10-Q 1 a50622694.htm WESTFIELD FINANCIAL, INC. 10-Q a50622694.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 March 31, 2013

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 April 26, 2013, the registrant had 21,837,060 shares of common stock, $.01 par value, issued and outstanding.
 
 
 

 
 
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We may, from time to time, make written or oral “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements contained in our filings with the Securities and Exchange Commission (the “SEC”), our reports to shareholders and in other communications by us. This Quarterly Report on Form 10-Q contains “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “would,” “plan,” “estimate,” “potential” and other similar expressions.  Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operation and business that are subject to various factors which could cause actual results to differ materially from these estimates.  These factors include, but are not limited to:
 
 
changes in the interest rate environment that reduce margins;
 
 
changes in the regulatory environment;
 
 
the highly competitive industry and market area in which we operate;
 
 
general economic conditions, either nationally or regionally, resulting in, among other things, a deterioration in credit quality;
 
 
changes in business conditions and inflation;
 
 
changes in credit market conditions;
 
 
changes in the securities markets which affect investment management revenues;
 
 
increases in Federal Deposit Insurance Corporation deposit insurance premiums and assessments could adversely affect our financial condition;
 
 
changes in technology used in the banking business;
 
 
the soundness of other financial services institutions which may adversely affect our credit risk;
 
 
certain of our intangible assets may become impaired in the future;
 
 
our controls and procedures may fail or be circumvented;
 
 
new line of business or new products and services, which may subject us to additional risks;
 
 
changes in key management personnel which may adversely impact our operations;
 
 
the effect on our operations of recent legislative and regulatory initiatives that were or may be enacted in response to the ongoing financial crisis;
 
 
severe weather, natural disasters, acts of war or terrorism and other external events which could significantly impact our business; and
 
 
other factors detailed from time to time in our Securities and Exchange Commission (“SEC”) filings.
 
Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
 
 
i

 
 

 
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
(Dollars in thousands)
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
ASSETS
           
CASH AND DUE FROM BANKS
  $ 11,597     $ 9,847  
FEDERAL FUNDS SOLD
    138       459  
INTEREST-BEARING  DEPOSITS AND OTHER SHORT-TERM INVESTMENTS
    7,448       1,455  
CASH AND CASH EQUIVALENTS
    19,183       11,761  
                 
SECURITIES AVAILABLE FOR SALE – AT FAIR VALUE
    616,155       621,507  
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT COST
    15,242       14,269  
LOANS - Net of allowance for loan losses of $7,565 and $7,794 at March 31, 2013 and  December 31,
        2012, respectively
    588,699       587,124  
PREMISES AND EQUIPMENT, Net
    11,127       11,077  
ACCRUED INTEREST RECEIVABLE
    4,477       4,602  
BANK-OWNED LIFE INSURANCE
    46,607       46,222  
DEFERRED TAX ASSET, Net
    2,130       123  
OTHER REAL ESTATE OWNED
    -       964  
OTHER ASSETS
    3,233       3,813  
TOTAL ASSETS
  $ 1,306,853     $ 1,301,462  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
LIABILITIES:
               
DEPOSITS :
               
Noninterest-bearing
  $ 115,322     $ 114,388  
Interest-bearing
    656,874       639,025  
Total deposits
    772,196       753,413  
                 
SHORT-TERM BORROWINGS
    55,827       69,934  
LONG-TERM DEBT
    289,600       278,861  
SECURITIES PENDING SETTLEMENT
    288       -  
OTHER LIABILITIES
    9,962       10,067  
TOTAL LIABILITIES
    1,127,873       1,112,275  
                 
SHAREHOLDERS' EQUITY:
               
Preferred stock - $.01 par value, 5,000,000 shares authorized, none outstanding at  March 31, 2013 and
        December 31, 2012
    -       -  
Common stock - $.01 par value, 75,000,000 shares authorized, 21,902,642 shares issued and outstanding
        at March 31, 2013; 22,843,722 shares issued and outstanding at December 31, 2012
    219       228  
Additional paid-in capital
    137,677       144,718  
Unearned compensation - ESOP
    (8,416 )     (8,553 )
Unearned compensation - Equity Incentive Plan
    (240 )     (265 )
Retained earnings
    42,877       42,364  
Accumulated other comprehensive income
    6,863       10,695  
Total shareholders' equity
    178,980       189,187  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 1,306,853     $ 1,301,462  
See accompanying notes to unaudited consolidated financial statements.
 
