Edgar Filing: CHICOPEE BANCORP, INC.

a50048353.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 September 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 November 4, 2011, there were 5,739,903 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
	September 30, 2011 and December 31, 2010	1

	Consolidated Statements of Operations for the Three and Nine
	Months Ended September 30, 2011 and 2010	2

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

	Consolidated Statements of Cash Flows for the
	Nine Months Ended September 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	28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	46

Item 4.	Controls and Procedures	47

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	49
Item 4.	(Removed and Reserved.)
Item 5.	Other Information	49
Item 6.	Exhibits	49

SIGNATURES		50

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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


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

Cash and due from banks	$	9,333		$	6,903
Federal funds sold		38,509			28,970
Total cash and cash equivalents		47,842			35,873

Securities available-for-sale, at fair value		548			362
Securities held-to-maturity, at cost (fair value $62,616 and $69,912 at
September 30, 2011 and December 31, 2010, respectively)		62,479			69,713
Federal Home Loan Bank stock, at cost		4,489			4,489
Loans, net of allowance for loan losses ($4,322 at
September 30, 2011 and $4,431 at December 31, 2010)		442,589			430,307
Loans held for sale		988			1,888
Other real estate owned		1,055			286
Mortgage servicing rights		341			306
Bank owned life insurance		13,328			13,032
Premises and equipment, net		10,025			10,340
Accrued interest and dividends receivable		1,721			1,897
Deferred income tax asset		2,508			2,469
FDIC prepaid insurance		947			1,361
Other assets		1,537			1,381
Total assets	$	590,397		$	573,704

Liabilities and Stockholders' Equity

Deposits
Non-interest-bearing	$	57,579		$	48,302
Interest-bearing		358,778			343,635
Total deposits		416,357			391,937

Securities sold under agreements to repurchase		21,239			17,972
Federal Home Loan Bank of Boston advances		62,142			71,615
Accrued expenses and other liabilities		541			298
Total liabilities		500,279			481,822


Stockholders' equity
Common stock (no par value, 20,000,000 shares authorized, 7,439,368
shares issued at September 30, 2011 and December 31, 2010)		72,479			72,479
Treasury stock, at cost (1,689,661 shares at September 30, 2011
and 1,427,390 shares at December 31, 2010)		(22,007	)		(18,295	)
Additional paid-in-capital		2,643			2,255
Unearned compensation (restricted stock awards)		(740	)		(1,431	)
Unearned compensation (Employee Stock Ownership Plan)		(4,240	)		(4,463	)
Retained earnings		42,029			41,308
Accumulated other comprehensive (loss) income		(46	)		29
Total stockholders' equity		90,118			91,882
Total liabilities and stockholders' equity	$	590,397		$	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						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010

Interest and dividend income:
Loans, including fees	$	5,801		$	5,862		$	17,478		$	17,714
Interest and dividends on securities		425			337			1,195			941
Other interest-earning assets		6			10			27			21
Total interest and dividend income		6,232			6,209			18,700			18,676

Interest expense:
Deposits		1,292			1,516			4,017			4,467
Securities sold under agreements to repurchase		8			10			27			55
Other borrowed funds		414			500			1,283			1,543
Total interest expense		1,714			2,026			5,327			6,065

Net interest income		4,518			4,183			13,373			12,611
Provision for loan losses		223			376			575			761

Net interest income after provision for loan losses		4,295			3,807			12,798			11,850

Non-interest income:
Service charges, fees and commissions		549			426			1,459			1,282
Loan sales and servicing, net		51			86			250			237
Net gain on sales of securities available-for-sale		-			-			12			-
Gain on acquisition of real estate		32			-			32			-
Loss on sale of other real estate owned		(36	)		(15	)		(99	)		(23	)
Other than temporary impairment charge		-			-			-			(13	)
Income from bank owned life insurance		101			106			296			318
Total non-interest income		697			603			1,950			1,801

Non-interest expenses:
Salaries and employee benefits		2,719			2,484			8,217			7,728
Occupancy expenses		358			362			1,189			1,189
Furniture and equipment		271			209			782			764
FDIC insurance assessment		145			105			414			418
Data processing		299			338			879			903
Professional fees		129			158			422			416
Advertising		160			131			413			384
Stationery, supplies and postage		104			79			280			234
Other non-interest expense		476			460			1,485			1,445
Total non-interest expenses		4,661			4,326			14,081			13,481

