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

Form 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, 2012

¨	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

15,517,924 shares outstanding as of August 1, 2012

INDEX


		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Condition (unaudited) June 30, 2012 and December 31, 2011		1

	Consolidated Statements of Earnings (unaudited) Three Months and Six Months Ended June 30, 2012 and 2011		2

	Consolidated Statements of Comprehensive Income (unaudited) Three Months and Six Months Ended June 30, 2012 and 2011		3

	Consolidated Statements of Stockholders’ Equity (unaudited) Six Months Ended June 30, 2012 and 2011		4

	Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 30, 2012 and 2011		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		40

Item 4.	Controls and Procedures		40

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		40

Item 1A.	Risk Factors		40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		41

Item 3.	Defaults Upon Senior Securities		41

Item 4.	Mine Safety Disclosures		41

Item 5.	Other Information		41

Item 6.	Exhibits		42

SIGNATURES			43

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, 2012			December 31, 2011
ASSETS

Cash and due from banks	$	21,652		$	20,112
Interest-bearing deposits		20,755			41,406

Total cash and cash equivalents		42,407			61,518

Securities available for sale, at fair value		243,897			221,813
Securities held to maturity, at amortized cost (fair value of $102,290 at June 30, 2012 and $118,311 at December 31, 2011)		99,421			115,897
Loans held for sale		835			53
Loans, net of allowance for loan losses of $11,751 at June 30, 2012 and $11,132 at December 31, 2011		1,152,889			1,112,941
Other real estate owned		2,397			2,054
Accrued interest receivable		4,603			4,846
Deferred tax asset, net		14,221			14,006
Stock in the Federal Home Loan Bank of Boston		14,454			15,365
Banking premises and equipment, net		17,638			16,438
Bank-owned life insurance		41,469			40,688
Goodwill		8,192			8,192
Other assets		11,203			9,941

TOTAL ASSETS	$	1,653,626		$	1,623,752


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Interest-bearing	$	1,032,118		$	1,024,073
Non-interest-bearing		228,495			205,902

Total deposits		1,260,613			1,229,975
Short-term borrowings		17,772			17,260
Long-term debt		125,025			126,857
Subordinated debentures		5,585			5,539
Escrow funds held for borrowers		1,804			2,103
Capitalized lease obligations		4,794			4,874
Accrued expenses and other liabilities		9,904			9,783

Total liabilities		1,425,497			1,396,391


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; 18,706,933 shares issued and outstanding at June 30, 2012 and December 31, 2011		187			187
Paid-in capital		183,077			182,433
Retained earnings		91,836			89,019
Unearned compensation		(9,695	)		(10,047	)
Treasury stock, at cost (3,186,409 shares at June 30, 2012 and 2,994,036 shares at December 31, 2011)		(44,051	)		(40,983	)
Accumulated other comprehensive income, net of taxes		6,775			6,752

Total stockholders’ equity		228,129			227,361

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,653,626		$	1,623,752

See notes to unaudited consolidated financial statements

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)

(Dollars in thousands, except per share amounts)


	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012		2011
Interest and dividend income:
Loans	$	14,181	$	14,703		$	28,256	$	29,190
Investments		2,767		3,387			5,622		6,578
Other interest-earning assets		51		38			92		78

Total interest and dividend income		16,999		18,128			33,970		35,846

Interest expense:
Deposits		2,598		3,194			5,351		6,491
Short-term borrowings		13		30			33		67
Long-term debt		1,094		1,522			2,192		3,115

Total interest expense		3,705		4,746			7,576		9,673

Net interest income before provision for loan losses		13,294		13,382			26,394		26,173

Provision for loan losses		750		673			1,400		1,481


Net interest income after provision for loan losses		12,544		12,709			24,994		24,692


Non-interest income:
Fee income on depositors’ accounts		1,529		1,373			2,937		2,665
Wealth management income		289		214			516		454
Income from bank-owned life insurance		436		393			876		724
Net gain on sale of loans		162		50			270		73
Net gain on sale of securities		—		—			—		1
Impairment charges on securities		—		(59	)		—		(59	)
Other income		154		240			544		502

Total non-interest income		2,570		2,211			5,143		4,360


Non-interest expense:
Salaries and benefits		6,286		6,414			12,728		12,683
Occupancy expenses		870		805			1,744		1,649
Marketing expenses		501		635			941		1,082
Data processing expenses		1,011		984			2,031		1,972
Professional fees		404		407			910		1,068
Acquisition related expenses		592		—			592		—
FDIC insurance assessments		267		244			536		574
Low income housing tax credit fund		—		197			243		395
Other expenses		1,537		1,717			3,018		2,920

Total non-interest expense		11,468		11,403			22,743		22,343


Income before income taxes		3,646		3,517			7,394		6,709

Income tax expense		1,064		827			1,963		1,590


Net income	$	2,582	$	2,690		$	5,431	$	5,119


Earnings per share:
Basic	$	0.18	$	0.18		$	0.37	$	0.34
Diluted	$	0.17	$	0.18		$	0.36	$	0.33

Weighted average shares outstanding:
Basic		14,542,642		15,028,468			14,606,624		15,022,249
Diluted		14,787,690		15,309,156			14,887,361		15,285,246

Dividends paid per share	$	0.09	$	0.08		$	0.18	$	0.16

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,
	2012			2011			2012			2011

Net Income	$	2,582		$	2,690		$	5,431		$	5,119

Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains on availible-for-sale securities		374			2,181			39			1,628
Reclassification adjustment for gains realized in income		—			—			—			(1	)

Net change in unrealized gains		374			2,181			39			1,627
Tax effect		(148	)		(854	)		(16	)		(646	)


Net of tax amount		226			1,327			23			981


Comprehensive income	$	2,808		$	4,017		$	5,454		$	6,100

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, 2012 and 2011

(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		Total
Balances at December 31, 2010		16,109,106		$	187	$	180,322		$	82,899		$	(10,750	)	$	(34,940	)	$	4,858	$	222,576
Net income		—			—		—			5,119			—			—			—		5,119
Other comprehensive income		—			—		—			—			—			—			981		981
Cash dividends paid ($0.16 per share)		—			—		—			(2,400	)		—			—			—		(2,400	)
Treasury stock purchases		(13,896	)		—		—			—			—			(195	)		—		(195	)
Shares repurchased in connection with restricted stock forfeited for tax purposes		(11,336	)		—		—			—			—			(170	)		—		(170	)
Restricted shares forfeited		(10,910	)		—		181			—			—			(181	)		—		—
Excess tax benefit on stock compensation plans		—			—		50			—			—			—			—		50
Cancellation of shares for tax withholdings on options exercised		—			—		(22	)		—			—			—			—		(22	)
Reissuance of treasury shares in connection with stock options exercised		16,514			—		—			—			—			200			—		200
Reissuance of treasury shares in connection with restricted stock grants		9,997			—		(158	)		—			—			158			—		—
Stock-based compensation		—			—		1,069			—			—			—			—		1,069
ESOP shares committed to be released		—			—		212			—			345			—			—		557

Balances at June 30, 2011		16,099,475		$	187	$	181,654		$	85,618		$	(10,405	)	$	(35,128	)	$	5,839	$	227,765


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

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, 2012 and 2011

(Dollars in thousands)


	2012			2011
Cash flows from operating activities:
Net income	$	5,431		$	5,119
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,400			1,481
ESOP expense		558			557
Stock-based compensation		712			1,069
Excess tax benefits on stock compensation plan		(29	)		(50	)
Amortization of premiums and discounts		935			697
Depreciation and amortization		808			494
Amortization of intangible assets		46			50
Net loss on sale and write down of other real estate owned		69			21
Impairment charges on securities		—			59
Net gain on sale/call of available for sale securities		—			(1	)
Loans originated for sale		(10,396	)		(4,516	)
Proceeds from sales of loans held for sale		9,884			4,247
Net gain on sale of loans		(270	)		(73	)
Deferred tax benefit		(215	)		(646	)
Net increase in cash surrender value of bank-owned life insurance		(781	)		(724	)
Decrease (increase) in accrued interest receivable		243			(129	)
Increase in other assets		(1,324	)		(3,421	)
Increase (decrease) in accrued expenses and other liabilities		867			(312	)

