Edgar Filing: United Financial Bancorp, Inc.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2013

¨	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 000-52947

United Financial Bancorp, Inc.

(Exact name of registrant as specified in its charter)


Maryland		74-3242562
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

95 Elm Street, West Springfield, Massachusetts		01089
(Address of principal executive offices)		Zip Code

Registrant’s telephone number, including area code: (413) 787-1700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x 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 x 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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $0.01 par value

19,650,099 shares outstanding as of July 31, 2013

INDEX


		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Condition (unaudited) June 30, 2013 and December 31, 2012		1

	Consolidated Statements of Net Income (unaudited) Three Months and Six Months Ended June 30, 2013 and 2012		2

	Consolidated Statements of Comprehensive Income (unaudited) Three Months and Six Months Ended June 30, 2013 and 2012		3

	Consolidated Statements of Stockholders’ Equity (unaudited) Six Months Ended June 30, 2013 and 2012		4

	Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 30, 2013 and 2012		5

	Notes to Unaudited Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		41

Item 4.	Controls and Procedures		41

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		41

Item 1A.	Risk Factors		41

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

Item 3.	Defaults Upon Senior Securities		42

Item 4.	Mine Safety Disclosures		42

Item 5.	Other Information		42

Item 6.	Exhibits		43

SIGNATURES			44

PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

(Dollars in thousands, except per share amounts)


	June 30, 2013			December 31, 2012
ASSETS

Cash and due from banks	$	26,194		$	28,972
Interest-bearing deposits		26,836			1,707

Total cash and cash equivalents		53,030			30,679

Securities available for sale, at fair value		272,902			294,322
Securities held to maturity, at amortized cost (fair value of $87,621 at June 30, 2013 and $85,674 at December 31, 2012)		86,640			82,986
Loans held for sale		—			632
Loans, net of allowance for loan losses of $13,070 at June 30, 2013 and $12,089 at December 31, 2012		1,850,120			1,807,401
Other real estate owned		1,787			2,578
Accrued interest receivable		6,802			6,790
Deferred tax asset, net		22,924			20,178
Stock in the Federal Home Loan Bank of Boston		17,334			18,554
Banking premises and equipment, net		24,698			25,064
Bank-owned life insurance		53,722			52,876
Goodwill		40,663			39,852
Other assets		17,728			20,391

TOTAL ASSETS	$	2,448,350		$	2,402,303


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Interest-bearing	$	1,596,977		$	1,540,873
Non-interest-bearing		328,058			307,302

Total deposits		1,925,035			1,848,175
Short-term borrowings		70,524			79,229
Long-term debt		124,187			133,969
Subordinated debentures		5,908			9,630
Escrow funds held for borrowers		4,294			4,315
Capitalized lease obligations		4,626			4,711
Accrued expenses and other liabilities		13,457			15,085

Total liabilities		2,148,031			2,095,114


Stockholders’ equity:
Preferred stock, par value $0.01 per share, authorized 50,000,000 shares; none issued		—			—
Common stock, par value $0.01 per share, authorized 100,000,000 shares; 24,266,428 shares issued at June 30, 2013 and December 31, 2012		243			243
Paid-in capital		273,624			272,822
Retained earnings		91,733			87,153
Treasury stock, at cost (4,618,496 shares at June 30, 2013 and 4,114,310 shares at December 31, 2012)		(65,924	)		(58,430	)
Accumulated other comprehensive income, net of taxes		643			5,401

Total stockholders’ equity		300,319			307,189

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,448,350		$	2,402,303

See notes to unaudited consolidated financial statements

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF NET INCOME (unaudited)

(Dollars in thousands, except per share amounts)


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013			2012
Interest and dividend income:
Loans	$	21,277	$	14,181	$	43,333		$	28,256
Investments		2,248		2,767		4,561			5,622
Other interest-earning assets		24		51		42			92

Total interest and dividend income		23,549		16,999		47,936			33,970
Interest expense:
Deposits		2,851		2,598		5,654			5,351
Short-term borrowings		16		13		49			33
Long-term debt		983		1,094		2,041			2,192

Total interest expense		3,850		3,705		7,744			7,576

Net interest income before provision for loan losses		19,699		13,294		40,192			26,394

Provision for loan losses		892		750		1,842			1,400


Net interest income after provision for loan losses		18,807		12,544		38,350			24,994


Non-interest income:
Fee income on depositors’ accounts		1,597		1,529		3,096			2,937
Wealth management income		247		289		458			516
Income from bank-owned life insurance		510		436		1,023			876
Net gain on sales of loans		107		162		213			270
Net loss on sales of securities		—		—		(50	)		—
Other income		554		154		1,073			544

Total non-interest income		3,015		2,570		5,813			5,143


Non-interest expense:
Salaries and benefits		8,145		6,286		16,624			12,728
Occupancy expenses		1,327		870		2,955			1,744
Marketing expenses		693		501		1,231			941
Data processing expenses		1,608		1,011		2,815			2,031
Professional fees		649		404		1,327			910
Acquisition related expenses		123		592		281			592
Branch closing expenses		477		—		987			—
FDIC insurance assessments		525		267		823			536
Tax credit funds		365		—		540			243
Other expenses		2,357		1,537		4,536			3,018

Total non-interest expense		16,269		11,468		32,119			22,743


Income before income taxes		5,553		3,646		12,044			7,394

Income tax expense		1,504		1,064		3,294			1,963


Net income	$	4,049	$	2,582	$	8,750		$	5,431


Earnings per share:
Basic	$	0.21	$	0.18	$	0.44		$	0.37
Diluted	$	0.20	$	0.17	$	0.43		$	0.36

Weighted average shares outstanding:
Basic		19,717,204		14,542,642		19,875,596			14,606,624
Diluted		19,978,699		14,787,690		20,133,120			14,887,361

Dividends paid per share	$	0.11	$	0.09	$	0.21		$	0.18

See notes to unaudited consolidated financial statements.

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(In thousands)

The components of comprehensive income and related tax effects are as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net Income	$	4,049		$	2,582		$	8,750		$	5,431


Other comprehensive (loss) income:
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains on availible-for-sale securities		(6,306	)		374			(7,745	)		39
Reclassification adjustment for losses realized in income		—			—			50			—

Net change in unrealized gains		(6,306	)		374			(7,695	)		39
Tax effect		2,400			(148	)		2,937			(16	)


Net of tax amount		(3,906	)		226			(4,758	)		23


Comprehensive income	$	143		$	2,808		$	3,992		$	5,454

See notes to unaudited consolidated financial statements.

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

FOR THE SIX MONTHS ENDED JUNE 30, 2013 and 2012

(Dollars in thousands, except per share amounts)


	Common Shares Outstanding			Common Stock		Paid-In Capital			Retained Earnings			Unearned Compensation			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
Balances at December 31, 2011		15,712,897		$	187	$	182,433		$	89,019		$	(10,047	)	$	(40,983	)	$	6,752		$	227,361
Net income		—			—		—			5,431			—			—			—			5,431
Other comprehensive income		—			—		—			—			—			—			23			23
Cash dividends paid ($0.18 per share)		—			—		—			(2,628	)		—			—			—			(2,628	)
Treasury stock purchases		(199,400	)		—		—			—			—			(3,166	)		—			(3,166	)
Shares repurchased in connection with restricted stock forfeited for tax purposes		(10,834	)		—		—			—			—			(148	)		—			(148	)
Restricted shares forfeited		(10,000	)		—		137			—			—			(137	)		—			—
Excess tax benefit on stock compensation plans		—			—		29			—			—			—			—			29
Cancellation of shares for tax withholdings on options exercised		—			—		(88	)		—			—			—			—			(88	)
Reissuance of treasury shares in connection with stock options exercised		15,361			—		(156	)		(10	)		—			211			—			45
Reissuance of treasury shares in connection with restricted stock grants		12,500			—		(196	)		24			—			172			—			—
Stock-based compensation		—			—		712			—			—			—			—			712
ESOP shares committed to be released		—			—		206			—			352			—			—			558

Balances at June 30, 2012		15,520,524		$	187	$	183,077		$	91,836		$	(9,695	)	$	(44,051	)	$	6,775		$	228,129

Balances at December 31, 2012		20,152,118		$	243	$	272,822		$	87,153		$	—		$	(58,430	)	$	5,401		$	307,189
Net income		—			—		—			8,750			—			—			—			8,750
Other comprehensive loss		—			—		—			—			—			—			(4,758	)		(4,758	)
Cash dividends paid ($0.21 per share)		—			—		—			(4,170	)		—			—			—			(4,170	)
Treasury stock purchases		(488,651	)		—		—			—			—			(7,269	)		—			(7,269	)
Shares repurchased in connection with restricted stock forfeited for tax purposes		(12,101	)		—		—			—			—			(172	)		—			(172	)
Restricted shares forfeited		(5,000	)		—		75			—			—			(75	)		—			—
Excess tax benefit on stock compensation plans		—			—		35			—			—			—			—			35
Cancellation of shares for tax withholdings on options exercised		—			—		(18	)		—			—			—			—			(18	)
Reissuance of treasury shares in connection with stock options exercised		1,566			—		(22	)		—			—			22			—			—
Stock-based compensation		—			—		732			—			—			—			—			732

Balances at June 30, 2013		19,647,932		$	243	$	273,624		$	91,733		$	—		$	(65,924	)	$	643		$	300,319

See notes to unaudited consolidated financial statements.

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

FOR THE SIX MONTHS ENDED JUNE 30, 2013 and 2012

(Dollars in thousands)


	2013			2012
Cash flows from operating activities:
Net income	$	8,750		$	5,431
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,842			1,400
ESOP expense		—			558
Stock-based compensation		732			712
Excess tax benefits on stock compensation plan		(35	)		(29	)
Amortization of premiums and discounts		1,476			935
Depreciation and amortization		1,683			808
Amortization of intangible assets		386			46
Net (loss) gain on sale and writedown of other real estate owned		(4	)		69
Net loss on sale of available for sale securities		50			—
Loans originated for sale		(7,498	)		(10,396	)
Proceeds from sales of loans held for sale		8,343			9,884
Net gain on sale of loans		(213	)		(270	)
Deferred tax benefit		(2,746	)		(215	)
Net increase in cash surrender value of bank-owned life insurance		(846	)		(781	)
(Increase) decrease in accrued interest receivable		(12	)		243
Decrease (increase) in other assets		4,403			(1,324	)
(Decrease) increase in accrued expenses and other liabilities		(1,477	)		275

Net cash provided by operating activities		14,834			7,346

Cash flows from investing activities:
Purchases of securities available for sale		(33,468	)		(51,636	)
Proceeds from sales of securities available for sale		2,563			—
Proceeds from maturities, calls and principal repayments of securities available for sale		43,565			29,292
Purchases of securities held to maturity		(16,927	)		(125	)
Proceeds from maturities, calls and principal repayments of securities held to maturity		12,812			15,965
Redemption of Federal Home Loan Bank of Boston stock		1,220			911
Proceeds from sales of other real estate owned		2,146			1,096
Net loan originations, purchases and principal repayments		(45,912	)		(42,856	)
Purchases of property and equipment		(1,306	)		(2,001	)

Net cash used in investing activities		(35,307	)		(49,354	)

(Continued)

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

FOR THE SIX MONTHS ENDED JUNE 30, 2013 and 2012 (Concluded)

(Dollars in thousands)


	2013			2012
Cash flows from financing activities:
Net increase in deposits	$	76,860		$	30,638
Net change in short-term borrowings		(8,705	)		512
Proceeds from issuance of long-term debt		6,542			1,693
Repayment of long-term debt, net of amortization of discount		(16,046	)		(3,479	)
Redemption of trust preferred securities		(4,000	)		—
Net decrease in escrow funds held for borrowers		(21	)		(299	)
Payments on capitalized lease obligations		(212	)		(212	)
Excess tax benefits on stock compensation plan		35			29
Cancellation of shares for tax withholdings on options exercised		(18	)		(88	)
Reissuance of treasury shares in connection with stock options exercised		—			45
Treasury stock purchases		(7,441	)		(3,314	)
Cash dividends paid		(4,170	)		(2,628	)

Net cash provided by financing activities		42,824			22,897

Increase (decrease) in cash and cash equivalents		22,351			(19,111	)
Cash and cash equivalents at beginning of period		30,679			61,518

Cash and cash equivalents at end of period	$	53,030		$	42,407


Supplemental Disclosure of Cash Flow Information:
Cash paid during the period:
Interest on deposits, borrowings and other interest bearing liabilities	$	9,751		$	7,864
Income taxes – net		6,220			5,267
Non-cash items:
Transfer of loans to other real estate owned		1,351			1,508

See notes to unaudited consolidated financial statements.

