Edgar Filing: CHICOPEE BANCORP, INC.

a50463526.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, 2012


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

For the transition period from __________________ to _________________

Commission File Number: 000-51996

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 1, 2012, there were 5,440,960 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, 2012 and December 31, 2011.	1

		Consolidated Statements of Income for the Three and Nine
		Months Ended September 30, 2012 and 2011	2

		Consolidated Statements of Comprehensive Income for the
		Three and Nine Months Ended September 30, 2012 and 2011	3

		Consolidated Statements of Changes in Stockholders’ Equity
		For the Nine Months Ended September 30, 2012 and 2011	4

		Consolidated Statements of Cash Flows for the
		Nine Months Ended September 30, 2012 and 2011	5

		Notes to Unaudited Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations		28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		47

Item 4.	Controls and Procedures		48

PART II. OTHER INFORMATION

Item 1.		Legal Proceedings	48
Item 1A.		Risk Factors	49
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.		Defaults Upon Senior Securities	49
Item 4.		Mine Safety Disclosures	49
Item 5.		Other Information	49
Item 6.		Exhibits	50

SIGNATURES			51

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	2012			2011
	(Unaudited)

Cash and due from banks	$	21,063		$	10,665
Federal funds sold		2,144			50,457
Interest-bearing deposits with the Federal Reserve Bank of Boston		18,287			-
Total cash and cash equivalents		41,494			61,122

Securities available for sale, at fair value		590			613
Securities held to maturity, at cost (fair value $69,834 and $80,607 at
September 30, 2012 and December 31, 2011, respectively)		62,325			73,852
Federal Home Loan Bank stock, at cost		4,277			4,489
Loans, net of allowance for loan losses ($4,401 at
September 30, 2012 and $4,576 at December 31, 2011)		468,460			443,471
Loans held for sale		-			1,635
Other real estate owned		538			913
Mortgage servicing rights		320			344
Bank owned life insurance		13,712			13,427
Premises and equipment, net		9,521			9,736
Accrued interest and dividends receivable		2,060			1,527
Deferred income tax asset		2,901			2,893
FDIC prepaid insurance		552			824
Other assets		1,226			1,460
Total assets	$	607,976		$	616,306

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits
Demand deposits	$	78,563		$	68,799
NOW accounts		34,563			26,747
Savings accounts		49,345			47,122
Money market deposit accounts		125,983			97,606
Certificates of deposit		186,655			213,103
Total deposits		475,109			453,377

Securities sold under agreements to repurchase		7,208			12,340
Advances from Federal Home Loan Bank		35,635			59,265
Accrued expenses and other liabilities		724			542
Total liabilities		518,676			525,524


Stockholders' equity
Common stock (no par value, 20,000,000 shares authorized, 7,439,368
shares issued at September 30, 2012 and December 31, 2011)		72,479			72,479
Treasury stock, at cost (1,976,338 shares at September 30, 2012
and 1,703,065 shares at December 31, 2011)		(26,073	)		(22,190	)
Additional paid-in-capital		2,995			2,800
Unearned compensation (restricted stock awards)		(19	)		(546	)
Unearned compensation (Employee Stock Ownership Plan)		(3,943	)		(4,166	)
Retained earnings		43,879			42,408
Accumulated other comprehensive loss		(18	)		(3	)
Total stockholders' equity		89,300			90,782
Total liabilities and stockholders' equity	$	607,976		$	616,306

See accompanying notes to unaudited consolidated financial statements.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011

Interest and dividend income:
Loans, including fees	$	5,660		$	5,801		$	17,017		$	17,478
Interest and dividends on securities		425			425			1,248			1,195
Other interest-earning assets		15			6			54			27
Total interest and dividend income		6,100			6,232			18,319			18,700

Interest expense:
Deposits		1,107			1,292			3,380			4,017
Securities sold under agreements to repurchase		2			8			11			27
Other borrowed funds		264			414			982			1,283
Total interest expense		1,373			1,714			4,373			5,327

Net interest income		4,727			4,518			13,946			13,373
Provision for loan losses		169			223			240			575

Net interest income after provision for loan losses		4,558			4,295			13,706			12,798

Non-interest income:
Service charges, fees and commissions		621			549			1,694			1,459
Loan sales and servicing, net		18			51			286			250
Net gain on sales of securities available for sale		-			-			-			12
Net loss on sale of other real estate owned		(112	)		(36	)		(220	)		(99	)
Income from bank owned life insurance		93			101			285			296
Other non-interest income		-			32			34			32
Total non-interest income		620			697			2,079			1,950

