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 September 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

15,467,328 shares outstanding as of October 31, 2012

INDEX


		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

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

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

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

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

	Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 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		27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		41

Item 4.	Controls and Procedures		41

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		42

Item 1A.	Risk Factors		42

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

Item 3.	Defaults Upon Senior Securities		43

Item 4.	Mine Safety Disclosures		43

Item 5.	Other Information		43

Item 6.	Exhibits		43

SIGNATURES			44

PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

(Dollars in thousands, except per share amounts)


	September 30, 2012			December 31, 2011
ASSETS

Cash and due from banks	$	16,662		$	20,112
Interest-bearing deposits		11,682			41,406

Total cash and cash equivalents		28,344			61,518

Securities available for sale, at fair value		238,842			221,813
Securities held to maturity, at amortized cost (fair value of $94,664 at September 30, 2012 and $118,311 at December 31, 2011)		91,469			115,897
Loans held for sale		—			53
Loans, net of allowance for loan losses of $12,550 at September 30, 2012 and $11,132 at December 31, 2011		1,207,902			1,112,941
Other real estate owned		1,349			2,054
Accrued interest receivable		4,770			4,846
Deferred tax asset, net		13,771			14,006
Stock in the Federal Home Loan Bank of Boston		14,454			15,365
Banking premises and equipment, net		18,145			16,438
Bank-owned life insurance		41,869			40,688
Goodwill		8,192			8,192
Other assets		14,577			9,941

TOTAL ASSETS	$	1,683,684		$	1,623,752


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Interest-bearing	$	1,040,969		$	1,024,073
Non-interest-bearing		234,191			205,902

Total deposits		1,275,160			1,229,975
Short-term borrowings		14,579			17,260
Long-term debt		140,287			126,857
Subordinated debentures		5,608			5,539
Escrow funds held for borrowers		1,892			2,103
Capitalized lease obligations		4,753			4,874
Accrued expenses and other liabilities		11,242			9,783

Total liabilities		1,453,521			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 at September 30, 2012 and December 31, 2011		187			187
Paid-in capital		183,476			182,433
Retained earnings		93,317			89,019
Unearned compensation		(9,523	)		(10,047	)
Treasury stock, at cost (3,239,112 shares at September 30, 2012 and 2,994,036 shares at December 31, 2011)		(44,808	)		(40,983	)
Accumulated other comprehensive income, net of taxes		7,514			6,752

Total stockholders’ equity		230,163			227,361

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,683,684		$	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 September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Interest and dividend income:
Loans	$	14,494		$	14,529		$	42,750		$	43,719
Investments		2,549			3,249			8,171			9,827
Other interest-earning assets		27			22			119			100

Total interest and dividend income		17,070			17,800			51,040			53,646
Interest expense:
Deposits		2,444			3,014			7,795			9,505
Short-term borrowings		12			29			46			96
Long-term debt		1,064			1,358			3,255			4,473

Total interest expense		3,520			4,401			11,096			14,074

Net interest income before provision for loan losses		13,550			13,399			39,944			39,572

Provision for loan losses		1,050			750			2,450			2,231


Net interest income after provision for loan losses		12,500			12,649			37,494			37,341


Non-interest income:
Fee income on depositors’ accounts		1,452			1,420			4,389			4,085
Wealth management income		279			248			795			702
Income from bank-owned life insurance		448			468			1,324			1,192
Net gain on sales of loans		188			51			458			124
Net gain on sales of securities		27			—			27			1
Impairment charges on securities		(202	)		(33	)		(202	)		(92	)
Other income		319			269			863			771

Total non-interest income		2,511			2,423			7,654			6,783


Non-interest expense:
Salaries and benefits		6,375			6,178			19,103			18,861
Occupancy expenses		823			823			2,567			2,472
Marketing expenses		316			339			1,257			1,421
Data processing expenses		1,109			961			3,140			2,933
Professional fees		372			573			1,282			1,641
Acquisition related expenses		366			—			958			—
FDIC insurance assessments		264			237			800			811
Low income housing tax credit fund		—			232			243			627
Other expenses		1,567			1,658			4,585			4,578

Total non-interest expense		11,192			11,001			33,935			33,344


Income before income taxes		3,819			4,071			11,213			10,780

Income tax expense		890			986			2,853			2,576


Net income	$	2,929		$	3,085		$	8,360		$	8,204


Earnings per share:
Basic	$	0.20		$	0.21		$	0.57		$	0.55
Diluted	$	0.20		$	0.20		$	0.56		$	0.54

Weighted average shares outstanding:
Basic		14,522,324			14,951,572			14,578,253			14,998,333
Diluted		14,708,373			15,206,514			14,827,428			15,258,353

Dividends paid per share	$	0.10		$	0.09		$	0.28		$	0.25

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 September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net Income	$	2,929		$	3,085		$	8,360		$	8,204


Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains on availible-for-sale securities		1,050			2,041			1,089			3,669
Reclassification adjustment for losses (gains) realized in income		138			—			138			(1	)

Net change in unrealized gains		1,188			2,041			1,227			3,668
Tax effect		(449	)		(804	)		(465	)		(1,450	)


Net of tax amount		739			1,237			762			2,218


Comprehensive income	$	3,668		$	4,322		$	9,122		$	10,422

See notes to unaudited consolidated financial statements.

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

FOR THE NINE MONTHS ENDED SEPTEMBER 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		—			—		—			8,204			—			—			—		8,204
Other comprehensive income		—			—		—			—			—			—			2,218		2,218
Cash dividends paid ($0.25 per share)		—			—		—			(3,745	)		—			—			—		(3,745	)
Treasury stock purchases		(322,796	)		—		—			—			—			(4,807	)		—		(4,807	)
Shares repurchased in connection with restricted stock forfeited for tax purposes		(21,545	)		—		—			—			—			(324	)		—		(324	)
Restricted shares forfeited		(10,910	)		—		181			—			—			(181	)		—		—
Excess tax benefit on stock compensation plans		—			—		85			—			—			—			—		85
Cancellation of shares for tax withholdings on options exercised		—			—		(36	)		—			—			—			—		(36	)
Reissuance of treasury shares in connection with stock options exercised		20,137			—		(233	)		—			—			298			—		65
Reissuance of treasury shares in connection with stock warrants exercised		16,514			—		—			—			—			200			—		200
Stock-based compensation		—			—		1,489			—			—			—			—		1,489
ESOP shares committed to be released		—			—		314			—			517			—			—		831

Balances at September 30, 2011		15,790,506		$	187	$	182,122		$	87,358		$	(10,233	)	$	(39,754	)	$	7,076	$	226,756

Balances at December 31, 2011		15,712,897		$	187	$	182,433		$	89,019		$	(10,047	)	$	(40,983	)	$	6,752	$	227,361
Net income		—			—		—			8,360			—			—			—		8,360
Other comprehensive income		—			—		—			—			—			—			762		762
Cash dividends paid ($0.28 per share)		—			—		—			(4,077	)		—			—			—		(4,077	)
Treasury stock purchases		(260,914	)		—		—			—			—			(4,045	)		—		(4,045	)
Shares repurchased in connection with
restricted stock forfeited for tax purposes		(11,013	)		—		—			—			—			(151	)		—		(151	)
Restricted shares forfeited		(11,000	)		—		151			—			—			(151	)		—		—
Excess tax benefit on stock compensation plans		—			—		29			—			—			—			—		29
Cancellation of shares for tax withholdings on options exercised		—			—		(92	)		—			—			—			—		(92	)
Reissuance of treasury shares in connection with stock options exercised		20,351			—		(172	)		(10	)		—			280			—		98
Reissuance of treasury shares in connection with restricted stock grants		17,500			—		(267	)		25			—			242			—		—
Stock-based compensation		—			—		1,103			—			—			—			—		1,103
ESOP shares committed to be released		—			—		291			—			524			—			—		815

Balances at September 30, 2012		15,467,821		$	187	$	183,476		$	93,317		$	(9,523	)	$	(44,808	)	$	7,514	$	230,163

See notes to unaudited consolidated financial statements.