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

Dollars in Thousands (except per share amounts)

NOTE A – BASIS OF PRESENTATION

The consolidated financial statements include the accounts of United Financial Bancorp, Inc. (“United Financial”), its wholly-owned subsidiary, United Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, UCB Securities, Inc. and UCB Securities, Inc. II, which are engaged in buying, selling and holding investment securities, and UB Properties, LLC and VB REO, LLC, which were formed to hold real estate assets acquired through foreclosure. All significant intercompany accounts and transactions have been eliminated in consolidation. These entities are collectively referred to herein as the “Company”.

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with general practices within the banking industry. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary for the fair presentation of the Company’s financial condition as of June 30, 2013 and the results of operations for the three and six months ended June 30, 2013 and 2012. The interim results of operations presented herein are not necessarily indicative of the results to be expected for the entire year or any other period. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 15, 2013.

NOTE B – RECENT ACCOUNTING PRONOUNCEMENTS

In October 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2012-04, Technical Amendments and Corrections to SEC Sections 2011-08. This ASU is intended to clarify the FASB Accounting Standards Codification (“Codification”), correct unintended application of guidance and includes amendments identifying when the use of fair value should be linked to the definition of fair value in Topic 820, Fair Value Measurement. Amendments to the Codification without transition guidance are effective upon issuance for both public and non-public entities. For public entities, amendments subject to transition guidance will be effective for fiscal periods beginning after December 15, 2012. This ASU was adopted in the first quarter of 2013 and did not have a material impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This Update requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line item of net income. This ASU is effective for public entities for reporting periods beginning after December 31, 2012. The Company adopted this ASU in the first quarter of 2013 and there was no impact on the Company’s consolidated financial results as the amendments relate only to disclosures in the consolidated financial statements.

NOTE C – CRITICAL ACCOUNTING POLICIES

The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Management believes that the following policies would be considered critical under the SEC’s definition:

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in adjustments to the amount of the recorded allowance for loan losses.

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, prior loss experience, current economic conditions, trends in non-performing, classified and impaired loans, charge-offs and delinquency rates, the adequacy of the underlying collateral, the size and composition of the loan portfolio, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.

A loan is considered impaired when, based on current information and events, it is probable that the Company 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.

The Company periodically may agree to modify the contractual terms of loans. A loan is classified as a troubled debt restructuring (“TDR”) if the Company grants a concession to a borrower that is experiencing financial difficulties. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest, extending the maturity date or a partial forgiveness of debt. A TDR loan is returned to accrual status after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six months. All TDRs are classified as impaired.

The allowance consists of a specific, general, and unallocated component, as further described below.

Specific component. The specific component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for the commercial segments (commercial and industrial, commercial real estate and construction) 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. A specific allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of the loan. Groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual loans in the consumer segments (residential real estate, home equity and consumer loans) for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

The Company has established a Business Banking unit within its Commercial Lending Department. The portfolio is made up of both commercial and industrial loans less than $250,000 and commercial real estate loans less than $500,000 which are managed by exception. This grouping of loans is considered a homogenous pool of loans and collectively evaluated for impairment. Accordingly, the Company does not separately identify individual loans within this unit for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

General component. The general component is based on historical loss experience adjusted for qualitative factors stratified by each of the loan segments: commercial and industrial, commercial real estate, construction, business banking commercial and industrial, business banking commercial real estate, residential real estate, home equity and consumer. Management uses an average of historical losses based on a time frame appropriate to capture relevant loss data for each loan class. This historical loss factor for each loan class is adjusted for the following qualitative factors: the levels/trends in delinquencies, classified and non-accruals; levels and trends in charge-offs and recoveries; 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; experience, ability and depth of lending management and staff; national and local economic trends and industry conditions; and effects of changes in credit concentrations. This analysis establishes factors that are applied to each loan segment to determine the amount of the general component of the allowance for loan losses. In the second quarter of 2012, management made refinements to its allowance for loan loss methodology to incorporate the establishment of the Business Banking unit into the Company’s approach. This refinement did not have a material effect on the loan loss provision or the total allowance for loan loss.

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.

Reserve for unfunded commitments. The Company also maintains a reserve for unfunded credit commitments to provide for the risk of loss inherent in these arrangements. The reserve is determined using a methodology similar to the analysis of the allowance for loan losses, taking into consideration probabilities of future funding requirements. The reserve for unfunded commitments is included in other liabilities and was $213 and $89 at June 30, 2013 and 2012, respectively.

Evaluation of the Investment Portfolio for Other-Than-Temporary Impairment. The evaluation of the investment portfolio for other-than-temporary impairment is also a critical accounting estimate. On a quarterly basis, management reviews securities with a decline in fair value below the amortized cost of the investment to determine whether the decline in fair value is temporary or other-than-temporary. Declines in the fair value of marketable equity securities below their cost that are deemed to be other-than-temporary based on the severity and duration of the impairment are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses for securities, impairment is required to be recognized if (1) we intend to sell the security; (2) it is “more likely than not” that we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired securities that management intends to sell, or more likely than not will be required to sell, the full amount of the other-than-temporary impairment is recognized through earnings. For all other impaired securities, credit-related other-than-temporary impairment is recognized through earnings, while non-credit related other-than-temporary impairment is recognized in other comprehensive income, net of applicable taxes.

Income Taxes. The Company uses the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company’s asset and liabilities. The realization of the net deferred tax asset generally depends upon future levels of taxable income and the existence of prior years’ taxable income, to which “carry back” refund claims could be made. A valuation allowance is maintained for deferred tax assets that management estimates are more likely than not to be unrealizable based on available evidence at the time the estimate is made. Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. In determining the valuation allowance, the Company uses historical and forecasted future operating results, based upon approved business plans, including a review of the eligible carryforward periods, tax planning opportunities and other relevant considerations. These underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance. Should actual factors and conditions differ materially from those considered by management, the actual realization of the net deferred tax asset could differ materially from the amounts recorded in the financial statements. If the Company is not able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset valuation allowance would be charged to income tax expense in the period such determination was made.

Goodwill and Identifiable Intangible Assets. Goodwill and identifiable intangible assets are recorded as a result of business acquisitions and combinations. These assets are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value of these assets may not be recoverable. If the carrying amount exceeds fair value, an impairment charge is recorded to income. The fair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows and market multiples analyses. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material.

Valuation of Financial Instruments. The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a non-recurring basis, or to establish a loss allowance or write-down based on the fair value of impaired assets. Further, the notes to the financial statements include information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings. Additionally, for financial instruments not recorded at fair value, the notes to the financial statements disclose the estimate of their fair value. Due to the judgments and uncertainties involved in the estimation process, the estimates could result in materially different results under different assumptions and conditions.

NOTE D – EARNINGS PER SHARE

Earnings per share (“EPS”) has been computed by dividing net income by weighted average shares outstanding before any dilution and excluding the weighted average number of unallocated shares held by the Bank’s employee stock ownership plan (the “ESOP”). Diluted earnings per share has been calculated by dividing net income by weighted average shares outstanding after giving effect to the potential dilution that could occur if potential common shares were converted into common stock using the treasury stock method.

The calculation of basic and diluted earnings per common share for the periods indicated is presented below.


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Net income	$	4,049	$	2,582	$	8,750	$	5,431

Weighted average common shares applicable to basic EPS (1)		19,717,204		14,542,642		19,875,596		14,606,624
Effect of dilutive potential common shares (2) (3)		261,495		245,048		257,524		280,737

Weighted average common shares applicable to diluted EPS		19,978,699		14,787,690		20,133,120		14,887,361

Earnings per share:
Basic	$	0.21	$	0.18	$	0.44	$	0.37
Diluted	$	0.20	$	0.17	$	0.43	$	0.36

(1)	Share-based compensation awards that qualify as participating securities (entiled to receive non-forfeitable dividends) are included in basic EPS using the two-class method.

(2)

Options to purchase 217,892 and 187,300 shares for the three months ended June 30, 2013 and 2012, respectively, and 217,892 and 167,036 shares for the six months ended June 30, 2013 and 2012, respectively, were outstanding but not included in the computation of earnings per share because they were anti-dilutive.

(3)	Includes incremental shares related to dilutive stock options.

NOTE E – ACCUMULATED OTHER COMPREHENSIVE INCOME

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 statement of condition, such items are components of accumulated other comprehensive income.

The components of accumulated other comprehensive income and related tax effects are as follows:


	June 30, 2013			December 31, 2012
Net unrealized gain on securities available for sale	$	2,452		$	10,147
Tax effect		910			3,847

Net-of-tax amount		1,542			6,300


Pension liability		(1,432	)		(1,432	)
Tax effect		(533	)		(533	)

Net-of-tax amount		(899	)		(899	)


Accumulated other comprehensive income	$	643		$	5,401

NOTE F – INVESTMENT SECURITIES

The amortized cost and fair value of securities classified as available for sale and held to maturity are as follows:


	Amortized		Unrealized
	Cost		Gains		Losses			Fair Value
Securities Available for Sale
June 30, 2013:
Debt Securities:
Government-sponsored enterprises	$	2,099	$	—	$	(95	)	$	2,004
Government-sponsored and government-guaranteed mortgage-backed securities		239,925		5,599		(2,770	)		242,754
Private label mortgage-backed securities		50		1		—			51
Municipal bonds		27,085		317		(1,159	)		26,243
Corporate bonds		1,291		559		—			1,850

Total	$	270,450	$	6,476	$	(4,024	)	$	272,902


December 31, 2012:
Debt Securities:
Government-sponsored enterprises	$	3,234	$	2	$	(3	)	$	3,233
Government-sponsored and government-guaranteed mortgage-backed securities		248,370		9,836		(444	)		257,762
Private label mortgage-backed securities		2,568		54		(56	)		2,566
Municipal bonds		28,713		595		(481	)		28,827
Corporate bonds		1,290		644		—			1,934

Total	$	284,175	$	11,131	$	(984	)	$	294,322


	Amortized		Unrealized
	Cost		Gains		Losses			Fair Value
Securities Held to Maturity
June 30, 2013:
Government-sponsored and government-guaranteed mortgage-backed securities	$	61,926	$	1,118	$	(364	)	$	62,680
Private label mortgage-backed securities		65		1		—			66
Industrial revenue bonds		18,556		—		—			18,556
State of Israel bonds		175		—		—			175
Municipal bonds		5,918		226		—			6,144

Total	$	86,640	$	1,345	$	(364	)	$	87,621


December 31, 2012:
Government-sponsored and government-guaranteed mortgage-backed securities	$	57,986	$	2,214	$	—		$	60,200
Private label mortgage-backed securities		79		2		—			81
Industrial revenue bonds		18,847		—		—			18,847
State of Israel bonds		150		—		—			150
Municipal bonds		5,924		472		—			6,396

Total	$	82,986	$	2,688	$	—		$	85,674

The scheduled maturities of debt securities available for sale and held to maturity at June 30, 2013 are shown below. Actual maturities will differ from contractual maturities because issuers generally have the right to call or prepay obligations with or without call or prepayment penalties.


	At June 30, 2013
	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	1	$	1	$	125	$	125
Due from one year to five years		1,805		1,813		810		850
Due from five years to ten years		15,704		15,431		1,537		1,600
Due after ten years		12,965		12,852		22,177		22,300

		30,475		30,097		24,649		24,875
Mortgage-backed securities		239,975		242,805		61,991		62,746

	$	270,450	$	272,902	$	86,640	$	87,621

Maturities are based on the final contractual payment dates, and do not reflect the impact of potential prepayments or early redemptions.

