Edgar Filing: CHICOPEE BANCORP, INC.

a6717673.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

[ ]	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: 000-51996

CHICOPEE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Massachusetts	20-4840562
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
70 Center Street, Chicopee, Massachusetts	01013
(Address of principal executive offices)	(Zip Code)
(413) 594-6692
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [ ] 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.

Large Accelerated Filer [ ]	Accelerated Filer [X]
Non-Accelerated Filer [ ]	Smaller Reporting Company [ ]

Indicate be check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

As of May 10, 2011, there were 5,956,707 shares of the Registrant’s Common Stock outstanding.

CHICOPEE BANCORP, INC.

FORM 10-Q

INDEX

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Financial Condition at
	March 31, 2011 and December 31, 2010.	1

	Consolidated Statements of Operations for the Three
	Months Ended March 31, 2011 and 2010	2

	Consolidated Statements of Changes in Stockholders’ Equity
	for the Three Months Ended March 31, 2011 and 2010	3

	Consolidated Statements of Cash Flows for the
	Three Months Ended March 31, 2011 and 2010	4

	Notes to Unaudited Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37

Item 4.	Controls and Procedures	39

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	40
Item 4.	(Removed and Reserved.)
Item 5.	Other Information	40
Item 6.	Exhibits	40

SIGNATURES		41

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHICOPEE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars In Thousands)


	March 31,			December 31,
Assets	2011			2010
	(Unaudited)

Cash and due from banks	$	9,396		$	6,903
Federal funds sold		27,884			28,970
Total cash and cash equivalents		37,280			35,873

Securities available-for-sale, at fair value		352			362
Securities held-to-maturity, at cost (fair value $65,156 and $69,912 at
March 31, 2011 and December 31, 2010, respectively)		65,017			69,713
Federal Home Loan Bank stock, at cost		4,489			4,489
Loans, net of allowance for loan losses ($4,442 at
March 31, 2011 and $4,431 at December 31, 2010)		442,635			430,307
Loans held for sale		111			1,888
Other real estate owned		438			286
Mortgage servicing rights		386			306
Bank owned life insurance		13,130			13,032
Premises and equipment, net		10,208			10,340
Accrued interest and dividends receivable		1,743			1,897
Deferred income tax asset		2,471			2,469
FDIC prepaid insurance		1,258			1,361
Other assets		2,190			1,381
Total assets	$	581,708		$	573,704

Liabilities and Stockholders' Equity

Deposits
Non-interest-bearing	$	50,102		$	48,302
Interest-bearing		353,995			343,635
Total deposits		404,097			391,937

Securities sold under agreements to repurchase		16,953			17,972
Federal Home Loan Bank of Boston advances		68,432			71,615
Accrued expenses and other liabilities		225			298
Total liabilities		489,707			481,822


Stockholders' equity
Common stock (no par value, 20,000,000 shares authorized, 7,439,368
shares issued at March 31, 2011 and December 31, 2010)		72,479			72,479
Treasury stock, at cost (1,459,490 shares at March 31, 2011
and 1,427,390 shares at December 31, 2010)		(18,714	)		(18,295	)
Additional paid-in-capital		2,373			2,255
Unearned compensation (restricted stock awards)		(1,124	)		(1,431	)
Unearned compensation (Employee Stock Ownership Plan)		(4,389	)		(4,463	)
Retained earnings		41,351			41,308
Accumulated other comprehensive income		25			29
Total stockholders' equity		92,001			91,882
Total liabilities and stockholders' equity	$	581,708		$	573,704

See accompanying notes to unaudited consolidated financial statements.

CHICOPEE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except for Number of Shares and Per Share Amounts)
(Unaudited)

	Three Months Ended
	March 31,
	2011			2010

Interest and dividend income:
Loans, including fees	$	5,809		$	5,918
Interest and dividends on securities		332			261
Other interest-earning assets		47			5
Total interest and dividend income		6,188			6,184

Interest expense:
Deposits		1,374			1,487
Securities sold under agreements to repurchase		10			27
Other borrowed funds		438			518
Total interest expense		1,822			2,032

Net interest income		4,366			4,152
Provision for loan losses		233			273

Net interest income after provision for loan losses		4,133			3,879

Non-interest income:
Service charges, fees and commissions		466			430
Loan sales and servicing, net		148			83
Net gain on sales of securities available-for-sale		12			-
Loss on sale of other real estate owned		(63	)		-
Other than temporary impairment charge		-			(13	)
Income from bank owned life insurance		98			107
Total non-interest income		661			607