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 and 2011

(Dollars in thousands)


	2012			2011
Cash flows from operating activities:
Net income	$	8,360		$	8,204
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,450			2,231
ESOP expense		815			831
Stock-based compensation		1,103			1,489
Excess tax benefits on stock compensation plan		(29	)		(85	)
Amortization of premiums and discounts		1,508			1,084
Depreciation and amortization		1,260			901
Amortization of intangible assets		70			76
Provision for other real estate owned		—			100
Net loss (gain) on sale and writedown of other real estate owned		362			(3	)
Impairment charges on securities		202			92
Net gain on sale/call of available for sale securities		(27	)		(1	)
Loans originated for sale		(13,392	)		(6,530	)
Proceeds from sales of loans held for sale		13,903			6,132
Net gain on sale of loans		(458	)		(124	)
Deferred tax provision		235			1,450
Net increase in cash surrender value of bank-owned life insurance		(1,181	)		(1,156	)
Decrease in accrued interest receivable		76			21
Increase in other assets		(5,208	)		(5,106	)
Increase in accrued expenses and other liabilities		1,675			75

Net cash provided by operating activities		11,724			9,681

Cash flows from investing activities:
Purchases of securities available for sale		(65,976	)		(72,408	)
Proceeds from sales of securities available for sale		2,517			—
Proceeds from maturities, calls and principal repayments of securities
available for sale		46,957			45,961
Purchases of securities held to maturity		(1,455	)		(8,396	)
Proceeds from maturities, calls and principal repayments of securities
held to maturity		24,937			17,861
Redemption of Federal Home Loan Bank of Boston stock		911			—
Proceeds from sales of other real estate owned		1,851			1,184
Net loan originations, purchases and principal repayments		(98,919	)		(48,402	)
Purchases of property and equipment		(2,957	)		(1,814	)
Purchases of bank-owned life insurance		—			(9,928	)

Net cash used in investing activities		(92,134	)		(75,942	)

(Continued)

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 and 2011 (Concluded)

(Dollars in thousands)


	2012			2011
Cash flows from financing activities:
Net increase in deposits	$	45,185		$	56,265
Net change in short-term borrowings		(2,681	)		3,603
Net change in long-term debt		13,499			(40,082	)
Net (decrease) increase in escrow funds held for borrowers		(211	)		322
Payments on capitalized lease obligations		(318	)		(305	)
Excess tax benefits on stock compensation plan		29			85
Cancellation of shares for tax withholdings on options exercised		(92	)		(36	)
Reissuance of treasury shares in connection with stock options exercised		98			65
Reissuance of treasury shares in connection with restricted stock warrants		—			200
Treasury stock purchases		(4,196	)		(4,431	)
Cash dividends paid		(4,077	)		(3,745	)

Net cash provided by financing activities		47,236			11,941

Decrease in cash and cash equivalents		(33,174	)		(54,320	)
Cash and cash equivalents at beginning of period		61,518			83,069

Cash and cash equivalents at end of period	$	28,344		$	28,749


Supplemental Disclosure of Cash Flow Information:
Cash paid during the period:
Interest on deposits, borrowings and other interest bearing liabilities	$	11,512		$	14,700
Income taxes – net		5,409			4,643
Non-cash items:
Transfer of loans to other real estate owned		1,508			2,235
Trade date accounting for treasury stock purchases		—			700
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

SEPTEMBER 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 September 30, 2012 and the results of operations for the three and nine months ended September 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 (the “Merger 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. Immediately following 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 NEBS 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.

The Company filed a Registration Statement on Form S-4 with the Securities and Exchange Commission (the “SEC”) on September 10, 2012. In addition, the Company filed a Form 8-K with the SEC on May 31, 2012. Both documents contain 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.

In July 2012, the FASB issued ASU 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU states that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Codification Subtopic 350-30, Intangibles—Goodwill and Other, General Intangibles Other than Goodwill. Under the guidance in this ASU, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company does not expect that the adopton of this ASU will have an impact on the Company’s consolidated financial statements.

In August 2012, the FASB issued ASU 2012-03, Technical Amendments and Corrections to SEC Sections—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22. This ASU amends various SEC paragraphs: (a) pursuant to the issuance of Staff Accounting Bulletin No. 114; (b) pursuant to the issuance of the SEC’s Final Rule, Technical Amendments to Commission Rules and Forms Related to the FASB’s Accounting Standards Codification, Release Nos. 33-9250, 34-65052, and IC-29748 August 8, 2011; and (c) related to ASU No. 2010-22, Accounting for Various Topics. The Company does not expect that the adoption of this ASU will have an impact on the Company’s consolidated financial statements.

In October 2012, the FASB issued ASU 2012-04, Technical Amendments and Corrections to SEC Sections 2011-08. This ASU is intended to clarify the Codification of correct unintended application of guidance and includes amendments identifying when the use of fair value should be linked to the definition of fair value in Topic 820, Fair Value Measurement. Amendments to the Codification without transition guidance are effective upon issuance for both public and non-public entities. For public entities, amendments subject to transition guidance will be effective for fiscal periods beginning after December 15, 2013. The Company does not expect that the adoption of this ASU will 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 third 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 September 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 September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Net income	$	2,929	$	3,085	$	8,360	$	8,204

Weighted average common shares applicable to basic EPS (1)		14,522,324		14,951,572		14,578,253		14,998,333
Effect of dilutive potential common shares (2) (3)		186,049		254,942		249,175		260,020

Weighted average common shares applicable to diluted EPS		14,708,373		15,206,514		14,827,428		15,258,353

Earnings per share:
Basic	$	0.20	$	0.21	$	0.57	$	0.55
Diluted	$	0.20	$	0.20	$	0.56	$	0.54

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

(2)

Options to purchase 277,550 and 251,446 shares for the three months ended September 30, 2012 and 2011, respectively, and 197,300 and 225,589 shares for the nine months ended September 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:


	September 30, 2012			December 31, 2011
Net unrealized gain on securities available for sale	$	13,068		$	11,841
Tax effect		(4,945	)		(4,480	)