 
 
1

 
 
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
(Dollars in thousands, except share and per share data)
 
   
Three Months
 
   
Ended March 31,
 
   
2013
   
2012
 
INTEREST AND DIVIDEND INCOME:
           
Residential and commercial real estate loans
  $ 4,995     $ 5,039  
Commercial and industrial loans
    1,241       1,302  
Consumer loans
    35       40  
Debt securities, taxable
    3,716       3,844  
Debt securities, tax-exempt
    304       423  
Equity securities
    37       45  
Other investments - at cost
    19       22  
Federal funds sold, interest-bearing deposits and other short-term investments
    2       -  
Total interest and dividend income
    10,349       10,715  
INTEREST EXPENSE:
               
Deposits
    1,387       1,637  
Long-term debt
    1,258       1,631  
Short-term borrowings
    34       30  
Total interest expense
    2,679       3,298  
Net interest and dividend income
    7,670       7,417  
(CREDIT) PROVISION FOR LOAN LOSSES
    (235 )     220  
Net interest and dividend income after (credit) provision for loan losses
    7,905       7,197  
                 
NONINTEREST INCOME (LOSS):
               
Service charges and fees
    572       509  
Income from bank-owned life insurance
    385       384  
Gain on bank-owned life insurance death benefit
    -       75  
Loss on prepayment of borrowings
    (1,426 )     -  
Gain on sales of securities, net
    1,427       1,585  
Total noninterest income
    958       2,553  
NONINTEREST EXPENSE:
               
Salaries and employees benefits
    3,808       4,277  
Occupancy
    705       705  
Computer operations
    526       527  
Professional fees
    510       437  
OREO expense
    22       17  
FDIC insurance assessment
    161       143  
Other
    783       738  
Total noninterest expense
    6,515       6,844  
INCOME BEFORE INCOME TAXES
    2,348       2,906  
INCOME TAX PROVISION
    566       567  
NET INCOME
  $ 1,782     $ 2,339  
                 
EARNINGS PER COMMON SHARE:
               
Basic earnings per share
  $ 0.08     $ 0.09  
Weighted average shares outstanding
    21,102,021       25,449,759  
Diluted earnings per share
  $ 0.08     $ 0.09  
Weighted average diluted shares outstanding
    21,102,075       25,502,311  
See accompanying notes to unaudited consolidated financial statements.
 
 
 
2

 
 
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
 
 
(Dollars in thousands)
 
   
Three Months Ended March 31,
 
   
2013
   
2012
 
             
Net income
  $ 1,782     $ 2,339  
                 
Other comprehensive (loss) income:
               
Unrealized losses on securities:
               
Unrealized holding losses on available for sale securities
    (4,418 )     (1,443 )
Reclassification adjustment for gains realized in income
    (1,427 )     (1,585 )
Net unrealized losses
    (5,845 )     (3,028 )
Tax effect
    2,007       1,051  
Net-of-tax amount
    (3,838 )     (1,977 )
                 
Defined benefit pension plans:
               
Reclassification adjustments:
               
Actuarial loss
    12       39  
Transition asset
    (3 )     (2 )
Net adjustments pertaining to defined benefit plans
    9       37  
Tax effect
    (3 )     (12 )
Net-of-tax amount
    6       25  
                 
Other comprehensive loss
    (3,832 )     (1,952 )
                 
Comprehensive (loss) income
  $ (2,050 )   $ 387  
See accompanying notes to unaudited consolidated financial statements.
 