Net cash provided by operating activities		7,938			3,922

Cash flows from investing activities:
Purchases of securities available for sale		(51,636	)		(69,491	)
Proceeds from maturities, calls and principal repayments of securities available for sale		29,292			32,897
Purchases of securities held to maturity		(125	)		—
Proceeds from maturities, calls and principal repayments of securities held to maturity		15,965			11,100
Redemption of Federal Home Loan Bank of Boston stock		911			—
Proceeds from sales of other real estate owned		1,096			732
Net loan originations, purchases and principal repayments		(42,856	)		(32,077	)
Purchases of property and equipment		(2,001	)		(1,180	)
Cash paid for merger related expenses		(592	)		—
Purchases of bank-owned life insurance		—			(9,928	)

Net cash used in investing activities		(49,946	)		(67,947	)

(Continued)

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

FOR THE SIX MONTHS ENDED JUNE 30, 2012 and 2011 (Concluded)

(Dollars in thousands)


	2012			2011
Cash flows from financing activities:
Net increase in deposits	$	30,638		$	45,969
Net change in short-term borrowings		512			(4,327	)
Net change in long-term debt		(1,786	)		(18,488	)
Net decrease in escrow funds held for borrowers		(299	)		(6	)
Payments on capitalized lease obligations		(212	)		(203	)
Excess tax benefits on stock compensation plan		29			50
Cancellation of shares for tax withholdings on options exercised		(88	)		(22	)
Reissuance of treasury shares in connection with stock options exercised		45			—
Reissuance of treasury shares in connection with restricted stock warrants		—			200
Treasury stock purchases		(3,314	)		(365	)
Cash dividends paid		(2,628	)		(2,400	)

Net cash provided by financing activities		22,897			20,408

Decrease in cash and cash equivalents		(19,111	)		(43,617	)
Cash and cash equivalents at beginning of period		61,518			83,069

Cash and cash equivalents at end of period	$	42,407		$	39,452


Supplemental Disclosure of Cash Flow Information:
Cash paid during the period:
Interest on deposits, borrowings and other interest bearing liabilities	$	7,864		$	10,048
Income taxes – net		5,267			4,628
Non-cash items:
Transfer of loans to other real estate owned		1,508			2,075
Trade date accounting for securities purchased		—			(3,002	)

See notes to unaudited consolidated financial statements.

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

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, which was 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, 2012 and the results of operations for the three and six months ended June 30, 2012 and 2011. 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, 2011 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 12, 2012.

NOTE B – PENDING ACQUISITION

On May 30, 2012, United Financial entered into a definitive agreement with New England Bancshares, Inc. (“NEBS”), the holding company for New England Bank, pursuant to which NEBS will merge with and into the Company. Concurrent with the merger, it is expected that New England Bank will merge with and into United Bank. Under the terms of the merger agreement, at the effective time of the merger, each share of NEBS common stock will be converted into the right to receive 0.9575 of a share of Company common stock. The consideration received by New England Bancshares stockholders is intended to qualify as tax-free.

The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval of the merger by shareholders of the Company and NEBS. The Merger Agreement contains provisions that provide for the termination of the Merger Agreement in certain circumstances, and such provisions may require New England Bancshares to pay the Company a termination fee of $3.2 million. Currently, the merger is expected to be completed in the fourth quarter of 2012.

A Form 8-K was filed with the Securities and Exchange Commission (the “SEC”) by United Financial on May 31, 2012 which contains additional information regarding the merger.

NOTE C – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The guidance clarifies and expands the disclosures pertaining to unobservable inputs used in Level 3 fair value measurements, including the disclosure of quantitative information related to (1) the valuation processes used, (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs from the asset’s highest and best use. The guidance also requires disclosure of the level within the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. The amendments in this Update are to be applied prospectively, effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted. This ASU was adopted in the first quarter of 2012 and did not have an impact on the Company’s consolidated financial statements as the amendments relate only to changes in financial statement presentation.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This ASU amends the disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholder’s equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early application is permitted. In December 2011, the FASB issued ASU 2011-12 to defer changes that relate to the presentation of reclassification adjustments but the other requirements of ASU 2011-05 remain in effect. This ASU was adopted in the first quarter of 2012 and did not have an impact to the consolidated financial results as the amendments relate only to changes in financial statement presentation.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350), Testing Goodwill for Impairment. This ASU is intended to reduce the complexity and cost of performing an evaluation of impairment of goodwill. Under the new guidance, an entity will have the option of first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If, after considering all relevant events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test will be unnecessary. This ASU was adopted in the first quarter of 2012 and did not have an impact on the Company’s consolidated financial statements.

NOTE D – 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 restructure (“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 initially 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.

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.

In the second quarter of 2012, management made refinements to its allowance for loan loss methodology to incorporate the Business Banking unit into the Company’s formula-based approach. This refinement did not have a significant effect on the second quarter’s loan loss provision or the total allowance for loan loss.

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 $89,000 and $0 at June 30, 2012 and 2011.

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 held to maturity and available for sale debt securities, impairment is required to be recognized (1) if we intend to sell the security; (2) if 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 held to maturity and available for sale 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 held to maturity or available for sale 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 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 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 E – 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				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Net income	$	2,582	$	2,690	$	5,431	$	5,119

Weighted average common shares applicable to basic EPS (1)		14,542,642		15,028,468		14,606,624		15,022,249
Effect of dilutive potential common shares (2) (3)		245,048		280,688		280,737		262,997

Weighted average common shares applicable to diluted EPS		14,787,690		15,309,156		14,887,361		15,285,246


Earnings per share:
Basic	$	0.18	$	0.18	$	0.37	$	0.34
Diluted	$	0.17	$	0.18	$	0.36	$	0.33

(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 187,300 and 245,589 shares for the three months ended June 30, 2012 and 2011, respectively, and 167,036 and 240,037 shares for the six months ended June 30, 2012 and 2011, 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 F – 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,			December 31,
	2012			2011

Net unrealized gain on securities available for sale	$	11,880		$	11,841
Tax effect		(4,496	)		(4,480	)

Net-of-tax amount		7,384			7,361


Pension liability		(1,045	)		(1,045	)
Tax effect		436			436

Net-of-tax amount		(609	)		(609	)


Accumulated other comprehensive income	$	6,775		$	6,752

NOTE G – 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, 2012:
Debt Securities:
Government-sponsored enterprises	$	160	$	3	$	—		$	163
Government-sponsored and government- guaranteed mortgage-backed securities		220,958		11,020		(22	)		231,956
Private label mortgage-backed securities		1,685		36		(1	)		1,720
Municipal bonds		7,759		627		(1	)		8,385
Corporate bonds		1,455		324		(106	)		1,673

Total	$	232,017	$	12,010	$	(130	)	$	243,897


December 31, 2011:
Debt Securities:
Government-sponsored enterprises	$	187	$	5	$	—		$	192
Government-sponsored and government- guaranteed mortgage-backed securities		198,446		11,047		—			209,493
Private label mortgage-backed securities		2,127		68		(17	)		2,178
Municipal bonds		7,759		625		—			8,384
Corporate bonds		1,453		244		(131	)		1,566

Total	$	209,972	$	11,989	$	(148	)	$	221,813


	Amortized		Unrealized
	Cost		Gains		Losses			Fair Value
Securities Held to Maturity
June 30, 2012:
Government-sponsored and government- guaranteed mortgage-backed securities	$	73,808	$	2,418	$	—		$	76,226
Private label mortgage-backed securities		113		4		—			117
Industrial revenue bonds		18,992		—		—			18,992
State of Israel bonds		150		—		(2	)		148
Municipal bonds		6,358		449		—			6,807

Total	$	99,421	$	2,871	$	(2	)	$	102,290


December 31, 2011:
Government-sponsored and government- guaranteed mortgage-backed securities	$	89,955	$	2,026	$	(32	)	$	91,949
Private label mortgage-backed securities		163		4		—			167
Industrial revenue bonds		19,000		—		—			19,000
State of Israel bonds		150		—		—			150
Municipal bonds		6,629		416		—			7,045