Net-of-tax amount		8,123			7,361


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

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


Accumulated other comprehensive income	$	7,514		$	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 Cost		Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
Securities Available for Sale
September 30, 2012:
Debt Securities:
Government-sponsored enterprises	$	148	$	2	$	—		$	150
Government-sponsored and government-guaranteed mortgage-backed securities		215,098		11,923		—			227,021
Private label mortgage-backed securities		1,478		27		—			1,505
Municipal bonds		7,759		681		—			8,440
Corporate bonds		1,291		435		—			1,726

Total	$	225,774	$	13,068	$	—		$	238,842


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 Cost		Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
Securities Held to Maturity
September 30, 2012:
Government-sponsored and government-guaranteed mortgage-backed securities	$	65,587	$	2,677	$	—		$	68,264
Private label mortgage-backed securities		86		3		—			89
Industrial revenue bonds		19,590		—		—			19,590
State of Israel bonds		150		—		—			150
Municipal bonds		6,056		515		—			6,571

Total	$	91,469	$	3,195	$	—		$	94,664


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 September 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 September 30, 2012
	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	148	$	150	$	155	$	155
Due from one year to five years		98		108		597		620
Due from five years to ten years		5,611		6,058		1,729		1,879
Due after ten years		3,341		4,000		23,315		23,657

		9,198		10,316		25,796		26,311
Mortgage-backed securities		216,576		228,526		65,673		68,353

	$	225,774	$	238,842	$	91,469	$	94,664

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 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 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	)

There were no securities in an unrealized loss position as of September 30, 2012.

Management evaluated the securities in the preceding tables and recognized a pre-tax, non-cash charge of $165,000 for other-than-temporary impairment (“OTTI”) of a corporate bond. Management has concluded that none of the other securities have experienced impairments that are other-than temporary. 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 September 30, 2012 and December 31, 2011:


	September 30, 2012			December 31, 2011
Commercial:
Commercial and industrial	$	201,017		$	176,086
Commercial mortgages		513,524			450,180
Construction		34,724			30,271
Consumer:
Residential mortgages		312,600			314,839
Home equity		143,052			135,518
Consumer		13,090			14,985

Total loans		1,218,007			1,121,879
Net deferred loan costs and fees		2,445			2,194
Allowance for loan losses		(12,550	)		(11,132	)

Loans, net	$	1,207,902		$	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 September 30, 2012 and December 31, 2011, the Company was servicing loans for participants aggregating $44.2 million and $43.8 million, respectively.

As of September 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 September 30, 2012 and are reported in long-term debt on the consolidated statement of condition.

The Company established a Business Banking unit within its Commercial Lending Department in 2012. The portfolio is made up of both commercial and industrial and commercial real estate loans. As a result, the Company has reallocated charge offs, recoveries, and allowance for loan losses accordingly. A summary of the activity pertaining to the allowance for loan losses for the three and nine months ended September 30, 2012 and 2011 is as follows:


									Business Banking
	Commercial and Industrial			Commercial Real Estate			Construction		Commercial and Industrial			Commercial Real Estate			Residential			Home Equity			Consumer			Unallocated		Total
Three Months Ended
September 30, 2012:
Beginning balance	$	2,828		$	5,232		$	742	$	727		$	683		$	690		$	379		$	97		$	373	$	11,751
Charge-offs		(109	)		(97	)		—		(40	)		(12	)		(45	)		(40	)		(10	)		—		(353	)
Recoveries		84			10			—		1			—			—			—			7			—		102
Provision		163			242			67		85			70			55			69			(7	)		306		1,050

Ending balance	$	2,966		$	5,387		$	809	$	773		$	741		$	700		$	408		$	87		$	679	$	12,550


	Commercial and Industrial			Commercial Real Estate			Construction			Residential			Home Equity		Consumer			Unallocated		Total
Three Months Ended
September 30, 2011:
Beginning balance	$	3,308		$	5,179		$	788		$	778		$	477	$	110		$	—	$	10,640
Charge-offs		(630	)		—			—			(49	)		—		(1	)		—		(680	)
Recoveries		29			—			—			—			—		2			—		31
Provision		743			(27	)		(53	)		91			4		(8	)		—		750

Ending balance	$	3,450		$	5,152		$	735		$	820		$	481	$	103		$	—	$	10,741


										Business Banking
	Commercial and Industrial			Commercial Real Estate			Construction			Commercial and Industrial			Commercial Real Estate			Residential			Home Equity			Consumer			Unallocated		Total
Nine Months Ended
September 30, 2012:
Beginning balance	$	3,446		$	5,572		$	860		$	—		$	—		$	666		$	474		$	114		$	—	$	11,132
Charge-offs		(315	)		(370	)		(127	)		(128	)		(52	)		(133	)		(70	)		(15	)		—		(1,210	)
Recoveries		123			45			1			2			—			—			—			7			—		178
Provision		(288	)		140			75			899			793			167			4			(19	)		679		2,450

Ending balance	$	2,966		$	5,387		$	809		$	773		$	741		$	700		$	408		$	87		$	679	$	12,550


	Commercial and Industrial			Commercial Real Estate			Construction			Residential			Home Equity			Consumer			Unallocated		Total
Nine Months Ended
September 30, 2011:
Beginning balance	$	2,801		$	5,000		$	668		$	740		$	623		$	155		$	—	$	9,987
Charge-offs		(1,144	)		(534	)		(28	)		(52	)		(7	)		(5	)		—		(1,770	)
Recoveries		234			52			3			—			—			4			—		293
Provision		1,559			634			92			132			(135	)		(51	)		—		2,231

Ending balance	$	3,450		$	5,152		$	735		$	820		$	481		$	103		$	—	$	10,741

Further information pertaining to the allowance for loan losses at September 30, 2012 and December 31, 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
At September 30, 2012:
Amount of allowance for loan losses for loans deemed to be impaired and individually evaluated for impairment
	$	250	$	111	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	361

Amount of allowance for loan losses for loans not deemed to be impaired and collectively evaluated for impairment
	$	2,717	$	5,276	$	809	$	772	$	741	$	700	$	408	$	87	$	679	$	12,189

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

Total loans	$	181,970	$	475,917	$	34,724	$	19,047	$	37,607	$	312,600	$	143,052	$	13,090	$	—	$	1,218,007

Loans deemed to be impaired and individually evaluated for impairment
	$	4,814	$	2,659	$	591	$	—	$	—	$	—	$	—	$	—	$	—	$	8,064

Loans not deemed to be impaired and collectively evaluated for impairment
	$	176,839	$	473,067	$	34,133	$	19,047	$	37,607	$	312,600	$	143,052	$	13,090	$	—	$	1,209,435

Loans acquired with deteriorated credit quality and deemed to be impaired
	$	317	$	191	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	508


	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 September 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 September 30, 2012:
Commercial:
Commercial and industrial	$	91	$	38	$	4,050	$	4,179	$	196,838	$	201,017	$	—
Commercial real estate		1,695		—		2,222		3,917		509,607		513,524		—
Construction		—		—		—		—		34,724		34,724		—
Consumer:
Residential real estate		1,798		103		1,176		3,077		309,523		312,600		—
Home equity		206		610		222		1,038		142,014		143,052		—
Consumer		146		82		75		303		12,787		13,090		—

Total	$	3,936	$	833	$	7,745	$	12,514	$	1,205,493	$	1,218,007	$	—


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 September 30, 2012 and December 31, 2011:


	At September 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	$	4,636	$	4,636			$	1,379	$	2,115
Commercial real estate		2,262		2,262				1,961		2,073
Construction		591		591				190		259
Residential real estate		—		—				1,417		1,417
Home Equity		—		—				56		56
Consumer		—		—				164		164

Total	$	7,489	$	7,489			$	5,167	$	6,084

With an allowance recorded:
Commercial and industrial	$	495	$	495	$	250	$	2,125	$	2,125	$	65
Commercial real estate		588		588		111		1,279		1,279		100
Construction		—		—		—		140		140		70

Total	$	1,083	$	1,083	$	361	$	3,544	$	3,544	$	235

By portfolio segment:
Commercial portfolio segment	$	8,572	$	8,572	$	361	$	7,074	$	7,991	$	235
Consumer portfolio segment		—		—		—		1,637		1,637		—

Total impaired loans	$	8,572	$	8,572	$	361	$	8,711	$	9,628	$	235

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


	Three Months Ended September 30, 2012						Three Months Ended September 30, 2011
	Average Recorded Investment on Impaired Loans		Interest Income				Average Recorded Investment on Impaired Loans		Interest Income
	Average Recorded Investment on Impaired Loans		Recognized		Recognized on a Cash Basis		Average Recorded Investment on Impaired Loans		Recognized		Recognized on a Cash Basis
Commercial:
Commercial and industrial	$	4,396	$	1	$	—	$	4,567	$	15	$	15
Commercial real estate		3,378		10		—		3,126		27		26
Construction		617		6		—		1,153		7		4
Consumer:
Residential real estate		—		—		—		2,032		12		12
Home Equity		—		—		—		110		4		4
Consumer		—		—		1		62		—		—

Total	$	8,391	$	17	$	1	$	11,050	$	65	$	61


	Nine Months Ended September 30, 2012						Nine Months Ended September 30, 2011
	Average Recorded Investment on Impaired Loans		Interest Income				Average Recorded Investment on Impaired Loans		Interest Income
	Average Recorded Investment on Impaired Loans		Recognized		Recognized on a Cash Basis		Average Recorded Investment on Impaired Loans		Recognized		Recognized on a Cash Basis

Commercial:
Commercial and industrial	$	4,320	$	10	$	8	$	3,533	$	19	$	19
Commercial real estate		3,477		35		7		4,489		90		89
Construction		708		19		—		1,196		30		23
Consumer:
Residential real estate		—		—		2		1,345		33		33
Home Equity		—		—		—		76		5		5
Consumer		—		—		1		73		2		6

Total	$	8,505	$	64	$	18	$	10,712	$	179	$	175

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


	September 30, 2012		December 31, 2011
Commercial:
Commercial and industrial	$	5,225	$	3,504
Commercial real estate		2,222		2,984
Construction		—		330
Consumer:
Residential real estate		1,189		1,417
Home equity		222		56
Consumer		75		163

Total	$	8,933	$	8,454

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


	Nine Months Ended September 30, 2012						Nine Months Ended September 30, 2011
	Number of Contracts		Outstanding Recorded Investment				Number of Contracts		Outstanding Recorded Investment
	Number of Contracts		Pre-Modification		Post-Modification		Number of Contracts		Pre-Modification		Post-Modification
Troubled Debt
Restructurings:
Commercial and industrial		1	$	140	$	140		1	$	863	$	863
Commercial real estate		4		1,211		1,211		1		248		263
Construction		2		613		613		—		—		—

Total		7	$	1,964	$	1,964		2	$	1,111	$	1,126

There were no loan modifications that were troubled debt restructures for the three months ended September 30, 2012 and 2011.

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.

The following is a summary of troubled debt restructurings that have subsequently defaulted within one year of modification:


	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Troubled Debt Restructurings That
Subsequently Defaulted:
Commercial real estate		1	$	860		1	$	860
Construction		—		—		1		872

Total		1	$	860		2	$	1,732

As of September 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 September 30, 2012
Commercial:	Commercial & Industrial		Commercial Real Estate		Construction		Total
Grade:
Pass	$	183,358	$	496,503	$	29,611	$	709,472
Special Mention		4,899		5,057		519		10,475
Substandard		12,099		11,964		4,594		28,657
Doubtful		661		—		—		661

Total	$	201,017	$	513,524	$	34,724	$	749,265


Consumer:	Residential		Home Equity		Consumer		Total
Grade:
Pass	$	310,970	$	142,782	$	13,015	$	466,767
Special Mention		—		—		—		—
Substandard		1,630		270		75		1,975
Doubtful		—		—		—		—

Total	$	312,600	$	143,052	$	13,090	$	468,742


	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 September 30, 2012 and December 31, 2011 were as follows:


	September 30, 2012		December 31, 2011
Unused lines of credit	$	262,526	$	250,034
Amounts due mortgagors		29,013		27,495
Standby letters of credit		3,568		4,004
Commitments to originate loans		63,794		32,689

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

The Company has committed to invest up to an aggregate of $12.0 million in two low income housing tax credit funds by the end of 2015. At September 30, 2012, the Company invested $8.2 million in the funds, which has been reduced by net operating losses of $1.3 million. The net carrying balance of $6.9 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 September 30, 2012 and December 31, 2011:


	September 30, 2012		December 31, 2011
Demand	$	234,191	$	205,902
NOW		67,279		52,899
Savings		264,942		247,664
Money market		295,674		301,770
Certificates of deposit		413,074		421,740

	$	1,275,160	$	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 September 30, 2012
Securities available for sale:
Government-sponsored enterprises	$	—	$	150	$	—	$	150
Government-sponsored and government-guaranteed mortgage-backed securities		—		227,021		—		227,021
Private label mortgage-backed securities		—		1,505		—		1,505
Municipal bonds		—		8,440		—		8,440
Corporate bonds		—		—		1,726		1,726

Total	$	—	$	237,116	$	1,726	$	238,842


	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 September 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 nine months ended September 30, 2012.


Balance at December 31, 2011	$	1,566
Total realized/unrealized losses included in net income		(165	)
Change in unrealized gain		325

Balance at September 30, 2012	$	1,726

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 nine months ended September 30, 2012 and 2011.


							Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
	At September 30, 2012						Total Gains/(Losses)			Total Gains/(Losses)
	Level 1		Level 2		Level 3		Total Gains/(Losses)			Total Gains/(Losses)
Assets:
Loans	$	—	$	—	$	722	$	(116	)	$	(126	)
Other real estate owned		—		—		1,070		(134	)		(184	)
Other assets		—		—		595		(37	)		(37	)

Total assets	$	—	$	—	$	2,387	$	(287	)	$	(347	)


							Three Months Ended September 30, 2011			Nine Months Ended September 30, 2011
	At September 30, 2011						Total Gains/(Losses)			Total Gains/(Losses)
	Level 1		Level 2		Level 3		Total Gains/(Losses)			Total Gains/(Losses)
Assets:
Loans	$	—	$	—	$	3,722	$	(290	)	$	(350	)
Other real estate owned		—		—		630		(100	)		(100	)
Other assets		—		—		508		(33	)		(92	)

Total assets	$	—	$	—	$	4,860	$	(423	)	$	(542	)

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. Included in other assets is a venture capital investment carried at cost. In the third quarter of 2012 management determined that an impairment indicator existed and that the investment suffered impairment that was considered other-than-temporary. The cost basis of the investment was written down by $37,000 in the third quarter to fair value as a new cost basis and the write down was accounted for as a realized loss and was included in earnings. In the second and third quarters of 2011, the cost basis of this investment was written down by $59,000 and $33,000, respectively.

