a50365438.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, 2012

or
   
[  ]
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 1, 2012, there were 5,449,230 shares of the Registrant’s Common Stock outstanding.
 
 
 
 
 
CHICOPEE BANCORP, INC.
FORM 10-Q
INDEX

     
   Page
PART I.   FINANCIAL INFORMATION
  
       
Financial Statements  
       
     
   
1
       
     
   
  2
       
     
   
  3
       
     
   
 4
       
     
   
  5
       
   
  6
       
Management’s Discussion and Analysis of Financial  
    Condition and Results of Operations
  28
       
Quantitative and Qualitative Disclosures about Market Risk
  47
       
Controls and Procedures
  49
       
PART II.   OTHER INFORMATION
  
       
 
49
 
49
 
 49
 
50
 
50
 
50
 
 50
       
   
51

 
 
 
 
PART I.  FINANCIAL INFORMATION

Item 1.    Financial Statements

CHICOPEE BANCORP, INC. AND SUBSIDIARIES
  
 
(Dollars In Thousands)
  
             
             
   
June 30,
    
December 31,
  
ASSETS
  
2012
    
2011
  
   
(Unaudited)
        
             
Cash and due from banks
   $ 18,350     $ 10,665  
Federal funds sold
     6,874       50,457  
Interest-bearing deposits with the Federal Reserve Bank of Boston
     30,150       -  
         Total cash and cash equivalents
     55,374       61,122  
                 
Securities available-for-sale, at fair value
     584       613  
Securities held-to-maturity, at cost (fair value $65,342 and $80,607 at
                
   June 30, 2012 and December 31, 2011, respectively)
     58,614       73,852  
Federal Home Loan Bank stock, at cost
     4,277       4,489  
Loans, net of allowance for loan losses ($4,482 at
                
   June 30, 2012 and $4,576 at December 31, 2011)
     454,084       443,471  
Loans held for sale
     525       1,635  
Other real estate owned
     1,325       913  
Mortgage servicing rights
     371       344  
Bank owned life insurance
     13,619       13,427  
Premises and equipment, net
     9,862       9,853  
Accrued interest and dividends receivable
     1,521       1,527  
Deferred income tax asset
     2,903       2,893  
FDIC prepaid insurance
     641       824  
Other assets
     1,166       1,343  
         Total assets
   $ 604,866     $ 616,306  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
                 
Deposits
                
    Demand deposits
   $ 72,613     $ 68,799  
    NOW accounts
     32,915       26,747  
    Savings accounts
     49,168       47,122  
    Money market deposit accounts
     100,847       97,606  
    Certificates of deposit
     199,033       213,103  
         Total deposits
     454,576       453,377  
                 
Securities sold under agreements to repurchase
     7,177       12,340  
Advances from Federal Home Loan Bank
     54,100       59,265  
Accrued expenses and other liabilities
     428       542  
         Total liabilities
     516,281       525,524  
                 
                 
Stockholders' equity
                
    Common stock (no par value, 20,000,000 shares authorized, 7,439,368
                
       shares issued at June 30, 2012 and December 31, 2011)
     72,479       72,479  
    Treasury stock, at cost (1,973,444 shares at June 30, 2012
                
       and 1,703,065 shares at December 31, 2011)
     (26,045 )     (22,190 )
    Additional paid-in-capital
     3,097       2,800  
    Unearned compensation (restricted stock awards)
     (163 )     (546 )
    Unearned compensation (Employee Stock Ownership Plan)
     (4,017 )     (4,166 )
    Retained earnings
     43,256       42,408  
    Accumulated other comprehensive loss
     (22 )     (3 )
         Total stockholders' equity
     88,585       90,782  
         Total liabilities and stockholders' equity
   $ 604,866     $ 616,306  
                 
See accompanying notes to unaudited consolidated financial statements.
                

