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EX-32 - EXHIBIT 32 - Georgetown Bancorp, Inc.ex32.htm
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EX-31.2 - EXHIBIT 31.2 - Georgetown Bancorp, Inc.ex31-2.htm





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q
     
(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
     
 
For the quarterly period ended March 31, 2011
 
     
 
OR
 
     
o 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: 0-51102

GEORGETOWN BANCORP, INC.
(Exact name of registrant as specified in its charter)

Federal
 
20-2107839
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
2 East Main Street, Georgetown, MA
 
01833
(Address of principal executive office)
 
(Zip Code)

(978) 352-8600
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 o

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 o  No o

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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date:  Common Stock, $0.10 par value, 2,680,455 shares outstanding as of May 9, 2011.


 
 

 

Form 10-Q
GEORGETOWN BANCORP, INC.
Table of Contents

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3
     
 
4
     
 
6
     
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28
     
28
     
 
     
29
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30






PART I—FINANCIAL INFORMATION
 
ITEM 1. Financial Statements

 
GEORGETOWN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
-------------------------------------------------------------------------------------
(unaudited)
 
ASSETS
 
 
   
At
   
At
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(In thousands)
 
             
Cash and due from banks
  $ 2,134     $ 1,490  
Short-term investments
    1,160       1,808  
               Total cash and cash equivalents
    3,294       3,298  
                 
Securities available for sale, at fair value
    6,253       7,219  
Securities held to maturity, at amortized cost
    2,938       3,202  
Federal Home Loan Bank stock, at cost
    3,111       3,111  
Loans held for sale
    -       685  
Loans, net of allowance for loan losses of $1,719,000 at
               
    March 31, 2011 and $1,651,000 at December 31, 2010
    181,597       178,524  
Premises and equipment, net
    3,905       3,961  
Accrued interest receivable
    814       777  
Bank-owned life insurance
    2,621       2,597  
Prepaid FDIC insurance
    471       514  
Other assets
    1,187       1,127  
                 
               Total assets
  $ 206,191     $ 205,015  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                 
Deposits
  $ 150,197     $ 151,463  
Securities sold under agreements to repurchase
    380       491  
Short-term Federal Home Loan Bank advances
    6,800       3,500  
Long-term Federal Home Loan Bank advances
    27,167       28,182  
Mortgagors' escrow accounts
    597       598  
Accrued expenses and other liabilities
    1,547       1,612  
               Total liabilities
    186,688       185,846  
                 
Commitments and contingencies
               
 
               
Stockholders' equity:
               
Preferred stock, $0.10 par value per share:  1,000,000
               
shares authorized; none outstanding
    -       -  
Common stock, $0.10 par value per share: 10,000,000
               
shares authorized; 2,777,250 shares issued
    278       278  
Additional paid-in capital
    11,495       11,424  
Retained earnings
    9,331       8,999  
Accumulated other comprehensive income
    96       120  
Unearned compensation - ESOP (34,741 and 36,789 shares unallocated
               
    at March 31, 2011 and December 31, 2010, respectively)
    (348 )     (368 )
Unearned compensation - Restricted stock  (36,552 and 24,000 shares non-vested
               
   at March 31, 2011 and December 31, 2010, respectively)
    (213 )     (100 )
Treasury stock, at cost (133,347 and 138,863 shares at March 31, 2011
               
   and December 31, 2010, respectively)
    (1,136 )     (1,184 )
               Total stockholders' equity
    19,503       19,169  
                 
               Total liabilities and stockholders' equity
  $ 206,191     $ 205,015  
                 
See accompanying notes to consolidated financial statements.
               
                 
 



GEORGETOWN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------
(unaudited)
 
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
   
(In thousands, except share data)
 
             
Interest and dividend income:
           
    Loans, including fees
  $ 2,698     $ 2,537  
    Securities
    99       157  
               Total interest and dividend income
    2,797       2,694  
                 
Interest expense:
               
    Deposits
    417       512  
    Short-term Federal Home Loan Bank advances
    5       6  
    Long-term Federal Home Loan Bank advances
    247       345  
    Securities sold under agreements to repurchase
    1       1  
               Total interest expense
    670       864  
                 
Net interest income
    2,127       1,830  
Provision for loan losses
    64       89  
Net interest income, after provision for loan losses
    2,063       1,741  
                 
Non-interest income:
               
    Customer service fees
    134       158  
    Mortgage banking income, net
    67       126  
    Income from bank-owned life insurance
    24       25  
    Other
    1       1  
               Total non-interest income
    226       310  
                 
Non-interest expenses:
               
    Salaries and employee benefits
    1,005       872  
    Occupancy and equipment expenses
    203       205  
    Data processing expenses
    109       108  
    Professional fees
    105       92  
    Advertising expenses
    87       82  
    FDIC insurance
    47       57  
    Other general and administrative expenses
    203       183  
               Total non-interest expenses
    1,759       1,599  
                 
Income before income taxes
    530       452  
                 
Income tax provision
    198       166  
                 
Net income
  $ 332     $ 286  
                 
Weighted-average number of common shares outstanding:
               
   Basic and diluted
    2,636,792       2,604,389  
                 
Earnings per share:
               
   Basic and diluted
  $ 0.13     $ 0.11  
                 
See accompanying notes to consolidated financial statements.
         