Non-interest expenses:
Salaries and employee benefits		2,839			2,536
Occupancy expenses		447			429
Furniture and equipment		250			268
FDIC insurance assessment		102			221
Data processing		293			279
Professional fees		142			125
Advertising		126			125
Stationery, supplies and postage		83			89
Other non-interest expense		464			464
Total non-interest expenses		4,746			4,536

Income (loss) before income taxes		48			(50	)
Income tax expense		5			-
Net income (loss)	$	43		$	(50	)

Earnings (loss) per share: (1)
Basic	$	0.01		$	(0.01	)
Diluted	$	0.01		$	(0.01	)

Adjusted weighted average shares outstanding:
Basic		5,421,684			5,726,836
Diluted		5,454,160			5,726,836

(1) Common stock equivalents are excluded from the computation of diluted net income per share for the three months ended March 31, 2011 and March 31, 2010, since the inclusion of such equivalents would be anti-dilutive.

See accompanying notes to unaudited consolidated financial statements.

CHICOPEE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2011 and 2010
(Dollars In Thousands)
(Unaudited)


								Unearned			Unearned						Accumulated
						Additional		Compensation			Compensation						Other
	Common		Treasury			Paid-in		(restricted stock			(Employee Stock			Retained			Comprehensive
	Stock		Stock			Capital		awards)			Ownership Plan)			Earnings			Income			Total

Balance at December 31, 2010	$	72,479	$	(18,295	)	$	2,255	$	(1,431	)	$	(4,463	)	$	41,308		$	29		$	91,882

Comprehensive income:
Net income		-		-			-		-			-			43			-			43
Change in net unrealized gain on securities
available-for-sale (net of deferred income taxes of $2)		-		-			-		-			-			-			(4	)		(4	)
Total comprehensive income																					39

Treasury stock purchased (32,100 shares)		-		(419	)		-		-			-			-			-			(419	)
Change in unearned compensation:
Stock option expense		-		-			91		-			-			-			-			91
Restricted stock award expense		-		-			-		307			-			-			-			307
Common stock held by ESOP committed to
be released		-		-			27		-			74			-			-			101
Balance at March 31, 2011	$	72,479	$	(18,714	)	$	2,373	$	(1,124	)	$	(4,389	)	$	41,351		$	25		$	92,001


Balance at December 31, 2009	$	72,479	$	(13,951	)	$	1,765	$	(2,269	)	$	(4,761	)	$	40,843		$	66		$	94,172

Comprehensive loss:
Net loss		-		-			-		-			-			(50	)		-			(50	)
Change in net unrealized gain on securities
available-for-sale (net of deferred income taxes of $17)		-		-			-		-			-			-			31			31
Total comprehensive loss																					(19	)

Treasury stock purchased (100 shares)		-		(2	)		-		-			-			-			-			(2	)
Change in unearned compensation:
Stock option expense		-		-			132		-			-			-			-			132
Restricted stock award expense		-		-			-		207			-			-			-			207
Common stock held by ESOP committed to
be released		-		-			19		-			74			-			-			93
Balance at March 31, 2010	$	72,479	$	(13,953	)	$	1,916	$	(2,062	)	$	(4,687	)	$	40,793		$	97		$	94,583

CHICOPEE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Three Months Ended March 31,
	2011			2010
	(In thousands)

Cash flows from operating activities:
Net income (loss)	$	43		$	(50	)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization		241			241
Provision for loan losses		233			273
Increase in cash surrender value of life insurance		(98	)		(107	)
Net realized gain on sale securities available-for-sale		(12	)		-
Realized gains on sales of mortgage loans		(48	)		(33	)
(Increase) decrease in other assets		(874	)		9
(Increase) decrease in accrued interest and dividends receivable		154			(39	)
Decrease in FDIC prepaid insurance		103			212
Net change in loans originated for resale		1,777			(87	)
Net loss on sales of other real estate owned		63			-
Decrease in other liabilities		(75	)		(134	)
Other than temporary impairment charge		-			13
Change in unearned compensation		499			432
Net cash provided by operating activities		2,006			730

