Edgar Filing: CHICOPEE BANCORP, INC.

a6813828.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 June 30, 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 [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.

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 August 5, 2011, there were 5,825,007 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
	June 30, 2011 and December 31, 2010	1

	Consolidated Statements of Operations for the Three and Six
	Months Ended June 30, 2011 and 2010	2

	Consolidated Statements of Changes in Stockholders’ Equity
	for the Six Months Ended June 30, 2011 and 2010	3

	Consolidated Statements of Cash Flows for the
	Six Months Ended June 30, 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	27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44

Item 4.	Controls and Procedures	45

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	47
Item 4.	(Removed and Reserved.)
Item 5.	Other Information	47
Item 6.	Exhibits	47

SIGNATURES		48

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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


	June 30,			December 31,
Assets	2011			2010
	(Unaudited)

Cash and due from banks	$	8,993		$	6,903
Federal funds sold		17,601			28,970
Total cash and cash equivalents		26,594			35,873

Securities available-for-sale, at fair value		632			362
Securities held-to-maturity, at cost (fair value $74,569 and $69,912 at
June 30, 2011 and December 31, 2010, respectively)		74,403			69,713
Federal Home Loan Bank stock, at cost		4,489			4,489
Loans, net of allowance for loan losses ($4,465 at
June 30, 2011 and $4,431 at December 31, 2010)		443,154			430,307
Loans held for sale		70			1,888
Other real estate owned		529			286
Mortgage servicing rights		374			306
Bank owned life insurance		13,227			13,032
Premises and equipment, net		10,090			10,340
Accrued interest and dividends receivable		1,679			1,897
Deferred income tax asset		2,479			2,469
FDIC prepaid insurance		1,092			1,361
Other assets		1,216			1,381
Total assets	$	580,028		$	573,704

Liabilities and Stockholders' Equity

Deposits
Non-interest-bearing	$	50,156		$	48,302
Interest-bearing		353,995			343,635
Total deposits		404,151			391,937

Securities sold under agreements to repurchase		19,304			17,972
Federal Home Loan Bank of Boston advances		65,237			71,615
Accrued expenses and other liabilities		276			298
Total liabilities		488,968			481,822


Stockholders' equity
Common stock (no par value, 20,000,000 shares authorized, 7,439,368
shares issued at June 30, 2011 and December 31, 2010)		72,479			72,479
Treasury stock, at cost (1,572,661 shares at June 30, 2011
and 1,427,390 shares at December 31, 2010)		(20,352	)		(18,295	)
Additional paid-in-capital		2,514			2,255
Unearned compensation (restricted stock awards)		(933	)		(1,431	)
Unearned compensation (Employee Stock Ownership Plan)		(4,315	)		(4,463	)
Retained earnings		41,658			41,308
Accumulated other comprehensive income		9			29
Total stockholders' equity		91,060			91,882
Total liabilities and stockholders' equity	$	580,028		$	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						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

Interest and dividend income:
Loans, including fees	$	5,868		$	5,934		$	11,677		$	11,852
Interest and dividends on securities		403			343			770			605
Other interest-earning assets		10			6			22			11
Total interest and dividend income		6,281			6,283			12,469			12,468

Interest expense:
Deposits		1,351			1,464			2,725			2,951
Securities sold under agreements to repurchase		10			19			19			46
Other borrowed funds		431			524			869			1,042
Total interest expense		1,792			2,007			3,613			4,039

Net interest income		4,489			4,276			8,856			8,429
Provision for loan losses		119			112			352			385

Net interest income after provision for loan losses		4,370			4,164			8,504			8,044

Non-interest income:
Service charges, fees and commissions		444			427			910			856
Loan sales and servicing, net		50			68			198			151
Net gain on sales of securities available-for-sale		-			-			12			-
Loss on sale of other real estate owned		-			(8	)		(63	)		(8	)
Other than temporary impairment charge		-			-			-			(13	)
Income from bank owned life insurance		97			105			195			212
Total non-interest income		591			592			1,252			1,198