The Company’s portfolio of mortgage-backed securities, which represent interests in pools of residential mortgage loans, consists primarily of securities issued by the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), and the Government National Mortgage Association (Ginnie Mae), all of which are federal government owned or sponsored enterprises.

Gross unrealized losses and fair values at June 30, 2013 and December 31, 2012 aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position follow:


	Less than 12 months					12 months or longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Number of Securities		Fair Value		Unrealized Losses
At June 30, 2013:
Securities Available for Sale
Debt Securities:
Government-sponsored enterprises	$	2,004	$	(95	)	$	—	$	—		5	$	2,004	$	(95	)
Government-sponsored and government-guaranteed mortgage-backed securities		124,929		(2,770	)		—		—		126		124,929		(2,770	)
Municipal bonds		19,624		(1,159	)		—		—		47		19,624		(1,159	)

Total	$	146,557	$	(4,024	)	$	—	$	—		178	$	146,557	$	(4,024	)


Securities Held to Maturity
Government-sponsored and government-guaranteed mortgage-backed securities	$	16,442	$	(364	)	$	—	$	—		3	$	16,442	$	(364	)

Total	$	16,442	$	(364	)	$	—	$	—		3	$	16,442	$	(364	)


	Less than 12 months					12 months or longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Number of Securities		Fair Value		Unrealized Losses
At December 31, 2012:
Securities Available for Sale
Debt Securities:
Government-sponsored enterprises	$	1,998	$	(3	)	$	—	$	—		5	$	1,998	$	(3	)
Government-sponsored and government-guaranteed mortgage-backed securities		41,537		(444	)		—		—		81		41,537		(444	)
Private label mortgage-backed securities		1,671		(56	)		—		—		9		1,671		(56	)
Municipal bonds		16,293		(481	)		—		—		38		16,293		(481	)

Total	$	61,499	$	(984	)	$	—	$	—		133	$	61,499	$	(984	)

There were no securities classified as held to maturity in an unrealized loss position as of December 31, 2012.

Management evaluated the securities in the preceding tables and has determined that no declines in the fair value of the Company’s securities portfolio are deemed to be other-than-temporary as of June 30, 2013. In its evaluation, management considered the types of securities, including if the securities were U.S. Government issued, the credit rating on the securities, credit outlook, payment status and financial condition, the length of time the security has been in a loss position, the size of the loss position, intent and ability to hold the securities to expected recovery of value and other meaningful information. The Company does not intend to sell any impaired debt securities and is unlikely to be required to sell any impaired debt security before its maturity or market price recovery.

NOTE G – LOANS

The components of the loan portfolio were as follows at June 30, 2013 and December 31, 2012:


	June 30, 2013			December 31, 2012
Commercial:
Commercial and industrial	$	304,301		$	306,192
Commercial real estate		843,802			814,692
Construction		66,804			52,778
Consumer:
Residential real estate		448,376			441,874
Home equity		177,762			179,039
Consumer		19,448			21,501

Total loans		1,860,493			1,816,076
Net deferred loan costs and fees		2,697			3,414
Allowance for loan losses		(13,070	)		(12,089	)

Loans, net	$	1,850,120		$	1,807,401

The Company transferred a portion of its originated commercial real estate and commercial and industrial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying consolidated statements of condition. The Company and participating lenders share ratably in any losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments (net of servicing fees) to participating lenders and disburses required escrow funds to relevant parties. At June 30, 2013 and December 31, 2012, the Company was servicing loans for participants aggregating $60.1 million and $57.7 million, respectively.

As of June 30, 2013 and December 31, 2012, the Company had two loans that were transferred to participants, which did not meet the requirements to be considered a participating interest. These transferred loans are reported as secured borrowings in the amount of $2.7 million and $2.4 million at June 30, 2013 and December 31, 2012, respectively, and are reported in long-term debt on the consolidated statement of condition.

The Company established a Business Banking unit within its Commercial Lending Department during the second quarter of 2012. The portfolio is made up of both commercial and industrial and commercial real estate loans. As a result, the Company has reallocated charge-offs, recoveries, and allowance for loan losses accordingly. A summary of the activity pertaining to the allowance for loan losses for the three and six months ended June 30, 2013 and 2012 is as follows:


									Business Banking
	Commercial and Industrial			Commercial Real Estate			Construction		Commercial and Industrial			Commercial Real Estate			Residential			Home Equity		Consumer			Unallocated		Total
Three Months Ended
June 30, 2013:
Beginning balance	$	3,168		$	5,725		$	1,006	$	672		$	647		$	583		$	369	$	68		$	458	$	12,696
Charge-offs		(125	)		(52	)		—		(96	)		(122	)		(70	)		—		(57	)		—		(522	)
Recoveries		2			—			—		—			—			1			1		—			—		4
Provision		329			158			28		51			70			162			17		69			8		892

Ending balance	$	3,374		$	5,831		$	1,034	$	627		$	595		$	676		$	387	$	80		$	466	$	13,070


										Business Banking
	Commercial and Industrial			Commercial Real Estate			Construction			Commercial and Industrial			Banking Commercial Real Estate			Residential			Home Equity			Consumer			Unallocated		Total
Three Months Ended
June 30, 2012:
Beginning balance	$	3,420		$	5,610		$	805		$	—		$	—		$	844		$	410		$	106		$	130	$	11,325
Charge-offs		(110	)		(57	)		(51	)		(56	)		(40	)		—			(30	)		—			—		(344	)
Recoveries		9			10			—			1			—			—			—			—			—		20
Provision (credit)		(491	)		(331	)		(12	)		782			723			(154	)		(1	)		(9	)		243		750

Ending balance	$	2,828		$	5,232		$	742		$	727		$	683		$	690		$	379		$	97		$	373	$	11,751


									Business Banking
	Commercial and Industrial			Commercial Real Estate			Construction		Commercial and Industrial			Commercial Real Estate			Residential			Home Equity			Consumer			Unallocated			Total
Six Months Ended
June 30, 2013:
Beginning balance	$	2,680		$	5,497		$	710	$	788		$	706		$	602		$	383		$	83		$	640		$	12,089
Charge-offs		(432	)		(52	)		—		(123	)		(122	)		(75	)		(26	)		(65	)		—			(895	)
Recoveries		17			—			—		—			—			1			1			15			—			34
Provision (credit)		1,109			386			324		(38	)		11			148			29			47			(174	)		1,842

Ending balance	$	3,374		$	5,831		$	1,034	$	627		$	595		$	676		$	387		$	80		$	466		$	13,070


										Business Banking
	Commercial and Industrial			Commercial Real Estate			Construction			Commercial and Industrial			Banking Commercial Real Estate			Residential			Home Equity			Consumer			Unallocated		Total
Six Months Ended
June 30, 2012:
Beginning balance	$	3,446		$	5,572		$	860		$	—		$	—		$	666		$	474		$	114		$	—	$	11,132
Charge-offs		(206	)		(273	)		(127	)		(88	)		(40	)		(88	)		(30	)		(5	)		—		(857	)
Recoveries		39			35			1			1			—			—			—			—			—		76
Provision (credit)		(451	)		(102	)		8			814			723			112			(65	)		(12	)		373		1,400

Ending balance	$	2,828		$	5,232		$	742		$	727		$	683		$	690		$	379		$	97		$	373	$	11,751

Further information pertaining to the allowance for loan losses at June 30, 2013 and December 31, 2012 is as follows:


							Business Banking
	Commercial and Industrial		Commercial Real Estate		Construction		Commercial and Industrial		Commercial Real Estate		Residential		Home Equity		Consumer		Unallocated		Total
At June 30, 2013:
Amount of allowance for loan losses for loans deemed to be impaired and individually evaluated for impairment	$	359	$	100	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	459

Amount of allowance for loan losses for loans not deemed to be impaired and collectively evaluated for impairment	$	3,015	$	5,731	$	1,034	$	627	$	595	$	676	$	387	$	80	$	466	$	12,611

Total loans	$	273,442	$	763,544	$	66,804	$	30,859	$	80,258	$	448,376	$	177,762	$	19,448	$	—	$	1,860,493

Loans deemed to be impaired and individually evaluated for impairment	$	5,704	$	3,754	$	192	$	—	$	—	$	—	$	—	$	—	$	—	$	9,650

Loans not deemed to be impaired and collectively evaluated for impairment	$	267,325	$	757,015	$	66,612	$	30,859	$	80,258	$	448,376	$	177,762	$	19,448	$	—	$	1,847,655

Loans acquired with deteriorated credit quality and deemed to be impaired	$	413	$	2,775	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	3,188


							Business Banking
	Commercial and Industrial		Commercial Real Estate		Construction		Commercial and Industrial		Commercial Real Estate		Residential		Home Equity		Consumer		Unallocated		Total
At December 31, 2012:
Amount of allowance for loan losses for loans deemed to be impaired and individually evaluated for impairment	$	32	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	32

Amount of allowance for loan losses for loans not deemed to be impaired and collectively evaluated for impairment	$	2,648	$	5,497	$	710	$	788	$	706	$	602	$	383	$	83	$	640	$	12,057

Total loans	$	272,789	$	732,272	$	52,778	$	33,403	$	82,420	$	441,874	$	179,039	$	21,501	$	—	$	1,816,076

Loans deemed to be impaired and individually evaluated for impairment	$	5,943	$	3,882	$	591	$	—	$	—	$	—	$	—	$	—	$	—	$	10,416

Loans not deemed to be impaired and collectively evaluated for impairment	$	266,091	$	722,470	$	51,838	$	33,403	$	82,420	$	441,874	$	179,039	$	21,501	$	—	$	1,798,636

Loans acquired with deteriorated credit quality and deemed to be impaired	$	755	$	5,920	$	349	$	—	$	—	$	—	$	—	$	—	$	—	$	7,024

The following is a summary of past due loans at June 30, 2013 and December 31, 2012:


	30-59 Days Past Due		60-89 Days Past Due		90 Days and Over Past Due		Total Past Due		Current		Total Financing Receivables		Recorded Investments > 90 Days and Accruing
At June 30, 2013:
Commercial:
Commercial and industrial	$	579	$	1,873	$	3,401	$	5,853	$	298,448	$	304,301	$	—
Commercial real estate		4,721		2,586		5,084		12,391		831,411		843,802		—
Construction		276		96		—		372		66,432		66,804		—
Consumer:
Residential real estate		3,313		519		3,927		7,759		440,617		448,376		—
Home equity		1,257		74		223		1,554		176,208		177,762		—
Consumer		186		88		169		443		19,005		19,448		—

Total	$	10,332	$	5,236	$	12,804	$	28,372	$	1,832,121	$	1,860,493	$	—


At December 31, 2012:
Commercial:
Commercial and industrial	$	3,974	$	1,155	$	4,442	$	9,571	$	296,621	$	306,192	$	—
Commercial real estate		6,326		1,136		5,351		12,813		801,879		814,692		—
Construction		2,853		—		—		2,853		49,925		52,778		—
Consumer:
Residential real estate		11,760		2,450		2,615		16,825		425,049		441,874		—
Home equity		1,044		161		137		1,342		177,697		179,039		—
Consumer		329		35		120		484		21,017		21,501		—

Total	$	26,286	$	4,937	$	12,665	$	43,888	$	1,772,188	$	1,816,076	$	—

The following is a summary of impaired loans at June 30, 2013 and December 31, 2012:


	At June 30, 2013						At December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial and industrial	$	4,762	$	5,095			$	6,666	$	6,997
Commercial real estate		6,029		6,607				9,802		10,736
Construction		192		192				940		940

Total	$	10,983	$	11,894			$	17,408	$	18,673

With an allowance recorded:
Commercial and industrial		1,355		1,355	$	359		32		32	$	32
Commercial real estate		500		500		100		—		—		—

Total	$	1,855	$	1,855	$	459	$	32	$	32	$	32

Total impaired loans	$	12,838	$	13,749	$	459	$	17,440	$	18,705	$	32

The following is a summary of information pertaining to impaired loans:


	Three Months Ended June 30, 2013						Three Months Ended June 30, 2012
	Average Recorded Investment on Impaired Loans		Interest Income				Average Recorded Investment on Impaired Loans		Interest Income
	Average Recorded Investment on Impaired Loans		Recognized		Recognized on a Cash Basis		Average Recorded Investment on Impaired Loans		Recognized		Recognized on a Cash Basis
Commercial:
Commercial and industrial	$	6,178	$	35	$	19	$	4,456	$	1	$	—
Commercial real estate		6,543		15		—		3,877		10		2
Construction		592		2		—		781		6		—
Consumer:
Residential real estate		—		13		13		—		2		2

Total	$	13,313	$	65	$	32	$	9,114	$	19	$	4


	Six Months Ended June 30, 2013						Six Months Ended June 30, 2012
	Average Recorded Investment on Impaired Loans		Interest Income				Average Recorded Investment on Impaired Loans		Interest Income
	Average Recorded Investment on Impaired Loans		Recognized		Recognized on a Cash Basis		Average Recorded Investment on Impaired Loans		Recognized		Recognized on a Cash Basis
Commercial:
Commercial and industrial	$	6,444	$	414	$	329	$	4,073	$	9	$	8
Commercial real estate		7,163		33		10		3,731		25		7
Construction		1,159		5		—		743		13		—
Consumer:
Residential real estate		—		16		16		—		2		2

Total	$	14,766	$	468	$	355	$	8,547	$	49	$	17

The following is a summary of non-accrual loans, at June 30, 2013 and December 31, 2012:


	June 30, 2013		December 31, 2012
Commercial:
Commercial and industrial	$	4,242	$	5,538
Commercial real estate		5,370		5,596
Construction		—		349
Consumer:
Residential real estate		3,961		2,970
Home equity		223		137
Consumer		169		120

Total	$	13,965	$	14,710

The following table represents modifications that were deemed to be troubled debt restructurings for the six months ended June 30, 2013 and 2012:


	Six Months Ended June 30, 2013						Six Months Ended June 30, 2012
	Number of Contracts		Outstanding Recorded Investment				Number of Contracts		Outstanding Recorded Investment
	Number of Contracts		Pre-Modification		Post-Modification		Number of Contracts		Pre-Modification		Post-Modification
Troubled Debt
Restructurings:
Commercial and industrial		2	$	1,824	$	1,420		1	$	140	$	140
Commercial real estate		—		—		—		4		1,211		1,211
Construction		—		—		—		2		613		613

Total		2	$	1,824	$	1,420		7	$	1,964	$	1,964

There were no loan modifications that were deemed troubled debt restructurings for the three months ended June 30, 2013 and 2012.

At June 30, 2013, the modifications related to two commercial and industrial loans to one borrower that were restructured as part of an agreement with the customer whereby the Bank received a cash paydown. The modifications lowered the interest rate and extended the maturity of these loans.

At June 30, 2012, the modifications provided on one commercial and industrial loan and four commercial real estate loans are related to one borrower relationship. The modification extended the maturity of demand notes that had reached maturity. The modifications provided on the two construction loans are related to one borrower relationship. The modification extended the maturity of demand notes that had reached maturity. Management performs a discounted cash flow calculation or collateral analysis if the loan is collateral dependent to determine the amount of impaired reserve required on each of the troubled debt restructurings. Any reserve required is recorded through the provision for loan losses.

As of June 30, 2013 and 2012, there have been no TDRs that have subsequently defaulted (defined as thirty or more days past due) within one year of modification.

CREDIT QUALITY INFORMATION

The Company utilizes a nine grade risk rating system for commercial and industrial, commercial real estate and construction loans as follows:

Pass: Loans within these five categories are considered low to average risk.

Special Mention: Loans in this category portray one or more weaknesses that may be tolerated in the short run. Assets in this category are currently protected but are potentially weak and are being closely monitored by management.

Substandard: Loans in this category are considered inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Doubtful: Loans in this category have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, however, its classification as an estimated loss is deferred until a more exact determination of the extent of the loss is ascertained.

Loss: Loans in this category are considered uncollectible and of such little value that their continuance as loans is not warranted.

The Company does not assign risk ratings to residential real estate, home equity and consumer loans unless they are contractually past due 90 days or more or where legal action has commenced against the borrower. All other consumer loans are charged off when they become contractually past due 120 days. Loans not assigned a rating are considered “pass.”

Business banking loans are assigned a Pass rating unless they are contractually past due 90 days or more, legal action has commenced against the borrower or other criteria for a risk rating change as defined within the business banking loan policy have been triggered. Upon one or more of these events, the loan will be risk rated Substandard.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial and industrial, commercial real estate and construction loans. Semi-annually, the Company engages an independent third party to review loans within these segments. Management uses the results of these reviews as part of its annual review process.

The following tables present the Company’s loan segment by internally assigned grades:


	At June 30, 2013
Commercial:	Commercial and Industrial		Commercial Real Estate		Construction		Total
Grade:
Pass	$	277,825	$	791,899	$	59,921	$	1,129,645
Special Mention		9,449		28,634		1,387		39,470
Substandard		16,295		23,269		5,496		45,060
Doubtful		732		—		—		732

Total	$	304,301	$	843,802	$	66,804	$	1,214,907


Consumer:	Residential		Home Equity		Consumer		Total
Grade:
Pass	$	443,795	$	177,420	$	19,279	$	640,494
Special Mention		—		—		—		—
Substandard		4,581		342		169		5,092
Doubtful		—		—		—		—

Total	$	448,376	$	177,762	$	19,448	$	645,586


	At December 31, 2012
Commercial:	Commercial and Industrial		Commercial Real Estate		Construction		Total
Grade:
Pass	$	275,279	$	762,240	$	46,196	$	1,083,715
Special Mention		14,788		29,092		1,632		45,512
Substandard		15,472		23,360		4,950		43,782
Doubtful		653		—		—		653

Total	$	306,192	$	814,692	$	52,778	$	1,173,662


Consumer:	Residential		Home Equity		Consumer		Total
Grade:
Pass	$	439,201	$	178,920	$	21,382	$	639,503
Special Mention		—		—		—		—
Substandard		2,673		119		119		2,911
Doubtful		—		—		—		—

Total	$	441,874	$	179,039	$	21,501	$	642,414

NOTE H – COMMITMENTS

Financial instruments with off-balance sheet risk at June 30, 2013 and December 31, 2012 were as follows:


	June 30, 2013		December 31, 2012
Unused lines of credit	$	330,080	$	308,683
Amounts due mortgagors		85,181		36,365
Standby letters of credit		5,409		3,573
Commitments to originate loans		58,736		63,974

The Company has also committed to invest up to $10.0 million, representing 25% of the Class A or senior investor balance, in low income housing tax credit funds by the end of 2015. At June 30, 2013, the Company invested $8.4 million in the funds, which has been reduced by net operating losses of $1.7 million. The net carrying balance of $6.7 million is included in other assets on the Company’s consolidated statement of condition. As a Class A investor, the Company has the right to transfer its investment to the fund’s Class B investor at the end of 10 years at which time the Company would have no compliance requirements or interest in the fund. The fund structure contemplates that the Class A investors will receive 95% of the tax credits and net operating losses for a period of eight years or until the minimum investment return has been met. Net operating losses allocated to the Company are recognized as they are incurred and recorded in non-interest expense.

In 2012, the Company committed to and invested $1.8 million, or 50% interest, in a new markets housing tax credit fund, which has been reduced by net operating losses of $24,000. The net carrying value of $1.8 million is included in other assets on the Company’s consolidated statement of condition.

The Company has committed to invest $2.0 million in another low income housing tax credit fund by the end of 2015. At June 30, 2013, the Company invested $347,000 in this fund, which has been reduced by net operating losses of $66,000. The net carrying value of $281,000 is included in other assets on the Company’s consolidated statement of condition.

The Company has committed to invest $979,000 in another new market tax credit fund by the end of 2013. At June 30, 2013, the Company had not made any investment in this fund.

NOTE I – DEPOSITS

Deposit accounts, by type, are summarized as follows at June 30, 2013 and December 31, 2012:


	June 30, 2013		December 31, 2012
Demand	$	328,058	$	307,302
NOW		91,041		87,983
Savings		345,198		350,188
Money market		426,649		395,293
Certificates of deposit		734,089		707,409

	$	1,925,035	$	1,848,175

NOTE J – CONTINGENCIES

The Bank, as successor in interest to Commonwealth National Bank, is involved in litigation relating to a loan foreclosure. The litigants claim that Commonwealth National Bank acted in bad faith and in violation of applicable law and that its actions resulted in a sale of the underlying property for less than its market value, thereby causing damage to the parties. During the third quarter of 2011 the judge issued a ruling in favor of the Bank. The litigants have appealed the decision. The Bank believes these claims and the appeal are without merit and is vigorously defending the litigation. No estimate of any reasonably possible loss or range of loss to the Bank can be made at this time.

The Bank is also a defendant in other claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

NOTE K – FAIR VALUES OF ASSETS AND LIABILITIES

The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value, as follows:

Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury, other U.S. government and government-sponsored enterprises that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets. Level 2 includes U.S. government and mortgage-backed securities issued by government-sponsored enterprises. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities. Level 3 also includes corporate bonds that have fair values derived from unobservable issuer-provided financial information and discounted cash flow models.

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


	Level 1		Level 2		Level 3		Total Fair Value
At June 30, 2013
Securities available for sale:
Government-sponsored enterprises	$	—	$	2,004	$	—	$	2,004
Government-sponsored and government-guaranteed mortgage-backed securities		—		242,754		—		242,754
Private label mortgage-backed securities		—		51		—		51
Municipal bonds		—		26,243		—		26,243
Corporate bonds		—		—		1,850		1,850

Total	$	—	$	271,052	$	1,850	$	272,902


	Level 1		Level 2		Level 3		Total Fair Value
At December 31, 2012
Securities available for sale:
Government-sponsored enterprises	$	—	$	3,233	$	—	$	3,233
Government-sponsored and government-guaranteed mortgage-backed securities		—		257,762		—		257,762
Private label mortgage-backed securities		—		2,566		—		2,566
Municipal bonds		—		28,827		—		28,827
Corporate bonds		—		—		1,934		1,934

Total	$	—	$	292,388	$	1,934	$	294,322

The Company had no liabilities measured at fair value on a recurring basis at June 30, 2013 or December 31, 2012.

The table below presents the changes in Level 3 assets measured at fair value on a recurring basis for the six months ended June 30, 2013.


Balance at December 31, 2012	$	1,934
Change in unrealized gain		(84	)

Balance at June 30, 2013	$	1,850

Due to the lack of observable market data, corporate bonds were included in Level 3 of the fair value hierarchy. The fair value has been derived by third party pricing services using pricing models and techniques which require significant judgment and estimation. Pricing models and techniques are dependent upon several unobservable inputs including the discount rate, the interest rate environment, credit defaults and losses and financial performance.

There were no transfers in or out of levels 1 and 2.

The Company may be required, from time to time, to measure at fair value certain other assets on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-fair value accounting or write-downs of individual assets. The following tables summarize the fair value hierarchy used to determine the adjustment and the carrying value of the related individual assets for the three and six months ended June 30, 2013 and 2012.


							Three Months Ended June 30, 2013			Six Months Ended June 30, 2013
	At June 30, 2013						Total Gains/(Losses)			Total Gains/(Losses)
	Level 1		Level 2		Level 3		Total Gains/(Losses)			Total Gains/(Losses)
Assets:
Loans	$	—	$	—	$	1,874	$	(137	)	$	(622	)
Other real estate owned		—		—		711		(116	)		(135	)

Total assets	$	—	$	—	$	2,585	$	(253	)	$	(757	)


							Three Months Ended June 30, 2012			Six Months Ended June 30, 2012
	At June 30, 2012						Total Gains/(Losses)			Total Gains/(Losses)
	Level 1		Level 2		Level 3		Total Gains/(Losses)			Total Gains/(Losses)
Assets:
Loans	$	—	$	—	$	528	$	135		$	(10	)
Other real estate owned		—		—		740		(50	)		(50	)

Total assets	$	—	$	—	$	1,268	$	85		$	(60	)

The amount of loans represents the carrying value of impaired loans net of related write-downs and valuation allowances for which adjustments are based on the estimated fair value of the underlying collateral. The other real estate owned amount represents the carrying value for which adjustments are also based on the estimated fair value of the property.