Cash flows from investing activities:
Additions to premises and equipment		(80	)		(100	)
Loan originations and principal collections, net		(12,937	)		(2,439	)
Proceeds from sale of other real estate owned		162			-
Proceeds from sales of securities available-for-sale		17			-
Purchases of securities held-to-maturity		(14,725	)		(13,400	)
Maturities of securities held-to-maturity		18,725			9,685
Proceeds from principal paydowns of securities held-to-maturity		699			363
Purchase of FHLB stock		-			(183	)
Net cash used by investing activities		(8,139	)		(6,074	)

Cash flows from financing activities:
Net increase (decrease) in deposits		12,160			(13,907	)
Net decrease in securities sold under agreements to repurchase		(1,018	)		(1,987	)
Proceeds from long-term FHLB advances		-			24,500
Payments on long-term FHLB advances		(3,183	)		(7,283	)
Net decrease in other short-term borrowings		-			15
Stock purchased for treasury		(419	)		(2	)
Net cash provided by financing activities		7,540			1,336

Net increase (decrease) in cash and cash equivalents		1,407			(4,008	)

Cash and cash equivalents at beginning of year		35,873			20,075
Cash and cash equivalents at end of period	$	37,280		$	16,067

Supplemental cash flow information:
Interest paid on deposits	$	1,374		$	1,487
Interest paid on borrowings		448			531
Income taxes paid		57			-
Transfers from loans to other real estate owned		377			-

See accompanying notes to unaudited consolidated financial statements.

CHICOPEE BANCORP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

At and for the Three Months Ended March 31, 2011 and 2010

1.	Basis of Presentation

Chicopee Bancorp, Inc. (the “Corporation”) has no significant assets other than all of the outstanding shares of its wholly-owned subsidiaries, Chicopee Savings Bank (the “Bank”) and Chicopee Funding Corporation (collectively, the “Company”). The Corporation was formed on March 14, 2006 and became the holding company for the Bank upon completion of the Bank’s conversion from a mutual savings bank to a stock savings bank. The conversion of the Bank was completed on July 19, 2006. The accounts of the Bank include its wholly-owned subsidiaries and a 99% owned subsidiary. The consolidated financial statements of the Company as of March 31, 2011 and for the periods ended March 31, 2011 and 2010 included herein are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the financial condition, results of operations, changes in stockholders’ equity and cash flows, as of and for the periods covered herein, have been made. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K.

The results for the three month interim periods ended March 31, 2011 are not necessarily indicative of the operating results for a full year.

2.	Earnings Per Share

Basic earnings per share represents income available to common stockholders divided by the adjusted weighted-average number of common shares outstanding during the period. The adjusted outstanding common shares equals the gross number of common shares issued less average treasury shares, unallocated shares of the Chicopee Savings Bank Employee Stock Ownership Plan (“ESOP”), and average dilutive restricted stock awards under the 2007 Equity Incentive Plan. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and certain stock awards and are determined using the treasury stock method.

Earnings (loss) per share is computed as follows:

	Three Months Ended March
	2011			2010

Net income (loss) (in thousands)	$	43		$	(50	)

Weighted average number of common shares issued		7,439,368			7,439,368
Less: average number of treasury shares		(1,453,446	)		(1,060,340	)
Less: average number of unallocated ESOP shares		(446,363	)		(476,120	)
Less: average number of dilutive restricted stock awards		(117,875	)		(176,072	)

Adjusted weighted average number of common
shares outstanding		5,421,684			5,726,836
Plus: dilutive outstanding restricted stock awards		32,476			-
Plus: dilutive outstanding stock options		-			-
Weighted average number of diluted shares outstanding		5,454,160			5,726,836

Earnings (loss) per share:
Basic- common stock	$	0.01		$	(0.01	)
Basic- unvested share-based payment awards	$	0.01		$	(0.01	)
Diluted- common stock	$	0.01		$	(0.01	)
Diluted- unvested share-based payment awards	$	0.01		$	(0.01	)

There were 562,698 and 688,167 stock options that were not included in the calculation of diluted earnings per share for the three months ended March 31, 2011 and 2010, respectively, because their effect was anti-dilutive.

3.	Equity Incentive Plan

Stock Options

Under the Company’s 2007 Equity Incentive Plan (the “Plan”) approved by the Company’s stockholders at the annual meeting of the Company’s stockholders on May 30, 2007, the Company may grant options to directors, officers and employees for up to 743,936 shares of common stock. Both incentive stock options and non-qualified stock options may be granted under the Plan. The exercise price for each option is equal to the market price of the Company’s stock on the date of grant and the maximum term of each option is ten years. The stock options vest over five years in five equal installments on each anniversary of the date of grant.