Non-interest expenses:
Salaries and employee benefits		2,659			2,708			5,498			5,244
Occupancy expenses		383			399			830			828
Furniture and equipment		262			288			512			556
FDIC insurance assessment		166			112			269			333
Data processing		287			286			580			565
Professional fees		150			109			293			258
Advertising		126			127			253			253
Stationery, supplies and postage		94			66			176			155
Other non-interest expense		546			525			1,009			964
Total non-interest expenses		4,673			4,620			9,420			9,156

Income before income taxes		288			136			336			86
Income tax expense (benefit)		(18	)		9			(14	)		9
Net income	$	306		$	127		$	350		$	77

Earnings per share: (1)
Basic	$	0.06		$	0.02		$	0.06		$	0.01
Diluted	$	0.06		$	0.02		$	0.06		$	0.01

Adjusted weighted average shares outstanding:
Basic		5,372,770			5,720,669			5,396,871			5,723,736
Diluted		5,415,769			5,745,476			5,432,708			5,742,983

(1) Common stock equivalents are excluded from the computation of diluted net income per share for the three and six months ended June 30, 2011 and June 30, 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

Six Months Ended June 30, 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		-		-			-		-			-			350		-			350
Change in net unrealized gain on securities
available-for-sale (net of deferred income taxes of $10)		-		-			-		-			-			-		(20	)		(20	)
Total comprehensive income																				330

Treasury stock purchased (145,271 shares)		-		(2,057	)		-		-			-			-		-			(2,057	)
Change in unearned compensation:
Stock option expense		-		-			199		-			-			-		-			199
Restricted stock award expense		-		-			-		498			-			-		-			498
Common stock held by ESOP committed to
be released		-		-			60		-			148			-		-			208
Balance at June 30, 2011	$	72,479	$	(20,352	)	$	2,514	$	(933	)	$	(4,315	)	$	41,658	$	9		$	91,060


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

Comprehensive income:
Net income		-		-			-		-			-			77		-			77
Change in net unrealized gain on securities
available-for-sale (net of deferred income taxes of $1)		-		-			-		-			-			-		(2	)		(2	)
Total comprehensive income																				75

Treasury stock purchased (43,600 shares)		-		(513	)		-		-			-			-		-			(513	)
Change in unearned compensation:
Stock option expense		-		-			260		-			-			-		-			260
Restricted stock award expense		-		-			-		413			-			-		-			413
Common stock held by ESOP committed to
be released		-		-			36		-			149			-		-			185
Balance at June 30, 2010	$	72,479	$	(14,464	)	$	2,061	$	(1,856	)	$	(4,612	)	$	40,920	$	64		$	94,592

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

	Six Months Ended June 30,
	2011			2010
	(In thousands)

Cash flows from operating activities:
Net income	$	350		$	77
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		481			526
Provision for loan losses		352			385
Increase in cash surrender value of life insurance		(195	)		(212	)
Realized gain on sales of securities available-for-sale, net		(12	)		-
Realized gains on sales of mortgage loans		(69	)		(71	)
Decrease (increase) in other assets		97			(75	)
Decrease in accrued interest and dividends receivable		219			11
Decrease in FDIC prepaid insurance		269			314
Net change in loans originated for resale		1,818			(452	)
Net loss on sales of other real estate owned		63			8
Decrease in other liabilities		(24	)		(160	)
Other than temporary impairment charge		-			13
Change in unearned compensation		905			858
Net cash provided by operating activities		4,254			1,222

Cash flows from investing activities:
Additions to premises and equipment		(178	)		(231	)
Loan originations and principal collections, net		(13,667	)		(8,806	)
Proceeds from sale or paydown of other real estate owned		162			72
Proceeds from sales of securities available-for-sale		17			-
Purchases of securities available-for-sale		(304	)		-
Purchases of securities held-to-maturity		(55,627	)		(57,400	)
Maturities of securities held-to-maturity		49,852			58,038
Proceeds from principal paydowns of securities held-to-maturity		1,101			745
Purchase of FHLB stock		-			(183	)
Net cash used by investing activities		(18,644	)		(7,765	)