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 the Company’s entire holdings of a particular financial instrument. Because a market may not readily exist for a significant portion of the Company’s financial instruments, 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 and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The following methods and assumptions were used by the Company in estimating fair values of its financial instruments:

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

Investment Securities and FHLBB Stock. The fair value of securities to be held to maturity and securities available for sale is estimated based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Ownership of Federal Home Loan Bank of Boston (“FHLBB”) stock is restricted to member banks; therefore, the stock is not traded. The estimated fair value of FHLBB stock is equal to its carrying value, which represents the price at which the FHLBB is obligated to redeem its stock.

Loans. For valuation purposes, the loan portfolio was segregated into its significant categories, which are residential mortgage, commercial real estate, commercial and industrial, construction and consumer loans. These categories were further segregated, where appropriate, into components based on significant financial characteristics such as type of interest rate (fixed or adjustable). Fair values were estimated for each component using assumptions developed by management and a valuation model provided by a third party specialist.

The fair values of residential mortgage, commercial real estate, commercial and industrial, construction and consumer loans were estimated by discounting the anticipated cash flows from the respective portfolios. Estimates of the timing and amount of these cash flows considered factors such as future loan prepayments. The discount rates reflected current market rates for loans with similar terms to borrowers of similar credit quality. The fair value of home equity lines of credit was based on the outstanding loan balances. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Loans Held for Sale. Fair values are based on commitments in effect from investors or prevailing market rates.

Deposits. The fair value of deposits with no stated maturity, such as demand deposits, NOW, regular savings, and money market deposit accounts, is equal to the amount payable on demand. The fair value estimates do not include the benefit that results from the generally lower cost of funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. The fair value estimate of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits having similar remaining maturities.

Short-term Borrowings. For short-term borrowings maturing within one year, 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 the Company’s 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.

Repurchase Agreements. The Company enters into overnight repurchase agreements with its customers. Since these agreements are short-term instruments, the fair value of these agreements approximates their recorded balance. The Company also secures term repurchase agreements through other financial institutions. The fair value of these agreements are determined by discounting the anticipated future cash payments using rates currently available to the Bank for debt with similar terms and remaining maturities.

Subordinated Debentures. The Company has outstanding subordinated debt in the form of trust preferred securities issued through a private placement offering. The fair value estimate is determined by discounting the anticipated future cash payments by using the rates currently available to the Company for debt with similar terms and remaining maturities.

Off-Balance Sheet Instruments. The fair value of off-balance-sheet mortgage lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. In the case of the commitments discussed in Note H, the fair value equals the carrying amounts which are not significant.

Summary of Fair Values of Financial Instruments. The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein do not represent the underlying fair value of the Company.

The fair value of the Company’s financial instruments is as follows at dates indicated:


	At June 30, 2013
	Carrying Value		Level 1		Level 2		Level 3		Estimated Fair Value
Financial Assets:
Cash and cash equivalents	$	53,030	$	53,030	$	—	$	—	$	53,030
Securities available for sale		272,902		—		271,052		1,850		272,902
Securities held to maturity		86,640		—		87,621		—		87,621
Stock in Federal Home Loan Bank of Boston		17,334		—		—		17,334		17,334
Net loans and loans held for sale		1,850,120		—		—		1,861,005		1,861,005
Financial Liabilities:
Deposits (with no stated maturity)		1,190,946		—		—		1,190,946		1,190,946
Time deposits		734,089		—		—		739,530		739,530
Federal Home Loan Bank of Boston advances		131,479		—		—		133,970		133,970
Repurchase agreements		60,524		—		—		61,111		61,111
Subordinated debentures		5,908		—		5,908		—		5,908


	At December 31, 2012
	Carrying Value		Level 1		Level 2		Level 3		Estimated Fair Value
Financial Assets:
Cash and cash equivalents	$	30,679	$	30,679	$	—	$	—	$	30,679
Securities available for sale		294,322		—		292,388		1,934		294,322
Securities held to maturity		82,986		—		85,674		—		85,674
Stock in Federal Home Loan Bank of Boston		18,554		—		—		18,554		18,554
Net loans and loans held for sale		1,808,033		—		—		1,846,519		1,846,519
Financial Liabilities:
Deposits (with no stated maturity)		1,140,766		—		—		1,140,766		1,140,766
Time deposits		707,409		—		—		711,845		711,845
Federal Home Loan Bank of Boston advances		141,525		—		—		145,543		145,543
Repurchase agreements		69,229		—		—		70,082		70,082
Subordinated debentures		9,630		—		9,630		—		9,630

NOTE L – PENSION AND POSTRETIREMENT BENEFIT PLANS

The Company maintains a Senior Executive Retirement Plan (“SERP”) and a Director Retirement Plan. These plans had no assets at June 30, 2013 and 2012. The following table presents the components of the net periodic benefit cost for the indicated periods:


	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2013				2012				2013				2012
	SERP		Director Retirement Plan		SERP		Director Retirement Plan		SERP		Director Retirement Plan		SERP		Director Retirement Plan
Periodic benefit cost:
Service cost	$	100	$	13	$	79	$	23	$	200	$	27	$	158	$	46
Interest cost		47		11		44		14		94		22		88		28

Total pension cost		147		24		123		37		294		49		246		74
Prior service cost amortization		50		11		28		9		100		22		57		18
Net loss amortization		—		12		—		3		—		24		—		6

Net periodic benefit cost	$	197	$	47	$	151	$	49	$	394	$	95	$	303	$	98

Benefits expected to be paid over the next five years as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 have not changed. These plans are funded on a pay-as-you-go-basis and the Company does not expect to make any contributions to these plans in 2013.

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report may contain forward-looking statements relating to such matters as anticipated financial performance, business prospects, future strategies, technological developments, new products, and similar matters. Forward-looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends” or similar expressions. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements provided that the Company notes factors that could cause the Company’s actual results to differ materially from the anticipated results expressed in the Company’s forward-looking statements. Factors that may cause actual results to differ materially from those projected in the forward-looking statements include, but are not limited to, general economic conditions, changes in market interest rates and real estate values, changes in the size, composition or risks in the loan and securities portfolios, loan or deposit demand, changes in asset quality, including levels of delinquent, classified and charged-off loans, legislative, accounting or regulatory changes, and significant increases in competitive pressures. Additional factors are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 under “Item 1A. Risk Factors”. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Forward-looking statements speak only as of the date they are made and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of the forward-looking statements or to reflect the occurrence of unanticipated events. Accordingly, past results and trends should not be used by investors to anticipate future results or trends.

Comparison of Financial Condition at June 30, 2013 and December 31, 2012

Total assets increased $46.0 million, or 1.9%, to $2.45 billion at June 30, 2013 from $2.40 billion at December 31, 2012 reflecting growth in net loans, interest-bearing deposits and securities held to maturity, partially offset by decreases in securities available for sale. Net loans increased $42.7 million, or 2.4%, to $1.85 billion at June 30, 2013 from $1.81 billion at December 31, 2012 due to growth of $41.2 million, or 3.5%, in commercial loans (commercial and industrial, commercial real estate and construction loans) and $6.5 million, or 1.5%, in residential mortgages, as a result of successful business development efforts and competitive products and pricing. These increases were offset by decreases in consumer loans of $2.1 million, or 9.6%, and home equity loans of $1.3 million, or 0.7%. The decrease in consumer loans was primarily due to payments. Home equity loan balances declined due to the decreased usage of existing home equity lines. Interest-bearing deposits increased $25.1 million primarily reflecting excess cash on deposit at the Federal Reserve Bank. Securities held to maturity increased $3.6 million, or 4.4%, to $86.6 million at June 30, 2013 from $83.0 million at December 31, 2012 as a result of purchases of fixed- and variable-rate agency mortgage-backed securities totaling $16.9 million, partially offset by repayments of government-sponsored agency debt and mortgage-backed securities of $12.8 million. Securities available for sale decreased $21.4 million, or 7.3%, to $272.9 million at June 30, 2013 from $294.3 million at December 31, 2012 primarily due to repayments of government-sponsored agency debt and mortgage-backed securities of $43.6 million, partially offset by purchases of fixed- and variable-rate agency mortgage-backed securities totaling $33.5 million.

Total deposits increased $76.9 million, or 4.2%, to $1.93 billion at June 30, 2013 compared to $1.85 billion at December 31, 2012 reflecting growth of $50.2 million, or 4.4%, in core account balances and an increase of $26.7 million, or 3.8%, in certificates of deposit. Core deposit balances were $1.19 billion, or 61.9% of total deposits, at June 30, 2013 compared to $1.14 billion, or 61.7% of total deposits, at December 31, 2012. The growth in core deposit account balances was driven by sales and marketing initiatives, competitive products and pricing, attention to excellence in customer service and targeted promotional activities. The increase in certificates of deposit was attributable to the purchase of $20.1 million in brokered CDs with a weighted average rate of 0.30% and a maturity of three months. Short-term borrowings decreased $8.7 million, or 11.0%, to $70.5 million at June 30, 2013 from $79.2 million at December 31, 2012 mainly due to a decrease in overnight customer repurchase agreements. Long-term debt decreased $9.8 million, or 7.3%, to $124.2 million at June 30, 2013 from $134.0 million at December 31, 2012 attributable to repayments of FHLB advances of $16.0 million, partially offset by new FHLBB advances secured totaling $6.5 million. Total subordinated debentures decreased $3.7 million, or 38.7%, to $5.9 million at June 30, 2013 as a result of the full redemption of a $4.0 million callable debt instrument previously issued by New England Bancshares, Inc. partially offset by the amortization of the mark-to-market adjustment on the Commonwealth National Bank trust preferred securities. At June 30, 2013, the Company continued to have considerable liquidity including significant unused borrowing capacity at the FHLBB and the Federal Reserve Bank of Boston and access to funding through the repurchase agreement and brokered deposit markets.

Total stockholders’ equity decreased $6.9 million, or 2.2%, to $300.3 million at June 30, 2013 from $307.2 million at December 31, 2012 as a result of repurchases of common stock totaling $7.3 million, $4.8 million in other comprehensive loss and cash dividend payments amounting to $4.2 million, partially offset by net income of $8.8 million.

Credit Quality and Reserve Coverage

The Company actively manages credit risk through its underwriting practices, loan review activities and collection operations, and does not offer nor has it historically offered residential mortgage and other consumer loans to subprime or Alternative-A-paper borrowers. All loans where the interest payment is 90 days or more in arrears as of the closing date of each month are placed on non-accrual status. Non-accrual loans totaled $14.0 million, or 0.75% of total loans, at June 30, 2013 compared to $14.7 million, or 0.81% of total loans, at December 31, 2012. Criticized and classified loans, which are loans that are of lesser quality and are reported for regulatory purposes as special mention, substandard, doubtful or loss, decreased $2.5 million, or 2.7%, to $90.4 million at June 30, 2013 compared to $92.9 million at December 31, 2012, primarily due to a decrease in classified commercial and industrial loans. Other real estate owned decreased $791,000, or 30.7% to $1.8 million at June 30, 2013 from $2.6 million at December 31, 2012 reflecting sales of several properties, partially offset by foreclosure activity. The other real estate owned balance at June 30, 2013 includes two properties with a book balance of $496,000 that are under contract to sell. Refer to “Note G – Loans” in the Notes to the Unaudited Consolidated Financial Statements in this report for additional disclosures about credit quality.

At June 30, 2013, the ratio of the allowance for loan losses to total loans was 0.70% compared to 0.67% at December 31, 2012. Excluding the impact of acquired loans totaling $588.4 million at June 30, 2013 and $664.6 million at December 31, 2012, the ratio of the allowance for loan losses to total loans would have been 1.03% at June 30, 2013 and 1.05% at December 31, 2012. Net charge-offs totaled $861,000, or 0.09% of average loans outstanding on an annualized basis, for the six months ended June 30, 2013 as compared to net charge-offs of $781,000, or 0.14% of average loans outstanding on an annualized basis, for the same period in 2012. Net charge-offs in both periods consisted primarily of commercial loans. Refer to “Note G – Loans” in the Notes to the Unaudited Consolidated Financial Statements in this report for disclosures about the allowance for loan losses.