Income before income taxes		331			84			667			170
Income tax benefit		(40	)		(99	)		(54	)		(90	)
Net income	$	371		$	183		$	721		$	260

Earnings per share: (1)
Basic	$	0.07		$	0.03		$	0.13		$	0.05
Diluted	$	0.07		$	0.03		$	0.13		$	0.05

Adjusted weighted average shares outstanding:
Basic		5,305,372			5,685,598			5,368,144			5,710,883
Diluted		5,321,435			5,685,598			5,396,608			5,718,995

(1) Common stock equivalents are excluded from the computation of diluted net income per share for the three and nine months ended September 30, 2011 and September 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
Nine Months Ended September 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 (Loss)			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		-		-			-		-			-			721		-			721
Change in net unrealized gain on securities
available-for-sale (net of deferred income taxes of $40)		-		-			-		-			-			-		(75	)		(75	)
Total comprehensive income																				646

Treasury stock purchased (262,271 shares)		-		(3,712	)		-		-			-			-		-			(3,712	)
Change in unearned compensation:
Stock option expense		-		-			308		-			-			-		-			308
Restricted stock award expense		-		-			-		691			-			-		-			691
Common stock held by ESOP committed to
be released		-		-			80		-			223			-		-			303
Balance at September 30, 2011	$	72,479	$	(22,007	)	$	2,643	$	(740	)	$	(4,240	)	$	42,029	$	(46	)	$	90,118


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

Comprehensive income:
Net income		-		-			-		-			-			260		-			260
Change in net unrealized gain on securities
available-for-sale (net of deferred income taxes of $3)		-		-			-		-			-			-		5			5
Total comprehensive income																				265

Treasury stock purchased (155,207 shares)		-		(1,763	)		-		-			-			-		-			(1,763	)
Change in unearned compensation:
Stock option expense		-		-			316		-			-			-		-			316
Restricted stock award expense		-		-			-		627			-			-		-			627
Common stock held by ESOP committed to
be released		-		-			45		-			223			-		-			268
Balance at September 30, 2010	$	72,479	$	(15,714	)	$	2,126	$	(1,642	)	$	(4,538	)	$	41,103	$	71		$	93,885

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

	Nine Months Ended September 30,
	2011			2010
	(In thousands)

Cash flows from operating activities:
Net income	$	721		$	260
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		734			752
Provision for loan losses		575			761
Increase in cash surrender value of life insurance		(296	)		(318	)
Realized gain on sale of securities available-for-sale, net		(12	)		-
Realized gain on sales of mortgage loans		(107	)		(118	)
Increase in other assets		(193	)		(266	)
Decrease (increase) in accrued interest and dividends receivable		176			(39	)
Decrease in FDIC prepaid insurance		413			428
Net change in loans originated for resale		900			(638	)
Net loss on sale of other real estate owned		99			23
Increase in other liabilities		241			52
Other than temporary impairment charge		-			13
Change in unearned compensation		1,302			1,211
Net cash provided by operating activities		4,553			2,121

Cash flows from investing activities:
Additions to premises and equipment		(318	)		(336	)
Loan originations and principal collections, net		(13,942	)		(8,767	)
Proceeds from sale of other real estate owned		217			193
Proceeds from sale of securities available-for-sale		17			-
Purchases of securities available-for-sale		(304	)		-
Purchases of securities held-to-maturity		(69,658	)		(73,925	)
Maturities of securities held-to-maturity		75,333			74,590
Proceeds from principal paydowns of securities held-to-maturity		1,568			1,265
Purchase of FHLB stock		-			(183	)
Net cash used by investing activities		(7,087	)		(7,163	)

Cash flows from financing activities:
Net increase in deposits		24,420			16,648
Net increase (decrease) in securities sold under agreements to repurchase		3,268			(2,358	)
Proceeds from long-term FHLB advances		-			24,500
Payments on long-term FHLB advances		(9,473	)		(13,396	)
Stock purchased for treasury		(3,712	)		(1,763	)
Net cash provided by financing activities		14,503			23,631

Net increase in cash and cash equivalents		11,969			18,589

Cash and cash equivalents at beginning of year		35,873			20,075
Cash and cash equivalents at end of period	$	47,842		$	38,664

Supplemental cash flow information:
Interest paid on deposits	$	4,017		$	4,467
Interest paid on borrowings		1,310			1,616
Income taxes paid		120			212
Transfers from loans to other real estate owned		1,085			421