Total	$	115,897	$	2,446	$	(32	)	$	118,311

The scheduled maturities of debt securities available for sale and held to maturity at June 30, 2012 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, 2012
	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

Due in one year or less	$	161	$	163	$	155	$	156
Due from one year to five years		98		106		597		620
Due from five years to ten years		5,296		5,702		1,729		1,870
Due after ten years		3,819		4,250		23,019		23,301

	$	9,374	$	10,221	$	25,500	$	25,947
Mortgage-backed securities		222,643		233,676		73,921		76,343

	$	232,017	$	243,897	$	99,421	$	102,290

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, 2012 and December 31, 2011 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, 2012:
Securities Available for Sale
Debt Securities:
Government-sponsored and government-guaranteed mortgage- backed securities	$	10,087	$	(22	)	$	—	$	—			3	$	10,087	$	(22	)
Private label mortgage-backed securities		—		—			474		(1	)		1		474		(1	)
Municipal bonds		288		(1	)		—		—			1		288		(1	)
Corporate bonds		—		—			224		(106	)		1		224		(106	)

Total	$	10,375	$	(23	)	$	698	$	(107	)		6	$	11,073	$	(130	)


Securities Held to Maturity
State of Israel bonds	$	123	$	(2	)	$	—	$	—			1	$	123	$	(2	)

Total	$	123	$	(2	)	$	—	$	—			1	$	123	$	(2	)


	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, 2011:
Securities Available for Sale
Debt Securities:
Private label mortgage-backed securities	$	—	$	—		$	614	$	(17	)		1	$	614	$	(17	)
Corporate bonds		—		—			198		(131	)		1		198		(131	)

Total	$	—	$	—		$	812	$	(148	)		2	$	812	$	(148	)


Securities Held to Maturity
Government-sponsored and government-guaranteed mortgage- backed securities	$	7,444	$	(32	)	$	—	$	—			2	$	7,444	$	(32	)

Total	$	7,444	$	(32	)	$	—	$	—			2	$	7,444	$	(32	)

Management has determined that no declines in the fair value of the Company’s securities portfolio represent other-than-temporary impairment as of June 30, 2012. 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, our intent and ability to hold the securities to expected recovery of value and other meaningful information. The Company does not intend to sell any debt securities and is unlikely to be required to sell any security before its maturity or market price recovery.

NOTE H – LOANS

The components of the loan portfolio were as follows at June 30, 2012 and December 31, 2011:


	June 30, 2012			December 31, 2011
Commercial:
Commercial and industrial	$	193,430		$	176,086
Commercial mortgages		476,447			450,180
Construction		30,011			30,271
Consumer:
Residential mortgages		311,270			314,839
Home equity		137,658			135,518
Consumer		13,540			14,985

Total loans		1,162,356			1,121,879
Net deferred loan costs and fees		2,284			2,194
Allowance for loan losses		(11,751	)		(11,132	)

Loans, net	$	1,152,889		$	1,112,941

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, 2012 and December 31, 2011, the Company was servicing loans for participants aggregating $43.5 million and $43.8 million, respectively.

As of June 30, 2012, the Company had two loans that were transferred to participants, which did not meet the requirements to be considered a participating interest. The transferred portion is reported as secured borrowings on the statement of condition, in the amount of $1.6 million. Total secured borrowings were $2.1 million at June 30, 2012 and are reported in long-term debt on the consolidated statement of condition.

A summary of the activity pertaining to the allowance for loan losses for the three and six months ended June 30, 2012 and 2011 is as follows:


	Commercial and Industrial			Commercial Real Estate			Construction			Business Banking Commercial and Industrial			Business 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		(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


	Commercial and Industrial			Commercial Real Estate			Construction			Residential			Home Equity			Consumer			Unallocated		Total
Three Months Ended
June 30, 2011:
Beginning balance	$	3,112		$	5,278		$	867		$	621		$	477		$	113		$	—	$	10,468
Charge-offs		(189	)		(422	)		—			(3	)		(7	)		(4	)		—		(625	)
Recoveries		69			52			3			—			—			—			—		124
Provision		316			271			(82	)		160			7			1			—		673

Ending balance	$	3,308		$	5,179		$	788		$	778		$	477		$	110		$	—	$	10,640


	Commercial and Industrial			Commercial Real Estate			Construction			Business Banking Commercial and Industrial			Business 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		(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

The Company has established a Business Banking unit within its Commercial Lending Department. 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.


	Commercial and Industrial			Commercial Real Estate			Construction			Residential			Home Equity			Consumer			Unallocated		Total
Six Months Ended
June 30, 2011:
Beginning balance	$	2,801		$	5,000		$	668		$	740		$	623		$	155		$	—	$	9,987
Charge-offs		(514	)		(534	)		(28	)		(3	)		(7	)		(4	)		—		(1,090	)
Recoveries		205			52			3			—			—			2			—		262
Provision		816			661			145			41			(139	)		(43	)		—		1,481

Ending balance	$	3,308		$	5,179		$	788		$	778		$	477		$	110		$	—	$	10,640

Further information pertaining to the allowance for loan losses at June 30, 2012 and December 31, 2011 is as follows:


	Commercial and Industrial		Commercial Real Estate		Construction		Residential		Home Equity		Consumer		Unallocated		Total
At June 30, 2012:
Amount of allowance for loan losses for loans deemed to be impaired and individually evaluated for impairment	$	—	$	210	$	—	$	—	$	—	$	—	$	—	$	210

Amount of allowance for loan losses for loans not deemed to be impaired and collectively evaluated for impairment	$	2,793	$	5,022	$	742	$	690	$	379	$	97	$	373	$	10,096

Amount of allowance for loan losses for loans acquired with deteriorated credit quality	$	35	$	—	$	—	$	—	$	—	$	—	$	—	$	35

Total loans	$	193,430	$	476,447	$	30,011	$	311,270	$	137,658	$	13,540	$	—	$	1,162,356

Loans deemed to be impaired and individually evaluated for impairment	$	2,808	$	4,352	$	592	$	—	$	—	$	—	$	—	$	7,752

Loans not deemed to be impaired and collectively evaluated for impairment	$	190,536	$	471,587	$	29,419	$	311,270	$	137,658	$	13,540	$	—	$	1,154,010

Loans acquired with deteriorated credit quality and deemed to be impaired	$	86	$	508	$	—	$	—	$	—	$	—	$	—	$	594


	Commercial and Industrial		Commercial Real Estate		Construction		Residential		Home Equity		Consumer		Unallocated		Total
At December 31, 2011:
Amount of allowance for loan losses for loans deemed to be impaired and individually evaluated for impairment	$	65	$	—	$	70	$	—	$	—	$	—	$	—	$	135

Amount of allowance for loan losses for loans not deemed to be impaired and collectively evaluated for impairment	$	3,381	$	5,472	$	790	$	666	$	474	$	114	$	—	$	10,897

Amount of allowance for loan losses for loans acquired with deteriorated credit quality	$	—	$	100	$	—	$	—	$	—	$	—	$	—	$	100

Total loans	$	176,086	$	450,180	$	30,271	$	314,839	$	135,518	$	14,985	$	—	$	1,121,879

Loans deemed to be impaired and individually evaluated for impairment	$	3,084	$	1,770	$	330	$	1,169	$	56	$	163	$	—	$	6,572

Loans not deemed to be impaired and collectively evaluated for impairment	$	172,582	$	446,939	$	29,941	$	313,422	$	135,462	$	14,822	$	—	$	1,113,168

Loans acquired with deteriorated credit quality and deemed to be impaired	$	420	$	1,471	$	—	$	248	$	—	$	—	$	—	$	2,139

The following is a summary of past due loans at June 30, 2012 and December 31, 2011:


	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, 2012:
Commercial:
Commercial and industrial	$	72	$	150	$	2,590	$	2,812	$	190,618	$	193,430	$	—
Commercial real estate		1,133		464		2,295		3,892		472,555		476,447		—
Construction		241		—		—		241		29,770		30,011		—
Consumer:
Residential real estate		2,360		263		1,715		4,338		306,932		311,270		—
Home equity		821		75		120		1,016		136,642		137,658		—
Consumer		71		90		—		161		13,379		13,540		—

Total	$	4,698	$	1,042	$	6,720	$	12,460	$	1,149,896	$	1,162,356	$	—


At December 31, 2011:
Commercial:
Commercial and industrial	$	544	$	205	$	2,728	$	3,477	$	172,609	$	176,086	$	—
Commercial real estate		2,518		1,028		2,131		5,677		444,503		450,180		—
Construction		—		—		330		330		29,941		30,271		—
Consumer:
Residential real estate		8,747		1,984		1,417		12,148		302,691		314,839		—
Home equity		1,087		—		56		1,143		134,375		135,518		—
Consumer		376		1		163		540		14,445		14,985		—

Total	$	13,272	$	3,218	$	6,825	$	23,315	$	1,098,564	$	1,121,879	$	—

The following is a summary of impaired loans at June 30, 2012 and December 31, 2011:


	At June 30, 2012						At December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial and industrial	$	2,808	$	2,808			$	1,379	$	2,115
Commercial real estate		4,173		4,173				1,961		2,073
Construction		592		592				190		259
Residential real estate		—		—				1,417		1,417
Home Equity		—		—				56		56
Consumer		—		—				164		164

Total	$	7,573	$	7,573			$	5,167	$	6,084

With an allowance recorded:
Commercial and industrial	$	86	$	86	$	35	$	2,125	$	2,125	$	65
Commercial real estate		687		687		210		1,279		1,279		100
Construction		—		—		—		140		140		70

Total	$	773	$	773	$	245	$	3,544	$	3,544	$	235

By portfolio segment:
Commercial portfolio segment	$	8,346	$	8,346	$	245	$	7,074	$	7,991	$	235
Consumer portfolio segment		—		—		—		1,637		1,637		—

Total impaired loans	$	8,346	$	8,346	$	245	$	8,711	$	9,628	$	235

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


	Three Months Ended June 30, 2012						Three Months Ended June 30, 2011
	Average		Interest Income				Average		Interest Income
	Recorded				Recognized		Recorded				Recognized
	Investment on				on a		Investment on				on a
	Impaired Loans		Recognized		Cash Basis		Impaired Loans		Recognized		Cash Basis
Commercial:
Commercial and industrial	$	4,456	$	1	$	—	$	3,322	$	—	$	—
Commercial real estate		3,877		10		2		3,230		33		33
Construction		781		6		—		1,204		7		3
Consumer:
Residential real estate		—		—		2		1,351		16		16
Home Equity		—		—		—		81		1		1
Consumer		—		—		—		94		—		—

Total	$	9,114	$	17	$	4	$	9,282	$	57	$	53


	Six Months Ended June 30, 2012						Six Months Ended June 30, 2011
	Average		Interest Income				Average		Interest Income
	Recorded				Recognized		Recorded				Recognized
	Investment on				on a		Investment on				on a
	Impaired Loans		Recognized		Cash Basis		Impaired Loans		Recognized		Cash Basis
Commercial:
Commercial and industrial	$	4,073	$	9	$	8	$	3,104	$	4	$	4
Commercial real estate		3,731		25		7		5,045		63		63
Construction		743		13		—		1,212		23		19
Consumer:
Residential real estate		—		—		2		977		21		21
Home Equity		—		—		—		75		1		1
Consumer		—		—		—		80		2		2

Total	$	8,547	$	47	$	17	$	10,493	$	114	$	110

The following is a summary of non-accrual loans, at June 30, 2012 and December 31, 2011:


	June 30, 2012		December 31, 2011
Commercial:
Commercial and industrial	$	2,942	$	3,504
Commercial real estate		4,117		2,984
Construction		—		330
Consumer:
Residential real estate		1,262		1,417
Home equity		292		56
Consumer		—		163

Total	$	8,613	$	8,454

The following table represents modifications that were deemed to be troubled debt restructures for the three and six months ended June 30, 2012 and 2011:


	Three Months Ended June 30, 2012						Three Months Ended June 30, 2011
	Number of		Outstanding Recorded Investment				Number of		Outstanding Recorded Investment
	Contracts		Pre-Modification		Post-Modification		Contracts		Pre-Modification		Post-Modification
Troubled Debt
Restructurings:

Commercial and industrial		1	$	140	$	140		1	$	873	$	873
Commercial real estate		4		1,211		1,211		—		—		—
Construction		2		613		613		—		—		—

Total		7	$	1,964	$	1,964		1	$	873	$	873


	Six Months Ended June 30, 2012						Six Months Ended June 30, 2011
	Number of		Outstanding Recorded Investment				Number of		Outstanding Recorded Investment
	Contracts		Pre-Modification		Post-Modification		Contracts		Pre-Modification		Post-Modification
Troubled Debt
Restructurings:

Commercial and industrial		1	$	140	$	140		1	$	873	$	873
Commercial real estate		4		1,211		1,211		1		248		263
Construction		2		613		613		—		—		—

Total		7	$	1,964	$	1,964		2	$	1,121	$	1,136

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 restructures. Any reserve required is recorded through the provision for loan losses.

As of June 30, 2012, there have been no TDRs that have subsequently defaulted 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 mobile home 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 table presents the Company’s loan segment by internally assigned grades:


	At June 30, 2012
Commercial:	Commercial & Industrial		Commercial Real Estate		Construction		Total
Grade:
Pass	$	177,066	$	453,757	$	24,277	$	655,100
Special Mention		6,319		5,814		433		12,566
Substandard		9,376		16,876		5,301		31,553
Doubtful		669		—		—		669

Total	$	193,430	$	476,447	$	30,011	$	699,888


Consumer:	Residential		Home Equity		Consumer		Total
Grade:
Pass	$	309,394	$	137,423	$	13,482	$	460,299
Special Mention		—		—		—		—
Substandard		1,876		235		58		2,169
Doubtful		—		—		—		—

Total	$	311,270	$	137,658	$	13,540	$	462,468


	At December 31, 2011
Commercial:	Commercial & Industrial		Commercial Real Estate		Construction		Total
Grade:
Pass	$	157,026	$	419,818	$	23,955	$	600,799
Special Mention		7,730		10,965		1,057		19,752
Substandard		11,230		19,397		5,259		35,886
Doubtful		100		—		—		100

Total	$	176,086	$	450,180	$	30,271	$	656,537


Consumer:	Residential		Home Equity		Consumer		Total
Grade:
Pass	$	311,921	$	135,253	$	14,723	$	461,897
Special Mention		52		—		—		52
Substandard		2,866		265		262		3,393
Doubtful		—		—		—		—

Total	$	314,839	$	135,518	$	14,985	$	465,342

NOTE I – COMMITMENTS

Financial instruments with off-balance sheet risk at June 30, 2012 and December 31, 2011 were as follows:


	June 30, 2012		December 31, 2011
Unused lines of credit	$	255,995	$	250,034
Amounts due mortgagors		20,428		27,495
Standby letters of credit		3,345		4,004
Commitments to originate loans		36,178		32,689

The Company has a commitment to invest up to $1.0 million in a venture capital fund. As of June 30, 2012, the Company has contributed $700,000 to the fund.

The Company has committed to invest up to $12.0 million in two low income housing tax credit funds by the end of 2015. At June 30, 2012, the Company invested $6.7 million in the funds, which have been reduced by net operating losses of $1.3 million. The net carrying balance of $5.5 million is included in other assets on the Company’s consolidated statement of condition. Tax benefits in the form of net operating losses are recognized as they are incurred and recorded in non-interest expense.