 
 
3

 
 
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
 
 
THREE MONTHS ENDED MARCH 31, 2013 AND 2012
 
(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 AT DECEMBER 31, 2011
    26,918,250     $ 269     $ 173,615     $ (9,119 )   $ (1,228 )   $ 47,735     $ 7,716     $ 218,988  
Net income
    -       -       -       -       -       2,339       -       2,339  
Other comprehensive loss
    -       -       -       -       -       -       (1,952 )     (1,952 )
Common stock held by ESOP committed to be released (84,261 shares)
    -       -       25       141       -       -       -       166  
Share-based compensation - stock options
    -       -       196       -       -       -       -       196  
Share-based compensation - equity incentive plan
    -       -       -       -       288       -       -       288  
Excess tax benefits from equity incentive plan
    -       -       3       -       -       -       -       3  
Common stock repurchased
    (493,226 )     (5 )     (3,956 )     -       -       -       -       (3,961 )
Issuance of common stock in connection with stock option exercises
    177,077       2       1,454       -       -       (678 )     -       778  
Excess tax benefits in connection with stock option exercises
    -       -       195       -       -       -       -       195  
Cash dividends declared ($0.06 per share)
    -       -       -       -       -       (1,529 )     -       (1,529 )
BALANCE AT MARCH, 31 2012
    26,602,101     $ 266     $ 171,532     $ (8,978 )   $ (940 )   $ 47,867     $ 5,764     $ 215,511  
                                                                 
BALANCE AT DECEMBER 31, 2012
    22,843,722     $ 228     $ 144,718     $ (8,553 )   $ (265 )   $ 42,364     $ 10,695     $ 189,187  
Net income
    -       -       -       -       -       1,782       -       1,782  
Other comprehensive loss
    -       -       -       -       -       -       (3,832 )     (3,832 )
Common stock held by ESOP committed to be released (81,803 shares)
    -       -       14       137       -       -       -       151  
Share-based compensation - stock options
    -       -       13       -       -       -       -       13  
Share-based compensation - equity incentive plan
    -       -       -       -       25       -       -       25  
Excess tax benefit from equity incentive plan
    -       -       1       -       -       -       -       1  
Common stock repurchased
    (941,080 )     (9 )     (7,069 )     -       -       -       -       (7,078 )
Cash dividends declared ($0.06 per share)
    -       -       -       -       -       (1,269 )     -       (1,269 )
BALANCE AT MARCH, 31 2013
    21,902,642     $ 219     $ 137,677     $ (8,416 )   $ (240 )   $ 42,877     $ 6,863     $ 178,980  
See accompanying notes to unaudited consolidated financial statements.
 
 
 
4

 
 
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
 
 
(Dollars in thousands)
 
   
Three Months Ended March 31,
 
   
2013
   
2012
 
OPERATING ACTIVITIES:
           
Net income
  $ 1,782     $ 2,339  
Adjustments to reconcile net income to net cash provided by operating activities:
               
(Credit) provision for loan losses
    (235 )     220  
Depreciation and amortization of premises and equipment
    260       266  
Net amortization of premiums and discounts on securities and mortgage loans
    1,128       952  
Net amortization of premiums on modified debt
    155       53  
Share-based compensation expense
    38       484  
Amortization of ESOP expense
    151       166  
Excess tax benefits from equity incentive plan
    (1 )     (3 )
Excess tax benefits in connection with stock option exercises
    -       (195 )
Net gains on sales of securities
    (1,427 )     (1,585 )
Loss on sale of other real estate owned
    6       -  
Loss on prepayment of borrowings
    1,426       -  
Deferred income tax benefit
    (3 )     (52 )
Income from bank-owned life insurance
    (385 )     (384 )
Gain on bank-owned life insurance death benefit
    -       (75 )
Changes in assets and liabilities:
               
Accrued interest receivable
    125       (124 )
Other assets
    580       (132 )
Other liabilities
    (95 )     544  
Net cash provided by operating activities
    3,505       2,474  
INVESTING ACTIVITIES:
               
Securities, available for sale:
               
Purchases
    (106,632 )     (152,055 )
Proceeds from sales
    77,163       100,285  
Proceeds from calls, maturities, and principal collections
    29,298       21,015  
Purchase of residential mortgages
    (13,089 )     (14,696 )
Loan originations and principal payments, net
    11,726       10,272  
Purchase of Federal Home Loan Bank of Boston stock
    (1,004 )     -  
Proceeds from redemption of Federal Home Loan Bank of Boston stock
    31       195  
Proceeds from sale of other real estate owned
    958       -  
Purchases of premises and equipment
    (310 )     (351 )
Net cash used in investing activities
    (1,859 )     (35,335 )
FINANCING ACTIVITIES:
               