 
1
 

CHICOPEE BANCORP, INC. AND SUBSIDIARIES
  
 
(In Thousands, Except for Number of Shares and Per Share Amounts)
  
(Unaudited)
  
             
   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
   
2012
    
2011
    
2012
    
2011
  
                         
Interest and dividend income:
                        
    Loans, including fees
   $ 5,672     $ 5,868     $ 11,357     $ 11,677  
    Interest and dividends on securities
     412       403       824       770  
    Other interest-earning assets
     18       10       38       22  
          Total interest and dividend income
     6,102       6,281       12,219       12,469  
                                 
Interest expense:
                                
    Deposits
     1,127       1,351       2,272       2,725  
    Securities sold under agreements to repurchase
     4       10       8       19  
    Other borrowed funds
     353       431       718       869  
          Total interest expense
     1,484       1,792       2,998       3,613  
                                 
Net interest income
     4,618       4,489       9,221       8,856  
Provision for loan losses
     64       119       71       352  
                                 
Net interest income after provision for loan losses
     4,554       4,370       9,150       8,504  
                                 
Non-interest income:
                                
    Service charges, fees and commissions
     533       444       1,074       910  
    Loan sales and servicing, net
     114       50       268       198  
    Net gain on sales of securities available-for-sale
     -       -       -       12  
    Net loss on other real estate owned
     -       -       (108 )     (63 )
    Income from bank owned life insurance
     96       97       192       195  
    Other non-interest income
     34       -       34       -  
          Total non-interest income
     777       591       1,460       1,252  
                                 
Non-interest expenses:
                                
    Salaries and employee benefits
     2,846       2,659       5,617       5,498  
    Occupancy expenses
     364       383       760       830  
    Furniture and equipment
     296       262       575       512  
    FDIC insurance assessment
     89       166       183       269  
    Data processing
     270       287       585       580  
    Professional fees
     146       150       312       293  
    Advertising
     149       126       299       253  
    Stationery, supplies and postage
     72       94       180       176  
    Other non-interest expense
     590       546       1,145       1,009  
          Total non-interest expenses
     4,822       4,673       9,656       9,420  
                                 
Income before income taxes
     509       288       954       336  
Income tax expense (benefit)
     57       (18 )     106       (14 )
          Net income
   $ 452     $ 306     $ 848     $ 350  
                                 
Earnings per share:
                                
     Basic
   $ 0.09     $ 0.06     $ 0.17     $ 0.06  
     Diluted
   $ 0.09     $ 0.06     $ 0.17     $ 0.06  
                                 
Adjusted weighted average shares outstanding:
                                
     Basic
     4,946,039       5,372,770       5,014,369       5,396,871  
     Diluted
     4,989,071       5,415,769       5,050,777       5,432,708  
                                 
See accompanying notes to unaudited consolidated financial statements.
                        

 
2
 
 
CHICOPEE BANCORP, INC. AND SUBSIDIARIES
  
 
(In Thousands)
  
(Unaudited)
  
       
   
Three Months Ended
  
   
June 30,
  
   
2012
    
2011
  
             
Net income
   $ 452     $ 306  
                 
Other comprehensive income, net of tax
                
     Unrealized losses on securities:
                
         Unrealized holding losses arising during period
     (42 )     (24 )
     Tax effect
     15       8  
Other comprehensive loss
     (27 )     (16 )
         Comprehensive income
   $ 425     $ 290  
                 
                 
   
Six Months Ended
  
   
June 30,
  
      2012       2011  
                 
Net income
   $ 848     $ 350  
                 
Other comprehensive income, net of tax
                
     Unrealized losses on securities:
                
         Unrealized holding losses arising during period
     (29 )     (18 )
         Less: reclassification adjustments for gains included in
                
         net income
     -       (12 )
     Tax effect
     10       10  
Other comprehensive loss
     (19 )     (20 )
        Comprehensive income
   $ 829     $ 330  
                 
See accompanying notes to unaudited consolidated financial statements.
                

 
3
 

 
CHICOPEE BANCORP, INC. AND SUBSIDIARIES
  
 
Six Months Ended June 30, 2012 and 2011
  
(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, 2011
   $ 72,479     $ (22,190 )   $ 2,800     $ (546 )   $ (4,166 )   $ 42,408     $ (3 )   $ 90,782  
                                                                 
Comprehensive income:
                                                                
Net income
     -       -       -       -       -       848       -       848  
Change in net unrealized loss on securities
                                                                
   available-for-sale (net of deferred income taxes of $10)
     -       -       -       -       -       -       (19 )     (19 )
           Total comprehensive income
                                                             829  
                                                                 
Treasury stock purchased (270,379 shares)
     -       (3,855 )     -       -       -       -       -       (3,855 )
Change in unearned compensation:
                                                                
       Stock option expense (net of income tax benefit of $45)
     -       -       234       -       -       -       -       234  
       Restricted stock award expense
     -       -       -       383       -       -       -       383  
       Common stock held by ESOP committed to
                                                                
         be released
     -       -       63       -       149       -       -       212  
Balance at June 30, 2012
   $ 72,479     $ (26,045 )   $ 3,097     $ (163 )   $ (4,017 )   $ 43,256     $ (22 )   $ 88,585  
                                                                 
                                                                 
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 (net of income tax benefit of $43)
     -       -       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  
                                                                 
See accompanying notes to unaudited consolidated financial statements.
                                    