NOTE J – DEPOSITS

Deposit accounts, by type, are summarized as follows at June 30, 2012 and December 31, 2011:


	June 30, 2012		December 31, 2011

Demand	$	228,495	$	205,902
NOW		62,064		52,899
Savings		261,586		247,664
Money market		292,763		301,770
Certificates of deposit		415,705		421,740

	$	1,260,613	$	1,229,975

NOTE K – CONTINGENCIES

The Bank, as successor in interest to Commonwealth National Bank, is involved in litigation relating to its foreclosure on a certain loan property. 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 L – 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, 2012
Securities available for sale:
Government-sponsored enterprises	$	—	$	163	$	—	$	163
Government-sponsored and government- guaranteed mortgage-backed securities		—		231,956		—		231,956
Private label mortgage-backed securities		—		1,720		—		1,720
Municipal bonds		—		8,385		—		8,385
Corporate bonds		—		—		1,673		1,673

Total	$	—	$	242,224	$	1,673	$	243,897


	Level 1		Level 2		Level 3		Total Fair Value
At December 31, 2011
Securities available for sale:
Government-sponsored enterprises	$	—	$	192	$	—	$	192
Government-sponsored and government- guaranteed mortgage-backed securities		—		209,493		—		209,493
Private label mortgage-backed securities		—		2,178		—		2,178
Municipal bonds		—		8,384		—		8,384
Corporate bonds		—		—		1,566		1,566

Total	$	—	$	220,247	$	1,566	$	221,813

The Company had no liabilities measured at fair value on a recurring basis at June 30, 2012 or December 31, 2011.

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, 2012.


Balance at December 31, 2011	$	1,566
Change in unrealized gain		107

Balance at June 30, 2012	$	1,673

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, 2012 and 2011.


							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	)


							Three Months Ended June 30, 2011			Six Months Ended June 30, 2011
	At June 30, 2011						Total Gains/(Losses)			Total Gains/(Losses)
	Level 1		Level 2		Level 3		Total Gains/(Losses)			Total Gains/(Losses)
Assets:
Loans	$	—	$	—	$	3,593	$	108		$	(13	)
Other assets		—		—		541		(59	)		(59	)

Total assets	$	—	$	—	$	4,134	$	49		$	(72	)

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.

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 I, 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, 2012
	Carrying Value		Level 1		Level 2		Level 3		Estimated Fair Value
Financial Assets:
Cash and cash equivalents	$	42,407	$	42,407	$	—	$	—	$	42,407
Securities available for sale		243,897		—		242,224		1,673		243,897
Securities held to maturity		99,421		—		102,291		—		102,291
Stock in Federal Home Loan Bank of Boston		14,454		—		—		14,454		14,454
Net loans		1,152,889		—		—		1,175,441		1,175,441

Financial Liabilities:
Deposits (with no stated maturity)		844,908		—		—		844,908		844,908
Time deposits		415,705		—		—		422,526		422,526
Federal Home Loan Bank of Boston advances		102,892		—		—		107,419		107,419
Repurchase agreements		37,772		—		—		38,301		38,301
Subordinated debentures		5,585		—		5,585		—		5,585


	At December 31, 2011
	Carrying Value		Level 1		Level 2		Level 3		Estimated Fair Value
Financial Assets:
Cash and cash equivalents	$	61,518	$	61,518	$	—	$	—	$	61,518
Securities available for sale		221,813		—		220,247		1,566		221,813
Securities held to maturity		115,897		—		118,311		—		118,311
Stock in Federal Home Loan Bank of Boston		15,365		—		—		15,365		15,365
Net loans		1,112,941		—		—		1,150,955		1,150,955

Financial Liabilities:
Deposits (with no stated maturity)		808,235		—		—		808,235		808,235
Time deposits		421,740		—		—		429,676		429,676
Federal Home Loan Bank of Boston advances		106,417		—		—		110,201		110,201
Repurchase agreements		37,260		—		—		37,347		37,347
Subordinated debentures		5,539		—		5,539		—		5,539

NOTE M – 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, 2012 and 2011. 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,
	2012				2011				2012				2011
	SERP		Director Retirement Plan		SERP		Director Retirement Plan		SERP		Director Retirement Plan		SERP		Director Retirement Plan
Periodic benefit cost:
Service cost	$	79	$	23	$	83	$	23	$	158	$	46	$	167	$	46
Interest cost		44		14		47		14		88		28		93		28

Total pension cost		123		37		130		37		246		74		260		74
Prior service cost amortization		28		9		34		9		57		18		69		18
Net loss amortization		—		3		—		3		—		6		—		6

Net periodic benefit cost	$	151	$	49	$	164	$	49	$	303	$	98	$	329	$	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, 2011 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 2012.

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, 2011 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, 2012 and December 31, 2011

Total assets increased $29.9 million, or 1.8%, to $1.65 billion at June 30, 2012 from $1.62 billion at December 31, 2011 reflecting growth in net loans and securities available for sale, partially offset by a decrease in interest-bearing deposits and held to maturity investment securities. Net loans increased $39.9 million, or 3.6%, to $1.15 billion at June 30, 2012 from $1.11 billion at December 31, 2011 mainly reflecting growth in the commercial loan portfolios. Commercial mortgages increased $26.3 million, or 5.8%, and commercial and industrial loans increased $17.3 million, or 9.9%, primarily the result of business development efforts, competitive products and pricing and the establishment of a loan production office in Beverly, Massachusetts in 2011. The increase in the commercial portfolios was partially offset by a decrease in residential mortgages of $3.6 million, or 1.1%, driven by sales of 30-year fixed rate loan originations totaling $9.6 million and payments, offset to a large extent by originations of 10- and 15-year fixed rate loans. Securities available for sale increased $22.1 million, or 10.0%, to $243.9 million at June 30, 2012 from $221.8 million at December 31, 2011 primarily due to purchases of fixed-rate agency mortgage-backed securities totaling $51.6 million, partially offset by repayments of government-sponsored agency debt and mortgage-backed securities of $29.3 million. Interest-bearing deposits decreased $20.7 million, or 49.9%, reflecting the use of excess cash to fund purchases of available for sale securities and loan originations. Securities held to maturity decreased $16.5 million, or 14.2%, to $99.4 million at June 30, 2012 from $115.9 million at December 31, 2011 as a result of repayments of government-sponsored agency debt and mortgage-backed securities.

Total deposits increased $30.6 million, or 2.5%, to $1.26 billion at June 30, 2012 compared to $1.23 billion at December 31, 2011 primarily due to growth in core deposit accounts of $36.7 million, or 4.5%, to $844.9 million at June 30, 2012 from $808.2 million at December 31, 2011. 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 core deposits was partially offset by a decrease in certificates of deposit of $6.0 million, or 1.4%, to $415.7 million at June 30, 2012 compared to $421.7 million at December 31, 2011 resulting from customers’ preference for savings, demand and NOW accounts due to the low rate environment. Short-term borrowings increased $512,000, or 3.0%, to $17.8 million at June 30, 2012 from $17.3 million at December 31, 2011 mainly due to growth in overnight repurchase agreements. Long-term debt decreased $1.8 million, or 1.4%, to $125.0 million at June 30, 2012 compared to $126.9 million at December 31, 2011 largely reflecting the use of excess cash balances to pay down maturing FHLBB advances. At June 30, 2012, 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 increased $768,000, or 0.3%, to $228.1 million at June 30, 2012 from $227.4 million at December 31, 2011 as a result of net income of $5.4 million, stock-based compensation credits totaling $712,000 and ESOP compensation of $558,000 for the six months ended June 30, 2012. These increases were partially offset by repurchases of common stock totaling $3.2 million and cash dividend payments amounting to $2.6 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 $8.6 million, or 0.74% of total loans, at June 30, 2012 compared to $8.5 million, or 0.75% of total loans, at December 31, 2011. Classified loans decreased $5.6 million, or 14.1%, to $33.7 million at June 30, 2012 and included ten relationships which represent 52.3% of the total. Of the $2.4 million in other real estate owned, $740,000 is under a sales contract with a closing expected in the third quarter of 2012. Refer to “Note H – Loans” in the Notes to the Unaudited Consolidated Financial Statements in this report for additional disclosures about credit quality.