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 September 30, 2012
	Carrying Value		Level 1		Level 2		Level 3		Estimated Fair Value
Financial Assets:
Cash and cash equivalents	$	28,344	$	28,344	$	—	$	—	$	28,344
Securities available for sale		238,842		—		237,116		1,726		238,842
Securities held to maturity		91,469		—		94,664		—		94,664
Stock in Federal Home Loan Bank of Boston		14,454		—		—		14,454		14,454
Net loans		1,207,902		—		—		1,232,387		1,232,387
Financial Liabilities:
Deposits (with no stated maturity)		862,086		—		—		862,086		862,086
Time deposits		413,074		—		—		418,932		418,932
Federal Home Loan Bank of Boston advances		118,220		—		—		123,236		123,236
Repurchase agreements		34,579		—		—		35,355		35,355
Subordinated debentures		5,608		—		5,608		—		5,608


	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 September 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 September 30,								For the Nine Months Ended September 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	$	78	$	24	$	84	$	24	$	236	$	70	$	251	$	70
Interest cost		44		14		46		14		132		42		139		42

Total pension cost		122		38		130		38		368		112		390		112
Prior service cost amortization		29		9		35		9		86		27		104		27
Net loss amortization		—		2		—		2		—		8		—		8

Net periodic benefit cost	$	151	$	49	$	165	$	49	$	454	$	147	$	494	$	147

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 September 30, 2012 and December 31, 2011

Total assets increased $59.9 million, or 3.7%, to $1.68 billion at September 30, 2012 from $1.62 billion at December 31, 2011 reflecting strong growth in net loans and an increase in securities available for sale, partially offset by a decrease in interest-bearing deposits and held to maturity investment securities. Net loans increased $95.0 million, or 8.5%, to $1.21 billion at September 30, 2012 from $1.11 billion at December 31, 2011 mainly due to strong growth in the commercial loan portfolios and to a lesser extent an increase in home equity loans, partially offset by modest run-off in residential mortgages and consumer loans. Commercial

mortgages increased $63.3 million, or 14.1%, and commercial and industrial loans increased $24.9 million, or 14.2%, primarily the result of business development efforts, competitive products and pricing and the establishment of a loan production office in Beverly, Massachusetts in 2011 and Glastonbury, Connecticut during the second quarter of 2012. Home equity loans increased $7.5 million, or 5.6%, largely attributable to sales and marketing initiatives as well as competitive products and pricing. These increases were partially offset by a decrease in residential mortgages of $2.2 million, or 0.7%, driven by sales of 30-year fixed rate loan originations totaling $13.4 million and payments, offset to a large extent by originations of 10- and 15-year fixed rate loans. Securities available for sale increased $17.0 million, or 7.7%, to $238.8 million at September 30, 2012 from $221.8 million at December 31, 2011 primarily due to purchases of fixed-rate agency mortgage-backed securities totaling $66.0 million, partially offset by repayments of government-sponsored agency debt and mortgage-backed securities of $47.0 million. Interest-bearing deposits decreased $29.7 million, or 71.8%, reflecting the use of excess cash to fund purchases of available for sale securities and loan originations. Securities held to maturity decreased $24.4 million, or 21.1%, to $91.5 million at September 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 $45.2 million, or 3.7%, to $1.28 billion at September 30, 2012 compared to $1.23 billion at December 31, 2011 primarily due to growth in core deposit accounts of $53.9 million, or 6.7%, to $862.1 million at September 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 $8.7 million, or 2.1%, to $413.1 million at September 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. Long-term debt increased $13.4 million, or 10.6%, to $140.3 million at September 30, 2012 compared to $126.9 million at December 31, 2011 as new Federal Home Loan Bank advances were secured to fund loan growth. Short-term borrowings decreased $2.7 million, or 15.5%, to $14.6 million at September 30, 2012 from $17.3 million at December 31, 2011 mainly due to a decrease in overnight repurchase agreements. At September 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 $2.8 million, or 1.2%, to $230.2 million at September 30, 2012 from $227.4 million at December 31, 2011 as a result of net income of $8.4 million, stock-based compensation credits totaling $1.1 million and ESOP compensation of $815,000. These increases were partially offset by repurchases of common stock totaling $4.0 million and cash dividend payments amounting to $4.1 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 $8.9 million, or 0.73% of total loans, at September 30, 2012 compared to $8.5 million, or 0.75% of total loans, at December 31, 2011, primarily due to an $832,000 increase in commercial real estate non-accrual loans. Classified loans decreased $8.1 million, or 20.5%, to $31.3 million at September 30, 2012, compared to $39.4 million at December 31, 2011. At September 30, 2012, classified loans included ten relationships representing 44.5% of the total. Of the $1.3 million in other real estate owned, one property with a book balance of $139,113 has a purchase and sales offer which has been accepted. Refer to “Note H – Loans” in the Notes to the Unaudited Consolidated Financial Statements in this report for additional disclosures about credit quality.

At September 30, 2012, the ratio of the allowance for loan losses to total loans was 1.03% compared to 0.99% at December 31, 2011. Excluding the impact of acquired loans totaling $125.0 million at September 30, 2012 and $168.0 million at December 31, 2011, the ratio of the allowance for loan losses to total loans would have been 1.15% at September 30, 2012 and 1.17% at December 31, 2011. Net charge-offs totaled $1.0 million, or 0.12% of average loans outstanding on an annualized basis, for the nine months ended September 30, 2012 as compared to net charge-offs of $1.5 million, or 0.18% of average loans outstanding on an annualized basis, for the same period in 2011. Net charge-offs in both periods 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 September 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 $156,000, or 5.1%, to $2.9 million for the third quarter of 2012 compared to net income of $3.1 million for the same period in 2011. Excluding acquisition related expenses of $366,000 ($254,000 net of tax benefit) incurred in 2012 and impairment charges on securities of $202,000 ($119,000 net of tax benefit) in 2012 and $33,000 ($19,000 net of tax benefit) in 2011, net income would have increased by $198,000, or 6.4%, to $3.3 million largely due to an increase of $257,000 (excluding impairment charges on securities) in non-interest income, a decrease in non-interest expense of $175,000 (excluding acquisition related expenses), and an increase in net interest income of $151,000. These positive results were offset in part by an increase of $300,000 in provision for loan losses. Diluted earnings per share was $0.20 for both periods. Excluding the after tax impact of acquisition related expenses and impairment charges on securities, diluted earnings per share would have increased $0.02, or 10.0%, to $0.22 for the three months ended September 30, 2012.