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 Nine Months Ended September 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 September 30, 2011 and for the periods ended September 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 nine month interim periods ended September 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 September						Nine Months Ended September
	2011			2010			2011			2010

Net income (in thousands)	$	371		$	183		$	721		$	260

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		(1,617,796	)		(1,144,317	)		(1,526,242	)		(1,090,696	)
Less: average number of unallocated ESOP shares		(446,363	)		(476,120	)		(446,363	)		(476,120	)
Less: average number of dilutive restricted stock awards		(69,837	)		(133,333	)		(98,619	)		(161,669	)

Adjusted weighted average number of common
shares outstanding		5,305,372			5,685,598			5,368,144			5,710,883
Plus: dilutive outstanding restricted stock awards		16,063			-			28,464			8,112
Plus: dilutive outstanding stock options		-			-			-			-
Weighted average number of diluted shares outstanding		5,321,435			5,685,598			5,396,608			5,718,995

Earnings per share:
Basic- common stock	$	0.07		$	0.03		$	0.13		$	0.05
Basic- unvested share-based payment awards	$	0.07		$	0.03		$	0.13		$	0.05
Diluted- common stock	$	0.07		$	0.03		$	0.13		$	0.05
Diluted- unvested share-based payment awards	$	0.07		$	0.03		$	0.13		$	0.05

There were 556,198 and 598,834 stock options that were not included in the calculation of diluted earnings per share for the three and nine months ended September 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 nine months ended September 30, 2011:

	Nine Months	Year Ended	Year Ended
	Ended September 30,	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 September 30, 2011, and changes during the nine 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		9.35		-
Exercised		2,300		11.20		7.39		-
Forfeited or expired		48,836		14.04		6.44		-
Outstanding at September 30, 2011		556,198	$	14.23		6.57	$	7,917
Exercisable at September 30, 2011		423,157	$	14.28		5.67	$	6,041
Exercisable at September 30, 2010		350,398	$	14.28		6.52	$	5,004

The Company granted 16,000 stock options in the nine months ended September 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 September 30, 2011 was $3.88 and $3.91, respectively. For the nine months ended September 30, 2011 and 2010, share based compensation expense applicable to options granted under the Plan was $308,000 and $316,000 and the related tax benefit was $66,000 and $64,000, respectively. During the quarter ended September 30, 2011, 2,000 stock options with an exercise price of $11.02 per share, and 300 stock options with an exercise price of $12.41 were exercised. As of September 30, 2011, unrecognized stock-based compensation expense related to non-vested options amounted to $415,000. This amount is expected to be recognized over a period of 1.39 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 September 30, 2011 is $14.29. The Company recorded compensation cost related to stock awards of approximately $691,000 and $627,000 in the nine months ended September 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 nine months ended September 30, 2011 with a grant price of $14.29. As of September 30, 2011, unrecognized stock-based compensation expense related to non-vested restricted stock awards amounted to $652,000. This amount is expected to be recognized over a period of 0.96 years.

A summary of the status of the Company’s stock awards as of September 30, 2011, and changes during the nine months ended September 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		64,040		14.29
Forfeited		-		-
Balance at September 30, 2011		55,346	$	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 did not 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.

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
	September 30,
	2011			2010
	(In Thousands)

Net income	$	371		$	183
Other comprehensive income, net of tax:
Unrealized holding (loss) gain on available-for-sale
securities arising during the period		(84	)		11
Tax effect		29			(4	)
Other comprehensive (loss) income, net of tax		(55	)		7
Total comprehensive income	$	316		$	190

	Nine Months Ended
	September 30,
	2011			2010
	(In Thousands)

Net income	$	721		$	260
Other comprehensive income, net of tax:
Unrealized holding losses on available-for-sale
securities arising during the period		(103	)		(5	)
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		40			(3	)
Other comprehensive loss (income), net of tax		(75	)		5
Total comprehensive income	$	646		$	265

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:

	September 30, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
Securities available-for-sale
Marketable equity securities¹	$	618	$	17	$	(87	)	$	548
Total securities available-for-sale	$	618	$	17	$	(87	)	$	548

Securities held-to-maturity
Debt securities of U.S. Government
sponsored enterprises	$	981	$	-	$	-		$	981
U.S. Treasury securities		23,997		-		(1	)		23,996
Corporate and industrial
revenue bonds		31,952		-		-			31,952
Certificates of deposit		3,000		-		-			3,000
Collateralized mortgage obligations		2,549		138		-			2,687
Total securities held-to-maturity	$	62,479	$	138	$	(1	)	$	62,616

	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 September 30, 2011 and December 31, 2010.

