Chicopee Bancorp 10Q 2012 Q1 Quarterly report

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 March 31, 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 May 7, 2012, there were 5,588,224 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
	March 31, 2012 and December 31, 2011	1

	Consolidated Statements of Income for the Three
	Months Ended March 31, 2012 and 2011	2

	Consolidated Statements of Comprehensive Income for the
	Three Months Ended March 31, 2012, and 2011	3

	Consolidated Statements of Changes in Stockholders’ Equity
	for the Three Months Ended March 31, 2012 and 2011	4

	Consolidated Statements of Cash Flows for the
	Three Months Ended March 31, 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	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40

Item 4.	Controls and Procedures	42

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	43

SIGNATURES		44

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHICOPEE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars In Thousands)

	March 31,			December 31,
ASSETS	2012			2011
	(Unaudited)

Cash and due from banks	$	14,309		$	10,665
Federal funds sold		41,265			50,457
Total cash and cash equivalents		55,574			61,122

Securities available-for-sale, at fair value		626			613
Securities held-to-maturity, at cost (fair value $68,309 and $80,607 at
March 31, 2012 and December 31, 2011, respectively)		62,353			73,852
Federal Home Loan Bank stock, at cost		4,277			4,489
Loans, net of allowance for loan losses ($4,448 at
March 31, 2012 and $4,576 at December 31, 2011)		449,550			443,471
Loans held for sale		1,604			1,635
Other real estate owned		901			913
Mortgage servicing rights		385			344
Bank owned life insurance		13,523			13,427
Premises and equipment, net		9,818			9,853
Accrued interest and dividends receivable		1,562			1,527
Deferred income tax asset		2,888			2,893
FDIC prepaid insurance		730			824
Other assets		1,270			1,343
Total assets	$	605,061		$	616,306

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits
Non-interest-bearing	$	63,378		$	68,799
Interest-bearing		385,239			384,578
Total deposits		448,617			453,377

Securities sold under agreements to repurchase		9,883			12,340
Advances from Federal Home Loan Bank		56,373			59,265
Accrued expenses and other liabilities		445			542
Total liabilities		515,318			525,524


Stockholders' equity
Common stock (no par value, 20,000,000 shares authorized, 7,439,368
shares issued at March 31, 2012 and December 31, 2011)		72,479			72,479
Treasury stock, at cost (1,831,654 shares at March 31, 2012
and 1,703,065 shares at December 31, 2011)		(24,039	)		(22,190	)
Additional paid-in-capital		2,939			2,800
Unearned compensation (restricted stock awards)		(354	)		(546	)
Unearned compensation (Employee Stock Ownership Plan)		(4,092	)		(4,166	)
Retained earnings		42,805			42,408
Accumulated other comprehensive income (loss)		5			(3	)
Total stockholders' equity		89,743			90,782
Total liabilities and stockholders' equity	$	605,061		$	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
	March 31,
	2012			2011

Interest and dividend income:
Loans, including fees	$	5,685		$	5,809
Interest and dividends on securities		414			367
Other interest-earning assets		19			12
Total interest and dividend income		6,118			6,188

Interest expense:
Deposits		1,146			1,374
Securities sold under agreements to repurchase		5			10
Other borrowed funds		365			438
Total interest expense		1,516			1,822

Net interest income		4,602			4,366
Provision for loan losses		7			233

Net interest income after provision for loan losses		4,595			4,133

Non-interest income:
Service charges, fees and commissions		540			466
Loan sales and servicing, net		153			148
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			98
Total non-interest income		681			661

Non-interest expenses:
Salaries and employee benefits		2,771			2,839
Occupancy expenses		395			447
Furniture and equipment		279			250
FDIC insurance assessment		94			102
Data processing		314			293
Professional fees		165			142
Advertising		149			126
Stationery, supplies and postage		108			83
Other non-interest expense		555			464
Total non-interest expenses		4,830			4,746

Income before income taxes		446			48
Income tax expense		49			5
Net income	$	397		$	43

Earnings per share: (1)
Basic	$	0.08		$	0.01
Diluted	$	0.08		$	0.01

Adjusted weighted average shares outstanding:
Basic		5,070,119			5,421,684
Diluted		5,119,446			5,454,160

(1) Common stock equivalents were excluded from the computation of diluted net income per share for the three months ended March 31, 2012 and 2011, since the inclusion of such equivalents would be anti-dilutive.

See accompanying notes to unaudited consolidated financial statements.

CHICOPEE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2012			2011

Net income	$	397		$	43

Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising during period		12			6
Less: reclassification adjustments for gains included in
net income		-			(12	)
Tax effect		(4	)		2
Other comprehensive income (loss)		8			(4	)
Comprehensive income	$	405		$	39

See accompanying notes to unaudited consolidated financial statements.

CHICOPEE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Three Months Ended March 31, 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		-		-			-		-			-			397		-			397
Change in net unrealized loss on securities
available-for-sale (net of deferred income taxes of $4)		-		-			-		-			-			-		8			8
Total comprehensive income																				405

Treasury stock purchased (128,589 shares)		-		(1,849	)		-		-			-			-		-			(1,849	)
Change in unearned compensation:
Stock option expense (net of income tax benefit of $22)		-		-			108		-			-			-		-			108
Restricted stock award expense		-		-			-		192			-			-		-			192
Common stock held by ESOP committed to
be released		-		-			31		-			74			-		-			105
Balance at March 31, 2012	$	72,479	$	(24,039	)	$	2,939	$	(354	)	$	(4,092	)	$	42,805	$	5		$	89,743


Balance at December 31, 2010	$	72,479	$	(18,295	)	$	2,255	$	(1,431	)	$	(4,463	)	$	41,308	$	29		$	91,882

Comprehensive income:
Net income		-		-			-		-			-			43		-			43
Change in net unrealized gain on securities
available-for-sale (net of deferred income taxes of $2)		-		-			-		-			-			-		(4	)		(4	)
Total comprehensive income																				39

Treasury stock purchased (32,100 shares)		-		(419	)		-		-			-			-		-			(419	)
Change in unearned compensation:
Stock option expense (net of income tax benefit of $21)		-		-			91		-			-			-		-			91
Restricted stock award expense		-		-			-		307			-			-		-			307
Common stock held by ESOP committed to
be released		-		-			27		-			74			-		-			101
Balance at March 31, 2011	$	72,479	$	(18,714	)	$	2,373	$	(1,124	)	$	(4,389	)	$	41,351	$	25		$	92,001

See accompanying notes to unaudited consolidated financial statements.

CHICOPEE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31,
	2012			2011
Cash flows from operating activities:	(In Thousands)
Net income	$	397		$	43
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		235			241
Provision for loan losses		7			233
Increase in cash surrender value of life insurance		(96	)		(98	)
Net realized gain on sales of securities available-for-sale		-			(12	)
Realized gains on sales of mortgage loans		(54	)		(48	)
Decrease (increase) in other assets		46			(874	)
(Increase) decrease in accrued interest and dividends receivable		(36	)		154
Decrease in FDIC prepaid insurance		94			103
Net change in loans originated for resale		31			1,777
Net loss on sales of other real estate owned		108			63
Decrease in other liabilities		(97	)		(75	)
Change in unearned compensation		405			499
Net cash provided by operating activities		1,040			2,006

Cash flows from investing activities:
Additions to premises and equipment		(163	)		(80	)
Loan originations and principal collections, net		(6,182	)		(12,937	)
Proceeds from sales of other real estate owned		-			162
Proceeds from sales of securities available-for-sale		-			17
Purchases of securities held-to-maturity		(3,004	)		(14,725	)
Maturities of securities held-to-maturity		14,009			18,725
Proceeds from principal paydowns of securities held-to-maturity		496			699
Proceeds from sale of FHLB stock		213			-
Net cash provided (used) by investing activities		5,369			(8,139	)

Cash flows from financing activities:
Net (decrease) increase in deposits		(4,760	)		12,160
Net decrease in securities sold under agreements to repurchase		(2,457	)		(1,018	)
Payments on long-term FHLB advances		(2,891	)		(3,183	)
Stock purchased for treasury		(1,849	)		(419	)
Net cash (used) provided by financing activities		(11,957	)		7,540

Net (decrease) increase in cash and cash equivalents		(5,548	)		1,407

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

Cash and cash equivalents at end of period	$	55,574		$	37,280

Supplemental cash flow information:
Interest paid on deposits	$	1,146		$	1,374
Interest paid on borrowings		398			367
Income taxes paid		-			57
Transfers from loans to other real estate owned		97			377

See accompanying notes to unaudited consolidated financial statements.