Net increase in deposits
    18,783       15,672  
Net change in short-term borrowings
    (14,107 )     17,252  
Repayment of long-term debt
    (22,876 )     (46,731 )
Proceeds from long-term debt
    32,034       47,633  
Cash dividends paid
    (1,269 )     (1,529 )
Common stock repurchased
    (6,790 )     (4,313 )
Issuance of common stock in connection with stock option exercises
    -       778  
Excess tax benefits in connection with equity incentive plan
    1       3  
Excess tax benefits in connection with stock option exercises
    -       195  
Net cash provided by financing activities
    5,776       28,960  
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS:
    7,422       (3,901 )
Beginning of period
    11,761       21,105  
End of period
  $ 19,183     $ 17,204  
                 
Supplemental cashflow information:
               
Interest paid
  $ 2,695     $ 3,217  
Taxes paid
    53       70  
Net cash due (paid) to broker for common stock repurchased
    288       (352 )
See the accompanying notes to consolidated financial statements.
 
 
 
5

 
 
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES


MARCH 31, 2013

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

Principles of Consolidation – The 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 March 31, 2013, 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, 2013 are not necessarily indicative of the results of operations for the year ending December 31, 2013.  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, 2012, included in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Annual Report”).

Reclassifications - Amounts in the prior period financial statements are reclassified when necessary 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 months ended March 31, 2013 and 2012 have been computed based on the following:

   
Three Months Ended
 
   
March 31,
 
   
2013
   
2012
 
   
(In thousands, except per share
data)
 
             
Net income applicable to common stock
  $ 1,782     $ 2,339  
                 
Average number of common shares issued
    22,311       26,743  
Less: Average unallocated ESOP Shares
    (1,202 )     (1,286 )
Less: Average ungranted equity incentive plan shares
    (7 )     (7 )
                 
Average number of common shares outstanding used
               
to calculate basic earnings per common share
    21,102       25,450  
                 
Effect of dilutive stock options
    -       52  
                 
Average number of common shares outstanding used
               
to calculate diluted earnings per common share
    21,102       25,502  
                 
Basic earnings per share
  $ 0.08     $ 0.09  
                 
Diluted earnings per share
  $ 0.08     $ 0.09  
                 
Antidilutive shares (1)
    1,661       1,641  
 
___________________
(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 included in shareholders’ equity are as follows:

   
March 31, 2013
   
December 31, 2012
 
   
(In thousands)
 
             
Net unrealized gain on securities available for sale
  $ 14,343     $ 20,188  
Tax effect
    (4,928 )     (6,935 )
Net-of-tax amount
    9,415       13,253  
                 
Unrecognized transition asset pertaining to defined benefit plans
    18       21  
Unrecognized deferred loss pertaining to defined benefit plans
    (3,885 )     (3,897 )
Net adjustments pertaining to defined benefit plans
    (3,867 )     (3,876 )
Tax effect
    1,315       1,318  
         Net-of-tax amount
    (2,552 )     (2,558 )
                 
Accumulated other comprehensive income
  $ 6,863     $ 10,695  

The following table presents changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2013 and 2012 by component:
 
   
Securities
   
Defined
Benefit
Plans(1)
   
Accumulated
Other
Comprehensive
Income
 
   
(In thousands)
 
Balance at December 31, 2012
  $ 13,253     $ (2,558 )   $ 10,695  
Change in unrealized gain/loss
    (4,418 )     9       (4,409 )
Tax effect on change in unrealized gain/loss
    1,068       (3 )     1,065  
Reclassification adjustment for gains realized in income
    (1,427 )     -       (1,427 )
Tax effect on gain/loss realized in income
    939       -       939  
Net current-period other comprehensive (loss) income
    (3,838 )     6       (3,832 )
Balance at March 31, 2013
  $ 9,415     $ (2,552 )   $ 6,863  
 
­­­________________________
(1)
Amounts have been recognized through the Consolidated Statements of Net Income as a component of salaries and employee benefits expense.
 