Non-interest expenses:
Salaries and employee benefits		2,447			2,719			8,064			8,217
Occupancy expenses		367			358			1,127			1,189
Furniture and equipment		264			271			838			782
FDIC insurance assessment		89			145			272			414
Data processing		285			299			817			879
Professional fees		136			129			447			422
Advertising		141			160			440			413
Stationery, supplies and postage		70			104			249			280
Other non-interest expense		563			476			1,760			1,485
Total non-interest expenses		4,362			4,661			14,014			14,081

Income before income taxes		816			331			1,771			667
Income tax expense (benefit)		193			(40	)		300			(54	)
Net income	$	623		$	371		$	1,471		$	721

Earnings per share:
Basic	$	0.12		$	0.07		$	0.29		$	0.13
Diluted	$	0.12		$	0.07		$	0.29		$	0.13

Adjusted weighted average shares outstanding:
Basic		5,077,268			5,305,372			5,132,576			5,368,144
Diluted		5,090,140			5,321,435			5,157,995			5,396,608

See accompanying notes to unaudited consolidated financial statements.

CHICOPEE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)

	Three Months Ended
	September 30,
	2012			2011

Net income	$	623		$	371

Other comprehensive income, net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period		6			(84	)
Tax effect		(2	)		29
Other comprehensive income (loss)		4			(55	)
Comprehensive income	$	627		$	316

	Nine Months Ended
	September 30,
	2012			2011

Net income	$	1,471		$	721

Other comprehensive income, net of tax
Unrealized losses on securities:
Unrealized holding losses arising during period		(23	)		(103	)
Less: reclassification adjustments for gains included in
net income		-			(12	)
Tax effect		8			40
Other comprehensive loss		(15	)		(75	)
Comprehensive income	$	1,456		$	646

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, 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		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		-		-			-			-			-			1,471		-			1,471
Change in net unrealized loss on securities
available for sale (net of deferred income taxes of $8)		-		-			-			-			-			-		(15	)		(15	)
Total comprehensive income																					1,456

Treasury stock purchased (273,273 shares)		-		(3,883	)		-			-			-			-		-			(3,883	)
Stock options exercised		-		-			(53	)		-			-			-		-			(53	)
Change in unearned compensation:
Stock option expense (net of income tax benefit of $51)		-		-			263			-			-			-		-			263
Restricted stock award expense		-		-			(113	)		527			-			-		-			414
Common stock held by ESOP committed to
be released		-		-			98			-			223			-		-			321
Balance at September 30, 2012	$	72,479	$	(26,073	)	$	2,995		$	(19	)	$	(3,943	)	$	43,879	$	(18	)	$	89,300


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 (net of income tax benefit of $66)		-		-			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

See accompanying notes to unaudited consolidated financial statements.

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

	Nine Months Ended September 30,
	2012			2011
Cash flows from operating activities:	(In Thousands)
Net income	$	1,471		$	721
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		748			734
Provision for loan losses		240			575
Increase in cash surrender value of life insurance		(285	)		(296	)
Net realized gain on sales of securities available for sale		-			(12	)
Realized gains on sales of mortgage loans		(128	)		(107	)
Decrease (increase) in other assets		347			(193	)
(Increase) decrease in accrued interest and dividends receivable		(533	)		176
Decrease in FDIC prepaid insurance		272			413
Net change in loans originated for resale		1,635			900
Net loss on sales of other real estate owned		220			99
Increase in other liabilities		182			241
Change in unearned compensation		998			1,302
Net cash provided by operating activities		5,167			4,553

Cash flows from investing activities:
Additions to premises and equipment		(491	)		(318	)
Loan originations and principal collections, net		(25,749	)		(13,942	)
Proceeds from sales of other real estate owned		675			217
Proceeds from sales of securities available for sale		-			17
Purchases of securities available for sale		-			(304	)
Purchases of securities held to maturity		(34,953	)		(69,658	)
Maturities of securities held to maturity		45,139			75,333
Proceeds from principal paydowns of securities held to maturity		1,337			1,568
Proceeds from sale of FHLB stock		213			-
Net cash used by investing activities		(13,829	)		(7,087	)