The Company recognizes compensation expense over the vesting period, based on the grant-date fair value of the options granted. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for options granted during the years ended December 31, 2010 and 2009, and the three months ended March 31, 2011:

	Three Months			Year Ended			Year Ended
	Ended March 31,			December 31,			December 31,
	2011			2010			2009
Expected dividend yield		2.00	%		2.00	%		2.00	%
Expected term	6.5 years			6.5 years			6.5 years
Expected volatility		25.02	%		25.89	%		25.89	%
Risk-free interest rate		2.92	%		2.95	%		2.95	%

Expected volatility is based on the historical volatility of the Company’s stock and other factors. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The Company uses historical data, such as option exercise and employee termination rates, to calculate the expected option life.

A summary of options under the Plan as of March 31, 2011, and changes during the three months then ended, is as follows:

					Weighted Average		Aggregate
					Remaining		Intrinsic
	Number of		Weighted Average		Contractual Term		Value
	Shares		Exercise Price		(in years)		(000's)

Outstanding at December 31, 2010		591,334	$	14.21		6.48	$	8,403
Granted		16,000		14.10		9.85		-
Exercised		-		-		-		-
Forfeited or expired		44,636		14.29		6.33		-
Outstanding at March 31, 2011		562,698	$	14.20		6.59	$	-
Exercisable at March 31, 2011		320,417	$	14.25		6.17	$	-
Exercisable at March 31, 2010		267,665	$	14.28		7.18	$	3,822

The Company granted 16,000 stock options in the three months ended March 31, 2011 with a fair value of $3.41. The weighted-average grant-date fair value of options granted during 2008 and 2009 was $2.37 and $3.07, respectively. There were no options granted during 2010. The weighted average grant-date fair value of the options outstanding and exercisable at March 31, 2011 is $3.87 and $3.90, respectively. For the three months ended March 31, 2011 and 2010, share based compensation expense applicable to the Plan was $91,000 and $132,000 and the related tax benefit was $21,000 and $26,000, respectively. For the three months ended March 31, 2011, there were 44,636 options forfeited and no options have been exercised. As of March 31, 2011, unrecognized stock-based compensation expense related to non-vested options amounted to $641,000. This amount is expected to be recognized over a period of 1.76 years.

Stock Awards

Under the Company’s 2007 Equity Incentive Plan, the Company may grant stock awards to its directors, officers and employees for up to 297,574 shares of common stock. The stock awards vest 20% per year beginning on the first anniversary of the date of grant. The fair market value of the stock awards, based on the market price at the date of grant, is recorded as unearned compensation. Unearned compensation is amortized over the applicable vesting period. The weighted-average grant-date fair value of stock awards as of March 31, 2011 is $14.29. The Company recorded compensation cost related to stock awards of approximately $308,000 and $207,000 in the three months ended March 31, 2011 and 2010. Stock awards with a fair value of $651,000, $777,000, and $765,000 have vested during the years ended December 31, 2010, 2009 and 2008, respectively. No stock awards were granted prior to July 1, 2007. The Company granted 2,000 stock awards in the three months ended March 31, 2011 with a grant price of $14.29. As of March 31, 2011, unrecognized stock-based compensation expense related to non-vested restricted stock awards amounted to $1,036,000. This amount is expected to be recognized over a period of 1.42 years.

A summary of the status of the Company’s stock awards as of March 31, 2011, and changes during the three months ended March 31, 2011, is as follows:

			Weighted
			Average
	Number of		Grant-Date
Nonvested Shares	Shares		Fair Value

Balance at December 31, 2010		117,386	$	14.29
Granted		2,000		14.29
Vested		10,712		14.29
Forfeited		-		-
Balance at March 31, 2011		108,674	$	14.29

4.	Recent Accounting Pronouncements (Applicable to the Company)

In January 2010, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements, to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures regarding transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a rollforward of activities, separately reporting purchases, sales, issuance, and settlements, for assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance is effective for annual reporting periods that begin after December 15, 2009, and for interim periods within those annual reporting periods except for the changes to the disclosure of rollforward activities for any Level 3 fair value measurements, which are effective for annual reporting periods that begin after December 15, 2010, and for interim periods within those annual reporting periods. Other than requiring additional disclosures, adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The guidance is effective for interim and annual reporting periods ending after December 15, 2010. Other than requiring additional disclosures, adoption of this new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

On April 5, 2011, the FASB issued ASU 2011-02 “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”, which clarifies when creditors should classify loan modifications as troubled debt restructurings. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the year. The guidance on measuring the impairment of a receivable restructured in a troubled debt restructuring is effective on a prospective basis. The Company is currently evaluating the new guidance.