                 

 

 
GEORGETOWN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------
(unaudited)
 
 
                     
Accumulated
                         
         
Additional
         
Other
   
Unearned
   
Unearned
             
   
Common
   
Paid-in
   
Retained
   
Comprehensive
   
Compensation-
   
Compensation-
   
Treasury
       
   
Stock
   
Capital
   
Earnings
   
Income (Loss)
   
ESOP
   
Restricted Stock
   
Stock
   
Total
 
   
(In thousands)
 
                                                 
Balance at December 31, 2009
  $ 278     $ 11,329     $ 7,546     $ 127     $ (450 )     -     $ (1,184 )   $ 17,646  
                                                                 
Comprehensive income:
                                                               
    Net income
    -       -       286       -       -       -       -       286  
    Net unrealized gain on securities
                                                               
        available for sale, net of related
                                                               
        tax effects of $14,000
    -       -       -       25       -       -       -       25  
                 Total comprehensive income
                                                            311  
                                                                 
Common stock held by ESOP allocated or
                                                               
committed to be allocated (2,048 shares)
    -       (10 )     -       -       21       -       -       11  
                                                                 
Restricted stock granted in connection with
                                                               
equity incentive plan (25,000 shares)
    -       130       -       -       -       (130 )     -       -  
                                                                 
Share based compensation - options
    -       1       -       -       -       -       -       1  
Share based compensation - restricted stock
    -       -       -       -       -       3       -       3  
                                                                 
Balance at March 31, 2010
  $ 278     $ 11,450     $ 7,832     $ 152     $ (429 )   $ (127 )   $ (1,184 )   $ 17,972  
                                                                 
Balance at December 31, 2010
  $ 278     $ 11,424     $ 8,999     $ 120     $ (368 )   $ (100 )   $ (1,184 )   $ 19,169  
                                                                 
Comprehensive income:
                                                               
    Net income
    -       -       332       -       -       -       -       332  
    Net unrealized loss on securities
                                                               
        available for sale, net of related
                                                               
        tax effects of $14,000
    -       -       -       (24 )     -       -       -       (24 )
                 Total comprehensive income
                                                            308  
                                                                 
Common stock held by ESOP allocated or
                                                               
committed to be allocated (2,048 shares)
    -       (6 )     -       -       20       -       -       14  
                                                                 
Restricted stock granted in connection with
                                                               
equity incentive plan (25,998 shares)
    -       169       -       -       -       (169 )     -       -  
                                                                 
Forfeiture of restricted stock (7,650 shares)
    -       (46 )     -       -       -       46       -       -  
                                                                 
Reissuance of treasury stock (5,796 shares)
    -       (50 )     -       -       -       -       50       -  
                                                                 
Return of treasury stock (280 shares)
    -       -       -       -       -       -       (2 )     (2 )
                                                                 
Share based compensation - options
    -       4       -       -       -       -       -       4  
Share based compensation - restricted stock
    -       -       -       -       -       10       -       10  
                                                                 
Balance at March 31, 2011
  $ 278     $ 11,495     $ 9,331     $ 96     $ (348 )   $ (213 )   $ (1,136 )   $ 19,503  
                                                                 
See accompanying notes to consolidated financial statements.
                                                         
 
 



GEORGETOWN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------
(unaudited)
 
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
   
(In thousands)
 
Cash flows from operating activities:
           
Net income
  $ 332     $ 286  
    Adjustments to reconcile net income to net cash
               
       provided (used) by operating activities:
               
            Provision for loan losses
    64       89  
            Accretion of securities, net
    (3 )     (6 )
            Amortization of deferred loan fees and costs, net
    (11 )     (3 )
            Depreciation and amortization expense
    64       90  
            Increase in accrued interest receivable
    (37 )     (39 )
            Income from bank-owned life insurance
    (24 )     (25 )
            Stock-based compensation expense
    28       15  
            Loans originated for sale
    (2,024 )     (4,070 )
            Principal balance of loans sold
    2,709       2,941  
            Net gain on other secondary market activities
    -       (70 )
            Prepaid FDIC insurance
    43       51  
            Net change in other assets and liabilities
    (111 )     365  
                  Net cash provided (used) by operating activities
    1,030       (376 )
                 
Cash flows from investing activities:
               
    Activity in securities available for sale:
               
            Maturities, prepayments and calls
    929       2,029  
            Purchases
    -       (1,000 )
    Maturities, prepayments and calls
               
         of securities held to maturity
    266       293  
    Loan originations, net
    (3,126 )     (5,325 )
    Purchase of premises and equipment
    (8 )     (18 )
                        Net cash used by investing activities
    (1,939 )     (4,021 )
                 
                 
(continued)
 
                 
                 
See accompanying notes to consolidated financial statements.
               