Cash flows from financing activities:
Net increase in deposits		21,732			24,420
Net (decrease) increase in securities sold under agreements to repurchase		(5,132	)		3,268
Payments on long-term FHLB advances		(23,630	)		(9,473	)
Stock purchased for treasury		(3,883	)		(3,712	)
Stock options exercised		(53	)		-
Net cash (used) provided by financing activities		(10,966	)		14,503

Net (decrease) increase in cash and cash equivalents		(19,628	)		11,969

Cash and cash equivalents at beginning of period		61,122			35,873

Cash and cash equivalents at end of period	$	41,494		$	47,842

Supplemental cash flow information:
Interest paid on deposits	$	3,380		$	4,017
Interest paid on borrowings		909			1,310
Income taxes paid		361			120
Transfers from loans to other real estate owned		520			1,085
Gain on acquisition of other real estate owned		34			32

See accompanying notes to unaudited consolidated financial statements.

CHICOPEE BANCORP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

September 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 September 30, 2012 and for the periods ended September 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 nine month interim periods ended September 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 September						Nine Months Ended September
	2012			2011			2012			2011

Net income (in thousands)	$	623		$	371		$	1,471		$	721

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		(1,929,399	)		(1,617,796	)		(1,848,185	)		(1,526,242	)
Less: average number of unallocated ESOP shares		(416,605	)		(446,363	)		(416,605	)		(446,363	)
Less: average number of dilutive restricted stock awards		(16,096	)		(69,837	)		(42,002	)		(98,619	)

Adjusted weighted average number of common
shares outstanding		5,077,268			5,305,372			5,132,576			5,368,144
Plus: dilutive outstanding restricted stock awards		12,872			16,063			25,419			28,464
Plus: dilutive outstanding stock options		-			-			-			-
Weighted average number of diluted shares outstanding		5,090,140			5,321,435			5,157,995			5,396,608

Earnings per share:
Basic- common stock	$	0.12		$	0.07		$	0.29		$	0.13
Basic- unvested share-based payment awards	$	0.12		$	0.07		$	0.29		$	0.13
Diluted- common stock	$	0.12		$	0.07		$	0.29		$	0.13
Diluted- unvested share-based payment awards	$	0.12		$	0.07		$	0.29		$	0.13

There were 595,198 and 556,198 stock options that were not included in the calculation of diluted earnings per share for the three and nine months ended September 30, 2012 and 2011, 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 year ended December 31, 2011, and the nine months ended September 30, 2012:

	Nine Months			Year Ended
	Ended September 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 September 30, 2012, 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, 2011		556,198		$	14.23		5.74	$	25
Granted		63,000			14.20		9.30		-
Exercised		(13,800	)		14.12		5.17		-
Forfeited or expired		(10,200	)		13.89		7.61		-
Outstanding at September 30, 2012		595,198		$	14.24		5.41	$	125
Exercisable at September 30, 2012		517,598		$	14.27		4.87	$	92
Exercisable at September 30, 2011		423,157		$	14.28		5.67	$	5

The Company granted 63,000 stock options in the nine months ended September 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 September 30, 2012 and December 31, 2011 was $3.85 and $3.91, respectively. For the nine months ended September 30, 2012 and 2011, share based compensation expense applicable to options granted under the Plan was $263,000 and $308,000 and the related tax benefit was $51,000 and $66,000, respectively. During the quarter ended September 30, 2012, 12,000 stock options with an exercise price of $14.29 per share, 1,200 stock options with an exercise price of $12.41 per share and 600 stock options with an exercise price of $14.10 per share were exercised. As of September 30, 2012, unrecognized stock-based compensation expense related to non-vested options amounted to $209,000. This amount is expected to be recognized over a period of 3.77 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, 2012 is $14.08. The Company recorded compensation cost related to stock awards of approximately $527,000 and $691,000 in the nine months ended September 30, 2012 and 2011, respectively. Stock awards with a fair value of $910,000, have vested during the year ended December 31, 2011. 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 nine months ended September 30, 2012. As of September 30, 2012, unrecognized stock-based compensation expense related to non-vested restricted stock awards amounted to $19,000. This amount is expected to be recognized over a period of 3.44 years.

A summary of the status of the Company’s stock awards as of September 30, 2012, and changes during the nine months ended September 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		53,746		14.29
Forfeited		-		-
Outstanding at September 30, 2012		1,600	$	14.08

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 nine months ended September 30, 2012 was $26,000.