Reclassification

Certain amounts in the 2010 financial statements have been reclassified to conform to the current period’s presentation. These reclassifications had no effect on the net income previously reported.

5. Comprehensive Income or Loss

Accounting principles generally require recognized revenue, expenses, gains, and losses to be included in net income or loss. Certain changes in assets and liabilities, such as the after-tax effect of unrealized gains and losses on securities available-for-sale, are not reflected in the statement of operations, but the cumulative effect of such items from period-to-period is reflected as a separate component of the equity section of the statement of financial condition (accumulated other comprehensive income or loss). Other comprehensive income or loss, along with net income or loss, comprises the Company's total comprehensive income or loss.

Comprehensive income (loss) is comprised of the following:

	Three Months Ended
	March 31,
	2011			2010
	(In Thousands)

Net income (loss)	$	43		$	(50	)
Other comprehensive income, net of tax:
Unrealized holding gains on available-for-sale
securities arising during the period		6			35
Other than temporary impairment charge, included in net loss		-			13
Reclassification adjustment for gain on sale of securities
available-for-sale included in net income		(12	)		-
Tax effect		2			(17	)
Other comprehensive income (loss), net of tax		(4	)		31
Total comprehensive income (loss)	$	39		$	(19	)

6. Investment Securities

The following table sets forth, at the dates indicated, information regarding the amortized cost and fair values, with gross unrealized gains and losses of the Company's investment securities:

	March 31, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
Securities available-for-sale
Marketable equity securities¹	$	314	$	38	$	-		$	352
Total securities available-for-sale	$	314	$	38	$	-		$	352

Securities held-to-maturity
U.S. Treasury securities	$	24,096	$	1	$	-		$	24,097
Corporate and industrial
revenue bonds		23,297		-		-			23,297
Certificates of deposit		14,450		-		-			14,450
Collateralized mortgage obligations		3,174		138					3,312
Total securities held-to-maturity	$	65,017	$	139	$	-		$	65,156


	December 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
Securities available-for-sale
Marketable equity securities¹	$	319	$	43	$	-		$	362
Total securities available-for-sale	$	319	$	43	$	-		$	362

Securities held-to-maturity
U.S. Treasury securities	$	30,817	$	-	$	(1	)	$	30,816
Corporate and industrial
revenue bonds		23,348		-		-			23,348
Certificates of deposit		11,725		-		-			11,725
Collateralized mortgage obligations		3,823		200		-			4,023
Total securities held-to-maturity	$	69,713	$	200	$	(1	)	$	69,912

¹ Does not include investments in FHLB-Boston stock of $4.5 million, and Banker’s Bank stock of $183,000 repectively, at March 31, 2011 and December 31, 2010.

For the three months ended March 31, 2011, the Company sold one individual issue with a total cost of $5,300 and a total fair value of $16,955. Available-for-sale securities are fully comprised of equity securities: 4 individual issues of highly traded stocks, representing 2 companies in the financial industry.

At March 31, 2011 and December 31, 2010, securities with a carrying value of $21.5 million and $25.9 million, respectively, were pledged as collateral to support securities sold under agreements to repurchase.

The amortized cost and estimated fair value of debt securities by contractual maturity at March 31, 2011 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. The collateralized mortgage obligations are allocated to maturity categories according to final maturity date.

	Held-to-Maturity
	Amortized Cost		Fair Value
	(In Thousands)
Within 1 year	$	38,546	$	38,547
From 1 to 5 years		3,243		3,243
From 5 to 10 years		11,475		11,613
Over 10 years		11,753		11,753
	$	65,017	$	65,156

Unrealized Losses on Investment Securities

Management conducts, at least on a monthly basis, a review of its investment portfolio including available-for-sale and held-to-maturity (“HTM”) securities to determine if the value of any security has declined below its cost or amortized cost and whether such security is other-than-temporarily impaired (“OTTI”). Securities are evaluated individually based on guidelines established by the FASB and the internal policy of the Company and include but are not limited to: (1) intent and ability of the Company to retain the investment for a period of time sufficient to allow for the anticipated recovery in market value; (2) percentage and length of time which an issue is below book value; (3) financial condition and near-term prospects of the issuer; (4) whether the debtor is current on contractually obligated interest and principal payments; (5) the volatility of the market price of the security; and (6) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred, including the expectation of receipt of all principal and interest due.