 
 
4
 
 
CHICOPEE BANCORP, INC. AND SUBSIDIARIES
  
 
(Unaudited)
  
             
   
Six Months Ended June 30,
  
   
2012
    
2011
  
Cash flows from operating activities:
  
(In Thousands)
  
    Net income
   $ 848     $ 350  
    Adjustments to reconcile net income to net cash
                
       provided by operating activities:
                
          Depreciation and amortization
     503       481  
          Provision for loan losses
     71       352  
          Increase in cash surrender value of life insurance
     (192 )     (195 )
          Net realized gain on sales of securities available-for-sale
     -       (12 )
          Realized gains on sales of mortgage loans
     (115 )     (69 )
          Decrease in other assets
     179       97  
          Decrease in accrued interest and dividends receivable
     6       219  
          Decrease in FDIC prepaid insurance
     183       269  
          Net change in loans originated for resale
     1,110       1,818  
          Net loss on sales of other real estate owned
     108       63  
          Decrease in other liabilities
     (114 )     (24 )
          Change in unearned compensation
     829       905  
                          Net cash provided by operating activities
     3,416       4,254  
                 
Cash flows from investing activities:
                
    Additions to premises and equipment
     (419 )     (178 )
    Loan originations and principal collections, net
     (11,203 )     (13,667 )
    Proceeds from sales of other real estate owned
     -       162  
    Proceeds from sales of securities available-for-sale
     -       17  
    Purchases of securities available-for-sale
     -       (304 )
    Purchases of securities held-to-maturity
     (25,922 )     (55,627 )
    Maturities of securities held-to-maturity
     40,221       49,852  
    Proceeds from principal paydowns of securities held-to-maturity
     930       1,101  
    Proceeds from sale of FHLB stock
     213       -  
                          Net cash provided (used) by investing activities
     3,820       (18,644 )
                 
Cash flows from financing activities:
                
    Net increase in deposits
     1,199       12,214  
    Net (decrease) increase in securities sold under agreements to repurchase
     (5,163 )     1,332  
    Payments on long-term FHLB advances
     (5,165 )     (6,378 )
    Stock purchased for treasury
     (3,855 )     (2,057 )
                          Net cash (used) provided by financing activities
     (12,984 )     5,111  
                 
Net decrease in cash and cash equivalents
     (5,748 )     (9,279 )
                 
Cash and cash equivalents at beginning of period
     61,122       35,873  
                 
Cash and cash equivalents at end of period
   $ 55,374     $ 26,594  
                 
Supplemental cash flow information:
                
    Interest paid on deposits
   $ 2,272     $ 2,725  
    Interest paid on borrowings
     801       888  
    Income taxes paid
     315       115  
    Transfers from loans to other real estate owned
     520       468  
    Gain on acquisition of other real estate owned
     34       -  
                 
See accompanying notes to unaudited consolidated financial statements.
                

 
5
 

CHICOPEE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
June 30, 2012 and 2011

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, 2012 and for the periods ended June 30, 2012 and 2011 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, 2011 included in the Company’s Annual Report on Form 10-K.

The results for the three and six month interim periods ended June 30, 2012 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
  
   
2012
    
2011
    
2012
    
2011
  
                         
Net income (in thousands)
   $ 452     $ 306     $ 848     $ 350  
                                 
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
     (2,021,778 )     (1,511,562 )     (1,953,296 )     (1,482,885 )
Less: average number of unallocated ESOP shares
     (416,605 )     (446,363 )     (416,605 )     (446,363 )
Less: average number of dilutive restricted stock awards
     (54,946 )     (108,673 )     (55,098 )     (113,249 )
                                 
Adjusted weighted average number of common
                                
 shares outstanding
     4,946,039       5,372,770       5,014,369       5,396,871  
Plus: dilutive outstanding restricted stock awards
     43,032       42,999       36,408       35,837  
Plus: dilutive outstanding stock options
     -       -       -       -  
Weighted average number of diluted shares outstanding
     4,989,071       5,415,769       5,050,777       5,432,708  
                                 