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


	Three Months Ended September 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⁾	$	313,919	$	3,493		4.45	%	$	318,705	$	3,894		4.89	%
Commercial real estate		512,834		6,841		5.34	%		467,735		6,940		5.93	%
Home equity		140,812		1,239		3.52	%		139,091		1,345		3.87	%
Commercial and industrial		197,552		2,742		5.55	%		171,187		2,120		4.95	%
Consumer and other		13,685		179		5.23	%		16,954		230		5.43	%

Total loans⁽²⁾		1,178,802		14,494		4.92	%		1,113,672		14,529		5.22	%
Investment securities		338,352		2,549		3.01	%		358,929		3,249		3.62	%
Other interest-earning assets		26,625		27		0.41	%		31,339		22		0.28	%

Total interest-earning assets		1,543,779		17,070		4.42	%		1,503,940		17,800		4.73	%
Noninterest-earning assets⁽³⁾		106,369							101,904

Total assets	$	1,650,148						$	1,605,844


Interest-bearing liabilities:
Savings accounts	$	259,783		290		0.45	%	$	240,101		425		0.71	%
Money market accounts		293,291		313		0.43	%		276,718		477		0.69	%
NOW accounts		55,788		42		0.30	%		41,471		36		0.35	%
Certificates of deposit		414,160		1,799		1.74	%		434,283		2,076		1.91	%

Total interest-bearing deposits		1,023,022		2,444		0.96	%		992,573		3,014		1.21	%
FHLB advances		103,915		791		3.04	%		132,544		1,080		3.26	%
Other interest-bearing liabilities		51,194		285		2.23	%		48,153		307		2.55	%

Total interest-bearing liabilities		1,178,131		3,520		1.20	%		1,173,270		4,401		1.50	%
Demand deposits		231,126							193,957
Other noninterest-bearing liabilities		11,277							10,339

Total liabilities		1,420,534							1,377,566
Stockholders' equity		229,614							228,278

Total liabilities and stockholders' equity	$	1,650,148						$	1,605,844


Net interest income			$	13,550						$	13,399

Interest rate spread⁽⁴⁾						3.22	%						3.23	%
Net interest-earning assets⁽⁵⁾	$	365,648						$	330,670

Net interest margin⁽⁶⁾						3.51	%						3.56	%
Average interest-earning assets to average interest-bearing liabilities						131.04	%						128.18	%

(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 September 30, 2012 vs. 2011
	Increase (Decrease) Due to
	Volume			Rate			Net
	(In thousands)

Interest-earning assets:
Loans:
Residential real estate⁽¹⁾	$	(57	)	$	(344	)	$	(401	)
Commercial real estate		636			(735	)		(99	)
Home equity		17			(123	)		(106	)
Commercial and industrial		349			273			622
Consumer and other		(42	)		(9	)		(51	)

Total loans		903			(938	)		(35	)
Investment securities		(178	)		(522	)		(700	)
Other interest-earning assets		(3	)		8			5

Total interest-earning assets		722			(1,452	)		(730	)


Interest-bearing liabilities:
Savings accounts		33			(168	)		(135	)
Money market accounts		27			(191	)		(164	)
NOW accounts		12			(6	)		6
Certificates of deposit		(93	)		(184	)		(277	)

Total interest-bearing deposits		(21	)		(549	)		(570	)
FHLB advances		(222	)		(67	)		(289	)
Other interest-bearing liabilities		18			(40	)		(22	)

Total interest-bearing liabilities		(225	)		(656	)		(881	)


Change in net interest income	$	947		$	(796	)	$	151

(1)	Includes loans held for sale.

Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses increased $151,000, or 1.1%, to $13.6 million for the third quarter of 2012 from $13.4 million for the same period in 2011 mainly as a result of an increase in average interest-earning assets, partially offset by a contraction in the net interest margin. Total average interest-earning assets increased $39.8 million, or 2.6%, to $1.54 billion for the third quarter of 2012, driven by strong loan growth partially offset by decreases in interest-earning cash balances and investment securities. The net interest margin decreased by 5 basis points to 3.51% for the three months ended September 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 and an increase of $370,000 in the amortization of certain acquisition accounting adjustments to $631,000 for the third quarter of 2012 from $261,000 for the same period in 2011.

Interest Income. Interest income decreased $730,000, or 4.1%, to $17.1 million for the three months ended September 30, 2012 from $17.8 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 31 basis points to 4.42% for the third 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 $881,000, or 20.0%, to $3.5 million for the three months ended September 30, 2012 from $4.4 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 30 basis points to 1.20% for the three months ended September 30, 2012 due to the repricing of deposits in response to the lower interest rate environment. Average interest-bearing liabilities increased $4.9 million, or 0.4%, to $1.18 billion for the three months ended September 30, 2012 from $1.17 billion for the prior year period as a result of growth of $30.4 million, or 3.1%, in interest-bearing deposits and a $3.0 million, or 6.3%, increase in other interest-bearing liabilities. These increases were partially offset by a decrease of $28.6 million, or 21.6%, 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 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 $300,000, or 40.0%, to $1.1 million for the three months ended September 30, 2012 from $750,000 for the same period in 2011, driven by an increase in general reserves associated with stronger commercial loan origination activity and the continuing shift to a more commercially oriented loan portfolio, offset by a decrease in charge-offs. The allowance for loan losses was $12.6 million, or 1.03% of loans outstanding at September 30, 2012. Excluding the impact of acquired loans, the ratio of the allowance for loan losses to total loans would have been 1.15%.

Non-interest Income. Non-interest income increased $88,000, or 3.6%, to $2.5 million for the third quarter of 2012 from $2.4 million for the same period in 2011. Net gains from sales of loans increased $137,000 due to improved pricing for sales of 30-year fixed rate loans and, to a lesser extent, increased sales volume. Other income increased $50,000, or 18.6%, as a result of higher loan prepayment penalties. Fee income on depositors’ accounts increased $32,000, or 2.3%, driven by growth in overdraft fees and debit card income. Wealth management income increased $31,000, or 12.5%, reflecting growth in fee-based assets under management. These increases were partially offset by an increase of $169,000 in impairment charges on securities. Management evaluated its securities portfolio and recognized pre-tax, non-cash charges totaling $202,000 in 2012 for other-than-temporary impairment (“OTTI”) of a corporate bond and a cost basis investment. In the third quarter of 2011, the Company recognized a $33,000 OTTI charge related to a cost basis investment.

Non-interest Expense. Non-interest expense increased $191,000, or 1.7%, to $11.2 million in the third quarter of 2012 from $11.0 million in the same period last year. Excluding acquisition related costs incurred in connection with the Company’s proposed acquisition of New England Bancshares totaling $366,000 in the third quarter of 2012, non-interest expense would have declined by $175,000, or 1.6%. Low income housing tax credit fund expense decreased by $232,000 due to a prior period adjustment. Professional fees decreased $201,000, or 35.1%, due in large part to legal and consulting costs incurred in 2011 in connection with strategic initiatives. Other expenses decreased $91,000, or 5.5%, reflecting a lower write-down of fair value of mortgage servicing rights. These items were partially reduced by higher compensation and data processing expenses. Salaries and benefits increased $197,000, or 3.2%, mainly due to a new loan production office opened in Glastonbury, Connecticut during the second quarter of 2012, annual salary increases and a higher short-term incentive plan accrual related to improved operating performance. Data processing expenses increased $148,000, or 15.4%, attributable to a larger loan and deposit base as well as increased costs related to software licenses, online banking and debit cards.