CHICOPEE BANCORP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

March 31, 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 March 31, 2012 and for the periods ended March 31, 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 month interim period ended March 31, 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 March
	2012			2011

Net income (in thousands)	$	397		$	43

Weighted average number of common shares issued		7,439,368			7,439,368
Less: average number of treasury shares		(1,897,395	)		(1,453,446	)
Less: average number of unallocated ESOP shares		(416,605	)		(446,363	)
Less: average number of dilutive restricted stock awards		(55,249	)		(117,875	)

Adjusted weighted average number of common
shares outstanding		5,070,119			5,421,684
Plus: dilutive outstanding restricted stock awards		49,327			32,476
Plus: dilutive outstanding stock options		-			-
Weighted average number of diluted shares outstanding		5,119,446			5,454,160

Earnings per share:
Basic- common stock	$	0.08		$	0.01
Basic- unvested share-based payment awards	$	0.08		$	0.01
Diluted- common stock	$	0.08		$	0.01
Diluted- unvested share-based payment awards	$	0.08		$	0.01

There were 619,198 and 562,698 stock options that were not included in the calculation of diluted earnings per share for the three months ended March 31, 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 three months ended March 31, 2012:

	Three Months			Year Ended
	Ended March 31,			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 March 31, 2012, and changes during the three 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		9.83		-
Exercised		-		-		-		-
Forfeited or expired		-		-		-		-
Outstanding at March 31, 2012		619,198	$	14.23		5.93	$	167
Exercisable at March 31, 2012		429,357	$	14.26		5.38	$	102
Exercisable at March 31, 2011		320,417	$	14.25		6.17	$	41

The Company granted 63,000 stock options in the three months ended March 31, 2012 with a fair value of $3.32. The weighted-average grant-date fair value of options granted during 2011 was $4.07, respectively. The weighted average grant-date fair value of the options outstanding and exercisable at March 31, 2012 and December 31, 2011 was $3.84 and $3.91, respectively. For the three months ended March 31, 2012 and 2011, share based compensation expense applicable to options granted under the Plan was $108,000 and $91,000 and the related tax benefit was $22,000 and $21,000, respectively. As of March 31, 2012, unrecognized stock-based compensation expense related to non-vested options amounted to $408,000. This amount is expected to be recognized over a period of 3.12 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 March 31, 2012 is $14.28. The Company recorded compensation cost related to stock awards of approximately $192,000 and $307,000 in the three months ended March 31, 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 three months ended March 31, 2012. As of March 31, 2012, unrecognized stock-based compensation expense related to non-vested restricted stock awards amounted to $266,000. This amount is expected to be recognized over a period of 0.62 years.

A summary of the status of the Company’s stock awards as of March 31, 2012, and changes during the three months ended March 31, 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 March 31, 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 three months ended March 31, 2012 amounted to $13,000.

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.

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 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.

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:

	March 31, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
Securities available-for-sale
Marketable equity securities	$	618	$	25	$	(17	)	$	626
Total securities available-for-sale	$	618	$	25	$	(17	)	$	626

Securities held-to-maturity
U.S. Treasury securities	$	16,000		-		-		$	16,000
Corporate and industrial
revenue bonds		31,367		5,861		-			37,228
Certificates of deposit		13,210		3		-			13,213
Collateralized mortgage obligations		1,776		92		-			1,868
Total securities held-to-maturity	$	62,353	$	5,956	$	-		$	68,309

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 March 31, 2012 and December 31, 2011, securities with an amortized cost of $14.9 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 March 31, 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	$	29,209	$	29,212
From 1 to 5 years		3,026		3,404
From 5 to 10 years		10,045		11,067
Over 10 years		20,073		24,626
	$	62,353	$	68,309

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 March 31, 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 March 31, 2012 and December 31, 2011:

	March 31, 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	$	237	$	(17	)	$	-	$	-	$	237	$	(17	)
Total temporarily impaired securities	$	237	$	(17	)	$	-	$	-	$	237	$	(17	)

	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 as of March 31, 2012. At December 31, 2011, unrealized losses related to five U.S. Treasury securities of which all were for less than 12 months.

Collateralized Mortgage Obligations (“CMO”)

As of March 31, 2012, the Company has 12 CMO bonds, or 13 individual issues, with an aggregate book value of $1.8 million, which included four bonds, or six individual issues, with FICO scores 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 March 31, 2012 and December 31, 2011, related to three securities issued by one company in the financial industry. In reviewing these marketable securities for OTTI, it was determined there was no impairement. As of March 31, 2012, and December 31, 2011, none of the three securities had losses for more than 12 months.

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 March 31, 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 March 31, 2012 and December 31, 2011, the Company received $6,000, 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 representing 42,765 shares from the Company.

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 March 31, 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 March 31, 2012 and December 31, 2011, the Company’s investment in Banker’s Bank totaled $183,000.

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.

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

Real estate loans:
Residential1	$	122,409			27.0	%	$	123,294			27.6	%
Home equity		29,983			6.6	%		29,790			6.7	%
Commercial		177,813			39.2	%		174,761			39.0	%
Total		330,205			72.8	%		327,845			73.3	%
Construction-residential		5,839			1.3	%		5,597			1.3	%
Construction-commercial		35,970			7.9	%		31,706			7.0	%
Total construction		41,809			9.2	%		37,303			8.3	%
Total real estate loans		372,014			82.0	%		365,148			81.6	%
Consumer loans		2,507			0.6	%		2,566			0.6	%
Commercial loans		78,562			17.4	%		79,412			17.8	%
Total loans		453,083			100.0	%		447,126			100.0	%
Deferred loan origination costs, net		915						921
Allowance for loan losses		(4,448	)					(4,576	)

Loans, net	$	449,550					$	443,471

1 Excludes loans held for sale of $1.6 million at March 31, 2012 and December 31, 2011, respectively.

The Company has transferred a portion of its originated commercial real estate and commercial loans to participating lenders. The amounts transferred have been accounted for as sales and therefore not included in the Company’s consolidated statements of financial condition. The Company and participating lenders share proportionally, based on participating agreements, any gains or losses the may result from the borrowers lack of compliance with the terms of the loan. The Company continues to service the loans on behalf of the participating lenders. At March 31, 2012 and December 31, 2011, the Company was servicing loans for participating lenders totaling $10.2 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 $83.0 million and $80.7 million at March 31, 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 loans are rated from one through nine. Credit risk ratings one through five are considered pass ratings. Classified assets include credit risk ratings of special mention through loss. At least quarterly, classified assets are reviewed by management and by an independent third party. Credit risk ratings are updated as soon as information is obtained that indicates a change in the credit risk rating may be warranted.

The following describes the credit risk ratings:

Special mention. Assets that do not currently expose the Company to sufficient risk to warrant classification in one of the following categories but possess potential weaknesses.

Substandard. Assets that have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Non-accruing loans are typically classified as substandard.

Doubtful. Assets that have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.

Loss. Assets rated in this category are considered uncollectible and are charged off against the allowance for loan losses.

Residential real estate and residential construction loans are categorized into pass and substandard risk ratings. Substandard residential loans are loans that are on nonaccrual status and are individually evaluated for impairment.

Consumer loans are considered nonperforming when they are 90 days past due or have not returned to accrual status. Consumer loans are not individually evaluated for impairment.

Home equity loans are considered nonperforming whey they are 90 days past due or have not returned to accrual status. Each nonperforming home equity loan is individually evaluated for impairment.

The following table presents an analysis of total loans segregated by risk rating and segment as of March 31, 2012:

	Commercial Credit Risk Exposure
	Commercial		Commercial Construction		Commercial Real Estate		Total
	(In Thousands)
Pass	$	74,586	$	23,906	$	168,811	$	267,303
Special mention		2,435		11,851		4,358		18,644
Substandard		1,541		213		4,644		6,398
Doubtful		-		-		-		-
Loss		-		-		-		-
Total commercial loans	$	78,562	$	35,970	$	177,813	$	292,345

	Residential Credit Risk Exposure
	Residential Real Estate		Residential Construction		Total
	(In Thousands)
Pass	$	120,829	$	5,508	$	126,337
Substandard (nonaccrual)		1,580		331		1,911
Total residential loans	$	122,409	$	5,839	$	128,248

	Consumer Credit Risk Exposure
	Consumer		Home Equity		Total
	(In Thousands)
Performing	$	2,473	$	29,639	$	32,112
Nonperforming (nonaccrual)		34		344		378
Total consumer loans	$	2,507	$	29,983	$	32,490

The following table presents an analysis of total loans segregated by risk rating and segment as of December 31, 2011:

	Commercial Credit Risk Exposure
	Commercial		Commercial Construction		Commercial Real Estate		Total
	(In Thousands)
Pass	$	74,699	$	19,904	$	165,168	$	259,771
Special mention		2,855		11,586		5,622		20,063
Substandard		1,858		216		3,971		6,045
Doubtful		-		-		-		-
Loss		-		-		-		-
Total commercial loans	$	79,412	$	31,706	$	174,761	$	285,879

	Residential Credit Risk Exposure
	Residential Real Estate		Residential Construction		Total
	(In Thousands)
Pass	$	121,072	$	5,597	$	126,669
Substandard (nonaccrual)		2,222		-		2,222
Total residential loans	$	123,294	$	5,597	$	128,891

	Consumer Credit Risk Exposure
	Consumer		Home Equity		Total
	(In Thousands)
Performing	$	2,487	$	29,484	$	31,971
Nonperforming (nonaccrual)		79		306		385
Total consumer loans	$	2,566	$	29,790	$	32,356

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components, as further described below.

General Component

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following portfolio segments: residential real estate, commercial real estate, commercial, consumer and home equity.

Management uses an average of historical losses based on a time frame appropriate to capture relevant loss data for each portfolio segment. Management deems 36 months to be an appropriate time frame on which to base historical losses for each portfolio segment. This historical loss factor is adjusted for the following qualitative factors for each portfolio segment: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and changes in lending policies, experience, ability, depth of lending management and staff; and national and local economic conditions. Management follows a similar process to estimate its liability for off-balance-sheet commitments to extend credit.

The qualitative factors are determined based on the various risk characteristics of each portfolio segment. Risk characteristics relevant to each portfolio segment are as follows:

Risk Characteristics

Residential real estate loans enable the borrower to purchase or refinance existing homes, most of which serve as the primary residence of the owner. Repayment is dependent on the credit quality of the borrower. Factors attributable to failure of repayment may include a weakened economy and/or unemployment, as well as possible personal considerations. While we anticipate adjustable-rate mortgages will better offset the potential adverse effects of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment.

Commercial real estate loans are secured by commercial real estate and residential investment real estate and generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Risk in commercial real estate and residential investment lending are borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy.

Commercial and residential construction loans are generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction.

Commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Consumer and home equity loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

The Company does not disaggregate its portfolio segments into loan classes.

Allocated Component

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for residential real estate, commercial real estate and commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. The Company recognizes the change in present value attributable to the passage of time as provision for loan losses. Large groups of smaller balance homogenous loans are collectively evaluated for impairment, and the allowance resulting therefrom is reported as the general component, as described above.