Cash flows from financing activities:
Net increase in deposits		12,214			385
Net increase (decrease) in securities sold under agreements to repurchase		1,332			(2,070	)
Proceeds from long-term FHLB advances		-			24,500
Payments on long-term FHLB advances		(6,378	)		(10,252	)
Stock purchased for treasury		(2,057	)		(513	)
Net cash provided by financing activities		5,111			12,050

Net (decrease) increase in cash and cash equivalents		(9,279	)		5,507

Cash and cash equivalents at beginning of period		35,873			20,075
Cash and cash equivalents at end of period	$	26,594		$	25,582

Supplemental cash flow information:
Interest paid on deposits	$	2,725		$	2,951
Interest paid on borrowings		888			1,041
Income taxes paid		115			209
Transfers from loans to other real estate owned		468			278

See accompanying notes to unaudited consolidated financial statements.

CHICOPEE BANCORP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

At and for the Three and Six Months Ended June 30, 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 June 30, 2011 and for the periods ended June 30, 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 and six month interim periods ended June 30, 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 per share is computed as follows:

	Three Months Ended June						Six Months Ended June
	2011			2010			2011			2010

Net income (in thousands)	$	306		$	127		$	350		$	77

Weighted average number of common shares issued		7,439,368			7,439,368			7,439,368			7,439,368
Less: average number of treasury shares		(1,511,562	)		(1,066,509	)		(1,482,885	)		(1,063,442	)
Less: average number of unallocated ESOP shares		(446,363	)		(476,120	)		(446,363	)		(476,120	)
Less: average number of dilutive restricted stock awards		(108,673	)		(176,070	)		(113,249	)		(176,070	)

Adjusted weighted average number of common
shares outstanding		5,372,770			5,720,669			5,396,871			5,723,736
Plus: dilutive outstanding restricted stock awards		42,999			24,807			35,837			19,247
Plus: dilutive outstanding stock options		-			-			-			-
Weighted average number of diluted shares outstanding		5,415,769			5,745,476			5,432,708			5,742,983

Earnings per share:
Basic- common stock	$	0.06		$	0.02		$	0.06		$	0.01
Basic- unvested share-based payment awards	$	0.06		$	0.02		$	0.06		$	0.01
Diluted- common stock	$	0.06		$	0.02		$	0.06		$	0.01
Diluted- unvested share-based payment awards	$	0.06		$	0.02		$	0.06		$	0.01

There were 562,698 and 683,667 stock options that were not included in the calculation of diluted earnings per share for the three and six months ended June 30, 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 six months ended June 30, 2011:

	Six Months			Year Ended			Year Ended
	Ended June 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 June 30, 2011, and changes during the six 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 June 30, 2011		562,698	$	14.20		6.59	$	-
Exercisable at June 30, 2011		320,417	$	14.25		5.93	$	-
Exercisable at June 30, 2010		267,665	$	14.28		6.86	$	3,822

The Company granted 16,000 stock options in the six months ended June 30, 2011 with a fair value of $3.41. The weighted-average grant-date fair value of options granted during 2009 and 2008 was $3.07 and $2.37, respectively. There were no options granted during 2010. The weighted average grant-date fair value of the options outstanding and exercisable at June 30, 2011 was $3.87 and $3.90, respectively. For the six months ended June 30, 2011 and 2010, share based compensation expense applicable to the Plan was $199,000 and $260,000 and the related tax benefit was $43,000 and $52,000, respectively. No options have been exercised as of June 30, 2011 and no options were granted prior to July 1, 2007. As of June 30, 2011, unrecognized stock-based compensation expense related to non-vested options amounted to $533,000. This amount is expected to be recognized over a period of 1.57 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 June 30, 2011 is $14.29. The Company recorded compensation cost related to stock awards of approximately $498,000 and $413,000 in the six months ended June 30, 2011 and 2010, respectively. Stock awards with a fair value of $651,000, and $777,000 have vested during the years ended December 31, 2010 and 2009, respectively. No stock awards were granted prior to July 1, 2007. The Company granted 2,000 stock awards in the six months ended June 30, 2011 with a grant price of $14.29. As of June 30, 2011, unrecognized stock-based compensation expense related to non-vested restricted stock awards amounted to $845,000. This amount is expected to be recognized over a period of 1.19 years.