Income Tax Expense. Income tax expense decreased $96,000, or 9.7%, to $890,000 for the third quarter of 2012 from $986,000 in the same period last year primarily due to a lower effective tax rate and a decrease in pre-tax income.

Comparison of Operating Results for the Nine Months Ended September 30, 2012 and 2011

Net Income. Net income for the nine months ended September 30, 2012 amounted to $8.4 million, or $0.56 per diluted share, compared to $8.2 million, or $0.54 per diluted share, for the same period in 2011. Excluding acquisition related expenses of $958,000 ($818,000 net of tax benefit) incurred in 2012 and impairment charges on securities of $202,000 ($119,000 net of tax benefit) in 2012 and $92,000 ($54,000 net of tax benefit) incurred in 2011, net income would have increased by $1.0 million, or 12.6%, to $9.3 million, or $0.63 per diluted share, for the nine months of 2012. The 2012 results were positively impacted by an increase of $981,000 in non-interest income (excluding impairment charges on securities), a $372,000 increase in net interest income and a decrease of $367,000 in non-interest expense (excluding acquisition related expenses). These positive results were offset in part by increases of $277,000 in income tax expense and $219,000 in provision for loan losses.

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.


	Nine Months Ended September 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⁾	$	313,981	$	10,794		4.58	%	$	316,824	$	11,806		4.97	%
Commercial real estate		500,959		20,660		5.50	%		461,622		20,709		5.98	%
Home equity		138,087		3,695		3.57	%		138,457		3,982		3.83	%
Commercial and industrial		187,230		7,031		5.01	%		167,732		6,476		5.15	%
Consumer and other		14,327		570		5.30	%		18,039		746		5.51	%

Total loans⁽²⁾		1,154,584		42,750		4.94	%		1,102,674		43,719		5.29	%
Investment securities		338,945		8,171		3.21	%		352,467		9,827		3.72	%
Other interest-earning assets		45,463		119		0.35	%		47,336		100		0.28	%

Total interest-earning assets		1,538,992		51,040		4.42	%		1,502,477		53,646		4.76	%
Noninterest-earning assets⁽³⁾		104,770							93,508

Total assets	$	1,643,762						$	1,595,985


Interest-bearing liabilities:
Savings accounts	$	258,587		994		0.51	%	$	228,488		1,273		0.74	%
Money market accounts		300,798		1,121		0.50	%		269,498		1,476		0.73	%
NOW accounts		53,278		125		0.31	%		40,670		116		0.38	%
Certificates of deposit		416,471		5,555		1.78	%		445,111		6,640		1.99	%

Total interest-bearing deposits		1,029,134		7,795		1.01	%		983,767		9,505		1.29	%
FHLB advances		104,281		2,431		3.11	%		139,491		3,627		3.47	%
Other interest-bearing liabilities		52,313		870		2.22	%		50,018		942		2.51	%

Total interest-bearing liabilities		1,185,728		11,096		1.25	%		1,173,276		14,074		1.60	%
Demand deposits		218,296							186,714
Other noninterest-bearing liabilities		11,293							10,101

Total liabilities		1,415,317							1,370,091
Stockholders' equity		228,445							225,894

Total liabilities and stockholders' equity	$	1,643,762						$	1,595,985


Net interest income			$	39,944						$	39,572

Interest rate spread⁽⁴⁾						3.17	%						3.16	%
Net interest-earning assets⁽⁵⁾	$	353,264						$	329,201

Net interest margin⁽⁶⁾						3.46	%						3.51	%
Average interest-bearing assets to average interest-bearing liabilities						129.79	%						128.06	%

(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.


	Nine Months Ended September 30, 2012 vs. 2011
	Increase (Decrease) Due to
	Volume			Rate			Net
	(In thousands)

Interest-earning assets:
Loans:
Residential real estate⁽¹⁾	$	(105	)	$	(907	)	$	(1,012	)
Commercial real estate		1,692			(1,741	)		(49	)
Home equity loans		(11	)		(276	)		(287	)
Commercial and industrial		736			(181	)		555
Consumer and other		(149	)		(27	)		(176	)

Total loans		2,163			(3,132	)		(969	)
Investment securities		(366	)		(1,290	)		(1,656	)
Other interest-earning assets		(4	)		23			19

Total interest-earning assets		1,793			(4,399	)		(2,606	)


Interest-bearing liabilities:
Savings accounts		152			(431	)		(279	)
Money market accounts		156			(511	)		(355	)
NOW accounts		32			(23	)		9
Certificates of deposit		(410	)		(675	)		(1,085	)

Total interest-bearing deposits		(70	)		(1,640	)		(1,710	)
FHLB advances		(849	)		(347	)		(1,196	)
Other interest-bearing liabilities		42			(114	)		(72	)

Total interest-bearing liabilities		(877	)		(2,101	)		(2,978	)


Change in net interest income	$	2,670		$	(2,298	)	$	372

(1)	Includes loans held for sale.

Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses increased $372,000, or 0.9%, to $39.9 million for the nine months ended September 30, 2012 from $39.6 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 $36.5 million, or 2.4%, to $1.54 billion for the nine months ended September 30, 2012, mainly due to strong 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 3.46% for the nine months ended September 30, 2012 from 3.51% 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 and an increase of $216,000 in the amortization of certain acquisition accounting adjustments to $1.1 million for the nine months ended September 30, 2012 from $845,000 for the same period in 2011.

Interest Income. Interest income decreased $2.6 million, or 4.9%, to $51.0 million for the nine months ended September 30, 2012 from $53.6 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 34 basis points to 4.42% for the nine months ended September 30, 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 $3.0 million, or 21.2%, to $11.1 million for the nine months ended September 30, 2012 from $14.1 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 35 basis points to 1.25% for the nine months ended September 30, 2012 reflecting the repricing of deposits in response to the lower interest rate environment. Average interest-bearing liabilities increased $12.5 million, or 1.1%, to $1.19 billion for the nine months ended September 30, 2012 from $1.17 billion for the prior year period reflecting growth of $45.4 million, or 4.6%, in interest-bearing deposits. The increase in average interest-bearing deposits was offset in part by a reduction of $35.2 million, or 25.2%, in average FHLBB advances to $104.3 million for the nine months ended September 30, 2012 as a result of payoffs of maturing advances.

Provision for Loan Losses. The provision for loan losses increased $219,000, or 9.8%, to $2.5 million for the nine months ended September 30, 2012, from $2.2 million for the same period in 2011, driven by an increase in general reserves associated with stronger commercial loan origination activity and a shift to a more commercial oriented portfolio, partially offset by reductions in net charge-offs and classified loans.