   
Securities
   
Defined
Benefit
Plans
   
Accumulated
Other Comprehensive
Income
 
   
(In thousands)
 
Balance at December 31, 2011
  $ 10,321     $ (2,605 )   $ 7,716  
Net current-period other comprehensive (loss) income
    (1,977 )     25       (1,952 )
Balance at March 31, 2012
  $ 8,344     $ (2,580 )   $ 5,764  
 
 
8

 
 
4.      SECURITIES

Securities available for sale are summarized as follows:
 
   
March 31, 2013
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In thousands)
 
Government sponsored mortgage-
    backed securities
  $ 336,625     $ 5,669     $ (1,521 )   $ 340,773  
U.S. government guaranteed  mortgage-
    backed securities
    122,366       5,822       (34 )     128,154  
Corporate bonds
    52,132       1,530       (4 )     53,658  
State and municipal bonds
    31,705       1,739       (17 )     33,427  
Government sponsored enterprise obligations
    51,640       1,020       (113 )     52,547  
Mutual funds
    6,035       88       (79 )     6,044  
Common and preferred stock
    1,309       243       -       1,552  
                                 
Total
  $ 601,812     $ 16,111     $ (1,768 )   $ 616,155  
 
   
December 31, 2012
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In thousands)
 
                         
Government sponsored mortgage-
    backed securities
  $ 318,951     $ 9,703     $ (631 )   $ 328,023  
U.S. government guaranteed  mortgage-
    backed securities
    124,650       6,085       -       130,735  
Corporate bonds
    50,782       1,618       (63 )     52,337  
State and municipal bonds
    38,788       2,067       (9 )     40,846  
Government sponsored enterprise obligations
    60,840       1,257       (37 )     62,060  
Mutual funds
    5,998       117       (69 )     6,046  
Common and preferred stock
    1,310       150       -       1,460  
                                 
Total
  $ 601,319     $ 20,997     $ (809 )   $ 621,507  
 
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 of Boston (“FHLBB”) 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 March 31, 2013, 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, 2013
 
   
Amortized Cost
   
Fair Value
 
   
(In thousands)
 
Mortgage-backed securities:
           
     Due after five years through ten years
  $ 76,233     $ 77,121  
     Due after ten years
    382,758       391,806  
Total
  $ 458,991     $ 468,927  
                 
Debt securities:
               
     Due in one year or less
  $ 1,871     $ 1,905  
     Due after one year through five years
    47,087       49,045  
     Due after five years through ten years
    71,404       72,932  
     Due after ten years
    15,115       15,750  
Total
  $ 135,477     $ 139,632  

Gross realized gains and losses on sales of securities for the three months ended March 31, 2013 and 2012 are as follows:

   
Three Months Ended
 
   
March 31,
 
   
2013
   
2012
 
   
(In thousands)
 
             
Gross gains realized
  $ 1,442     $ 2,141  
Gross losses realized
    (15 )     (556 )
Net gain realized
  $ 1,427     $ 1,585  
 
Proceeds from the sale of securities available for sale amounted to $77.2 million and $100.3 million for the three months ended March 31, 2013 and 2012, respectively.

The tax provision applicable to net realized gains and losses was $488,000 and $550,000 for the three months ended March 31, 2013 and 2012, respectively.
 
 
10

 
 
Information pertaining to securities with gross unrealized losses at March 31, 2013, and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

   
March 31, 2013
 
   
Less Than Twelve Months
   
Over Twelve Months
 
   
Gross
Unrealized
Losses
   
Fair Value
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In thousands)
 
                         
Government sponsored mortgage-backed securities
  $ (1,521 )   $ 144,445     $ -     $ -  
    U.S. government guaranteed  mortgage-backed
        securities
    (34 )     7,286       -       -  
Corporate bonds
    (4 )     1,618       -       -  
State and municipal bonds
    (17 )     1,167       -       -  
Government sponsored enterprise obligations
    (113 )     19,845       -       -  
Mutual funds
    (1 )     1,038       (78 )     1,688  
                                 