A summary of the status of the Company’s stock awards as of June 30, 2011, and changes during the six months ended June 30, 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 June 30, 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.

In April 2011, the FASB issued ASU No. 2011-03, Transfer and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. This ASU removes from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. The guidance is effective for first interim and annual reporting periods ending after December 15, 2011. The Company believes the adoption of this new guidance will not have a material effect on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of whether a Restructuring Is a Troubled Debt Restructuring. The new guidance clarifies when a loan modification or restructuring is considered a troubled debt restructuring (“TDR”) in order to address current diversity in practice and lead to more consistent application of accounting principles generally accepted in the United States of America. In evaluating whether a restructuring constitutes a TDR, a creditor must separately conclude that the restructuring constitutes a concession and the debtor is experiencing financial difficulties. Additionally, the guidance clarifies that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables when evaluating whether a restructuring constitutes a TDR. The guidance is effective for interim and annual reporting periods beginning on or after June 15, 2011. The Company has not yet evaluated whether the clarifications provided in ASU No. 2011-02 will change the amount of loan modifications or restructurings classified as TDR.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU clarifies how to measure fair value, but does not require additional fair value measurement and is not intended to affect current valuation practices outside of financial reporting. However, additional information and disclosure will be required for transfers between Level 1 and Level 2, the sensitivity of a fair value measurement categorized as Level 3, and the categorization of items that are not measured at fair value by level of the fair value hierarchy. The guidance is effective during interim and annual reporting periods beginning after December 15, 2011. The Company is currently evaluating the impact of the clarifications provided in ASU No. 2011-04 on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU will, “require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income.” This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company believes the adoption of this new guidance will not have a material effect on the Company’s consolidated financial statements.

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 is comprised of the following:

	Three Months Ended
	June 30,
	2011			2010
	(In Thousands)

Net income	$	306		$	127
Other comprehensive income, net of tax:
Unrealized holding losses on available-for-sale
securities arising during the period		(24	)		(50	)
Tax effect		8			17
Other comprehensive loss, net of tax		(16	)		(33	)
Total comprehensive income	$	290		$	94



	Six Months Ended
	June 30,
	2011			2010
	(In Thousands)

Net income	$	350		$	77
Other comprehensive income, net of tax:
Unrealized holding losses on available-for-sale
securities arising during the period		(18	)		(16	)
Other than temporary impairment charge, included in net income		-			13
Reclassification adjustment for gain on sale of securities
available-for-sale included in net income		(12	)		-
Tax effect		10			1
Other comprehensive loss, net of tax		(20	)		(2	)
Total comprehensive income	$	330		$	75

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:

	June 30, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
Securities available-for-sale
Marketable equity securities¹	$	618	$	24	$	(10	)	$	632
Total securities available-for-sale	$	618	$	24	$	(10	)	$	632

Securities held-to-maturity
Debt securities of U.S. Government
sponsored enterprises	$	992	$	-	$	-		$	992
U.S. Treasury securities		27,693		1		(1	)		27,693
Corporate and industrial
revenue bonds		32,111		-		-			32,111
Certificates of deposit		10,750		-		-			10,750
Collateralized mortgage obligations		2,857		166		-			3,023
Total securities held-to-maturity	$	74,403	$	167	$	(1	)	$	74,569


	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 at June 30, 2011 and December 31, 2010.

For the six months ended June 30, 2011, the Company purchased 5 individual issues with a total cost of $304,000 and a total fair value of $309,000. Available-for-sale securities are fully comprised of equity securities: 9 individual issues of highly traded stocks, representing 3 companies in the financial industry.