At June 30, 2012 and December 31, 2011, the ratio of the allowance for loan losses to total loans was 1.01%. Excluding the impact of acquired loans totaling $132.8 million at June 30, 2012 and $168.0 million at December 31, 2011, the ratio of the allowance for loan losses to total loans would have been 1.14% at June 30, 2012 and 1.17% at December 31, 2011. Net charge-offs totaled $781,000, or 0.14% of average loans outstanding on an annualized basis, for the six months ended June 30, 2012 as compared to net charge-offs of $828,000, or 0.15% of average loans outstanding on an annualized basis, for the same period in 2011 and consisted primarily of commercial loans. Refer to “Note H – 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, 2012 and 2011

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 decreased $108,000, or 4.0%, to $2.6 million for the second quarter of 2012 compared to net income of $2.7 million for the same period in 2011. Excluding the impact of acquisition related expenses of $592,000 (non tax-deductible), net income would have increased by $484,000, or 18.0%, to $3.2 million largely due to a decrease in non-interest expense of $527,000 (excluding acquisition related expenses) and an increase of $359,000 in non-interest income. These positive results were offset in part by a decrease in net interest income of $88,000 and increases of $77,000 in provision for loan losses and $237,000 in income tax expense. Diluted earnings per share decreased $0.01 to $0.17 for the three months ended June 30, 2012 compared to $0.18 for the same period last year. Excluding the impact of acquisition related expenses, diluted earnings per share would have increased $0.03, or 16.7%, to $0.21.

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,
	2012							2011
	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⁾	$	312,592	$	3,588		4.59	%	$	318,095	$	3,985		5.01	%
Commercial real estate		498,354		6,875		5.52	%		461,866		7,005		6.07	%
Home equity		137,526		1,225		3.56	%		138,462		1,330		3.84	%
Commercial and industrial		188,343		2,298		4.88	%		166,914		2,133		5.11	%
Consumer and other		14,326		195		5.44	%		17,968		250		5.57	%

Total loans⁽²⁾		1,151,141		14,181		4.93	%		1,103,305		14,703		5.33	%
Investment securities		340,086		2,767		3.25	%		356,479		3,387		3.80	%
Other interest-earning assets		55,905		51		0.36	%		49,654		38		0.31	%

Total interest-earning assets		1,547,132		16,999		4.39	%		1,509,438		18,128		4.80	%
Noninterest-earning assets⁽³⁾		105,865							93,329

Total assets	$	1,652,997						$	1,602,767


Interest-bearing liabilities:
Savings accounts	$	261,297		336		0.51	%	$	233,292		442		0.76	%
Money market accounts		305,501		366		0.48	%		269,397		504		0.75	%
NOW accounts		55,539		42		0.30	%		40,931		37		0.36	%
Certificates of deposit		416,857		1,854		1.78	%		444,605		2,211		1.99	%

Total interest-bearing deposits		1,039,194		2,598		1.00	%		988,225		3,194		1.29	%
FHLB advances		103,632		819		3.16	%		138,215		1,245		3.60	%
Other interest-bearing liabilities		53,860		288		2.14	%		49,798		307		2.47	%

Total interest-bearing liabilities		1,196,686		3,705		1.24	%		1,176,238		4,746		1.61	%
Demand deposits		217,586							190,941
Other noninterest-bearing liabilities		10,870							9,309

Total liabilities		1,425,142							1,376,488
Stockholders’ equity		227,855							226,279

Total liabilities and stockholders’ equity	$	1,652,997						$	1,602,767


Net interest income			$	13,294						$	13,382

Interest rate spread⁽⁴⁾						3.15	%						3.19	%
Net interest-earning assets⁽⁵⁾	$	350,446						$	333,200

Net interest margin⁽⁶⁾						3.44	%						3.55	%
Average interest-earning assets to average interest-bearing liabilities						129.28	%						128.33	%

(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, 2012 vs. 2011
	Increase (Decrease) Due to
	Volume			Rate			Net
	(In thousands)

Interest-earning assets:
Loans:
Residential real estate⁽¹⁾	$	(68	)	$	(329	)	$	(397	)
Commercial real estate		530			(660	)		(130	)
Home equity		(9	)		(96	)		(105	)
Commercial and industrial		265			(100	)		165
Consumer and other		(50	)		(5	)		(55	)

Total loans		668			(1,190	)		(522	)
Investment securities		(151	)		(469	)		(620	)
Other interest-earning assets		5			8			13

Total interest-earning assets		522			(1,651	)		(1,129	)


Interest-bearing liabilities:
Savings accounts		48			(154	)		(106	)
Money market accounts		61			(199	)		(138	)
NOW accounts		12			(7	)		5
Certificates of deposit		(132	)		(225	)		(357	)

Total interest-bearing deposits		(11	)		(585	)		(596	)
FHLB advances		(286	)		(140	)		(426	)
Other interest-bearing liabilities		24			(43	)		(19	)

Total interest-bearing liabilities		(273	)		(768	)		(1,041	)


Change in net interest income	$	795		$	(883	)	$	(88	)

(1)	Includes loans held for sale.

Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses decreased $88,000, or 0.7%, to $13.3 million for the second quarter of 2012 from $13.4 million for the same period in 2011 mainly as a result of contraction in the net interest margin, partially offset by an increase in average interest-earning assets. The net interest margin decreased by 11 basis points to 3.44% for the three months ended June 30, 2012 reflecting the downward re-pricing of certain fixed-rate loans and investments as a result of the lower interest rate environment, offset in part by reduced funding costs. Total average interest-earning assets increased $37.7 million, or 2.5%, to $1.55 billion for the second quarter of 2012, mainly due to growth in commercial loans and interest-earning cash balances, partially offset by a decrease in investment securities.

Interest Income. Interest income decreased $1.1 million, or 6.2%, to $17.0 million for the three months ended June 30, 2012 from $18.1 million for the prior year period due to a lower yield on average interest-earning assets, partially offset by growth in average interest-earning assets. The yield on average interest-earning assets decreased by 41 basis points to 4.39% for the second quarter of 2012 in connection with the lower interest rate environment. 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 decreased $1.0 million, or 21.9%, to $3.7 million for the three months ended June 30, 2012 from $4.7 million for the prior year period reflecting a decrease in the average rate paid on interest-bearing liabilities, partially offset by an increase in average interest-bearing liabilities. The average rate paid on interest-bearing liabilities declined 37 basis points to 1.24% for the three months ended June 30, 2012 due to the repricing of deposits in response to the lower interest rate environment. Average interest-bearing liabilities increased $20.4 million, or 1.7%, to $1.20 billion for the three months ended June 30, 2012 from $1.18 billion for the prior year period as a result of growth of $51.0 million, or 5.2%, in interest-bearing deposits and a $4.1 million, or 8.2%, increase in other interest-bearing liabilities. These increases were partially offset by a decrease of $34.6 million, or 25.0%, in average FHLBB advances as a result of payoffs of maturing advances.

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 certain factors. Among the factors management considers are 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 $77,000, or 11.4%, to $750,000 for the three months ended June 30, 2012 from $673,000 for the same period in 2011, driven by strong loan growth and the continuing shift to a more commercially oriented loan portfolio, offset by a decrease in charge-offs. The allowance for loan losses was $11.8 million, or 1.01% of loans outstanding at June 30, 2012. Excluding the impact of acquired loans, the ratio of the allowance for loan losses to total loans would have been 1.14%.

Non-interest Income. Non-interest income increased $359,000, or 16.2%, to $2.6 million for the second quarter of 2012 from $2.2 million for the same period in 2011. Fee income on depositors’ accounts increased $156,000, or 11.4%, driven by higher overdraft fees and growth in ATM and debit card income. Net gains from sales of loans increased $112,000 due to an increase in sales of 30-year fixed rate loans and improved pricing. Wealth management income increased $75,000, or 35.0% reflecting higher fee-based assets under management and transaction based commissions. Bank-owned life insurance income increased $43,000, or 10.9%, reflecting the purchase of an additional $10.0 million investment in the second quarter of 2011.