Non-interest Income. Non-interest income increased $871,000, or 12.8%, to $7.7 million for the nine months ended September 30, 2012 from $6.8 million for the prior year period. Net gains from sales of loans increased $334,000 due to improved pricing for sales of 30-year fixed rate loans and to a lesser extent, increased sales volume. Fee income on depositors’ accounts increased $304,000, or 7.4%, driven by growth in debit card income and overdraft fees. Bank-owned life insurance income increased $132,000, or 11.1%, reflecting the purchase of an additional $10.0 million investment in the second quarter of 2011. Wealth management income increased $93,000, or 13.2%, reflecting higher fee-based assets under management and transaction-based commissions. These increases were partially offset by an increase of $110,000 in impairment charges on securities. Management evaluated its securities portfolio and recognized pre-tax, non-cash charges totaling $202,000 in 2012 for OTTI of a corporate bond and a cost basis investment. For the 2011 period, the Company recognized $92,000 of OTTI charges related to a cost basis investment.

Non-interest Expense. Non-interest expense increased $591,000, or 1.8%, to $33.9 million for the nine months ended September 30, 2012 from $33.3 million for the prior year period. Excluding acquisition related costs of $958,000, non-interest expense would have declined by $367,000, or 1.1%. Low income housing tax credit fund expense decreased by $384,000 due to a prior period adjustment. Professional fees decreased by $359,000, or 21.9%, related to lower legal and consulting costs incurred in 2011 in connection with strategic initiatives. Marketing expense declined $164,000, or 11.5%, due to decreases in newspaper and television advertising and other promotional activities. These items were partially reduced by higher compensation, data processing and occupancy expenses. Salaries and benefits increased by $242,000, or 1.3%, due to annual wage increases, staffing costs related to new loan production offices and a higher incentive compensation accrual, offset in part by lower stock-based compensation. Data processing expenses increased $207,000, or 7.1%, attributable to a larger loan and deposit base as well as increased costs related to software licenses, online banking and debit cards. Occupancy expense increased $95,000, or 3.8%, driven by higher rent and depreciation charges.

Income Tax Expense. Income tax expense increased $277,000 to $2.9 million for nine months ended September 30, 2012 from $2.6 million for the comparable 2011 period primarily due to higher pretax income and a 1.5% increase in the effective tax rate due primarily to non-deductible acquisition related expenses and reduced low income housing tax credit fund expenses.

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 September 30, 2012 and December 31, 2011.


Net Interest Income At-Risk

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

-100	(4.0)%	(3.9)%
Stable	0.0%	0.0%
+200	4.2%	(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.


		September 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)
Change in Interest Rates (basis points) (1)		Estimated EVE (2)		Amount			Percent			EVE Ratio (4)			Increase (Decrease) (basis points)
				(Dollars in thousands)
	+300	$	192,173	$	(39,984	)		(17	)%		12.07	%		(153	)
	+200		220,210		(11,947	)		(5	)		13.45			(15	)
	+100		233,740		1,583			1			13.95			35
	0		232,157		—			—			13.60			—
	-100		232,902		745			—			13.45			(16	)


		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)
Change in Interest Rates (basis points) (1)		Estimated EVE (2)		Amount			Percent			EVE Ratio (4)			Increase (Decrease) (basis points)
				(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 September 30, 2012 and December 31, 2011, in the event of a 300 basis point increase in interest rates, we would experience a 17% and 23%, respectively, decrease in economic value of equity. In the event of a 100 basis point decrease in interest rates at September 30, 2012 and December 31, 2011, we would experience a 0% 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 September 30, 2012, our liquidity ratio was 17.49%, 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 September 30, 2012, cash and cash equivalents totaled $28.3 million. Securities classified as available for sale and held to maturity, which provide additional sources of liquidity, totaled $238.8 million and $91.5 million, respectively, at September 30, 2012. In addition, at September 30, 2012, we had the ability to borrow a total of approximately $203.6 million from the FHLBB and had $117.2 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 September 30, 2012, we had $63.8 million in loan commitments outstanding. In addition to commitments to originate loans, we had $262.5 million in unused lines of credit to borrowers, $3.6 million in standby letters of credit and $29.0 million to be disbursed under existing construction loan commitments. Certificates of deposit due within one year of September 30, 2012 totaled $249.5 million, or 19.6% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit, FHLBB advances, borrowings from the Federal Reserve Bank and repurchase agreements. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 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 nine months ended September 30, 2012, we originated $311.9 million of loans and purchased $67.4 million of securities. In the comparable 2011 period, we originated $203.7 million of loans and purchased $77.8 million of securities.

Financing activities consist primarily of activity in deposit accounts and FHLBB advances. We experienced a net increase in total deposits of $45.2 million and $56.3 million for the nine months ended September 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 increased by $11.8 million during the nine months ended September 30, 2012 to fund loan growth. For the same period in 2011, FHLBB advances decreased by $32.2 million reflecting the use of cash flows received from the loan and investment portfolios and excess deposit funds to pay down advances.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLBB, which provides an additional source of funds. We have also used FHLBB advances to “match-fund” certain longer-term one- to four-family residential mortgage loans and commercial real estate loans. The Bank’s unused borrowing capacity with the FHLBB, excluding its available line of credit balance of $12.0 million at September 30, 2012 and December 31, 2011, was approximately $74.4 million at September 30, 2012 and $107.1 million at December 31, 2011. At September 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 $78.8 million at September 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 all interest paid on its subordinated debentures. United Financial also repurchases shares of its common stock. At September 30, 2012, United Financial on an unconsolidated basis had liquid assets of $20.3 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 September 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	$	249,504	$	137,380	$	26,190	$	—	$	413,074
Federal Home Loan Bank advances		31,405		28,026		32,801		25,000		117,232
Repurchase agreements		14,579		—		—		20,000		34,579
Subordinated debentures		—		—		—		7,732		7,732
Standby letters of credit		3,568		—		—		—		3,568
Operating leases		1,080		2,323		1,698		4,410		9,511
Capitalized leases		423		847		848		5,879		7,997
Future benefits to be paid under retirement plans		1,064		2,999		1,289		4,679		10,031

Total	$	301,623	$	171,575	$	62,826	$	67,700	$	603,724

Commitments:
Commitments to extend credit	$	358,901	$	—	$	—	$	—	$	358,901
Investment in venture capital fund		300		—		—		—		300
Investment in low income tax credit fund		2,686		413		—		—		3,099

Total	$	361,887	$	413	$	—	$	—	$	362,300

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 September 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 September 30, 2012:
Total risk-based capital		14.77	%		8.00	%		10.00	%
Tier 1 risk-based capital		13.85	%		4.00	%		6.00	%
Tier 1 (core) capital		11.35	%		4.00	%		5.00	%
Tangible equity		11.35	%		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 September 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 September 30, 2012.

(b) Not applicable.

(c) The following table provides certain information with regard to shares repurchased by the Company in the third 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)

July 1 - 31, 2012		2,600		$	14.54		2,600		128,103

August 1 - 31, 2012		43,493	(2)		14.24		43,314		84,789

September 1 - 30, 2012		15,600			14.38		15,600		69,189


Total		61,693		$	14.29		61,514

(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 September 30, 2012, the Company has repurchased 738,614 shares at a cost of approximately $11.1 million and an average price of $15.07 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)

10.0		Amended Employment Agreement by and between United Financial Bancorp, Inc., United Bank and Richard B. Collins, dated as of August 16, 2012.

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 September 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.*

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

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

*	Furnished, not filed

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized.


	United Financial Bancorp, Inc.

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

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