Earnings per share:
                                
Basic- common stock
   $ 0.09     $ 0.06     $ 0.17     $ 0.06  
Basic- unvested share-based payment awards
   $ 0.09     $ 0.06     $ 0.17     $ 0.06  
Diluted- common stock
   $ 0.09     $ 0.06     $ 0.17     $ 0.06  
Diluted- unvested share-based payment awards
   $ 0.09     $ 0.06     $ 0.17     $ 0.06  
 
There were 619,198 and 562,698 stock options that were not included in the calculation of diluted earnings per share for the three and six months ended June 30, 2012 and 2011, respectively, because their effect was anti-dilutive.
 
 
6
 
 
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 year ended December 31, 2011, and the six months ended June 30, 2012:

   
Six Months
    
Year Ended
  
   
Ended June 30,
    
December 31,
  
   
2012
    
2011
  
Expected dividend yield
     0.86 %     0.86 %
Weighted average expected term
  
6.5 years
    
6.5 years
  
Weighted average expected volatility
     23.27 %     25.37 %
Weighted average risk-free interest rate
     1.40 %     2.92 %
 
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, 2012, 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, 2011
     556,198     $ 14.23       5.74     $ 25  
Granted
     63,000       14.20       9.56       -  
Exercised
     -       -       -       -  
Forfeited or expired
     -       -       -       -  
Outstanding at June 30, 2012
     619,198     $ 14.23       5.68     $ 154  
Exercisable at June 30, 2012
     429,357     $ 14.26       5.14     $ 93  
Exercisable at June 30, 2011
     320,417     $ 14.25       5.93     $ 16  
 
The Company granted 63,000 stock options in the six months ended June 30, 2012 with a fair value of $3.32. The weighted-average grant-date fair value of options granted during 2011 was $4.07. The weighted average grant-date fair value of the options outstanding and exercisable at June 30, 2012 and December 31, 2011 was $3.84 and $3.91, respectively. For the six months ended June 30, 2012 and 2011, share based compensation expense applicable to options granted under the Plan was $234,000 and $199,000 and the related tax benefit was $45,000 and $43,000, respectively. As of June 30, 2012, unrecognized stock-based compensation expense related to non-vested options amounted to $290,000. This amount is expected to be recognized over a period of 3.79 years.
 
 
7
 
 
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, 2012 is $14.28. The Company recorded compensation cost related to stock awards of approximately $383,000 and $498,000 in the six months ended June 30, 2012 and 2011, respectively. Stock awards with a fair value of $910,000, and $651,000 have vested during the years ended December 31, 2011 and 2010, respectively. No stock awards were granted prior to July 1, 2007. The Company granted 2,000 stock awards during the year ended December 31, 2011 with a grant price of $14.08. There were no awards granted by the company during the six months ended June 30, 2012. As of June 30, 2012, unrecognized stock-based compensation expense related to non-vested restricted stock awards amounted to $75,000. This amount is expected to be recognized over a period of 1.07 years.

A summary of the status of the Company’s stock awards as of June 30, 2012, and changes during the six months ended June 30, 2012, is as follows:
           
Weighted
  
           
Average
  
     
Number of
    
Grant-Date
  
Nonvested Shares
    
Shares
    
Fair Value
  
               
Outstanding at December 31, 2011
       55,346     $ 14.28  
Granted
       -       -  
Vested
       400       14.08  
Forfeited
       -       -  
Outstanding at June 30, 2012
       54,946     $ 14.28  
 
4.    Long-term Incentive Plan
 
On March 13, 2012, the Company adopted the Chicopee Bancorp, Inc. 2012 Phantom Stock Unit Award and Long-Term Incentive Plan (the “Plan”), effective as of January 1, 2012, to promote the long-term financial success of the Company and its subsidiaries by providing a means to attract, retain and reward individuals who contribute to such success and to further align their interest with those of the Company’s shareholders.
 
A total of 150,000 phantom stock units will be available for awards under the Plan. The only Awards that may be granted under the Plan are Phantom Stock Units. A Phantom Stock Unit represents the right to receive a cash payment on the determination date equal to the book value of a share of the Company’s stock on the determination date. The settlement of a Phantom Stock Unit on the determination date shall be in cash. The Plan year shall be January 1, 2012 to December 31, 2012. Unless the Compensation Committee of the Board of Directors of the Company determines otherwise, the required period of service for full vesting will be three years. The Company’s total expense under the Plan for the six months ended June 30, 2012 was $27,000.