Loans considered for impairment include all loan segments of commercial and residential, as well as home equity loans. The segments are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

The Company may periodically agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a TDR. All TDR’s are classified as impaired.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment evaluation, except for home equity loans.

Unallocated Component

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

There were no changes in the Company’s accounting policies or methodology pertaining to the allowance for loan losses during the current period.

The following table presents the allowance for loan losses and select loan information as of March 31, 2012:

	Residential Real Estate			Residential Construction		Commercial Real Estate		Commercial Construction		Commercial			Consumer Loans			Home Equity		Total
Allowance for loan losses	(In Thousands)
Balance as of December 31, 2011	$	549		$	89	$	1,891	$	526	$	1,343		$	47		$	131	$	4,576
Provision (reduction) for loan losses		(104	)		14		26		46		6			15			4		7
Recoveries		-			-		-		-		-			6			-		6
Loans charged off		(69	)		-		-		-		(48	)		(24	)		-		(141	)
Balance as of March 31, 2012	$	376		$	103	$	1,917	$	572	$	1,301		$	44		$	135	$	4,448

Allowance for loan losses ending balance
Collectively evaluated for impairment	$	337		$	88	$	1,856	$	572	$	1,026		$	44		$	122	$	4,045
Individually evaluated for impairment		39			15		61		-		275			-			13		403
	$	376		$	103	$	1,917	$	572	$	1,301		$	44		$	135	$	4,448

Total loans ending balance
Collectively evaluated for impairment	$	120,475		$	5,508	$	173,478	$	35,757	$	77,104		$	2,507		$	29,640	$	444,469
Individually evaluated for impairment		1,934			331		4,335		213		1,458			-			343		8,614
	$	122,409		$	5,839	$	177,813	$	35,970	$	78,562		$	2,507		$	29,983	$	453,083

The following table presents the allowance for loan losses and select loan information as of March 31, 2011:

	Residential Real Estate			Residential Construction			Commercial Real Estate			Commercial Construction		Commercial		Consumer Loans			Home Equity			Total
	(In Thousands)
Allowance for loan losses
Balance as of December 31, 2010	$	513		$	148		$	1,783		$	402	$	1,429	$	28		$	128			4,431
Provision (reduction) for loan losses		(42	)		(6	)		238			14		10		31			(12	)		233
Recoveries		-			-			-			-		-		6			-			6
Loans charged off		(34	)		(13	)		(164	)		-		-		(17	)		-			(228	)
Balance as of March 31, 2011	$	437		$	129		$	1,857		$	416	$	1,439	$	48		$	116		$	4,442


Allowance for loan losses ending balance
Collectively evaluated for impairment	$	356		$	67		$	1,772		$	388	$	1,025	$	48		$	116		$	3,772
Individually evaluated for impairment		81			62			85			28		414		-			-			670
	$	437		$	129		$	1,857		$	416	$	1,439	$	48		$	116		$	4,442

Total loans ending balance
Collectively evaluated for impairment	$	127,207		$	5,107		$	170,397		$	24,126	$	75,918	$	2,860		$	28,979		$	434,594
Individually evaluated for impairment		2,793			219			3,181			1,725		3,510		-			113			11,541
	$	130,000		$	5,326		$	173,578		$	25,851	$	79,428	$	2,860		$	29,092		$	446,135

Impairment

The following table presents a summary of information pertaining to impaired loans by segment as of and for the three months ended March 31, 2012:

	Recorded Investment		Unpaid Balance		Average Recorded Investment		Related Allowance		Interest Income Recognized
	(In Thousands)
Impaired loans without a valuation allowance:
Residential real estate	$	1,564	$	1,564	$	1,674	$	-	$	10
Residential construction		-		-		-		-		-
Commercial real estate		3,990		4,315		3,039		-		58
Commercial construction		213		213		343		-		3
Commercial		589		589		832		-		11
Consumer		-		-		-		-		-
Home equity		308		308		160		-		1
Total	$	6,664	$	6,989	$	6,048	$	-	$	83

Impaired loans with a valuation allowance:
Residential real estate	$	370	$	370	$	551	$	39	$	5
Residential construction		331		331		119		15		-
Commercial real estate		345		345		596		61		8
Commercial construction		-		-		176		-		-
Commercial		869		869		1,686		275		1
Consumer		-		-		-		-		-
Home equity		35		35		21		13		-
Total	$	1,950	$	1,950	$	3,149	$	403	$	14

Total impaired loans:
Residential real estate	$	1,934	$	1,934	$	2,225	$	39	$	15
Residential construction		331		331		119		15		-
Commercial real estate		4,335		4,660		3,635		61		66
Commercial construction		213		213		519		-		3
Commercial		1,458		1,458		2,518		275		12
Consumer		-		-		-		-		-
Home equity		343		343		181		13		1
Total	$	8,614	$	8,939	$	9,197	$	403	$	97

The following table presents a summary of information pertaining to impaired loans by segment as of and for the year ended December 31, 2011:

	Recorded Investment		Unpaid Balance		Average Recorded Investment		Related Allowance		Interest Income Recognized
	(In Thousands)
Impaired loans without a valuation allowance:
Residential real estate	$	1,127	$	1,127	$	1,816	$	-	$	32
Residential construction		-		-		19		-		-
Commercial real estate		3,424		3,749		2,710		-		191
Commercial construction		-		-		600		-		-
Commercial		580		580		791		-		21
Consumer		-		-		-		-		-
Home equity		271		271		139		-		15
Total	$	5,402	$	5,727	$	6,075	$	-	$	259

Impaired loans with a valuation allowance:
Residential real estate	$	1,095	$	1,095	$	688	$	183	$	39
Residential construction		-		-		97		-		-
Commercial real estate		482		482		792		80		25
Commercial construction		216		216		222		22		14
Commercial		1,083		1,083		2,085		317		52
Consumer		-		-		-		-		-
Home equity		35		35		14		13		2
Total	$	2,911	$	2,911	$	3,898	$	615	$	132

Total impaired loans:
Residential real estate	$	2,222	$	2,222	$	2,504	$	183	$	71
Residential construction		-		-		116		-		-
Commercial real estate		3,906		4,231		3,502		80		216
Commercial construction		216		216		822		22		14
Commercial		1,663		1,663		2,876		317		73
Consumer		-		-		-		-		-
Home equity		306		306		153		13		17
Total	$	8,313	$	8,638	$	9,973	$	615	$	391

As of March 31, 2011, the total average recorded investment of impaired loans was $11.7 million. Interest income recognized on impaired loans was $140,000 for the three months ended March 31, 2012.

Delinquency and Nonaccrual

All loan segments past due greater than 30 days are considered delinquent. The Company calculates the number of days past due based on a 30 day month. Management continuously monitors delinquency and nonaccrual levels and trends.

It is the policy of the Company to discontinue the accrual of interest on all loan classes when principal or interest payments are delinquent 90 days or more. The accrual of interest is also discontinued for impaired loans that are delinquent 90 days or more or at management’s discretion.

All interest accrued, but not collected, for all loan classes, including impaired loans that are placed on nonaccrual or charged off, is reversed against interest income. Interest recognized on these loans is limited to interest payments received until qualifying for return to accrual. All loan classes are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following table presents an aging analysis of past due loans as of March 31, 2012:

	31-59 Days Past Due		60-89 Days Past Due		Greater than 90 days		Total Past Due		Current		Total Loans		Nonaccrual Loans
	(In Thousands)
Residential real estate	$	1,302	$	314	$	657	$	2,273	$	120,136	$	122,409	$	1,580
Residential construction		-		-		331		331		5,508		5,839		331
Commercial real estate		981		183		481		1,645		176,168		177,813		481
Commercial construction		-		-		-		-		35,970		35,970		-
Commercial		229		609		737		1,575		76,987		78,562		972
Consumer		63		-		4		67		2,440		2,507		344
Home equity		147		40		306		493		29,490		29,983		34
Total	$	2,722	$	1,146	$	2,516	$	6,384	$	446,699	$	453,083	$	3,742

The following table presents an aging analysis of past due loans as of December 31, 2011:

	31-59 Days Past Due		60-89 Days Past Due		Greater than 90 days		Total Past Due		Current		Total Loans		Nonaccrual Loans
	(In Thousands)
Residential real estate	$	1,693	$	179	$	1,379	$	3,251	$	120,043	$	123,294	$	2,222
Residential construction		-		331		-		331		5,266		5,597		-
Commercial real estate		738		565		672		1,975		172,786		174,761		798
Commercial construction		-		-		-		-		31,706		31,706		-
Commercial		79		298		849		1,226		78,186		79,412		1,306
Consumer		83		27		74		184		2,382		2,566		79
Home equity		189		-		306		495		29,295		29,790		306
Total	$	2,782	$	1,400	$	3,280	$	7,462	$	439,664	$	447,126	$	4,711

Any loan with a payment more than 30 days past due will be considered delinquent.

Troubled Debt Restructurings

The following is a summary of accruing and non-accruing TDR loans modified as TDRs by segment during the three months ended March 31, 2012:

	Number of Modifications		Recorded Investment Pre- Modification		Recorded Investment Post- Modification		Current Balance
			(In Thousands)
Residential real estate		1	$	118	$	127	$	127
Residential construction		-		-		-		-
Commercial real estate		-		-		-		-
Commercial construction		-		-		-		-
Commercial		1		67		67		67
Consumer		1		27		27		27
Home equity		1		38		38		38
Total		4	$	250	$	259	$	259

TDR loans consist of loans where the Company, for economic or legal reasons related to the borrower’s financial difficulties, granted a concession to the borrower that the Company would not otherwise consider. TDRs can take the form of a reduction in the stated interest rate, receipts of assets from a debtor in partial or full satisfaction of a loan, the extension of the maturity date, or the reduction of either the interest or principal. Once a loan has been identified as a TDR, it will continue to be reported as a TDR until the loan is paid in full.