During the year ended December 31, 2010, management determined that one equity security in the financial industry had other-than-temporary impairment for which a charge was recorded in the amount of $13,000. For the three months ended March 31, 2011, management determined that there were no securities other-than-temporarily impaired.

The following table presents the fair value of investments with continuous unrealized losses for of December 31, 2010:


	December 31, 2010
	Less Than Twelve Months					Twelve Months and Over				Total
	(In Thousands)
			Gross					Gross				Gross
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
U.S. Treasury securities	$	17,995	$	(1	)	$	-	$	-	$	17,995	$	(1	)
Total temporarily impaired securities	$	17,995	$	(1	)	$	-	$	-	$	17,995	$	(1	)

There were no securities with unrealized losses at March 31, 2011.

U.S. Treasury Securities

There were no unrealized losses within the U.S. Treasury securities category at March 31, 2011. At December 31, 2010, all had unrealized losses for less than 12 months, totaling approximately $1,000. Management deemed these losses to be immaterial.

Collateralized Mortgage Obligations

As of March 31, 2011 and December 31, 2010, there were no unrealized losses within the CMO portfolio. The portfolio ended the quarter with an unrealized gain of $138,000 compared to an unrealized gain of $200,000 at December 31, 2010.

Management reviews these securities on a regular basis for OTTI and considers if the issuer is an agency sponsored by the U.S. Government and whether downgrades by rating agencies have occurred. The Company reviews its CMO portfolio for OTTI similar to its OTTI analysis for its other securities, whereby it considers the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the debtors are current on contractually obligated interest and principal payments, the volatility of the market price of the security, and the Company’s intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or until maturity. The Company has the ability and intent to hold these securities until maturity.

As of March 31, 2011, the Company has 18 CMO bonds, or 22 individual issues, with an aggregate book value of $3.2 million, which included 5 bonds, or 6 individual issues, with a FICO score of less than 650. This risk is mitigated by loan-to-value ratios of less than 65%. The total exposure of these 5 bonds to the Company is $8,000. Since the purchase of these bonds, interest payments have been current and the Company expects to receive all principal and interest due.

These 18 CMO bonds have been substantially paid down with an average current factor of 15%, and are backed by well seasoned loans of an earlier vintage, which have not been significantly affected by high delinquency levels or vulnerable to lower collateral coverage as seen in later issued pools. All such CMOs are paying according to their contractual terms and are expected to continue to pay their contractual cash flows.

The Company’s remaining 13 CMO bonds are all investment grade and classified as HTM. All of these securities were issued by government sponsored agencies and are all collateralized primarily by AAA rated Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”) mortgage loans and, to the best of the Company’s knowledge, are not collateralized by sub-prime or Alt-A loans. FHLMC and FNMA guarantees the contractual cash flows of these CMOs. The loans collateralizing such CMOs consist of fixed-rate, 15-year loans, originated in early 2003 and 2004, with average FICO scores between 725 and 775, and average LTV of 57%.

Based on management’s analysis, which included the above indicators, the Company has determined that no OTTI exists within the CMO portfolio as of March 31, 2011 and December 31, 2010.

Marketable Equity Securities

As of March 31, 2011, there were no unrealized losses within the equity securities portfolio. The portfolio ended the quarter with a net unrealized gain of $38,000.

As of December 31, 2010, there were no unrealized losses within the equities portfolio. The portfolio ended the year with an unrealized gain of $43,000.

Federal Home Loan Bank (“FHLB”) stock and Federal Reserve Bank stock have also been evaluated for impairment. FHLB stock is a non-marketable equity security and therefore is reported at cost, which equals par value. Shares held in excess of the minimum required amount are generally redeemable at par value. However, in the first quarter of 2009 the FHLB announced a moratorium on such redemptions in order to preserve its capital in response to current market conditions and declining retained earnings. The minimum required shares are redeemable, subject to certain limitations, five years following termination of FHLB membership. The Company has no intention of terminating its FHLB membership. For the three months ended March 31, 2011, the Company received $3,400 in dividend income from its FHLB stock investment.