Non-interest Expense. Non-interest expense increased $65,000, or 0.6%, to $11.5 million for the second quarter of 2012 from $11.4 million in the same period last year. Included in the 2012 second quarter were $592,000 of acquisition related costs incurred in connection with the Company’s proposed acquisition of New England Bancshares. Excluding these acquisition related costs, non-interest expense would have declined by $527,000, or 4.6%. The low income housing tax credit fund expense decreased by $197,000 due to a true-up of prior period expenses. Other expenses decreased $180,000, or 10.5%, reflecting a write-down to fair value of mortgage servicing rights and decreases in postage and contribution expenses. Marketing expense fell by $134,000, or 21.1%, due to reduced newspaper advertising and other promotional activities. Salaries and benefits decreased by $128,000, or 2.0%, mainly attributable to lower stock-based compensation, offset to a large extent by annual wage increases, a larger incentive accrual due to improved operating performance and staffing costs for a new loan production office opened in 2011. These items were partially reduced by a $65,000, or 8.1%, increase in occupancy expense driven by higher building maintenance costs.

Income Tax Expense. Income tax expense increased $237,000, or 28.7%, to $1.1 million for the second quarter of 2012 from $827,000 in the same period last year primarily due to an increase in pretax income and the effective tax rate. The effective tax rate increased to 29.2% in the second quarter of 2012 from 23.5% for the same period last year as acquisition related expenses totaling $592,000 were non-deductible.

Comparison of Operating Results for the Six Months Ended June 30, 2012 and 2011

Net Income. Net income for the six months ended June 30, 2012 amounted to $5.4 million, or $0.36 per diluted share, compared to $5.1 million, or $0.33 per diluted share, for the same period in 2011. Excluding acquisition related expenses of $592,000 (non tax deductible), net income would have increased by $904,000, or 18.0%, to $6.0 million, or $0.40 per diluted share, for the first six months of 2012. The 2012 results were positively impacted by a $783,000 increase in non-interest income and a $221,000 increase in net interest income, as well as decreases of $192,000 in non-interest expense (excluding acquisition related expenses) and $81,000 in the provision for loan losses. These items were offset in part by an increase of $373,000 in income tax expense.

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,
	2012							2011
	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⁾	$	314,016	$	7,301		4.65	%	$	315,871	$	7,912		5.01	%
Commercial real estate		494,952		13,819		5.58	%		458,513		13,771		6.01	%
Home equity		136,709		2,455		3.59	%		138,134		2,637		3.82	%
Commercial and industrial		182,016		4,290		4.71	%		165,976		4,355		5.25	%
Consumer and other		14,650		391		5.34	%		18,591		515		5.54	%

Total loans⁽²⁾		1,142,343		28,256		4.95	%		1,097,085		29,190		5.32	%
Investment securities		339,246		5,622		3.31	%		349,182		6,578		3.77	%
Other interest-earning assets		54,986		92		0.33	%		55,468		78		0.28	%

Total interest-earning assets		1,536,575		33,970		4.42	%		1,501,735		35,846		4.77	%
Noninterest-earning assets⁽³⁾		103,959							89,238

Total assets	$	1,640,534						$	1,590,973


Interest-bearing liabilities:
Savings accounts	$	257,982		704		0.55	%	$	222,585		848		0.76	%
Money market accounts		304,592		808		0.53	%		265,829		998		0.75	%
NOW accounts		52,009		82		0.32	%		40,263		81		0.40	%
Certificates of deposit		417,639		3,757		1.80	%		450,615		4,564		2.03	%

Total interest-bearing deposits		1,032,222		5,351		1.04	%		979,292		6,491		1.33	%
FHLB advances		104,467		1,641		3.14	%		143,022		2,548		3.56	%
Other interest-bearing liabilities		52,880		584		2.21	%		50,968		634		2.49	%

Total interest-bearing liabilities		1,189,569		7,576		1.27	%		1,173,282		9,673		1.65	%
Demand deposits		211,810							183,033
Other noninterest-bearing liabilities		11,301							9,976

Total liabilities		1,412,680							1,366,291
Stockholders’ equity		227,854							224,682

Total liabilities and stockholders’ equity	$	1,640,534						$	1,590,973


Net interest income			$	26,394						$	26,173

Interest rate spread⁽⁴⁾						3.15	%						3.13	%
Net interest-earning assets⁽⁵⁾	$	347,006						$	328,453

Net interest margin⁽⁶⁾						3.44	%						3.49	%
Average interest-bearing assets to average interest-bearing liabilities						129.17	%						127.99	%

(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, 2012 vs. 2011
	Increase (Decrease) Due to
	Volume			Rate			Net
	(In thousands)

Interest-earning assets:
Loans:
Residential real estate⁽¹⁾	$	(46	)	$	(565	)	$	(611	)
Commercial real estate		1,053			(1,005	)		48
Home equity loans		(27	)		(155	)		(182	)
Commercial and industrial		400			(465	)		(65	)
Consumer and other		(106	)		(18	)		(124	)

Total loans		1,274			(2,208	)		(934	)
Investment securities		(183	)		(773	)		(956	)
Other interest-earning assets		(1	)		15			14

Total interest-earning assets		1,090			(2,966	)		(1,876	)


Interest-bearing liabilities:
Savings accounts		121			(265	)		(144	)
Money market accounts		132			(322	)		(190	)
NOW accounts		21			(20	)		1
Certificates of deposit		(319	)		(488	)		(807	)

Total interest-bearing deposits		(45	)		(1,095	)		(1,140	)
FHLB advances		(631	)		(276	)		(907	)
Other interest-bearing liabilities		23			(73	)		(50	)

Total interest-bearing liabilities		(653	)		(1,444	)		(2,097	)


Change in net interest income	$	1,743		$	(1,522	)	$	221

(1)	Includes loans held for sale.

Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses increased $221,000, or 0.8%, to $26.4 million for the six months ended June 30, 2012 from $26.2 million for the comparable 2011 period as a result of growth in average interest-earning assets, offset in part by net interest margin compression. Total average interest-earning assets increased $34.8 million, or 2.3%, to $1.54 billion for the six months ended June 30, 2012, mainly due to growth in commercial loan balances, partially offset by a decrease in investment securities and interest-earning cash balances. The net interest margin decreased 5 basis points to 3.44% for the six months ended June 30, 2012 from 3.49% for the prior year period primarily attributable to the downward repricing of certain fixed rate loans and investments as a result of the lower interest rate environment. These items were partially offset by lower funding costs.

Interest Income. Interest income decreased $1.9 million, or 5.2%, to $34.0 million for the six months ended June 30, 2012 from $35.8 million for the prior year period due to a decrease in the yield on earning assets partially offset by an increase in average interest-earning assets. The yield on average interest-earning assets decreased by 35 basis points to 4.42% for the second quarter of 2012 in connection with the lower interest rate environment. 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 decreased $2.1 million, or 21.7%, to $7.6 million for the six months ended June 30, 2012 from $9.7 million for the prior year period due to a decrease in the average rate paid on interest-bearing liabilities, partially offset by growth in average interest-bearing liabilities. The average rate paid on interest-bearing liabilities declined 38 basis points to 1.27% for the six months ended June 30, 2012 reflecting the repricing of deposits in response to the lower interest rate environment. Average interest-bearing liabilities increased $16.3 million, or 1.4%, to $1.19 billion for the six months ended June 30, 2012 from $1.17 billion for the prior year period reflecting growth of $52.9 million, or 5.4%, in interest-bearing deposits. The increase in average interest-bearing deposits was offset in part by a reduction of $38.6 million, or 27.0%, in average FHLB advances to $104.5 million for the six months ended June 30, 2012 as a result of payoffs of maturing advances.

Provision for Loan Losses. The provision for loan losses decreased $81,000, or 5.5%, to $1.4 million for the six months ended June 30, 2012, from $1.5 million for the same period in 2011, driven by reductions in loan loss reserve factors, charge-offs, and classified loans, partially offset by increased origination activity and a shift to a more commercial oriented portfolio. The decrease in loan loss reserve factors reflects improving asset quality trends and positive changes in economic conditions.

