortgage-backed securities
    -       -       (501 )     1,567  
Mutual funds
    -       -       (58 )     1,626  
Common and preferred stock
    -       -       (11 )     28  
                                 
Total
  $ (22 )   $ 14,652     $ (570 )   $ 3,221  
 
 
11

 
 
At June 30, 2012, six government-sponsored mortgage-backed securities had gross unrealized losses with aggregate depreciation of 0.5% from our amortized cost basis existing for less than 12 months.  At June 30, 2012, one government-sponsored enterprise obligation had gross unrealized loss with aggregate depreciation of 0.04% from our amortized cost basis existing for less than 12 months.  At June 30, 2012, eight corporate bonds had gross unrealized loss of 1.1% from our amortized cost basis existing for less than 12 months.  These unrealized 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 June 30, 2012, one mutual fund had a gross unrealized loss with depreciation of 3.5% from our cost basis existing for greater than 12 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.

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:
 
   
Six Months Ended June 30,
 
   
2012
   
2011
 
   
(In thousands)
 
             
Beginning balance
  $ 442     $ 425  
Reductions for securities sold during the period
    (442 )     (85 )
Additional credit losses for which other-than-temporary
    impairment charge was previously recognized
    -       40  
Ending balance
  $ -     $ 380  
 
 
12

 
 
5.          LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consisted of the following amounts:
 
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(In thousands)
 
             
Commercial real estate
  $ 234,259     $ 232,491  
Residential real estate
    186,995       155,994  
Home equity
    35,768       36,464  
Commercial and industrial
    123,659       125,739  
Consumer
    2,133       2,451  
    Total loans
    582,814       553,139  
Unearned premiums and deferred loan fees and costs, net
    1,192       1,017  
Allowance for loan losses
    (8,065 )     (7,764 )
    $ 575,941     $ 546,392  

During the six months ended June 30, 2012 and 2011, we purchased residential real estate loans aggregating $45.7 million and $38.6 million, respectively.

We have transferred a portion of our originated commercial real estate loans to participating lenders.  The amounts transferred have been accounted for as sales and are therefore not included in our accompanying 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 both June 30, 2012 and December 31, 2011, we serviced loans for participants aggregating $5.7 million.

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

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

The allowance for loan losses is evaluated on a regular basis by management.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  The allowance consists of general and allocated components, as further described below.
 
 
13

 
 
General component

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

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

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

Commercial real estate – Loans in this segment are primarily income-producing investment properties 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 secured or unsecured and repayment is dependent on the credit quality of the individual borrower.

Allocated component

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

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
 
 
14

 
 
An analysis of changes in the allowance for loan losses by segment for the periods ended June 30, 2012 and 2011 is as follows:
 
   
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and
Industrial
   
Consumer
   
Total
 
   
(In thousands)
 
Balance at December 31, 2011
  $ 1,531     $ 3,504     $ 2,712     $ 17     $ 7,764  
Provision
    104       20       95       1       220  
Charge-offs
    -       (195 )     -       (4 )     (199 )
Recoveries
    1       14       1       2       18  
Balance at March 31, 2012
  $ 1,636     $ 3,343     $ 2,808     $ 16     $ 7,803  
Provision
    201       137       (77 )     (1 )     260  
Charge-offs
    (40 )     -       -       (7 )     (47 )
Recoveries
    3       37       3       6       49  
Balance at June 30, 2012
  $ 1,800     $ 3,517     $ 2,734     $ 14     $ 8,065  
                                         
Balance at December 31, 2010
  $ 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 at March 31, 2011
  $ 1,005     $ 3,177     $ 2,797     $ 20     $ 6,999  
Provision
    184       (93 )     84       -       175  
Charge-offs
    (2 )     (175 )     (77 )     (3 )     (257 )
Recoveries
    3       132       20       1       156  
Balance at June 30, 2011
  $ 1,190     $ 3,041     $ 2,824     $ 18     $ 7,073  
 
 
15

 
 
Further information pertaining to the allowance for loan losses by segment at June 30, 2012, and December 31, 2011 follows:
 
   
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and
Industrial
   
Consumer
   
Total
 
   
(In thousands)
 
June 30, 2012
                             
Allowance for loan losses:
                             
Individually evaluated for loss potential
  $ 110     $ 470     $ 97     $ -     $ 677  
Collectively evaluated for loss potential
    1,690       3,047       2,637       14       7,388  
Total
  $ 1,800     $ 3,517     $ 2,734