Comparison of Operating Results for the Three Months Ended June 30, 2013 and 2012

Overview

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income earned on interest-earning assets, consisting primarily of loans, investment securities and other interest-earning assets, and the interest paid on interest-bearing liabilities, consisting primarily of deposits, FHLBB advances and repurchase agreements.

Our results of operations also are affected by provisions for loan losses, non-interest income and non-interest expense. Non-interest income consists primarily of deposit account fees, wealth management fees, increases in the cash surrender value of bank-owned life insurance, gains on sale of loans and securities and miscellaneous other income. Non-interest expense consists primarily of salaries and benefits, occupancy, marketing, data processing, professional fees, FDIC insurance assessments, low income housing tax credit fund and other operating expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Net Income. Net income increased $1.4 million, or 56.8%, to $4.0 million for the second quarter of 2013 compared to net income of $2.6 million for the same period in 2012. Excluding branch closing costs totaling $477,000 ($282,000 net of tax benefit), acquisition related expenses of $123,000 ($117,000 net of tax benefit) resulting from the Company’s acquisition of New England Bancshares, Inc. (“NEBS”) in November 2012, and a $200,000 gain related to an investment in a venture capital fund which is accounted for on a cash basis ($119,000 net of tax expense) for the 2013 period and $592,000 (no tax impact) in acquisition related expenses for the same period in 2012, net income would have increased by $1.1 million, or 36.4%, from $3.2 million for the second quarter of 2012 to $4.3 million for the second quarter of 2013. The improved quarterly operating results were largely due to growth in net interest income of $6.4 million, driven by net interest margin expansion and an increase in average interest earning assets and, to a lesser extent, an increase in non-interest income. These positive results were offset in part by increases of $4.8 million in non-interest expense and $142,000 in provision for loan losses. Diluted earnings per share increased $0.03, or 17.6%, to $0.20 for the three months ended June 30, 2013 compared to $0.17 for the same period last year due to improved earnings, offset in part by an increase in weighted average shares outstanding. Total diluted weighted average shares increased by 5.2 million shares for the three months ended June 30, 2013 compared to the same period in 2012 due to the issuance of shares for the acquisition of NEBS, partially offset by the repurchase of shares under the Company’s current stock repurchase plan. Excluding the after tax impact of branch closing costs, acquisition related expenses and the cash basis investment gain, diluted earnings per share would have been flat for the three months ended June 30, 2013 compared to the same period in 2012.

Average Balances and Yields. The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield.


	Three Months Ended June 30,
	2013							2012
	Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Loans:
Residential real estate⁽¹⁾	$	445,739	$	4,259		3.82	%	$	312,592	$	3,588		4.59	%
Commercial real estate		892,533		11,245		5.04	%		498,354		6,875		5.52	%
Home equity		177,574		1,516		3.41	%		137,526		1,225		3.56	%
Commercial and industrial		308,627		3,950		5.12	%		188,343		2,298		4.88	%
Consumer and other		21,108		307		5.82	%		14,326		195		5.44	%

Total loans⁽²⁾		1,845,581		21,277		4.61	%		1,151,141		14,181		4.93	%
Investment securities		358,184		2,248		2.51	%		340,086		2,767		3.25	%
Other interest-earning assets		26,558		24		0.36	%		55,905		51		0.36	%

Total interest-earning assets		2,230,323		23,549		4.22	%		1,547,132		16,999		4.39	%
Noninterest-earning assets⁽³⁾		177,488							105,865

Total assets	$	2,407,811						$	1,652,997


Interest-bearing liabilities:
Savings accounts	$	345,729		317		0.37	%	$	261,297		336		0.51	%
Money market accounts		421,902		409		0.39	%		305,501		366		0.48	%
NOW accounts		83,795		71		0.34	%		55,539		42		0.30	%
Certificates of deposit		733,361		2,054		1.12	%		416,857		1,854		1.78	%

Total interest-bearing deposits		1,584,787		2,851		0.72	%		1,039,194		2,598		1.00	%
FHLBB advances		112,439		716		2.55	%		103,632		819		3.16	%
Other interest-bearing liabilities		73,066		283		1.55	%		53,860		288		2.14	%

Total interest-bearing liabilities		1,770,292		3,850		0.87	%		1,196,686		3,705		1.24	%
Demand deposits		317,343							217,586
Other noninterest-bearing liabilities		15,821							10,870

Total liabilities		2,103,456							1,425,142
Stockholders’ equity		304,355							227,855

Total liabilities and stockholders’ equity	$	2,407,811						$	1,652,997


Net interest income			$	19,699						$	13,294

Interest rate spread⁽⁴⁾						3.35	%						3.15	%
Net interest-earning assets⁽⁵⁾	$	460,031						$	350,446

Net interest margin⁽⁶⁾						3.53	%						3.44	%
Average interest-earning assets to average interest-bearing liabilities						125.99	%						129.28	%

(1)	Includes loans held for sale.

(2)	Loans, including non-accrual loans, are net of deferred loan origination costs and advanced funds.

(3)	Includes bank-owned life insurance, the income on which is classified as non-interest income.

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

(5)	Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(6)	Net interest margin represents annualized net interest income divided by average total interest-earning assets.

Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.


	Three Months Ended June 30,
	2013 vs. 2012
	Increase (Decrease) Due to
	Volume			Rate			Net
	(In thousands)

Interest-earning assets:
Loans:
Residential real estate⁽¹⁾	$	1,344		$	(673	)	$	671
Commercial real estate		5,013			(643	)		4,370
Home equity		344			(53	)		291
Commercial and industrial		1,535			117			1,652
Consumer and other		97			15			112

Total loans		8,333			(1,237	)		7,096
Investment securities		141			(660	)		(519	)
Other interest-earning assets		(27	)		—			(27	)

Total interest-earning assets		8,447			(1,897	)		6,550


Interest-bearing liabilities:
Savings accounts		93			(112	)		(19	)
Money market accounts		121			(78	)		43
NOW accounts		23			6			29
Certificates of deposit		1,058			(858	)		200

Total interest-bearing deposits		1,295			(1,042	)		253
FHLBB advances		66			(169	)		(103	)
Other interest-bearing liabilities		87			(92	)		(5	)

Total interest-bearing liabilities		1,448			(1,303	)		145


Change in net interest income	$	6,999		$	(594	)	$	6,405

(1)	Includes loans held for sale.

Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses increased $6.4 million, or 48.2%, to $19.7 million for the second quarter of 2013 from $13.3 million for the same period in 2012 mainly as a result of an increase in average interest-earning assets and net interest margin expansion. Total average interest-earning assets increased $683.2 million, or 44.2%, to $2.23 billion for the second quarter of 2013, driven by the acquisition of New England Bank and organic loan growth, partially offset by a decrease in interest-earning cash balances. The net interest margin increased by 9 basis points to 3.53% for the three months ended June 30, 2013 due in large part to a $945,000 increase in the net accretion of acquisition accounting adjustments to $1.3 million for the second quarter of 2013 from $319,000 for the same period in 2012.

Interest Income. Interest income increased $6.5 million, or 38.5%, to $23.5 million for the three months ended June 30, 2013 from $17.0 million for the prior year period due to an increase in average interest-earning assets, partially offset by a decrease in the yield on earning assets. The yield on average interest-earning assets decreased by 17 basis points to 4.22% for the second quarter of 2013 in connection with the lower interest rate environment, partially offset by an increase of $111,000 in the accretion of loan acquisition accounting adjustments. The decrease in market rates contributed to the downward repricing of a portion of the Company’s existing assets and to lower rates for new assets.

Interest Expense. Interest expense increased $145,000, or 3.9%, for the three months ended June 30, 2013 compared to the prior year period, reflecting an increase in average interest-bearing liabilities, partially offset by a decrease in the average rate paid on interest-bearing liabilities. Average interest-bearing liabilities increased $573.6 million, or 47.9%, to $1.77 billion for the three months ended June 30, 2013 from $1.20 billion for the prior year period due in large part to the Company’s acquisition of NEBS in the fourth quarter of 2012 and organic deposit growth. The average rate paid on interest-bearing liabilities declined 37 basis points to 0.87% for the three months ended June 30, 2013 due to the repricing of deposits in response to the lower interest rate environment and an increase of $833,000 in the net accretion of acquisition accounting adjustments.

Provision for Loan Losses. The allowance for loan losses is based on management’s estimate of the probable losses inherent in the portfolio, considering the impact of prior loss experience, current economic conditions and their effect on borrowers, the composition and size of the portfolio, trends in non-performing loans, classified and impaired loans, and delinquency rates and the performance of individual loans in relation to contractual terms. The provision for loan losses reflects adjustments to the allowance based on management’s review of the loan portfolio in light of those conditions. The provision for loan losses increased by $142,000, or 18.9%, to $892,000 for the three months ended June 30, 2013 from $750,000 for the same period in 2012, driven by an increase in general reserves associated with stronger commercial loan origination activity, increases in impaired loan reserves and net charge-offs and the continuing shift to a more commercially oriented loan portfolio. Net charge-offs increased from $324,000 for the three months ended June 30, 2012 to $518,000 for the three months ended June 30, 2013. The allowance for loan losses was $13.1 million, or 0.70% of loans outstanding, at June 30, 2013.

Non-interest Income. Non-interest income increased $445,000, or 17.3%, to $3.0 million for the second quarter of 2013 from $2.6 million for the same period in 2012. Other income increased $400,000 as a result of a $200,000 gain on an investment in a venture capital fund that is accounted for on a cash basis, higher loan prepayment penalties and late charges as well as increased credit enhancement fees related to loans sold to the FHLBB. Income from bank-owned life insurance increased $74,000, or 17.0%, due in large part to the acquisition of the NEBS portfolio, partially offset by a decrease in the yield on the portfolio assets. Fee income on depositors’ accounts increased $68,000, or 4.4%, driven by growth in overdraft fees, automated teller fees paid by non-customers and other account service charges. These increases were offset in part by decreases of $55,000 in gains on sales of loans and $42,000 in wealth management income.

Non-interest Expense. Non-interest expense increased $4.8 million, or 41.9%, to $16.3 million in the second quarter of 2013 from $11.5 million in the same period last year. Excluding branch closing costs of $477,000 incurred during the second quarter of 2013 and acquisition-related expenses incurred in connection with the Company’s acquisition of NEBS totaling $123,000 for the 2013 period and $592,000 for the same period in 2012, non-interest expense would have increased $4.8 million, or 44.1%, to $15.7 million. Salaries and benefits increased $1.9 million, or 29.6%, mainly due to costs incurred to support our new Connecticut operations, staffing costs associated with a new loan production office opened in Glastonbury, Connecticut during the second quarter of 2012 and a new branch established in Northborough, Massachusetts during the fourth quarter of 2012, annual wage increases and a larger incentive accrual due to improved operating performance. Other expenses increased $893,000, or 58.1%, reflecting increased expenses from the expansion of our franchise into Connecticut (i.e. telephone, depreciation, postage, core deposit intangible amortization, foreclosed properties, business development, printing, office supplies and branch security). Data processing expenses increased $597,000, or 59.1%, attributable to a larger loan and deposit base as well as increased costs related to software licenses, online banking and debit cards. Occupancy costs grew $457,000, or 52.5%, principally attributable to expenses incurred to operate our new Connecticut facilities as well as expenses related to the new loan production office and new branch. Professional fees increased $245,000, or 60.6%, primarily due to additional legal and consulting costs associated with our Connecticut operations and increased expenses related to loan workout activities and third party loan reviews.

Income Tax Expense. Income tax expense increased $440,000, or 41.4%, to $1.5 million for the second quarter of 2013 from $1.1 million in the same period last year as a result of an increase in taxable income.