The Company periodically evaluates its investment in FHLB stock for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through March 31, 2011.

7.	Loans and Allowance for Loan Losses

At March 31, 2011, the Company’s net loan portfolio was $442.6 million, or 76.1% of total assets, compared to $430.3 million or 75.0% of total assets, at December 31, 2010. The following table sets forth the composition of the Company’s loan portfolio in dollar amounts and as a percentage of the respective portfolio.

	March 31, 2011						December 31, 2010
				Percent						Percent
	Amount			of Total			Amount			of Total
	(Dollars In Thousands)

Real estate loans:
Residential	$	130,000			29.2	%	$	132,670			30.6	%
Home equity		29,092			6.5	%		29,933			6.9	%
Commercial		173,578			38.9	%		162,107			37.4	%
Total		332,670			74.6	%		324,710			74.9	%

Construction-residential		5,326			1.2	%		6,428			1.5	%
Construction-commercial		25,851			5.8	%		26,643			6.1	%
Total construction		31,177			7.0	%		33,071			7.6	%

Total real estate loans		363,847			81.6	%		357,781			82.5	%

Consumer loans		2,860			0.6	%		3,165			0.7	%

Commercial loans		79,428			17.8	%		72,847			16.8	%

Total loans		446,135			100.0	%		433,793			100.0	%

Net deferred loan origination costs		942						945
Allowance for loan losses		(4,442	)					(4,431	)

Loans, net	$	442,635					$	430,307

¹ Excludes loans held for sale of $111,000 and $1.9 million at March 31, 2011 and December 31, 2010, respectively.

The Company has transferred a portion of its originated commercial real estate and commercial loans to participating lenders. The amounts transferred have been accounted for as sales and therefore not included in the Company’s Balance Sheet. The Company and participating lenders share proportionally, based on participating agreements, any gains or losses the may result from the borrowers lack of compliance with the terms of the loan. The Company continues to service the loans on behalf of the participating lenders. At March 31, 2011 and December 31, 2010, the Company was servicing loans for participating lenders totaling $7.8 million and $11.8 million, respectively.

In accordance with the Company’s asset/liability management strategy and in an effort to reduce interest rate risk, the Company continues to sell fixed rate, low coupon residential real estate loans to the secondary market. The unpaid principal balance of mortgages that are serviced for others was $77.6 million and $75.8 million at March 31, 2011 and December 31, 2010, respectively. Servicing rights will continue to be retained on all loans written and sold in the secondary market.

Risk Characteristics

Residential Real Estate includes loans which enable the borrower to purchase or refinance existing homes, most of which serve as the primary residence of the owner. Repayment is dependent on the credit quality of the borrower. Factors attributable to failure of repayment may include a weakened economy and/or unemployment, as well as possible personal considerations. While we anticipate adjustable-rate mortgages will better offset the potential adverse effects of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment.

Commercial Real Estate loans are secured by commercial real estate and residential investment real estate and generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Risk in commercial real estate and residential investment lending are borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy.

Construction Loans are generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction.

Commercial and Industrial Loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Consumer and Home Equity Loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Credit Quality

To evaluate the risk in the loan portfolio, internal credit risk ratings are used for the following loan classes: commercial real estate, commercial construction and commercial & industrial. The risks evaluated in determining an adequate credit risk rating, include the financial strength of the borrower and the collateral securing the loan. Commercial loans are rated from one through nine. Credit risk ratings one through five are considered pass ratings. Classified assets include credit risk ratings of special mention through loss. At least quarterly, classified assets are reviewed by management and by an independent third party. Credit risk ratings are updated as soon as information is obtained that indicates a change in the credit risk rating may be warranted.

The following describes the credit risk ratings:

Special Mention. Assets that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories but possess potential weaknesses.

Substandard. Assets that have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Non-accruing loans are typically classified as substandard.

Doubtful. Assets that have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.

Loss. Assets rated in this category are considered uncollectible and are charged off against the allowance for loan losses.

Residential real estate and residential construction loans are categorized into pass and substandard risk ratings. Substandard residential loans are loans that are on nonaccrual status and are individually evaluated for impairment.

Consumer loans are considered nonperforming when they are 90 days past due or have not returned to accrual status. Consumer loans are not individually evaluated for impairment.