Non-interest Income. Non-interest income increased $783,000, or 18.0%, to $5.1 million for the six months ended June 30, 2012. Fee income on depositors’ accounts increased $272,000, or 10.2%, driven by higher overdraft fees and growth in ATM and debit card income. Net gains from sales of loans increased $197,000 due to an increase in sales of 30-year fixed rate loans and improved pricing. Bank-owned life insurance income increased $152,000, or 21.0%, reflecting the purchase of an additional $10.0 million investment in the second quarter of 2011. Wealth management income increased $62,000, or 13.7%, reflecting higher fee-based assets under management and transaction-based commissions.

Non-interest Expense. Non-interest expense increased $400,000, or 1.8%, to $22.7 million for the six months ended June 30, 2012 from $22.3 million for the prior year period. Excluding acquisition related costs of $592,000, non-interest expense would have declined by $192,000, or 0.9%. Professional fees decreased by $158,000, or 14.8%, related to lower legal and consulting activities. The low income housing tax credit fund expense decreased by $152,000 due to a true-up of prior period expenses. Marketing expense decreased by $141,000, or 13.0%, due to reduced newspaper advertising and other promotional activities. These items were partially reduced by a $98,000, or 3.4%, increase in other expense related to higher levels of depreciation and writedowns of mortgage servicing rights to fair value, a $95,000, or 5.8%, increase in occupancy expense driven by higher building maintenance costs and a $45,000, or 0.4%, increase in salaries and benefits due to annual wage increases, staffing costs related to the new loan production office and a higher incentive compensation accrual, offset in part by lower stock-based compensation.

Income Tax Expense. Income tax expense increased $373,000 to $2.0 million for six months ended June 30, 2012 from $1.6 million for the comparable 2011 period primarily due to higher pretax income and the effective tax rate. The effective tax rate increased to 26.5% for the six months ended June 30, 2012 from 23.7% for the same period last year as acquisition related expenses totaling $592,000 were non-deductible.

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 residential real estate, home equity loans, commercial real estate loans, construction loans and commercial and industrial 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, 2012 and December 31, 2011.


Net Interest Income At-Risk

Change in Interest Rates (Basis Points)	Estimated Increase (Decrease) in NII (June 30, 2012)			Estimated Increase (Decrease) in NII (December 31, 2011)

-100		(3.4	)%		(3.9	)%
Stable		0.0	%		0.0	%
+200		2.7	%		(0.3	)%

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. The computation of 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.


		June 30, 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)
		Estimated EVE (2)		Amount			Percent			EVE Ratio (4)
		Estimated EVE (2)		Amount			Percent			EVE Ratio (4)
				(Dollars in thousands)

	+300	$	176,338	$	(51,936	)		(23	)%		11.35	%		(228	)
	+200		207,282		(20,992	)		(9	)		12.96			(68	)
	+100		224,905		(3,368	)		(1	)		13.71			8
	0		228,274		—			—			13.64			—
	-100		234,644		6,370			3			13.77			14


		December 31, 2011
										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)
		Estimated EVE (2)		Amount			Percent			EVE Ratio (4)
		Estimated EVE (2)		Amount			Percent			EVE Ratio (4)
				(Dollars in thousands)

	+300	$	183,875	$	(53,540	)		(23	)%		12.06	%		(241	)
	+200		213,647		(23,768	)		(10	)		13.61			(86	)
	+100		231,936		(5,479	)		(2	)		14.42			(6	)
	0		237,415		—			—			14.47			—
	-100		239,393		1,978			1			14.38			(10	)

(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, 2012 and December 31, 2011, in the event of a 300 basis point increase in interest rates, we would experience a 23% decrease in economic value of equity. In the event of a 100 basis point decrease in interest rates at June 30, 2012 and December 31, 2011, we would experience a 3% and 1%, 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, 2012, our liquidity ratio was 19.68%, compared to 21.00% at December 31, 2011.

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-earning 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, 2012, cash and cash equivalents totaled $42.4 million. Securities classified as available for sale and held to maturity, which provide additional sources of liquidity, totaled $243.9 million and $99.4 million, respectively, at June 30, 2012. In addition, at June 30, 2012, we had the ability to borrow a total of approximately $197.0 million from the FHLBB. On that date, we had $101.8 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, 2012, we had $36.2 million in loan commitments outstanding. In addition to commitments to originate loans, we had $256.0 million in unused lines of credit to borrowers, $3.3 million in standby letters of credit and $20.4 million to be disbursed under existing construction loan commitments. Certificates of deposit due within one year of June 30, 2012 totaled $244.0 million, or 19.4% 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, 2013. 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, 2012, we originated $174.5 million of loans and purchased $51.8 million of securities. In the comparable 2011 period, we originated $122.5 million of loans and purchased $66.5 million of securities.

Financing activities consist primarily of activity in deposit accounts and FHLBB advances. We experienced a net increase in total deposits of $30.6 million and $46.0 million for the six months ended June 30, 2012 and 2011, 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 $3.5 million and $18.5 million during the six months ended June 30, 2012 and 2011, respectively, reflecting the use of cash flows received from the loan and investment portfolios and excess deposit funds to pay down FHLBB 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, 2012 and December 31, 2011, was approximately $83.2 million at June 30, 2012 and $107.1 million at December 31, 2011. At June 30, 2012 and December 31, 2011, 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 $79.1 million at June 30, 2012.

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 to its holders of its subordinated debenture. United Financial also repurchases shares of its common stock. At June 30, 2012, United Financial on an unconsolidated basis had liquid assets of $14.5 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, 2012. 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	$	244,047	$	140,876	$	30,782	$	—	$	415,705
Federal Home Loan Bank advances		23,940		44,904		14,911		18,000		101,755
Repurchase agreements		17,772		—		—		20,000		37,772
Subordinated debentures		—		—		—		7,732		7,732
Standby letters of credit		3,345		—		—		—		3,345
Operating leases		1,041		1,979		1,419		3,459		7,898
Capitalized leases		423		847		848		5,985		8,103
Future benefits to be paid under retirement plans		1,064		2,999		1,289		4,679		10,031

Total	$	291,632	$	191,605	$	49,249	$	59,855	$	592,341

Commitments:
Commitments to extend credit	$	315,946	$	—	$	—	$	—	$	315,946
Investment in venture capital fund		300		—		—		—		300
Investment in low income tax credit fund		4,105		413		—		—		4,518

Total	$	320,351	$	413	$	—	$	—	$	320,764

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, 2012, 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, 2012:
Total risk-based capital		15.23	%		8.00	%		10.00	%
Tier 1 risk-based capital		14.32	%		4.00	%		6.00	%
Tier 1 (core) capital		11.31	%		4.00	%		5.00	%
Tangible equity		11.31	%		1.50	%		N/A

As of December 31, 2011:
Total risk-based capital		17.09	%		8.00	%		10.00	%
Tier 1 risk-based capital		16.17	%		4.00	%		6.00	%
Tier 1 (core) capital		12.23	%		4.00	%		5.00	%
Tangible equity		12.23	%		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 most recent fiscal quarter 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 its foreclosure on a certain loan property. 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, 2011, which could materially affect our business, financial condition or future results, should be carefully considered. At June 30, 2012, 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, 2012.

(b) Not applicable.

(c) The following table provides certain information with regard to shares repurchased by the Company in the second quarter of 2012.


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, 2012		70,200		$	15.84		70,200		130,703

May 1 - 31, 2012		—			—		—		130,703

June 1 - 30, 2012		10,834	(2)		13.68		—		130,703


Total		81,034		$	15.56		70,200

(1)

On October 26, 2010, the Board of Directors approved a plan to repurchase up to 5%, or approximately 807,803 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, 2012, the Company has repurchased 677,100 shares at a cost of approximately $10.3 million and an average price of $15.14 per share, under this plan.

(2)	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

101.0		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statement of Changes in Equity and Comprehensive Income, (iv) the Consolidated Statements of Cash Flows and (v) 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 by the undersigned thereunto duly authorized.


	United Financial Bancorp, Inc.

Date: August 8, 2012	By:	/s/ Richard B. Collins
		Richard B. Collins
		Chairman, President and Chief Executive Officer

Date: August 8, 2012	By:	/s/ Mark A. Roberts
		Mark A. Roberts
		Executive Vice President and Chief Financial Officer