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

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 November 1, 2012, there were 5,440,960 shares of the Registrant’s Common Stock outstanding.
 
 
 

 
 
CHICOPEE BANCORP, INC.
FORM 10-Q
INDEX

     
   Page
 
       
 Item 1.   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
  48
       
 
       
 
48
 
49
 
 49
 
49
 
49
 
49
 
 50
       
51

 
 

 
 
PART I.  FINANCIAL INFORMATION

Item 1.    Financial Statements
 
 
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.
         
 
 
1

 
 
 
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.
                         
 
 
2

 
 
 
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.
               
 
 
3

 
 
 
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.
                                         
 
 
4

 
 
 
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.
               
 
 
5

 
 
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.
 
 
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 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.
 
 
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 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.
 
 
8

 
 
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.
 
 
9

 
 
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.
 
 
10

 
 
   
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.
 
 
11

 
 
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.
 
 
12

 
 
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.
 
 
13

 
 
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     $<