Comparison of Operating Results for the Six Months Ended June 30, 2013 and 2012

Net Income. Net income for the six months ended June 30, 2013 amounted to $8.8 million, or $0.43 per diluted share, compared to $5.4 million, or $0.36 per diluted share, for the same period in 2012. Excluding branch closing costs totaling $987,000 ($584,000 net of tax benefit), acquisition related expenses of $281,000 ($271,000 net of tax benefit) and a $200,000 gain related to an investment in a venture capital fund that is accounted for on a cash basis ($119,000 net of tax expense) for the 2013 period and $592,000 (non tax deductible) of acquisition related expenses for the same period in 2012, net income would have increased by $3.5 million, or 57.5%, from $6.0 million for the six months ended June 30, 2013 to $9.5 million, or $0.47 per diluted share, for the first six months of 2013. The improved year-to-date operating results were largely due to growth in net interest income of $13.8 million, driven by net interest margin expansion and an increase in average interest earning assets and, to a lesser extent, an increase in non-interest income. These positive results were offset in part by increases of $9.4 million in non-interest expense and $442,000 in provision for loan losses. Diluted earnings per share increased $0.07, or 19.4%, to $0.43 for the six months ended June 30, 2013 compared to $0.36 for the same period last year due to improved earnings, offset in part by an increase in weighted average shares outstanding. Total diluted weighted average shares increased by 5.2 million shares for the six months ended June 30, 2013 compared to the same period in 2012 due to the issuance of shares for the acquisition of NEBS, partially offset by the repurchase of shares under the Company’s current stock repurchase plan.

Average Balances and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield.


	Six Months Ended June 30,
	2013							2012
	Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Loans:
Residential real estate⁽¹⁾	$	445,684	$	8,476		3.80	%	$	314,016	$	7,301		4.65	%
Commercial real estate		878,707		22,936		5.22	%		494,952		13,819		5.58	%
Home equity		177,870		3,011		3.39	%		136,709		2,455		3.59	%
Commercial and industrial		314,270		8,280		5.27	%		182,016		4,290		4.71	%
Consumer and other		21,611		630		5.83	%		14,650		391		5.34	%

Total loans⁽²⁾		1,838,142		43,333		4.71	%		1,142,343		28,256		4.95	%
Investment securities		361,691		4,561		2.52	%		339,246		5,622		3.31	%
Other interest-earning assets		24,242		42		0.35	%		54,986		92		0.33	%

Total interest-earning assets		2,224,075		47,936		4.31	%		1,536,575		33,970		4.42	%
Noninterest-earning assets⁽³⁾		178,374							103,959

Total assets	$	2,402,449						$	1,640,534


Interest-bearing liabilities:
Savings accounts	$	348,061		652		0.37	%	$	257,982		704		0.55	%
Money market accounts		414,423		802		0.39	%		304,592		808		0.53	%
NOW accounts		81,452		161		0.40	%		52,009		82		0.32	%
Certificates of deposit		724,610		4,039		1.11	%		417,639		3,757		1.80	%

Total interest-bearing deposits		1,568,546		5,654		0.72	%		1,032,222		5,351		1.04	%
FHLB advances		124,467		1,508		2.42	%		104,467		1,641		3.14	%
Other interest-bearing liabilities		77,620		582		1.50	%		52,880		584		2.21	%

Total interest-bearing liabilities		1,770,633		7,744		0.87	%		1,189,569		7,576		1.27	%
Demand deposits		310,137							211,810
Other noninterest-bearing liabilities		16,231							11,301

Total liabilities		2,097,001							1,412,680
Stockholders’ equity		305,448							227,854

Total liabilities and stockholders’ equity	$	2,402,449						$	1,640,534


Net interest income			$	40,192						$	26,394

Interest rate spread⁽⁴⁾						3.44	%						3.15	%
Net interest-earning assets⁽⁵⁾	$	453,442						$	347,006

Net interest margin⁽⁶⁾						3.61	%						3.44	%
Average interest-bearing assets to average interest-bearing liabilities						125.61	%						129.17	%

(1)	Includes loans held for sale.

(2)	Loans, including non-accrual loans, are net of deferred loan origination costs and advanced funds.

(3)	Includes bank-owned life insurance, the income on which is classified as non-interest income.

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

(5)	Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(6)	Net interest margin represents annualized net interest income divided by average total interest-earning assets.


	Six Months Ended June 30,
	2013 vs. 2012
	Increase (Decrease) Due to
	Volume			Rate			Net
	(In thousands)

Interest-earning assets:
Loans:
Residential real estate⁽¹⁾	$	2,673		$	(1,498	)	$	1,175
Commercial real estate		10,070			(953	)		9,117
Home equity loans		704			(148	)		556
Commercial and industrial		3,433			557			3,990
Consumer and other		200			39			239

Total loans		17,080			(2,003	)		15,077
Investment securities		353			(1,414	)		(1,061	)
Other interest-earning assets		(53	)		3			(50	)

Total interest-earning assets		17,380			(3,414	)		13,966


Interest-bearing liabilities:
Savings accounts		205			(257	)		(52	)
Money market accounts		246			(252	)		(6	)
NOW accounts		54			25			79
Certificates of deposit		2,069			(1,787	)		282

Total interest-bearing deposits		2,574			(2,271	)		303
FHLB advances		281			(414	)		(133	)
Other interest-bearing liabilities		221			(223	)		(2	)

Total interest-bearing liabilities		3,076			(2,908	)		168


Change in net interest income	$	14,304		$	(506	)	$	13,798

(1)	Includes loans held for sale.

Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses increased $13.8 million, or 52.3%, to $40.2 million for the six months ended June 30, 2013 from $26.4 million for the comparable 2012 period as a result of growth in average interest-earning assets and net interest margin expansion. Total average interest-earning assets increased $687.5 million, or 44.7%, to $2.22 billion for the first six months of 2013, driven by the acquisition of New England Bank and organic loan growth, partially offset by a decrease in interest-earning cash balances. The net interest margin increased by 17 basis points to 3.61% for the six months ended June 30, 2013 due in large part to a $2.3 million increase in the net accretion of acquisition accounting adjustments to $3.0 million for the first six months of 2013 from $690,000 for the same period in 2012.

Interest Income. Interest income increased $13.9 million, or 41.1%, to $47.9 million for the six months ended June 30, 2013 from $34.0 million for the prior year period due to an increase in average interest-earning assets partially offset by a decrease in the yield on earning assets. The yield on average interest-earning assets decreased by 11 basis points to 4.31% for the first six months of 2013 in connection with the lower interest rate environment, partially offset by an increase of $549,000 in the accretion of loan acquisition accounting adjustments. The decrease in market rates contributed to the downward repricing of a portion of the Company’s existing assets and to lower rates for new assets.

Interest Expense. Interest expense increased $168,000, or 2.2%, to $7.7 million for the six months ended June 30, 2013 from $7.6 million for the prior year period due to growth in average interest-bearing liabilities partially offset by a decrease in the average rate paid on interest-bearing liabilities. Average interest-bearing liabilities increased $581.1 million, or 48.9%, to $1.77 billion for the six months ended June 30, 2013 from $1.19 billion for the prior year period due in large part to the Company’s acquisition of NEBS in the fourth quarter of 2012 and organic deposit growth. The average rate paid on interest-bearing liabilities declined 40 basis points to 0.87% for the six months ended June 30, 2013 reflecting the repricing of deposits in response to the lower interest rate environment and an increase of $1.8 million in the net accretion of acquisition accounting adjustments.

Provision for Loan Losses. The provision for loan losses increased $442,000, or 31.6%, to $1.8 million for the six months ended June 30, 2013, from $1.4 million for the same period in 2012, driven by an increase in general reserves associated with stronger commercial loan origination activity, increases in impaired loan reserves and net charge-offs as well as the continuing shift to a more commercially oriented loan portfolio. Net charge-offs increased from $781,000 for the six months ended June 30, 2012 to $861,000 for the six months ended June 30, 2013. The allowance for loan losses was $13.1 million, or 0.70% of loans outstanding, at June 30, 2013.

Non-interest Income. Non-interest income increased $670,000, or 13.0%, to $5.8 million for the six months ended June 30, 2013. Other income increased $529,000 as a result of a $200,000 gain on an investment in a venture capital fund that is accounted for on a cash basis, higher loan prepayment penalties and late charges as well as increased credit enhancement fees related to loans sold to the FHLBB. Fee income on depositors’ accounts increased $159,000, or 5.4%, driven by growth in overdraft fees, automated teller fees paid by non-customers and other account service charges. Income from bank-owned life insurance increased $147,000, or 16.8%, due in large part to the acquisition of the NEBS portfolio, partially offset by a decrease in the yield on the portfolio assets. These increases were offset in part by losses totaling $50,000 from sales of $2.6 million in private label mortgage-backed securities and decreases of $58,000 in wealth management income and $57,000 in gains on sales of loans.

Non-interest Expense. Non-interest expense increased $9.4 million, or 41.2%, to $32.1 million for the six months ended June 30, 2013 from $22.7 million for the prior year period. Excluding branch closing costs of $987,000 incurred in 2013 and acquisition-related costs totaling $281,000 for the 2013 period and $592,000 for the same period in 2012, non-interest expense would have increased by $8.7 million, or 39.3%. Salaries and benefits increased $3.9 million, or 30.6%, mainly due to costs incurred to support our new Connecticut operations, staffing costs associated with a new loan production office opened in Glastonbury, Connecticut during the second quarter of 2012 and a new branch established in Northborough, Massachusetts during the fourth quarter of 2012, annual wage increases and a larger incentive accrual due to improved operating performance. Other expenses increased $1.5 million, or 50.3%, reflecting increased expenses from the expansion of our franchise into Connecticut (i.e. telephone, depreciation, postage, core deposit intangible amortization, foreclosed properties, business development, printing, office supplies and branch security). Occupancy costs grew $1.2 million, or 69.4%, principally attributable to expenses incurred to operate our new Connecticut facilities as well as expenses related to the new loan production office and new branch. Data processing expenses increased $784,000, or 38.6%, attributable to a larger loan and deposit base as well as increased costs related to software licenses, online banking and debit cards. Professional fees increased $417,000, or 45.8%, primarily due to additional legal and consulting costs associated with our Connecticut operations and increased expenses related to loan workout activities and third party loan reviews.

Income Tax Expense. Income tax expense increased $1.3 million to $3.3 million for six months ended June 30, 2013 from $2.0 million for the comparable 2012 period primarily due to higher pretax income and an increase in the effective tax rate. The effective tax rate increased to 27.4% for the six months ended June 30, 2013 from 26.5% for the same period last year.

Market Risk, Liquidity and Capital Resources

Market Risk

The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk (“IRR”). Our assets, the largest portion of which are mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage IRR and reduce the exposure of our net interest income (“NII”) to changes in market interest rates. Accordingly, our Board of Directors has established an Asset/Liability Management Committee, which is responsible for evaluating the IRR inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. With the assistance of an IRR management consultant, the committee monitors the level of IRR on a regular basis and meets at least quarterly to review our asset/liability policies and IRR position.

We have sought to manage our IRR in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we currently use the following strategies to manage our IRR: (i) using alternative funding sources, such as advances from the FHLBB, to “match fund” certain longer-term loans; (ii) continued emphasis on increasing core deposits; (iii) offering adjustable-rate and shorter-term loans; (iv) offering a variety of consumer loans, which typically have shorter-terms; (v) investing in mortgage-backed securities with variable rates or fixed rates with shorter durations; and (vi) sales of thirty-year fixed-rate residential real estate loans. Reducing the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans and securities with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our NII to changes in market interest rates.

Net interest income at-risk measures the risk of a decline in earnings due to potential short-term and long term changes in interest rates. The table below represents an analysis of our IRR as measured by the estimated changes in NII for the following twelve months, resulting from an instantaneous and sustained parallel shift in the yield curve of +200 and -100 basis points at June 30, 2013 and December 31, 2012.