During the three months ending March 31, 2012 there were four TDRs totaling $259,000 entered into with borrowers who were experiencing financial difficulty. The Company reviews TDRs on a loan by loan basis and applies specific reserves to loan balances in excess of collateral values if sufficient borrower cash flow cannot be identified. At March 31, 2012, the specific reserves related to TDRs were $15,000. The modifications granted did not result in a reduction of the recorded investment. TDRs granted in 2012 were primarily the result of concessions to reduce the interest rate or extension of the maturity date. At March 31, 2012, the Company had two troubled debt restructurings totaling $64,000 included in nonperforming loans. The two restructured loans continue to be reported on nonaccrual but have been performing as modified. For the three months ended March 31, 2012, the interest income recorded from the restructured loans amounted to approximately $4,000.

In the normal course of business, the Company may modify a loan for a credit worthy borrower where the modified loan is not considered a TDR. In these cases, the modified terms are consistent with loan terms available to credit worthy borrowers and within normal loan pricing. The modifications to such loans are done according to existing underwriting standards which include review of historical financial statements, including current interim information if available, an analysis of the causes of the borrower’s decline in performance and projections to assess repayment ability going forward.

9. Fair Value Measurements

ASC Topic 820, Fair Value Measurements and Disclosures, provides a framework for measuring fair value under U.S. generally accepted accounting principles (“GAAP”).

The Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the assumptions used to determine fair value:

Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury Notes and U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 – Valuations for assets and liabilities with inputs that are observable either directly or indirectly for substantially the full term or valuations obtained from third party pricing services based on quoted market prices for comparable assets or liabilities. Level 2 also includes assets and liabilities traded in inactive markets.

There were no transfers of assets and liabilities between Level 1 and Level 2 during the three months ended March 31, 2012.

Level 3 – Valuations for assets and liabilities with inputs that are unobservable, which are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

Assets measured at fair value on a recurring basis are summarized below:

	Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	March 31, 2012		(Level 1)		(Level 2)		(Level 3)
Assets (market approach)	(Dollars In Thousands)
Securities available-for-sale
Equity securities by industry type:
Financial	$	626	$	626	$	-	$	-
Total equity securities	$	626	$	626	$	-	$	-

	Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Assets (market approach)	(Dollars In Thousands)
Securities available-for-sale
Equity securities by industry type:
Financial	$	613	$	613	$	-	$	-
Total equity securities	$	613	$	613	$	-	$	-

The Company may be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets:

	Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	March 31, 2012		(Level 1)		(Level 2)		(Level 3)
	(Dollars In Thousands)
Assets
Impaired loans with a valuation allowance, net	$	1,547	$	-	$	1,547	$	-
Other real estate owned		901		-		901		-
Loans held for sale		1,604		-		1,604		-
Mortgage servicing rights		450		-		450		-

	Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
	(Dollars In Thousands)
Assets
Impaired loans with a valuation allowance, net	$	2,296	$	-	$	2,296	$	-
Other real estate owned		913		-		913		-
Loans held for sale		1,635		-		1,635		-
Mortgage servicing rights		360		-		360		-

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Mortgage servicing rights. Mortgage servicing rights represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method. In evaluating the carrying values of the mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. As such, the Company classifies mortgage servicing rights as nonrecurring Level 2.

Loans held for sale. Loans held for sale are recorded at the lower of carrying value or market value. The fair value of mortgage loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies mortgage loans held for sale as nonrecurring Level 2.

Other real estate owned. Real estate acquired through foreclosure is initially recorded at market value. The fair value of other real estate owned is based on property appraisals and an analysis of similar properties currently available. As such, the Company records other real estate owned as nonrecurring Level 2.

Impaired loans. A loan is considered to be impaired when it is probable that all of the principal and interest due under the original underwriting terms of the loan may not be collected. Impairment is measured based on the fair value of the underlying collateral. As such, the Company records impaired loans as nonrecurring Level 2.

A valuation reserve was included in the allowance for loan losses for the above impaired loans of $403,000 and $615,000 as of March 31, 2012 and December 31, 2011, respectively. The amount of impaired loans represents the carrying value, net of the related allowance for loan losses on impaired loans, for which adjustments are based on the appraised value of the collateral, which is based on the market approach of valuation. The market value approach is used to value OREO.

ASC Topic 825, Fair Value Measurements and Disclosures, requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, if the fair values can be reasonably determined. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques using observable inputs when available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Cash and cash equivalents. The carrying amounts of cash equivalents and due from banks approximate their relative fair values.

Investment securities. The fair values of investment securities are estimated by independent providers. In obtaining such valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether the valuations are representative of an exit price in the Company’s principal markets. The Company’s principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominately reflective of bid level pricing in those markets. Fair values are calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. If these considerations had been incorporated into the fair value estimates, the aggregate fair value could have been changed. The carrying values of restricted equity securities approximate fair values.

Loans and loans held for sale. Fair values are estimated for portfolios of loans with similar financial characteristics. The fair values of performing loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest risk inherent in the loan. The estimates of maturity are based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of the current economic and lending conditions, and the effects of the estimated prepayments. Fair values for significant non-performing loans are based on estimated cash flows and are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Management has made estimates of fair value using discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, Management has no basis to determine whether the fair value presented above would be indicative of the value negotiated in an actual sale.

Accrued interest receivable. The fair value estimate of this financial instrument approximates the carrying value as this financial instrument has a short maturity. It is the Company’s policy to stop accruing interest on loans for which it is probable that the interest is not collectable. Therefore, this financial instrument has been adjusted for estimated credit loss.

Deposits. The fair value of deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposits compared to the cost of borrowing funds in the market. If that value were considered, the fair value of the Company’s net assets could increase.

Borrowed funds. The fair value of borrowed funds is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for borrowings of similar remaining maturities.

Accrued interest payable. The fair value estimate approximates the carrying amount as this financial instrument has a short maturity.

Off-balance-sheet instruments. Off-balance-sheet instruments include loan commitments. Fair values for loan commitments have not been presented as the future revenue derived from such financial instruments is not significant.

Limitations. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These values do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on Management’s judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial instruments include the deferred tax asset, premise and equipment, and other real estate owned. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

The carrying amounts and estimated fair values of the Company's financial instruments are as follows:

	March 31, 2012
	Fair Value Measurements Using
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
					Assets		Inputs		Inputs
	Carrying Amount		Total Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars In Thousands)
Financial assets:
Cash and cash equivalents	$	55,574	$	55,574	$	55,574	$	-	$	-
Securities available-for-sale		626		626		626		-		-
Securities held-to-maturity		62,353		68,309		-		68,309		-
FHLB stock		4,277		4,277		-		4,277		-

Residential real estate		122,409		122,118		-		-		122,118
Residential construction		5,839		5,838		-		-		5,838
Commercial real estate		177,813		177,274		-		-		177,274
Commercial construction		35,970		36,273		-		-		36,273
Commercial		78,562		78,677		-		-		78,677
Consumer		2,507		2,537		-		-		2,537
Home equity		29,983		30,137		-		-		30,137
Total loans		453,083		452,854		-		-		452,854

Loans held for sale		1,604		1,604		-		1,604		-
Accrued interest receivable		1,562		1,562		-		1,562		-
Mortgage servicing rights		385		450		-		450		-

Financial liabilities:
Deposits	$	448,617	$	443,105	$	-	$	443,105	$	-
Securities sold under agreements to repurchase		9,883		9,883		-		9,883		-
FHLB long term advances		56,373		58,466		-		58,466		-
Accrued interest payable		167		167		-		167		-

	December 31, 2011
	Carrying Amount		Fair Value
Financial assets:	(Dollars In Thousands)
Cash and cash equivalents	$	6,122	$	6,122
Securities available-for-sale		613		613
Securities held-to-maturity		73,852		80,607
FHLB stock		4,489		4,489
Total loans		443,471		448,781
Loans held for sale		1,635		1,635
Accrued interest receivable		1,527		1,527
Mortgage servicing rights		344		360

Financial liabilities:
Deposits		453,377		454,776
Securities sold under agreements to repurchase		12,340		12,340
FHLB long term advances		59,625		61,540
Accrued interest payable		132		132

10. Common Stock

On September 30, 2011, the Company announced that the Board of Directors authorized a sixth Stock Repurchase Program for the purchase of up to 287,000, or 5%, shares of the Company's common stock outstanding upon the completion of the fifth Stock Repurchase Program. On November 3, 2011, the Company announced that it had completed its fifth Stock Repurchase Program for the purchase of 303,004 shares, at an average price per share of $13.84. During the first quarter of 2012, the Company repurchased 128,589 shares of Company stock, at an average price per share of $14.38. The Company intends to repurchase its shares from time to time at prevailing prices in the open market, in block transactions or in privately negotiated transactions. Repurchases will be made under rule 10b-5(1) repurchase plans. The repurchased shares will be held by the Company as treasury stock and will be available for general corporate purposes. As of March 31, 2012, a total of 154,811 shares were authorized to be repurchased under the current stock repurchase program.

11. Subsequent Events

Subsequent events represent events or transactions occurring after the balance sheet date but before the financial statements are issued or are available to be issued. Financial statements are considered “issued” when they are widely distributed to shareholders and others for general use and reliance in a form and format that complies with GAAP. Financial statements are considered “available to be issued” when they are complete in form and format that complies with GAAP and all approvals necessary for their issuance have been obtained.

The Company is an SEC filer and management has evaluated subsequent events through the date that the financial statements were issued.

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

The following analysis discusses changes in the financial condition and results of operations of the Company at and for the three months ended March 31, 2012 and 2011, and should be read in conjunction with the Company’s Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part I, Item 1 of this document.

Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company include, but are not limited to: changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles and guidelines. Additional factors are discussed in the Company’s 2011 Annual Report on Form 10-K under “Item 1A-Risk Factors” and in “Part II. Item 1A. Risk Factors” of this 10-Q. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Except as required by law, the Company does not undertake – and specifically disclaims any obligation – to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

General

Chicopee Savings Bank is a community-oriented financial institution dedicated to serving the financial services needs of consumers and businesses within its market area. We attract deposits from the general public and use such funds to originate primarily one- to four-family residential real estate loans, commercial real estate loans, commercial loans, multi-family loans, construction loans and consumer loans. At March 31, 2012, we operated out of our main office, lending and operations center, and eight branch offices located in Chicopee, Ludlow, South Hadley, Ware, and West Springfield. All of our offices are located in western Massachusetts.

CRITICAL ACCOUNTING POLICIES

Management’s discussion and analysis of the Company’s financial condition is based on the consolidated financial statements which are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, Management evaluates its estimates, including those related to the allowance for loan losses, other-than-temporary impairment of securities, the valuation of mortgage servicing rights, and the valuation of other real estate owned. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from Management’s estimates and assumptions under different assumptions or conditions. Additional accounting policies are more fully described in Note 1 in the “Notes to Consolidated Financial Statements” presented in our 2011 Annual Report on Form 10-K. A brief description of our current accounting policies involving significant management judgment follows.

Allowance for Loan Losses. Management believes the allowance for loan losses requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is based on Management’s evaluation of the level of the allowance required in relation to the probable losses inherent in the loan portfolio. Management believes the allowance for loan losses is a significant estimate and therefore regularly evaluates it for adequacy by taking into consideration factors such as: levels and historical trends in delinquencies, impaired loans, non-accruing loans, charge-offs and recoveries, and classified assets; trends in the volume and terms of the loans; effects of any change in underwriting policies, procedures, and practices; experience, ability, and depth of management staff; national and local economic trends and conditions; trends and conditions in the industries in which borrowers operate; and effects of changes in credit concentrations. The use of different estimates or assumptions could produce different a provision for loan losses.

Other-Than-Temporary Impairment of Securities. One of the significant estimates related to investment securities is the evaluation of other-than-temporary impairments. The evaluation of securities for other-than- temporary impairment is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition and/or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period of unrealized losses. Securities that are in an unrealized loss position are reviewed at least quarterly to determine if other-than-temporary impairment is present based on certain quantitative and qualitative factors and measures. The primary factors considered in evaluating whether a decline in value of securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity and (f) 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.

Mortgage Servicing Rights. The valuation of mortgage servicing rights is a critical accounting policy which requires significant estimates and assumptions. The Company often sells mortgage loans it originates and retains the ongoing servicing of such loans, receiving a fee for these services, generally 1% of the outstanding balance of the loan per annum. Mortgage servicing rights are recognized when they are acquired through the sale of loans, and are reported in other assets. They are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Management uses an independent firm which specializes in the valuation of mortgage servicing rights to determine the fair value. The Company uses the amortization method for financial reporting. The most important assumption is the anticipated loan prepayment rate, and increases in prepayment speeds result in lower valuations of mortgage servicing rights. Management evaluates for impairment based upon the fair value of the rights, which can vary depending upon current interest rates and prepayment expectations, as compared to amortized cost. The use of different assumptions could produce a different valuation. All of the assumptions are based on standards the Company believes would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources.

Valuation of Other Real Estate Owned (“OREO”). Periodically, we acquire property through foreclosure or acceptance of a deed in lieu-of-foreclosure as OREO. OREO is recorded at fair value less costs to sell. The valuation of this property is accounted for individually based on its net realizable value on the date of acquisition. At the acquisition date, if the net realizable value of the property is less than the book value of the loan, a charge or reduction in the allowance for loan losses is recorded. If the value of the property becomes subsequently impaired, as determined by an appraisal or an evaluation in accordance with our appraisal policy, we will record the decline by a charge against current earnings. Upon acquisition of a property, a current appraisal or broker’s opinion must substantiate market value for the property.

Comparison of Financial Condition at March 31, 2012 and December 31, 2011

Total assets decreased $11.2 million, or 1.8%, from $616.3 million at December 31, 2011 to $605.1 million at March 31, 2012. The decrease in total assets was primarily due to a decrease in investments of $11.5 million, or 15.4%, and a decrease in cash and cash equivalents of $5.5 million, or 9.1%, partially offset by the increase in net loans of $6.1 million, or 1.4%, from $443.5 million at December 31, 2011 to $450.0 million at March 31, 2012.

The Company’s net loan portfolio increased $6.1 million, or 1.4%, during the first quarter of 2012. The significant components of the increase in net loans was an increase of $4.3 million, or 13.4%, in commercial construction loans, and an increase of $3.1 million, or 1.7%, in commercial real estate loans. These increases were partially offset by a decrease of $850,000, or 1.1%, in commercial and industrial loans and a decrease of $885,000, or 0.7%, in residential real estate loans. The $4.3 million, or 13.4%, increase in commercial construction loans was to existing commercial relationships for the expansion of their facilities. Upon completion, the loans will be transferred to the commercial real estate portfolio. The decrease in residential real estate loans was primarily due to prepayments and refinancing activity attributed to the historically low interest rates. 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. In the first quarter of 2012, the Company sold $6.7 million in low coupon residential real estate loans and currently services $83.0 million in loans sold to the secondary market. In order to service our customers, the servicing rights will continue to be retained on all loans written and sold in the secondary market.

The investment securities portfolio, including held-to-maturity and available-for-sale securities, decreased $11.5 million, or 15.4%, to $63.0 million at March 31, 2012 from $74.5 million at December 31, 2011 The decrease in investments was primarily due to $11.0 million, or 40.7%, in U.S. Treasury securities maturities.

Total deposits decreased $4.8 million, or 1.1%, from $453.4 million at December 31, 2011 to $448.6 million at March 31, 2012. Core deposits increased $4.0 million, or 1.7%, from $240.3 million at December 31, 2011 to $244.3 million at March 31, 2012. Demand deposits decreased $5.4 million, or 7.9%, money market accounts decreased $4.9 million, or 5.1%, to $102.5 million, NOW accounts increased $3.0 million, or 11.1%, and savings accounts increased $1.6 million, or 3.3%. The $4.0 million, or 1.7%, increase in core deposits was partially offset by the $8.8 million, or 4.1%, decrease in certificates of deposit to $204.3 million, at March 31, 2012 compared to $213.1 million, at December 31, 2011. The decrease in certificates of deposit was mainly attributed to the strategic run-off of high cost deposits as a result of management’s focus to lower the cost of deposits and allow higher cost, short-term time deposits to mature without renewals.

Stockholders’ equity decreased $1.0 million, or 1.1%, from $90.8 million at December 31, 2011 to $89.7 million at March 31, 2012. The decrease in stockholders’ equity was primarily due to the repurchase of the Company’s stock at a cost of $1.8 million, partially offset by an increase in stock-based compensation of $266,000, or 5.6%, an increase in additional paid in capital of $139,000, or 5.0%, and net income of $397,000. Pursuant to the Company’s Stock Repurchase Programs previously announced, the Company repurchased 128,589 shares of Company stock at an average price of $14.38 per share.

Allowance for Loan Losses

	At or for the Three Months
	Ended March 31,
	2012			2011
	(Dollars In Thousands)

Allowance for loan losses at beginning of year, December 31	$	4,576		$	4,431

Charged-off loans:
Residential real estate		(69	)		(34	)
Construction		-			(13	)
Commercial real estate		-			(164	)
Commercial		(48	)		-
Home equity		-			-
Consumer		(24	)		(17	)
Total charged-off loans		(141	)		(228	)

Recoveries on loans previously charged-off:
Residential real estate		-			-
Construction		-			-
Commercial real estate		-			-
Commercial		-			-
Home equity		-			-
Consumer		6			6
Total recoveries		6			6
Net loan charge-offs		(135	)		(222	)
Provision for loan losses		7			233
Allowance for loan losses, end of period	$	4,448		$	4,442

Ratios:
Net loan charge-offs to total average loans		0.03	%		0.05	%
Allowance for loan losses to total loans (1)		0.98	%		1.00	%
Allowance for loan losses to nonperforming
loans (2)		118.87	%		83.62	%
Recoveries to charge-offs		4.26	%		2.63	%

(1) Total loans includes net loans plus the allowance for loan losses.


(2) Nonperforming loans consist of all loans 90 days or more past due or other loans which have been identified by the Company as presenting uncertainty with respect to the collectability of interest or principal.

Analysis and determination of the allowance for loan losses. The allowance for loan losses is a valuation allowance for probable credit losses inherent in the loan portfolio. Management evaluates the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings. The allowance for loan losses is maintained at an amount that management considers appropriate to cover inherent probable losses in the loan portfolio.

Our methodology for assessing the appropriateness of the allowance for loan losses consists of: (1) a specific allowance on identified problem loans; and (2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Specific allowance required for identified problem loans. We establish an allowance on certain identified problem loans based on such factors as: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency.

General valuation allowance on the remainder of the loan portfolio. We establish a general allowance for loans that are not delinquent to recognize the probable losses associated with lending activities. This general valuation allowance is determined by segregating the loans by loan category and assigning percentages to each category. The percentages are adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors include: levels and historical trends in delinquencies, impaired loans, nonaccrual loans, charge-offs, recoveries, and classified assets; trends in the volume and terms of loans; effects of any change in underwriting, policies, procedures, and practices; experience, ability, and depth of management and staff; national and local economic trends and conditions; trends and conditions in the industries in which borrowers operate; effects of changes in credit concentrations. The applied loss factors are reevaluated quarterly to ensure their relevance in the current economic environment.

We identify loans that may need to be charged off as a loss by reviewing all delinquent loans, classified loans and other loans for which management may have concerns about collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan or a shortfall in the fair value of the collateral if the loan is collateral dependent would result in our allocating a portion of the allowance to the loan that was impaired.