Total
  $ (1,690 )   $ 175,399     $ (78 )   $ 1,688  

   
December 31, 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
  $ (631 )   $ 49,081     $ -     $ -  
Corporate bonds
    (63 )     4,330       -       -  
State and municipal bonds
    (9 )     1,178       -       -  
Government sponsored enterprise obligations
    (37 )     17,918       -       -  
Mutual funds
    -       -       (69 )     1,684  
                                 
Total
  $ (740 )   $ 72,507     $ (69 )   $ 1,684  

 
11

 
 
At March 31, 2013, 35 mortgage-backed securities had gross unrealized losses with aggregate depreciation of 1.0% from our amortized cost basis existing for less than 12 months.  At March 31, 2013, six government-sponsored enterprise obligations had gross unrealized loss with aggregate depreciation of 0.6% from our amortized cost basis existing for less than 12 months.  At March 31, 2013, two corporate bonds had gross unrealized loss of 0.2% from our amortized cost basis existing for less than 12 months.  At March 31, 2013, one municipal bond had gross unrealized loss of 1.4% 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 March 31, 2013, one mutual fund had gross unrealized loss with aggregate depreciation of 0.1% from our amortized cost basis existing for less than 12 months.  At March 31, 2013, one mutual fund had a gross unrealized loss with depreciation of 4.4% 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 that 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:
 
   
Three Months
Ended March 31,
 
   
2012
 
   
(In thousands)
 
       
Beginning balance
  $ 442  
Reductions for securities sold during the period
    (442 )
Ending balance
  $ -  
 
 
12

 
 
5.          LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consisted of the following amounts:
 
March 31,
   
December 31,
 
   
2013
   
2012
 
   
(In thousands)
 
Commercial real estate
  $ 243,481     $ 245,764  
Residential real estate:
               
Residential
    190,537       185,345  
Home equity
    33,348       34,352  
Commercial and industrial
    126,233       126,052  
Consumer
    1,770       2,431  
    Total Loans
    595,369       593,944  
Unearned premiums and deferred loan fees and costs, net
    895       974  
Allowance for loan losses
    (7,565 )     (7,794 )
    $ 588,699     $ 587,124  

During the three months ended March 31, 2013 and 2012, we purchased residential real estate loans aggregating $13.1 million and $14.7 million, respectively.

We have transferred a portion of our originated commercial real estate loans to participating lenders.  The amounts transferred have been accounted for as sales and are therefore not included in our accompanying unaudited consolidated balance sheets.  We share ratably with our participating lenders in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan.  We continue to service the loans on behalf of the participating lenders and, as such, collect cash payments from the borrowers, remit payments (net of servicing fees) to participating lenders and disburse required escrow funds to relevant parties.  At March 31, 2013 and December 31, 2012, we serviced loans for participants aggregating $8.5 million and $7.8 million, respectively.

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

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

The allowance for loan losses is evaluated on a regular basis by management.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  The allowance consists of general, allocated, and unallocated components, as further described below.
 
 
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 and owner occupied commercial properties throughout New England.  The underlying cash flows generated by the properties or operations 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 financial information annually and continually monitors the cash flows of these loans.

Commercial and industrial loans – Loans in this segment are made to businesses and are generally secured by assets of the business.  Repayment is expected from the cash flows of the business.  A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

Consumer loans – Loans in this segment are secured or unsecured and repayment is dependent on the credit quality of the individual borrower.

Allocated component

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

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

 
14

 
 
Unallocated component

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

An analysis of changes in the allowance for loan losses by segment for the periods ended March 31, 2013 and 2012 is as follows:

   
Commercial
Real Estate
   
Residential
Real Estate
   
Commercial
and
Industrial
   
Consumer
   
Unallocated
   
Total
 
   
(In thousands)
 
Balance at December 31, 2012
  $ 3,406     $ 1,746     $ 2,167     $ 13     $ 462     $ 7,794  
Provision (Credit)
    (251 )     33       (23 )     2       4       (235 )
Charge-offs
    (20 )     (57 )     (72 )     (5 )     -       (154 )
Recoveries
    154       -       5       1       -       160  
Balance at March 31, 2013
  $ 3,289     $ 1,722     $ 2,077     $ 11     $ 466     $ 7,565  
                                                 