5. Recent Accounting Pronouncements (Applicable to the Company)

In April 2011, the Financial Accounting Standards Board issued Accounting Standard Updated 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. Investment Securities

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

	September 30, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
Securities available for sale
Marketable equity securities	$	618	$	16	$	(44	)	$	590
Total securities available for sale	$	618	$	16	$	(44	)	$	590

Securities held to maturity
U.S. Treasury securities	$	15,694	$	1	$	-		$	15,695
Corporate and industrial
revenue bonds		35,050		7,438		-			42,488
Certificates of deposit		10,229		2		-			10,231
Collateralized mortgage obligations		1,352		68		-			1,420
Total securities held to maturity	$	62,325	$	7,509	$	-		$	69,834

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 September 30, 2012 and December 31, 2011, securities with an amortized cost of $12.7 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 September 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.

	Held to Maturity
	Amortized Cost		Fair Value
	(In Thousands)
Within 1 year	$	26,823	$	26,841
From 1 to 5 years		2,126		2,495
From 5 to 10 years		9,554		10,667
Over 10 years		23,822		29,831
	$	62,325	$	69,834

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 fair 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 fair 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 September 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 September 30, 2012 and December 31, 2011:

	September 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	$	289	$	(15	)	$	225	$	(29	)	$	514	$	(44	)
Total temporarily impaired securities	$	289	$	(15	)	$	225	$	(29	)	$	514	$	(44	)

	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	)

U.S. Treasury Securities

There were no unrealized losses within the U.S. Treasury securities portfolio at September 30, 2012. 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 September 30, 2012, the Company has 12 CMO bonds, or nine individual issues, with an aggregate book value of $1.4 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 September 30, 2012 and December 31, 2011, related to eight securities issued by two companies in the financial industry. As of September 30, 2012, three out of the eight securities had unrealized losses for more than 12 months of $29,000, or 11.6%. 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 September 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 September 30, 2012 and December 31, 2011, the Company received $17,000, 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 September 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 September 30, 2012 and December 31, 2011, the Company’s investment in Banker’s Bank totaled $183,000.

7. 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.


	September 30, 2012						December 31, 2011
				Percent						Percent
	Amount			of Total			Amount			of Total
	(Dollars In Thousands)

Real estate loans:
Residential1	$	122,024			25.9	%	$	123,294			27.6	%
Home equity		31,593			6.7	%		29,790			6.7	%
Commercial		185,655			39.3	%		174,761			39.0	%
Total		339,272			71.9	%		327,845			73.3	%
Construction-residential		5,530			1.2	%		5,597			1.3	%
Construction-commercial		38,859			8.2	%		31,706			7.0	%
Total construction		44,389			9.4	%		37,303			8.3	%
Total real estate loans		383,661			81.3	%		365,148			81.6	%
Consumer loans		2,598			0.5	%		2,566			0.6	%
Commercial loans		85,681			18.2	%		79,412			17.8	%
Total loans		471,940			100.0	%		447,126			100.0	%
Deferred loan origination costs, net		921						921
Allowance for loan losses		(4,401	)					(4,576	)

Loans, net	$	468,460					$	443,471

1 Excludes loans held for sale of $1.6 million at December 31, 2011.

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, 2012 and December 31, 2011, the Company was servicing loans for participating lenders totaling $10.4 million and $8.8 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 $84.6 million and $80.7 million at September 30, 2012 and December 31, 2011, respectively. Servicing rights will continue to be retained on all loans written and sold in the secondary market.

Credit Quality

To evaluate the risk in the loan portfolio, internal credit risk ratings are used for the following loan segments: commercial real estate, commercial construction and commercial. The risks evaluated in determining an adequate credit risk rating, include the financial strength of the borrower and the collateral securing the loan. All commercial real estate, commercial construction, and 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, substandard, doubtful, and 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 weakness 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 when 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 segment as of September 30, 2012:

	Commercial Credit Risk Exposure
	Commercial		Commercial Construction		Commercial Real Estate		Total
	(In Thousands)
Pass	$	77,048	$	26,340	$	177,697	$	281,085
Special mention		7,031		8,029		3,704		18,764
Substandard		1,602		4,490		4,254		10,346
Doubtful		-		-		-		-
Loss		-		-		-		-
Total commercial loans	$	85,681	$	38,859	$