The allowance for loan losses is based on management’s estimate of the amount required to reflect the potential inherent losses in the loan portfolio, based on circumstances and conditions known or anticipated at each reporting date. There are inherent uncertainties with respect to the collectability of the Company’s loans and it is reasonably possible that actual loss experience in the near term may differ from the amounts reflected in this report.

At March 31, 2012, the allowance for loan losses represented 0.98% of total loans and 118.9% of nonperforming loans. The allowance for loan losses decreased $128,000, or 2.8%, from $4.6 million at December 31, 2011 to $4.4 million at March 31, 2012, due to a provision for loan losses of $7,000 offset by net charge-offs of $135,000. The provision for loan losses was $7,000 for the three months ended March 31, 2012 compared to $233,000 for the three months ended March 31, 2011, a decrease of $226,000, or 97.0%. Non-performing loans decreased $1.6 million, or 29.6% from $5.3 million, or 1.19% of total loans at March 31, 2011, to $3.7 million, or 0.83% of total loans at March 31, 2012. Total non-performing assets decreased $1.1 million, or 19.3%, from $5.8 million, or 0.99% of total assets, at March 31, 2011 to $4.6 million, or 0.77% of total assets at March 31, 2012. The allowance for loan losses as a percentage of total loans decreased from 1.0% at March 31, 2011 to 0.98% at March 31, 2012 and the allowance for loan losses as a percentage of non-performing loans increased from 83.6% at March 31, 2011 to 118.9% at March 31, 2012.

Nonperforming Assets

The following table sets forth information regarding nonaccrual loans and, real estate owned, at the dates indicated.

	March 31,			December 31,
	2012			2011
	(Dollars In Thousands)

Nonaccrual loans:
Residential real estate	$	1,580		$	2,222
Construction		331			-
Commercial real estate		481			798
Commercial		972			1,306
Home equity		344			306
Consumer		34			79
Total nonaccrual loans		3,742			4,711
Other real estate owned, net		901			913
Total nonperforming assets	$	4,643		$	5,624
Ratios:
Total nonperforming loans as a
percentage of total loans (1)		0.83	%		1.05	%
Total nonperforming assets as a
percentage of total assets (2)		0.77	%		0.91	%

(1)	Total loans equals net loans plus the allowance for loan losses.

(2)

Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans consist of all loans 90 days or more past due and other loans which have been identified by the Company as presenting uncertainty with respect to the collectability of interest or principal. At March 31, 2012, the Company had two troubled debt restructurings totaling $64,000 included in nonperforming loans. The two restructured loans continue to be reported on nonaccrual but have been performing as modified.

Loans are placed on nonaccrual status either when reasonable doubt exists as to the timely collection of principal and interest or when a loan becomes 90 days past due unless an evaluation clearly indicates that the loan is well-secured and in the process of collection. There were no loans that were over 90 days delinquent and still accruing interest.

As of March 31, 2012, nonperforming loans decreased $1.0 million, or 20.6%, to $3.7 million compared to $4.7 million as of December 31, 2011. The decrease in nonperforming loans is primarily due to the decrease in nonperforming residential real estate loans of $642,000, or 28.9%, a decrease of $317,000, or 39.7%, in nonperforming commercial real estate loans, a decrease of $334,000, or 25.6%, in nonperforming commercial and industrial loans, and a decrease of $45,000, or 57.0%, in nonperforming consumer loans. These decreases were partially offset by an increase of $38,000, or 12.4%, in nonperforming home equity loans, and an increase of $331,000, in nonperforming construction loans. Loans that are less than 90 days past due and were previously on nonaccrual continue to be on nonaccrual status until the borrower can demonstrate their ability to make payments according to their loan terms. The following loan segments were not accruing interest as of March 31, 2012: 16 residential real estate loans with an outstanding balance of $1.6 million, one construction loan with an outstanding balance of $331,000, two commercial real estate loans with an outstanding balance of $481,000, nine commercial loans with an outstanding balance of $972,000, three consumer loans with an outstanding balance of $34,000 and five home equity loan with an outstanding balance of $344,000.

Deposits

The following table sets forth the Company’s deposit accounts at the dates indicated:

	March 31, 2012					December 31, 2011
	Balance		Percent of Total Deposits			Balance		Percent of Total Deposits
	(Dollars In Thousands)

Demand deposits	$	63,378		14.1	%	$	68,799		15.2	%
NOW accounts		29,722		6.6	%		26,747		5.9	%
Savings accounts		48,673		10.8	%		47,122		10.4	%
Money market deposit accounts		102,548		22.9	%		97,606		21.5	%
Total transaction accounts		244,321		54.5	%		240,274		53.0	%
Certificates of deposit		204,296		45.5	%		213,103		47.0	%
Total deposits	$	448,617		100.0	%	$	453,377		100.0	%

Total deposits decreased $4.8 million, or 1.1%, to $448.6 million at March 31, 2012 from $453.4 million at December 31, 2011. Money market accounts increased $4.9 million, or 5.1%, to $102.5 million, regular savings accounts increased $1.6 million, or 3.3%, to $48.7 million, and NOW accounts increased $3.0 million, or 11.1%, to $29.7 million. These increases were offset by a decrease in demand accounts of $5.4 million, or 7.9%, to $63.4 million and a decrease in certificates of deposit of $8.8 million, or 4.1%, to $204.3 million. The decrease in certificates of deposits was mainly attributed to the strategic run-off of high cost accounts as a result of management’s focus to lower the cost of deposits and allow higher cost, short-term time deposits to mature without renewals.

Borrowings

The following sets forth information concerning our borrowings for the periods indicated:

	March 31,			December 31,
	2012			2011
Maximum amount of advances outstanding at any month-end during the period:	( In Thousands)
FHLB Advances	$	58,308		$	70,564
Securities sold under agreements to repurchase		11,620			24,560
Average advances outstanding during the period:
FHLB Advances	$	57,481		$	64,777
Securities sold under agreements to repurchase		10,564			17,554
Weighted average interest rate during the period:
FHLB Advances		2.55	%		2.57	%
Securities sold under agreements to repurchase		0.19	%		0.21	%
Balance outstanding at end of period:				��
FHLB Advances	$	56,373		$	59,265
Securities sold under agreements to repurchase		9,883			12,340
Weighted average interest rate at end of period:
FHLB Advances		2.54	%		2.51	%
Securities sold under agreements to repurchase		0.18	%		0.18	%

We utilize borrowings from a variety of sources to supplement our supply of funds for loans and investments. FHLB advances decreased $2.9 million, or 4.9%, from $59.3 million at December 31, 2011 to $56.4 million at March 31, 2012 due to payments on long-term advances of $2.3 million. Securities sold under agreements to repurchase decreased $2.5 million, or 19.9%, primarily due to fluctuations in the balances of these accounts.

Comparison of Operating Results for the Three Months Ended March 31, 2012 and 2011

General

The Company reported net income for the three months ended March 31, 2012 of $397,000, or $0.08 earnings per share, compared to net income of $43,000, or $0.01 earnings per share, for the same period in 2011. The increase in net income for the three months ended March 31, 2012 compared to the three months ended March 31, 2011, was primarily due to an increase in net interest income of $236,000, or 5.4%, a decrease in the provision for loan losses of $226,000, or 97.0%, and an increase in non-interest income of $20,000, or 3.0%. These increases were partially offset by an increase in non-interest expense of $84,000, or 1.8%, and an increase in income tax expense of $44,000 from $5,000 at March 31, 2011 to $49,000 at March 31, 2012.

Analysis of Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends on the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.

The following table sets forth average balances, interest income and expense and yields earned or rates paid on the major categories of assets and liabilities for the periods indicated. The average yields and costs are derived by dividing interest income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively. The yields and costs are annualized. Average balances are derived from average daily balances. The yields and costs include fees which are considered adjustments to yields. Loan interest and yield data does not include any accrued interest from non-accruing loans.

	For the Three Months Ended March 31,
	2012								2011
						Average								Average
	Average					Yield/			Average					Yield/
	Balance		Interest			Rate			Balance		Interest			Rate
	(Dollars in Thousands)
Interest-earning assets:
Investments (1)	$	74,524	$	666			3.59	%	$	71,537	$	561			3.18	%
Loans:
Residential real estate loans		149,946		1,832			4.91	%		155,346		2,008			5.24	%
Commercial real estate loans		189,733		2,657			5.63	%		176,470		2,565			5.89	%
Consumer loans		32,453		340			4.21	%		32,561		375			4.67	%
Commercial loans		77,559		856			4.44	%		77,586		861			4.50	%
Loans, net (2)		449,691		5,685			5.08	%		441,963		5,809			5.33	%
Other		40,534		19			0.19	%		24,521		12			0.20	%
Total interest-earning assets		564,749		6,370			4.54	%		538,021		6,382			4.81	%
Noninterest-earning assets		38,756								35,447
Total assets	$	603,505							$	573,468

Interest-bearing liabilities:
Deposits:
Money market accounts	$	93,079	$	77			0.33	%	$	67,272	$	54			0.33	%
Savings accounts (3)		47,871		13			0.11	%		45,594		12			0.11	%
NOW accounts		27,387		59			0.87	%		14,975		7			0.19	%
Certificates of deposit		210,395		997			1.91	%		217,739		1,301			2.42	%
Total interest-bearing deposits		378,732		1,146			1.22	%		345,580		1,374			1.61	%
FHLB advances		57,481		365			2.55	%		69,522		438			2.56	%
Securities sold under agreement to
repurchase		10,564		5			0.19	%		17,977		10			0.23	%
Total interest-bearing borrowings		68,045		370			2.19	%		87,499		448			2.08	%
Total interest-bearing liabilities		446,777		1,516			1.36	%		433,079		1,822			1.71	%
Demand deposits		65,727								47,806
Other noninterest-bearing liabilities		418								211
Total liabilities		512,922								481,096
Total stockholders' equity		90,583								92,372
Total liabilities and stockholders' equity	$	603,505							$	573,468