At June 30, 2011 and December 31, 2010, securities with a carrying value of $21.4 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 June 30, 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	$	39,435	$	39,436
From 1 to 5 years		3,243		3,243
From 5 to 10 years		11,157		11,322
Over 10 years		20,568		20,568
	$	74,403	$	74,569

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 six months ended June 30, 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 as of June 30, 2011 and December 31, 2010:

	June 30, 2011
	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

Marketable equity securities	$	244	$	(10	)	$	-	$	-	$	244	$	(10	)
U.S. Treasury securities		4,996		(1	)		-		-		4,996		(1	)
Total temporarily impaired securities	$	5,240	$	(11	)	$	-	$	-	$	5,240	$	(11	)

	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	)

U.S. Treasury Securities

Unrealized losses within the U.S. Treasury securities category at June 30, 2011, related to four U.S. Treasury securities of which all had losses for less than 12 months. At December 31, 2010, all had unrealized losses for less than 12 months. Management deemed these losses to be immaterial.

Collateralized Mortgage Obligations

As of June 30, 2011 and December 31, 2010, there were no unrealized losses within the CMO portfolio. The portfolio ended the quarter with an unrealized gain of $166,000 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 June 30, 2011, the Company has 15 CMO bonds, or 21 individual issues, with an aggregate book value of $2.9 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 $6,500. Since the purchase of these bonds, interest payments have been current and the Company expects to receive all principal and interest due.

These 15 CMO bonds have been substantially paid down with an average current factor of 14%, 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 10 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 727 and 766, 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 June 30, 2011.

Marketable Equity Securities

Unrealized losses of $10,000 within the marketable equity securities category at June 30, 2011 related to three securities issued by one company in the financial industry. The losses were offset by unrealized gains related to six securities issued by three companies in the financial industry.

As of December 31, 2010, there were no unrealized losses within the equities portfolio.

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 six months ended June 30, 2011, the Company received $6,800 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 June 30, 2011.

7. Loans and Allowance for Loan Losses

At June 30, 2011, the Company’s net loan portfolio was $443.2 million, or 76.4% 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.

	June 30, 2011						December 31, 2010
				Percent						Percent
	Amount			of Total			Amount			of Total
	(Dollars In Thousands)

Real estate loans:
Residential	$	130,435			29.2	%	$	132,670			30.6	%
Home equity		29,292			6.6	%		29,933			6.9	%
Commercial		171,382			38.4	%		162,107			37.4	%
Total		331,109			74.2	%		324,710			74.9	%

Construction-residential		5,568			1.2	%		6,428			1.5	%
Construction-commercial		24,895			5.6	%		26,643			6.1	%
Total construction		30,463			6.8	%		33,071			7.6	%

Total real estate loans		361,572			81.0	%		357,781			82.5	%

Consumer loans		2,694			0.6	%		3,165			0.7	%

Commercial loans		82,395			18.4	%		72,847			16.8	%

Total loans		446,661			100.0	%		433,793			100.0	%

Net deferred loan origination costs		958						945
Allowance for loan losses		(4,465	)					(4,431	)

Loans, net	$	443,154					$	430,307

¹ Excludes loans held for sale of $70,000 and $1.9 million at June 30, 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 consolidated statements of financial condition. 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 June 30, 2011 and December 31, 2010, the Company was servicing loans for participating lenders totaling $7.7 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 $77.4 million and $75.8 million at June 30, 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 for as of June 30, 2011:

	Commercial Credit Risk Exposure
	Commercial		Commercial Construction		Commercial Real Estate		Total
	(In Thousands)
Pass	$	76,592	$	12,250	$	162,046	$	250,888
Special mention		1,834		12,423		5,709		19,966
Substandard		3,969		222		3,627		7,818
Doubtful		-		-		-		-
Loss		-		-		-		-
Total commercial loans	$	82,395	$	24,895	$	171,382	$	278,672

	Residential Credit Risk Exposure
	Residential Real Estate		Residential Construction		Total
	(In Thousands)
Pass	$	128,090	$	5,521