5.    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.
 
 
8
 

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 adoption of this new guidance did 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 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 was effective for interim and annual reporting periods beginning on or after June 15, 2011.  The adoption of this new guidance did not have a material effect on the Company’s consolidated financial statements.

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 adoption of this new guidance did not have a material effect 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 adoption of this new guidance did not have a material effect on the Company’s consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”, which defers the effective date of a requirement in ASU 2011-05 related to reclassifications of items out of accumulated other comprehensive income. The deferral in the effective date was made to allow the FASB time to redilberate whether to require presentation on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented.

6.    Reclassification

Certain amounts in the 2011 financial statements have been reclassified to conform to the current period’s presentation. These reclassifications had no effect on the net income previously reported.
 
 
9
 
 
7.    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, 2012
  
         
Gross
    
Gross
        
   
Amortized
    
Unrealized
    
Unrealized
    
Fair
  
   
Cost
    
Gains
    
Losses
    
Value
  
   
(In Thousands)
  
Securities available-for-sale
                        
  Marketable equity securities
   $ 618     $ 18     $ (52 )   $ 584  
     Total securities available-for-sale
   $ 618     $ 18     $ (52 )   $ 584  
                                 
Securities held-to-maturity
                                
  U.S. Treasury securities
   $ 15,689     $ -     $ (1 )   $ 15,688  
  Corporate and industrial
                                
     revenue bonds
     31,153       6,646       -       37,799  
  Certificates of deposit
     10,222       4       -       10,226  
  Collateralized mortgage obligations
     1,550       79       -       1,629  
     Total securities held-to-maturity
   $ 58,614     $ 6,729     $ (1 )   $ 65,342  
                                 
Non-marketable securities
                                
   Federal Home Loan Bank stock
   $ 4,277     $ -     $ -     $ 4,277  
   Banker's Bank stock
     183       -       -       183  
     Total non-marketable securities
   $ 4,460     $ -     $ -     $ 4,460  
                                 
                                 
   
December 31, 2011
  
           
Gross
    
Gross
          
   
Amortized
    
Unrealized
    
Unrealized
    
Fair
  
   
Cost
    
Gains
    
Losses
    
Value
  
   
(In Thousands)
  
Securities available-for-sale
                                
  Marketable equity securities
   $ 618     $ 28     $ (33 )   $ 613  
     Total securities available-for-sale
   $ 618     $ 28     $ (33 )   $ 613  
                                 
Securities held-to-maturity
                                
  U.S. Treasury securities
   $ 26,998     $ 1     $ (1 )   $ 26,998  
  Corporate and industrial
                                
     revenue bonds
     31,576       6,643       -       38,219  
  Certificates of deposit
     13,206       7       -       13,213  
  Collateralized mortgage obligations
     2,072       105       -       2,177  
     Total securities held-to-maturity
   $ 73,852     $ 6,756     $ (1 )   $ 80,607  
                                 
Non-marketable securities
                                
   Federal Home Loan Bank stock
   $ 4,489     $ -     $ -     $ 4,489  
   Banker's Bank stock
     183       -       -       183  
     Total non-marketable securities
   $ 4,672     $ -     $ -     $ 4,672  
 
At June 30, 2012 and December 31, 2011, securities with an amortized cost of $12.8 million and $25.5 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, 2012 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.
 
 
10
 

   
Held-to-Maturity
  
   
Amortized
Cost
    
Fair Value
  
   
(In Thousands)
  
Within 1 year
   $ 26,811     $ 26,826  
From 1 to 5 years
     2,126       2,494  
From 5 to 10 years
     9,784       10,853  
Over 10 years
     19,893       25,169  
    $ 58,614     $ 65,342  
 
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 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.

As of June 30, 2012 and December 31, 2011, management determined that there were no securities other-than-temporarily impaired.