Net interest-earning assets	$	117,972							$	104,942
Tax equivalent net interest income/
interest rate spread (4)				4,854			3.18	%				4,560			3.10	%
Tax equivalent net interest margin
(net interest income as a percentage of
interest-earning assets)							3.46	%							3.44	%
Ratio of interest-earning assets
to interest-bearing liabilities							126.41	%							124.23	%
Less: tax equivalent adjustment (1)				(252	)							(194	)
Net interest income as reported on income statement			$	4,602							$	4,366

(1)	Municipal securities income and net interest income are presented on a tax equivalent basis using a tax rate of 41%. The tax
	equivalent adjustment is deducted from the tax equivalent net interest income to agree to the amount reported on the statement of operations. See 'Explanation of Use of Non-GAAP Financial Measurements'.
(2)	Loans, net excludes loans held for sale and the allowance for loan losses and includes nonperforming loans.
(3)	Savings accounts include mortgagors' escrow deposits.
(4)	Tax equivalent interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's tax equivalent interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

	Three Months Ended March 31,
	2012 compared to 2011
	Increase (Decrease)
	Due to
	Volume			Rate			Net
	(Dollars in Thousands)

Interest-earning assets:
Investment securities (1)	$	26		$	79		$	105
Loans:
Residential real estate loans		(63	)		(113	)		(176	)
Commercial real estate loans		203			(111	)		92
Consumer loans		(1	)		(34	)		(35	)
Commercial loans		-			(5	)		(5	)
Total loans		139			(263	)		(124	)
Other		8			(1	)		7
Total interest-earning assets (2)	$	173		$	(185	)	$	(12	)

Interest-bearing liabilities:
Deposits:
Money market accounts	$	22		$	1		$	23
Savings accounts (2)		1			-			1
NOW accounts		10			42			52
Certificates of deposit		(41	)		(263	)		(304	)
Total interest-bearing deposits		(8	)		(220	)		(228	)
FHLB advances		(73	)		-			(73	)
Securities sold under agreement
to repurchase		(3	)		(2	)		(5	)
Total interest-bearing borrowings		(76	)		(2	)		(78	)
Total interest-bearing liabilities		(84	)		(222	)		(306	)
Increase in net interest income (3)	$	257		$	37		$	294

(1) The changes in state and municipal income are reflected on a tax equivalent basis using a tax rate of 41%.

(2) Includes interest on mortgagors’ escrow deposits.

(3) The changes in interest income and net interest income are reflected on a tax equivalent basis and thus do not correspond to the statement of operations.

Net interest income, on a tax equivalent basis, increased $294,000, or 6.4%, to $4.9 million for the three months ended March 31, 2012, primarily due to the decrease in the cost of interest bearing liabilities outweighing the decrease in the yield on average interesting-earning assets. Net interest margin, on a tax equivalent basis, increased 2 basis points from 3.44% for the three months ended March 31, 2011 to 3.46% for the three months ended March 31, 2012.

Interest and dividend income, on a tax equivalent basis, decreased $12,000, or 0.2%, to $6.4 million for the three months ended March 31, 2012. Average interest-earning assets increased $26.7 million, or 5.0%, from $538.0 million at March 31, 2011 to $564.7 million at March 31, 2012. Average loans increased $7.7 million, or 1.8%, primarily due to strong commercial originations. Average investment securities increased $3.0 million, or 4.2%, for the period and tax equivalent investment securities interest income increased $105,000, or 18.7%, primarily due to the increase in tax-exempt industrial revenue bond income. The yield on average interest-earning assets decreased 27 basis points to 4.54% for the three months ended March 31, 2012, primarily as a result of lower market rates of interest.

Total interest expense decreased $306,000, or 16.8%, to $1.5 million for the three months ended March 31, 2012 from $1.8 million for the three months ended March 31, 2011, due to lowering deposit costs by $228,000, or 16.6% and a decrease in cost of borrowings of $78,000 or 17.4%. Average interest-bearing liabilities increased $13.7 million, or 3.2% to $446.8 million for the three months ended March 31, 2012 from $433.1 million for the three months ended March 31, 2011. Rates paid on average interest-bearing liabilities declined 35 basis points from 1.71% for the three months ended March 31, 2011 to 1.36% for the three months ended March 31, 2012. The lower interest rate environment led to a decrease in rates paid for certificates of deposit of 51 basis points. Money market rates remained unchanged at 0.33% for March 31, 2012, and 2011, respectively.

Provision for Loan Losses

The provision for loan losses was $7,000 for the three months ended March 31, 2012 compared to $233,000 for the three months ended March 31, 2011, a decrease of $226,000, or 97.0%. Non-performing loans decreased $1.6 million, or 30.2% from $5.3 million, or 1.19% of total loans at March 31, 2011, to $3.7 million, or 0.83% of total loans at March 31, 2012. Total non-performing assets decreased $1.2 million, or 19.3%, from $5.8 million, or 0.99% of total assets, at March 31, 2011 to $4.6 million, or 0.77% of total assets at March 31, 2012. The allowance for loan losses as a percentage of total loans decreased from 1.0% at March 31, 2011 to 0.98% at March 31, 2012 and the allowance for loan losses as a percentage of non-performing loans increased from 83.6% at March 31, 2011 to 118.9% at March 31, 2012.

Non-Interest Income

Non-interest income for the three months ended March 31, 2012, increased $20,000, or 3.0%, from $661,000 at March 31, 2011 to $681,000 at March 31, 2012. Income from customer service fees and commissions increased $74,000, or 15.9%, partially offset by a $45,000, or 71.4%, increase in net losses on OREO.

Non-Interest Expenses

Non-interest expense increased $84,000, or 1.8%, for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. This increase was primarily due to the increase in furniture and equipment of $29,000, or 11.6%, increase in data processing of $21,000, or 7.2%, increase in professional fees of $23,000, or 16.2%, increase in advertising expense of $23,000, or 18.3%, increase in stationery, supplies and postage of $25,000, or 30.1%, and an increase of $91,000, or 19.6%, in other non-interest expense. These increases were partially offset by a decrease of $68,000, or 2.4%, in salaries and benefits, a decrease of $52,000, or 11.6%, in occupancy expense and an $8,000, or 7.8%, decrease in FDIC insurance expense. The $68,000, or 2.4%, decrease in salaries and benefits from the previous year was due to the retirement of one of our senior officers on March 31, 2011.

Explanation of Use of Non-GAAP Financial Measurements

We believe that it is common practice in the banking industry to present interest income and related yield information on tax exempt securities on a tax-equivalent basis and that such information is useful to investors because it facilitates comparisons among financial institutions. However, the adjustment of interest income and yields on tax exempt securities to a tax equivalent amount may be considered to include financial information that is not in compliance with U.S. generally accepted accounting principles (“GAAP”). A reconciliation from GAAP to non-GAAP is provided below.

	Three Months Ended
	March 31,
	2012					2011
	(Dollars in Thousands)
			Average					Average
	Interest		Yield			Interest		Yield


Investment securities (no tax adjustment)	$	414		2.23	%	$	367		2.08	%
Tax equivalent adjustment (1)		252					194
Investment securities (tax equivalent basis)	$	666		3.59	%	$	561		3.18	%

Net interest income (no tax adjustment)	$	4,602				$	4,366
Tax equivalent adjustment (1)		252					194
Net interest income (tax equivalent basis)	$	4,854				$	4,560

Interest rate spread (no tax adjustment)				3.00	%				2.95	%
Net interest margin (no tax adjustment)				3.28	%				3.29	%

(1)	The tax equivalent adjustment is based on a combined federal and state tax rate of 41% for all periods presented.

Liquidity Management

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities, borrowings from the FHLB and securities sold under agreements to repurchase. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Prepayment rates can have a significant impact on interest income. Because of the large percentage of loans we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that, in turn, affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. Our asset sensitivity would be reduced if prepayments slow and vice versa. While we believe these assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual loan repayment activity. Our short-term securities are primarily consisted of U.S. Treasury and government agencies, which we use primarily for the collateral purposes for sweep accounts maintained by commercial customers. The balances of these securities fluctuate as the aggregate balance of our sweep accounts fluctuate.

We regularly adjust our investments in liquid assets based upon our assessment of: (1) expected loan demands; (2) expected deposit flows; (3) yields available on interest-earning deposits and securities; and (4) the objectives of our asset/liability management policy.

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2012, total cash and cash equivalents totaled $55.6 million, net of reserve requirements. Securities classified as available-for-sale whose market value exceeds our cost, which provides additional sources of liquidity, totaled $372,000 at March 31, 2012. Other liquid assets as of March 31, 2012 included: U.S. Treasury securities and collateralized mortgage, net of pledged securities, totaling $2.8 million, and certificates of deposit of $13.2 million. At March 31, 2012, the Company had an over collateralized securities pledging position of $5.0 million.

In addition, at March 31, 2012, we had the ability to borrow a total of approximately $85.1 million from the FHLB. On March 31, 2012, we had $56.4 million of borrowings outstanding. We have the ability to increase our borrowing capacity with the FHLB by pledging additional loans. We have received approval from the Federal Reserve Bank to access it’s discount window. The Company’s unused borrowing capacity with the Federal Reserve Bank was approximately $47.7 million at March 31, 2012. In addition, we had the following available lines of credit to use as contingency funding sources: $3.0 million with Bankers Bank, N.E. and available Fed Funds to purchase of $3.0 million.

Certificates of deposit due within one year of March 31, 2012 totaled $97.3 million, or 47.6%, of our certificates of deposit. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2013. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Capital Management

We are subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2012, the Company exceeded all of its regulatory capital requirements. The Company is considered “well capitalized” under regulatory guidelines. The Company is subject to the Federal Reserve Board’s capital adequacy guidelines for bank holding companies (on a consolidated basis) substantially similar to those of the FDIC. The Company exceeded these requirements at March 31, 2012.