Net Interest Income At-Risk

Change in Interest Rates (Basis Points)	Estimated Increase (Decrease) in NII (June 30, 2013)	Estimated Increase (Decrease) in NII (December 31, 2012)

-100	(3.3)%	(3.3)%
Stable	0.0%	0.0%
+200	0.4%	2.0%

The preceding income simulation analysis is for the Bank and its subsidiaries only and does not represent a forecast of NII and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and timing of interest rate levels including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, market conditions, prepayment/refinancing levels, the varying impact of interest rate changes on caps and floors embedded in adjustable rate loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables and other factors may vary significantly from assumptions used.

Economic Value of Equity Simulation Analysis. We also utilize a model to compute the amounts by which the net present value of an institution’s cash flows from assets, liabilities and off-balance sheet items (the institution’s economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. The model has estimated the economic value of each type of asset, liability and off-balance sheet contract under the assumption that the United States Treasury yield curve increases or decreases instantaneously by 100 to 300 basis points in 100 basis point increments. However, given the low level of market interest rates, an economic value of equity calculation for an interest rate decrease of greater than 100 basis points was not prepared. A basis point equals one-hundredth of one percent, and 200 basis points equals two percent. An increase in interest rates from 3% to 5% would mean, for example, a 200 basis point increase in the “Change in Interest Rates” column below.

The tables below set forth, at the dates indicated, the estimated changes in our economic value of equity that would result from the designated instantaneous changes in the United States Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. This data is for the Bank and its subsidiaries only and does not include any yield curve changes in the assets of United Financial which, excluding its investment in the Bank, consists primarily of cash and cash equivalents.


		June 30, 2013
										EVE as a Percentage of Present Value of Assets (3)
Change in Interest Rates (basis points) (1)				Estimated Increase (Decrease) in EVE									Increase (Decrease) (basis points)
Change in Interest Rates (basis points) (1)		Estimated EVE (2)		Amount			Percent			EVE Ratio (4)			Increase (Decrease) (basis points)
				(Dollars in thousands)
	+300	$	208,877	$	(90,458	)		(30	)%		9.31	%		(303	)
	+200		257,552		(41,784	)		(14	)		11.14			(120	)
	+100		287,762		(11,573	)		(4	)		12.13			(21	)
	0		299,336		—			—			12.35			—
	-100		315,635		16,300			5			12.78			43


		December 31, 2012
										EVE as a Percentage of Present Value of Assets (3)
Change in Interest Rates (basis points) (1)				Estimated Increase (Decrease) in EVE									Increase (Decrease) (basis points)
Change in Interest Rates (basis points) (1)		Estimated EVE (2)		Amount			Percent			EVE Ratio (4)			Increase (Decrease) (basis points)
				(Dollars in thousands)
	+300	$	253,448	$	(58,910	)		(19	)%		11.31	%		(169	)
	+200		290,998		(21,360	)		(7	)		12.64			(36	)
	+100		311,510		(848	)		—			13.22			22
	0		312,358		—			—			13.00			—
	-100		317,039		4,681			2			12.99			(1	)

(1)	Assumes an instantaneous uniform change in interest rates at all maturities.

(2)	EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

(3)	Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.

(4)	EVE ratio represents EVE divided by the present value of assets.

The tables above indicate that at June 30, 2013 and December 31, 2012, in the event of a 300 basis point increase in interest rates, we would experience a 30% and 19%, respectively, decrease in economic value of equity. In the event of a 100 basis point decrease in interest rates at June 30, 2013 and December 31, 2012, we would experience a 5% and 2%, respectively, increase in economic value of equity.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in economic value of equity require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the economic value of equity table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the economic value of equity table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

Liquidity

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, advances from the FHLBB, loan and mortgage-backed security repayments and maturities and sales of loans and investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, mortgage prepayments and loan and investment sales are greatly influenced by market interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies. We seek to maintain a liquidity ratio (defined as the sum of cash and liquid assets divided by the sum of total deposits and short-term interest-bearing liabilities) of 10% or greater. At June 30, 2013, our liquidity ratio was 14.14% compared to 13.29% at December 31, 2012.

We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are generally invested in interest-bearing deposits and short- and intermediate-term securities.

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2013, cash and cash equivalents totaled $53.0 million. Securities classified as available for sale and held to maturity, which provide additional sources of liquidity, totaled $272.9 million and $86.6 million, respectively, at June 30, 2013. In addition, at June 30, 2013, we had the ability to borrow a total of approximately $379.0 million from the FHLBB and had $130.7 million in advances outstanding.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.

At June 30, 2013, we had $58.7 million in loan commitments outstanding. In addition to commitments to originate loans, we had $330.1 million in unused lines of credit to borrowers, $5.4 million in standby letters of credit and $85.2 million to be disbursed under existing construction loan commitments. Certificates of deposit due within one year of June 30, 2013 totaled $435.5 million, or 22.6% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit, FHLBB advances, borrowings from the Federal Reserve Bank and repurchase agreements. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2014. We believe however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activities are the origination of loans and the purchase of securities. For the six months ended June 30, 2013, we originated $296.2 million of loans and purchased $50.4 million of securities. In the comparable 2012 period, we originated $174.5 million of loans and purchased $51.8 million of securities.

Financing activities consist primarily of activity in deposit accounts and FHLBB advances. We experienced a net increase in total deposits of $76.9 million and $30.6 million for the six months ended June 30, 2013 and 2012, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. FHLBB advances decreased by $10.0 million during the six months ended June 30, 2013 and $3.5 million for the same period in 2012, reflecting the use of cash flows received from the loan and investment portfolios and excess deposit funds to pay down advances.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLBB, which provides an additional source of funds. We have also used FHLBB advances to “match-fund” certain longer-term one- to four-family residential mortgage loans and commercial real estate loans. The Bank’s unused borrowing capacity with the FHLBB, excluding its available line of credit balance of $12.0 million at June 30, 2013 and December 31, 2012, was approximately $236.3 million at June 30, 2013 and $28.3 million at December 31, 2012. At June 30, 2013 and December 31, 2012, the Bank had no borrowings against the line of credit. We also have access to funding through the repurchase agreement and brokered CD markets and have received approval from the Federal Reserve Bank to access its discount window. The Bank’s unused borrowing capacity with the Federal Reserve Bank was approximately $78.1 million at June 30, 2013.

United Financial is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, United Financial is responsible for paying any dividends declared to its shareholders and all interest paid on its subordinated debentures. United Financial also repurchases shares of its common stock. At June 30, 2013, United Financial on an unconsolidated basis had liquid assets of $21.8 million.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments

As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, standby letters of credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made by us. We consider commitments to extend credit in determining our allowance for loan losses.

Contractual Obligations

In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment. The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at June 30, 2013. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.


	Payments Due by Period (In Thousands)
	Less Than One Year		One to Three Years		Three to Five Years		More than Five Years		Total
Contractual Obligations:
Certificates of deposit	$	435,508	$	225,624	$	68,571	$	—	$	729,703
Federal Home Loan Bank advances		56,255		11,000		45,465		18,000		130,720
Repurchase agreements		40,524		—		—		20,000		60,524
Subordinated debentures		—		—		—		7,732		7,732
Standby letters of credit		5,409		—		—		—		5,409
Operating leases		2,141		4,205		3,229		11,161		20,736
Capitalized leases		423		848		848		5,016		7,135
Future benefits to be paid under retirement plans		3,690		162		1,530		5,398		10,780

Total	$	543,950	$	241,839	$	119,643	$	67,307	$	972,739

Commitments:
Commitments to extend credit	$	479,406	$	—	$	—	$	—	$	479,406
Investment in venture capital fund		200		—		—		—		200
Investment in tax credit funds		3,030		413		—		—		3,443

Total	$	482,636	$	413	$	—	$	—	$	483,049

Capital Resources

The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2013, the Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory requirements.


	Actual			For Capital Adequacy Purposes			To Be Well Capitalized Under Regulatory Framework
As of June 30, 2013:
Total risk-based capital		12.58	%		8.00	%		10.00	%
Tier 1 risk-based capital		11.93	%		4.00	%		6.00	%
Tier 1 (core) capital		10.02	%		4.00	%		5.00	%
Tangible equity		10.02	%		1.50	%		N/A

As of December 31, 2012:
Total risk-based capital		13.61	%		8.00	%		10.00	%
Tier 1 risk-based capital		12.98	%		4.00	%		6.00	%
Tier 1 (core) capital		10.69	%		4.00	%		5.00	%
Tangible equity		10.69	%		1.50	%		N/A

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is included above in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the caption “Market Risk, Liquidity and Capital Resources.”

ITEM 4.

Controls and Procedures

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and in a timely manner alerting them to material information relating to the Company (or its consolidated subsidiary) required to be filed in its periodic SEC filings.

No change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) occurred during the three months ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In the ordinary course of business, we routinely enhance our internal controls and procedures for financial reporting by either upgrading our current systems or implementing new systems. Changes have been made and will be made to our internal controls and procedures for financial reporting as a result of these efforts.

PART II. OTHER INFORMATION

ITEM 1.

Legal Proceedings

The Bank, as successor in interest to Commonwealth National Bank, is involved in litigation relating to a loan foreclosure. The litigants claim that Commonwealth National Bank acted in bad faith and in violation of applicable law and that its actions resulted in a sale of the underlying property for less than its market value, thereby causing damage to the parties. A trial was held in the third quarter of 2011 and the judge ruled in the Bank’s favor. The litigants have appealed the decision. The Bank believes these claims and the appeal are without merit and is vigorously defending the litigation. No estimate of any reasonably possible loss or range of loss to the Bank can be made at this time.

ITEM 1A.

Risk Factors

In addition to the other information set forth in this report, the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition or future results, should be carefully considered. At June 30, 2013, the risk factors for the Company have not changed materially from those reported in our Annual Report on Form 10-K.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a) No unregistered securities were sold by the Company during the quarter ended June 30, 2013.

(b) Not applicable.

(c) The following table provides certain information with regard to shares repurchased by the Company in the second quarter of 2013.


Period	(a) Total Number of Shares (or Units) Purchased			(b) Average Price Paid Per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)

April 1 - 30, 2013		262,217		$	14.85		262,217		275,071

May 1 - 31, 2013		22,413	⁽²⁾		14.89		22,034		253,037

June 1 - 30, 2013		11,153	⁽³⁾		14.27		—		253,037


Total		295,783		$	14.83		284,251

(1)

On October 18, 2012, the Board of Directors approved a plan to repurchase up to 5%, or approximately 769,000 shares, of the Company’s common stock. Under the plan, the Company intends to repurchase shares from time to time, depending on market conditions until it is completed. As of June 30, 2013, the Company has repurchased 515,963 shares at a cost of approximately $7.7 million and an average price of $14.88 per share, under this plan.

(2)	Includes the withholding of 379 shares at $14.27 per share as payment of taxes due upon the vesting of the restricted stock awards under the United Financial Bancorp, Inc. 2008 Equity Incentive Plan.

(3)	Represents withholdings subject to restricted stock awards under the United Financial Bancorp, Inc. 2008 Equity Incentive Plan as payment of taxes due upon the vesting of the restricted stock awards.

ITEM 3.

Defaults Upon Senior Securities

Not applicable.

ITEM 4.

Mine Safety Disclosures

Not applicable.

ITEM 5.

Other Information

Not applicable.

ITEM 6.

Exhibits.


3.1		Articles of Incorporation of United Financial Bancorp, Inc. (1)

3.2		Amended and Restated Bylaws of United Financial Bancorp, Inc. (2)

4.0		Form of Common Stock Certificate of United Financial Bancorp, Inc. (1)

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.0		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Net Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.*

(1)	Incorporated by reference to the Registration Statement on Form S-1 of United Financial Bancorp, Inc. (File No. 333-144245), originally filed with the Securities and Exchange Commission on June 29, 2007.

(2)	Incorporated by reference to the Form 10-K of United Financial Bancorp, Inc. filed with the Securities and Exchange Commission on March 13, 2009.

*	Furnished, not filed

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.


	United Financial Bancorp, Inc.

Date: August 8, 2013	By:	/s/ Richard B. Collins
		Richard B. Collins
		Chairman, President and Chief Executive Officer

Date: August 8, 2013	By:	/s/ Mark A. Roberts
		Mark A. Roberts
		Executive Vice President and Chief Financial Officer