The following table presents the fair value of investments with continuous unrealized losses as of June 30, 2012 and December 31, 2011:


   
June 30, 2012
  
   
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
   $ 288     $ (17 )   $ 219     $ (35 )   $ 507     $ (52 )
U.S. Treasury securities
     6,692       (1 )     -       -       6,692       (1 )
    Total temporarily impaired securities
   $ 6,980     $ (18 )   $ 219     $ (35 )   $ 7,199     $ (53 )
                                                 
                                                 
   
December 31, 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
   $ 221     $ (33 )   $ -     $ -     $ 221     $ (33 )
U.S. Treasury securities
     13,998       (1 )     -       -       13,998       (1 )
    Total temporarily impaired securities
   $ 14,219     $ (34 )   $ -     $ -     $ 14,219     $ (34 )

 
11
 
 
U.S. Treasury Securities
Unrealized losses within the U.S. Treasury securities portfolio at June 30, 2012, related to three Treasury securities, which all had losses for less than 12 months. At December 31, 2011, unrealized losses related to five U.S. Treasury securities which all had losses for less than 12 months. Management deems these losses to be immaterial.

Collateralized Mortgage Obligations (“CMO”)
As of June 30, 2012, the Company has 12 CMO bonds, or nine individual issues, with an aggregate book value of $1.5 million, which included one bond, with a FICO score less than 650. This risk is mitigated by loan-to-value ratios of less than 65%. Since the purchase of these bonds, interest payments have been current and the Company expects to receive all principal and interest due.

Marketable Equity Securities
Unrealized losses within the marketable equity securities portfolio at June 30, 2012 and December 31, 2011, related to eight securities issued by two companies in the financial industry.  As of June 30, 2012, three out of the eight securities had unrealized losses for more than 12 months of $35,000, or 13.8%. In reviewing these marketable securities for OTTI, it was determined that there was no impairment. Management will continue to conduct, on at least a monthly basis, a review if its investment portfolio to determine if the value of any security has declined below its cost and whether such security is other-than-temporarily impaired.
 
Non-Marketable Securities
The Company is a member of the Federal Home Loan Bank (“FHLB”). The FHLB is a cooperatively owned wholesale bank for housing and finance in the six New England States. Its mission is to support the residential mortgage and community development lending activities of its members, which include over 450 financial institutions across New England. As a requirement of membership in the FHLB, the Company must own a minimum required amount of FHLB stock, calculated periodically based primarily on the Company’s level of borrowings from the FHLB. The Company uses the FHLB for much of its wholesale funding needs. As of June 30, 2012 and December 31, 2011, the Company’s investment in FHLB stock totaled $4.3 million, and $4.5 million, respectively.

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. As of June 30, 2012 and December 31, 2011, the Company received $11,000, and $13,000, in dividend income from its FHLB stock investment, respectively. On February 22, 2012, the FHLB announced that the Board of Directors approved the repurchase of excess captial stock from its members. On March 9, 2012, the FHLB repurchased $213,000 of FHLB stock, representing 42,765 shares.

The Company periodically evaluates its investment in FHLB stock for impairment based on, among other factors, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through June 30, 2012. The Company will continue to monitor its investment in FHLB stock.

Banker’s Bank Northeast stock is carried at cost and is evaluated for impairment based on an estimate of the ultimate recovery to par value. As of June 30, 2012 and December 31, 2011, the Company’s investment in Banker’s Bank totaled $183,000.
 
 
12
 
 
8.    Loans and Allowance for Loan Losses

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, 2012
    
December 31, 2011
  
         
Percent
          
Percent
  
   
Amount
    
of Total
    
Amount
    
of Total
  
   
(Dollars In Thousands)
  
                         
Real estate loans:
  
 
                    
Residential1
   $ 119,009       26.0 %   $ 123,294       27.6 %
Home equity
     30,735       6.7 %     29,790       6.7 %
Commercial
     176,334       38.5 %     174,761       39.0 %
          Total     326,078       71.2 %     327,845       73.3 %
Construction-residential
     5,328       1.2 %     5,597       1.3 %
Construction-commercial
     40,956       8.9 %     31,706       7.0 %
          Total construction     46,284       10.1 %     37,303       8.3 %
               Total real estate loans     372,362       81.3 %     365,148       81.6 %
Consumer loans
     2,621       0.6 %     2,566       0.6 %
Commercial loans
     82,684       18.1 %     79,412       17.8 %
               Total loans     457,667       100.0 %     447,126       100.0 %
Deferred loan origination costs, net
     899               921          
Allowance for loan losses
     (4,482 )             (4,576 )        
                                 
               Loans, net
 $ 454,084             $ 443,471