Home equity loans are considered nonperforming whey they are 90 days past due or have not returned to accrual status. Each nonperforming home equity loan is individually evaluated for impairment.

The following table presents an analysis of total loans segregated by risk rating and class as of March 31, 2011:

	Commercial Credit Risk Exposure
	Commercial		Commercial Construction		Commercial Real Estate		Total
	(In Thousands)
Pass	$	74,595	$	9,341	$	163,742	$	247,678
Special mention		1,241		11,503		6,372		19,116
Substandard		3,592		5,007		3,464		12,063
Doubtful		-		-		-		-
Loss		-		-		-		-
Total commercial loans	$	79,428	$	25,851	$	173,578	$	278,857

	Residential Credit Risk Exposure
	Residential Real Estate		Residential Construction				Total
	(In Thousands)
Pass	$	127,207	$	5,107			$	132,314
Substandard (also, nonaccrual)		2,793		219				3,012
Total residential loans	$	130,000	$	5,326			$	135,326

	Consumer Credit Risk Exposure
	Consumer		Home Equity				Total
	(In Thousands)
Performing	$	2,779	$	28,979			$	31,758
Nonperforming (nonaccrual)		81		113				194
Total consumer loans	$	2,860	$	29,092			$	31,952

The following table presents an analysis of total loans segregated by risk rating and class as of December 31, 2010:

	Commercial Credit Risk Exposure
	Commercial		Commercial Construction		Commercial Real Estate		Total
	(In Thousands)
Pass	$	68,048	$	10,484	$	152,062	$	230,594
Special mention		1,516		11,856		6,090		19,462
Substandard		3,283		4,303		3,955		11,541
Doubtful		-		-		-		-
Loss		-		-		-		-
Total commercial loans	$	72,847	$	26,643	$	162,107	$	261,597

	Residential Credit Risk Exposure
	Residential Real Estate		Residential Construction				Total
	(In Thousands)
Pass	$	129,341	$	6,112			$	135,453
Substandard (also, nonaccrual)		3,329		316				3,645
Total residential loans	$	132,670	$	6,428			$	139,098

	Consumer Credit Risk Exposure
	Consumer		Home Equity				Total
	(In Thousands)
Performing	$	3,093	$	29,729			$	32,822
Nonperforming (nonaccrual)		72		204				276
Total consumer loans	$	3,165	$	29,933			$	33,098

The following table sets forth activity in the Company’s allowance for loan losses for the periods set forth:

	For the Three Months
	Ended March 31,
	2011			2010
	(In Thousands)

Allowance for loan losses at beginning of the year:	$	4,431		$	4,077
Provision for loan losses		233			273
Recoveries		6			6
Loans charged-off		(228	)		(53	)

Allowance for loan losses, end of period:	$	4,442		$	4,303

Allowance for loan losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

Management believes the allowance for loan losses requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is based on management’s evaluation of the level of the allowance required in relation to the probable loss exposure in the loan portfolio. The allowance for loan losses is evaluated on a regular basis by management. Qualitative factors, or risks considered in evaluating the adequacy of the allowance for loan losses for all loan classes include historical loss experience; levels and trends in delinquencies, nonaccrual loans, impaired loans and net charge offs; the character and size of the loan portfolio; effects of any changes in underwriting policies; experience of management and staff; current economic conditions and their effect on borrowers; effects of changes in credit concentrations, and management’s estimation of probable losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. 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 specific and general losses in the portfolio.

There were no changes in the allowance for loan losses methodology at March 31, 2011. The following table presents the allowance for loan losses and select loan information for the three months ended March 31, 2011:


	Residential Real Estate			Residential Construction			Commercial Real Estate			Commercial Construction		Commercial		Consumer Loans			Home Equity			Total
Allowance for Loan Losses	(In Thousands)
Balance as of December 31, 2010	$	513		$	148		$	1,783		$	402	$	1,429	$	28		$	128		$	4,431
Provision (reduction)		(42	)		(6	)		238			14		10		31			(12	)	$	233
Recoveries		-			-			-			-		-		6			-		$	6
Charge offs		(34	)		(13	)		(164	)		-		-		(17	)		-		$	(228	)
Balance as of March 31, 2011	$	437		$	129		$	1,857		$	416	$	1,439	$	48		$	116		$	4,442

Allowance for loan losses ending balance
Collectively evaluated for impairment	$	356		$	67		$	1,772		$