Balance at December 31, 2011
  $ 3,504     $ 1,531     $ 2,712     $ 17     $ -     $ 7,764  
Provision (Credit)
    20       104       95       1       -       220  
Charge-offs
    (195 )     -       -       (4 )     -       (199 )
Recoveries
    14       1       1       2       -       18  
Balance at March 31, 2012
  $ 3,343     $ 1,636     $ 2,808     $ 16     $ -     $ 7,803  
 
 
15

 
 
Further information pertaining to the allowance for loan losses by segment at March 31, 2013, and December 31, 2012 follows:
 
   
Commercial
Real Estate
   
Residential
Real
Estate
   
Commercial
and
Industrial
   
Consumer
   
Unallocated
   
Total
 
   
(In thousands)
 
March 31, 2013
                                   
                                     
Amount of allowance for loans individually evaluated and
                                               
deemed impaired
  $ 279     $ -     $ 29     $ -     $ -     $ 308  
Amount of allowance for loans collectively or individually                                                 
evaluated for impairment and not deemed impaired
    3,010       1,722       2,048       11       466       7,257  
Total allowance for loan losses
  $ 3,289     $ 1,722     $ 2,077     $ 11     $ 466     $ 7,565  
                                                 
Loans individually evaluated and deemed impaired
  $ 15,286     $ 244     $ 1,381     $ -     $ -     $ 16,911  
Loans collectively evaluated and not deemed impaired
    228,195       223,641       124,852       1,770       -       578,458  
Total loans
  $ 243,481     $ 223,885     $ 126,233     $ 1,770     $ -     $ 595,369  
                                                 
December 31, 2012
                                               
                                                 
Amount of allowance for loans individually evaluated and                                                
deemed impaired
  $ 377     $ 57     $ 104     $ -     $ -     $ 538  
Amount of allowance for loans collectively or individually                                                  
evaluated for impairment and not deemed impaired
    3,029       1,689       2,063       13       462       7,256  
Total allowance for loan losses
  $ 3,406     $ 1,746     $ 2,167     $ 13     $ 462     $ 7,794  
                                                 
Loans individually evaluated and deemed impaired
  $ 15,398     $ 302     $ 1,379     $ -     $ -     $ 17,079  
Loans collectively evaluated and not deemed impaired
    230,366       219,395       124,673       2,431       -       576,865  
Total loans
  $ 245,764     $ 219,697     $ 126,052     $ 2,431     $ -     $ 593,944  

The following is a summary of past due and non-accrual loans by class at March 31, 2013, and December 31, 2012:

   
30 – 59 Days
Past Due
   
60 – 89 Days
Past Due
   
Greater than
90 Days Past
Due
   
Total Past
Due
   
Past Due 90
Days or More
and Still
Accruing
   
Loans on
Non-Accrual
 
   
(In thousands)
 
March 31, 2013
                                   
Commercial real estate
  $ 663     $ 328     $ 808     $ 1,799     $ -     $ 1,527  
Residential real estate:
                                               
Residential
    125       19       473       617       -       937  
Home equity
    220       98       -       318       -       97  
Commercial and industrial
    345       104       140       589       -       396  
Consumer
    4       13       4       21       -       3  
Total
  $ 1,357     $ 562     $ 1,425     $ 3,344     $ -     $ 2,960  
                                                 
December 31, 2012
                                               
Commercial real estate
  $ 94     $ 331     $ 818     $ 1,243     $ -     $ 1,558  
Residential real estate:
                                               
Residential
    347       70       735       1,152       -       939  
Home equity
    139       42       -       181       -       103  
Commercial and industrial
    138       -       178       316       -       409  
Consumer
    -       1       -       1       -       -  
Total
  $ 718     $ 444     $ 1,731     $ 2,893     $ -     $ 3,009  
 
 
16

 
 
The following is a summary of impaired loans by class at March 31, 2013, and December 31, 2012:

                     
Three Months Ended
 
   
At March 31, 2013
   
March 31, 2013
 
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
   
(In thousands)
 
Impaired loans without a valuation allowance:
                         
Commercial real estate
  $ 1,526     $ 1,781     $ -     $ 1,542     $ -  
Residential real estate
    244       309       -       273