The Company’s and Bank’s actual capital amounts and ratios as of March 31, 2012 and December 31, 2011 are presented in the following table:

											Minimum
											to be Well
											Capitalized Under
						Minimum for Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars In Thousands)
As of March 31, 2012

Total Capital to Risk Weighted Assets
Company	$	92,913		19.5	%	$	38,134		8.0	%		N/A		N/A
Bank	$	82,415		17.3	%	$	38,061		8.0	%	$	47,576		10.0	%

Tier 1 Capital to Risk Weighted Assets
Company	$	88,461		18.6	%	$	19,067		4.0	%		N/A		N/A
Bank	$	77,963		16.4	%	$	19,030		4.0	%	$	28,546		6.0	%

Tier 1 Capital to Average Assets
Company	$	88,461		14.7	%	$	24,089		4.0	%		N/A		N/A
Bank	$	77,963		13.0	%	$	24,050		4.0	%	$	30,062		5.0	%

											Minimum
											to be Well
											Capitalized Under
						Minimum for Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars In Thousands)

As of December 31, 2011:

Total Capital to Risk Weighted Assets
Company	$	94,009		19.6	%	$	38,362		8.0	%		N/A		N/A
Bank	$	81,606		17.0	%	$	38,291		8.0	%	$	47,864		10.0	%

Tier 1 Capital to Risk Weighted Assets
Company	$	89,433		18.7	%	$	19,181		4.0	%		N/A		N/A
Bank	$	77,030		16.1	%	$	19,146		4.0	%	$	28,718		6.0	%

Tier 1 Capital to Average Assets
Company	$	89,433		14.8	%	$	24,148		4.0	%		N/A		N/A
Bank	$	77,030		12.8	%	$	24,096		4.0	%	$	30,120		5.0	%

Restrictions on Dividends

Dividends from Chicopee Bancorp, Inc. may depend, in part, upon receipt of dividends from the Bank. The subsidiary may pay dividends to its parent out of so much of its net income as the Bank’s directors deem appropriate, subject to the limitation that the total of all dividends declared by the Bank in any calendar year may not exceed the total of its net income of that year combined with its retained net income of the preceding two years and subject to minimum regulatory capital requirements. The approval of the Massachusetts Commissioner of Banks is required if the total of all dividends declared in any calendar year exceeds the total of its net profits for that year combined with its retained net profits of the preceding two years. Net profits for this purpose means the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets after deducting from the total thereof all current operating expenses, actual losses, accrued dividends on preferred stock, if any and all federal and state taxes.

There were no dividends paid for the three months ended March 31, 2012.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, letters of credit and lines of credit. We currently have no plans to engage in hedging activities in the future.

Credit-Related Financial Instruments

The Company is a party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and various financial instruments with off-balance-sheet risk. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.

The following financial instruments were outstanding whose contract amounts represent credit risk:

	March 31,		December 31,
	2012		2011

Commitments to grant loans	$	25,109	$	16,957
Unfunded commitments for construction loans		15,900		18,665
Unfunded commitments under lines of credit		71,773		72,466
Standby letters of credit		1,252		1,139

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash, securities, accounts receivable, inventory, property, plant and equipment, and real estate.

Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized, usually do not contain a specified maturity date, and may not be drawn upon to the total extent to which the Company is committed.

“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, requires certain disclosures and liability recognition for the fair value at issuance of guarantees that fall within its scope. The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. The Company has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled $1.3 million at March 31, 2012 and $1.1 million at December 31, 2011, respectively, and represent the maximum potential future payments the Company could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. The Company’s policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral. The fair value of the Company’s standby letters of credit at March 31, 2012 and December 31, 2011 was insignificant.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Qualitative Aspects of Market Risk

We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk emphasizes: adjusting the maturities of borrowings; adjusting the investment portfolio mix and duration; increasing our focus on shorter-term, adjustable-rate commercial and multi-family lending; selling fixed-rate mortgage loans; and periodically selling available-for-sale securities. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments.

We have an Asset/Liability Committee, which includes members of management, to communicate, coordinate and control all aspects involving asset/liability management. The committee reports to the Board of Directors of the Bank quarterly and establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

Quantitative Aspects of Market Risk

We analyze our interest rate sensitivity to manage the risk associated with interest rate movements through the use of interest income simulation. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive.” An asset or liability is said to be “interest rate sensitive” within a specific time period if it will mature or reprice within that time period.

Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income. Interest income simulations are completed quarterly and presented to the Asset/Liability Committee and Board of Directors of the Bank. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. The numerous assumptions used in the simulation process are reviewed by the Asset/Liability Committee and the Board of Directors of the Bank on a quarterly basis. Changes to these assumptions can significantly affect the results of the simulation. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.

Simulation analysis is only an estimate of our interest rate risk exposure at a particular point in time. We continually review the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.

The table below sets forth an approximation of our exposure as a percentage of estimated net interest income for the next 12 month period using interest income simulation. The simulation uses projected repricing of assets and liabilities at March 31, 2012 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on interest income simulation. Because of the large percentage of loans we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that, in turn, affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. Our asset sensitivity would be reduced if prepayments slow and vice versa. While we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate future mortgage-backed security and loan repayment activity.

The following table reflects changes in estimated net interest income for the Company at March 31, 2012 through March 31, 2013:

Changes in Interest Rates (Basis Points)	Percentage Change in Estimated Net Interest Income over Twelve Months
Up 500 - 24 Months	7.2%
Up 400 - 24 Months	5.2%
Up 300 - 12 Months	4.3%
Up 200 - 12 Months	18.0%
Up 100 - 12 Months	3.4%
Base	0.0%
Down 100 Basis Points	-1.5%

As indicted in the table above the results of a 100 basis and 200 basis point instantaneous increases in interest rates is estimated to increase net interest income by 3.4% and 18.0% over a 12-month time horizon, when compared to a flat scenario. A 300 basis point gradual increase in interest rates over a 12-month time horizon is estimated to increase net interest income by 4.3%. A 400 and 500 basis point increase in market interest rates over a 24-month time horizon is estimated to increase net interest income by 5.2% and 7.2% in the first twelve months.

Item 4. Controls and Procedures.

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the financial condition and results of operations of the Company.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition or future results. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. At March 31, 2012, the risk factors for the Company have not changed materially from those reported in our 2011 Annual Report on Form 10-K. However, the risks described in our 2011 Annual Report on Form 10-K are not the only risks that we face.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a)	Unregistered Sales of Equity Securities – Not applicable

(b)	Use of Proceeds – Not applicable

(c)	Repurchase of Our Equity Securities –

On September 30, 2011, the Company announced that the Board of Directors authorized a sixth Stock Repurchase Program for the purchase of up to 287,000, or 5%, shares of the Company's common stock outstanding upon the completion of the fifth Stock Repurchase Program. On November 3, 2011, the Company announced that it had completed its fifth Stock Repurchase Program for the purchase of 303,004 shares, at an average price per share of $13.84. During the first quarter of 2012, the Company repurchased 128,589 shares of Company stock, at an average price per share of $14.38. The Company intends to repurchase its shares from time to time at prevailing prices in the open market, in block transactions or in privately negotiated transactions. Repurchases will be made under rule 10b-5(1) repurchase plans. The repurchased shares will be held by the Company as treasury stock and will be available for general corporate purposes. Repurchases made in the first quarter of 2012 were as follows:

(c)

(d)

Total Number of

Maximum Number

(or Approximate

(a)

(b)

(or Units)

Dollar Value) of

Total Number

Average Price

Purchased as Part

Shares (or Units) that

of Shares

Paid Per

of Publicly

May Yet Be

(or Units)

Announced Plans

Purchased Under the

Period

Purchased

(or Unit)

or Programs

Plans or Programs

January 1-31, 2012

46,100

14.21

49,700

237,300

February 1-29, 2012

80,289

14.49

129,989

157,011

March 1-31, 2012

2,200

13.97

132,189

154,811

Total

128,589

14.38

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

3.1	Articles of Incorporation of Chicopee Bancorp, Inc. (1)
3.2	Bylaws of Chicopee Bancorp, Inc. (2)
4.0	Stock Certificate of Chicopee Bancorp, Inc. (1)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0	Section 1350 Certification
101.0	The following financial information from Chicopee Bancorp Inc.’s Quarterly Report on Form 10-Q for the three months ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, (ii) the Consolidated Statements of Earnings for each of the three month periods ended March 31, 2012 and 2011, (iii) the Consolidated Statement of Other Comprehensive Income for each of the three month periods ended March 31, 2012 and 2011, (iv) the Consolidated Statements of Cash Flows for each of the three month period ended March 31, 2012 and 2011, (v) the Consolidated Statements of Changes in Stockholders’ Equity for the three month period ended March 31, 2012 and 2011, and (vi) the Notes to Consolidated Financial Statements, tagged in summary and detail. (3)

(1)	Incorporated herein by reference to the Exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-132512), as amended, initially filed with the Securities and Exchange Commission on March 17, 2006.

(2)	Incorporated herein by reference to Exhibit 3.2 to the Company’s 8-K (File No. 000-51996) filed with the Securities and Exchange Commission on August 1, 2007.

(3)	This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CHICOPEE BANCORP, INC.


Dated: May 9, 2012	By:	/s/ William J. Wagner
		William J. Wagner
		Chairman of the Board, President and
		Chief Executive Officer
		(principal executive officer)

Dated: May 9, 2012	By:	/s/ Guida R. Sajdak
		Guida R. Sajdak
		Senior Vice President,
		Chief Financial Officer and Treasurer
		(principal financial and chief accounting officer)

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Chicopee Bancorp Inactive 10-Q2012 Q1 Quarterly report

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