At September 30, 2011 and December 31, 2010, securities with a carrying value of $22.3 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 September 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	$	27,978	$	27,976
From 1 to 5 years		3,243		3,243
From 5 to 10 years		10,849		10,988
Over 10 years		20,409		20,409
	$	62,479	$	62,616

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 issued by a company in the financial industry had other-than-temporary impairment for which a charge was recorded in the amount of $13,000. For the nine months ended September 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 September 30, 2011 and December 31, 2010:

	September 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	$	472	$	(87	)	$	-	$	-	$	472	$	(87	)
U.S. Treasury securities		5,997		(1	)		-		-		5,997		(1	)
Total temporarily impaired securities	$	6,469	$	(88	)	$	-	$	-	$	6,469	$	(88	)

	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 September 30, 2011, related to two 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 September 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 $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 September 30, 2011, the Company has 15 CMO bonds, or 21 individual issues, with an aggregate book value of $2.5 million, which included five bonds, or six individual issues, with FICO scores less than 650. This risk is mitigated by loan-to-value ratios of less than 65%. The total exposure of these five bonds to the Company is $4,800. 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 13.0%, 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 AA+ 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 60%.

Based on management’s analysis, which included the above indicators, the Company has determined that no OTTI exists within the CMO portfolio as of September 30, 2011.

Marketable Equity Securities

Unrealized losses within the marketable equity securities category at September 30, 2011 related to eight securities issued by two companies in the financial industry. In reviewing the marketable securities for OTTI, it was determined that the eight securities did not fail the Company’s OTTI test. Three securities issued by one company were in a loss position for four consecutive months and five securities issued by one company were in an unrealized gain position after aquisition with the exception of the stock price at the end of the third quarter. During the third quarter of 2011, none of the eight securities had losses for more than 12 months.

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 nine months ended September 30, 2011, the Company received $10,000 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 September 30, 2011.

7. Loans and Allowance for Loan Losses

At September 30, 2011, the Company’s net loan portfolio was $442.6 million, or 75.0% 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.

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

Real estate loans:
Residential¹	$	123,955			27.8	%	$	132,670			30.6	%
Home equity		30,246			6.8	%		29,933			6.9	%
Commercial		173,297			38.9	%		162,107			37.4	%
Total		327,498			73.5	%		324,710			74.9	%

Construction-residential		4,828			1.1	%		6,428			1.5	%
Construction-commercial		28,781			6.4	%		26,643			6.1	%
Total construction		33,609			7.5	%		33,071			7.6	%

Total real estate loans		361,107			81.0	%		357,781			82.5	%

Consumer loans		2,538			0.5	%		3,165			0.7	%
					.
Commercial loans		82,333			18.5	%		72,847			16.8	%

Total loans		445,978			100.0	%		433,793			100.0	%

Net deferred loan origination costs		933						945
Allowance for loan losses		(4,322	)					(4,431	)

Loans, net	$	442,589					$	430,307

¹ Excludes loans held for sale of $988,000 and $1.9 million at September 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 September 30, 2011 and December 31, 2010, the Company was servicing loans for participating lenders totaling $9.4 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 $78.4 million and $75.8 million at September 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 Loans 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 following 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 September 30, 2011:

	Commercial Credit Risk Exposure
	Commercial		Commercial Construction		Commercial Real Estate		Total
	(In Thousands)
Pass	$	77,253	$	16,243	$	163,222	$	256,718
Special mention		2,699		12,319		6,226		21,244
Substandard		2,381		219		3,849		6,449
Doubtful		-		-		-		-
Loss		-		-		-		-
Total commercial loans	$	82,333	$	28,781	$	173,297	$	284,411

	Residential Credit Risk Exposure
	Residential Real Estate		Residential Construction		Total
	(In Thousands)
Pass	$	122,123	$	4,828	$	126,951
Substandard (also, nonaccrual)		1,832		-		1,832
Total residential loans	$	123,955	$	4,828	$	128,783

	Consumer Credit Risk Exposure
	Consumer		Home Equity		Total
	(In Thousands)
Performing	$	2,474	$	30,205	$	32,679
Nonperforming (nonaccrual)		64		41		105
Total consumer loans	$	2,538	$	30,246	$	32,784

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