                 


GEORGETOWN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------
(unaudited)
(concluded)
 
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
   
(In thousands)
 
Cash flows from financing activities:
           
    Net change in deposits
    (1,266 )     2,730  
    Net change in securities sold under agreements
               
        to repurchase
    (111 )     (22 )
    Net change in Federal Home Loan Bank advances with
               
        maturities of  three months or less
    3,300       6,650  
    Repayments of Federal Home Loan Bank advances
               
        with maturities greater than three months
    (1,015 )     (3,014 )
    Net change in mortgagors' escrow accounts
    (1 )     84  
    Return of vested restricted shares to treasury stock
    (2 )     -  
                  Net cash provided by financing activities
    905       6,428  
 
               
Net change in cash and cash equivalents
    (4 )     2,031  
                 
Cash and cash equivalents at beginning of period
    3,298       3,645  
                 
Cash and cash equivalents at end of period
  $ 3,294     $ 5,676  
                 
Supplementary information:
               
Interest paid on deposit accounts
  $ 417     $ 510  
Interest paid on borrowings
    253       345  
Income taxes paid
    111       -  
Due to broker for investment purchase
    -       1,000  
                 
                 
                 
                 
See accompanying notes to consolidated financial statements.
               
                 

 
 




GEORGETOWN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)           Basis of Presentation

The accompanying unaudited financial statements of Georgetown Bancorp, Inc. (the “Company”) were prepared in accordance with the instructions for Form 10-Q and with Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three-month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for future periods, including the entire fiscal year. These financial statements should be read in conjunction with the financial statements and notes thereto included in the December 31, 2010 Consolidated Financial Statements presented in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2011. The consolidated financial statements include the accounts of Georgetown Savings Bank (the “Bank”) and its wholly owned subsidiary, Georgetown Securities Corporation, which engages in the buying, selling and holding of securities. All significant inter-company balances and transactions have been eliminated in consolidation. These consolidated financial statements consider events that occurred through the date the consolidated financial statements were issued.
 
(2)           Earnings Per Common Share

The Company has adopted the EPS guidance included in ASC 260-10. As presented below, basic earnings or loss per share is computed by dividing income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings or loss per share reflect the potential dilution that occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For purposes of computing diluted EPS, the treasury stock method is used.
 
Treasury shares and unallocated ESOP shares are not deemed outstanding for earnings per share calculations.

Earnings per common share have been computed based on the following:
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
         
 
 
Net income available to common stockholders
  $ 332,000     $ 286,000  
                 
Basic common shares:
               
Weighted average shares outstanding
    2,640,655       2,638,387  
Less:  Weighted average unallocated ESOP shares
    (36,083 )     (44,276 )
Add:  Weighted average unvested restricted stock
               
           shares with non-forfeitable dividend rights
    32,220       10,278  
Basic weighted average common shares outstanding
    2,636,792       2,604,389  
                 
Dilutive potential common shares
    -       -  
                 
Diluted weighted average common shares outstanding
    2,636,792       2,604,389  
                 
Basic and diluted earnings per share
  $ 0.13     $ 0.11  

Options to purchase 42,348 and 25,000 shares were not included in the computation of diluted earnings per share for the three months ended March 31, 2011 and 2010, respectively, because to do so would have been antidilutive.





(3)           Corporate Structure

In conjunction with its reorganization into the mutual holding company structure, on January 5, 2005, the Bank (i) converted to a stock savings bank as the successor to the Bank in its mutual form; (ii) organized the Company as a federally-chartered corporation that owns 100% of the common stock of the Bank (in stock form); and (iii) organized Georgetown Bancorp, MHC as a federally-chartered mutual holding company that owned 57.0% of the Common Stock of the Company as of March 31, 2011.
 
(4)           Recent Accounting Pronouncements

In July 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  This Update requires an entity to provide disclosures that facilitate financial statement users’ evaluation of (1) the nature of credit risk inherent in the entity’s loan portfolio (2) how that risk is analyzed and assessed in arriving at the allowance for loan and lease losses and (3) the changes and reasons for those changes in the allowance for loan and lease losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. This Update was effective for the Company for the quarter ending December 31, 2010 and had a significant impact on the disclosures in the consolidated financial statements.

In December 2010, the FASB issued ASU 2010-28, “Intangibles - Goodwill and Other.”  This ASU addresses when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts.  For public entities, the amendments in this ASU are effective for fiscal years, and interim periods beginning after December 15, 2010.  For nonpublic entities, the amendments are effective for fiscal years and interim periods beginning after December 15, 2011. The amendments in this ASU are not expected to have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.”  This ASU addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations.  This ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. This ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This ASU provides additional guidance or clarification to help creditors determine whether a restructuring constitutes a troubled debt restructuring. For public entities, the amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  As a result of applying these amendments, an entity may identify receivables that are newly considered impaired, and should measure impairment on those receivables prospectively for the first interim or annual period beginning on or after June 15, 2011.  Additional disclosures are also required under this ASU.  The Company is currently evaluating the impact of this ASU.  The ASU is expected to cause more loan modifications to be classified as TDRs and the Company/Bank is evaluating its modification programs and practices in light of the new ASU.

In April 2011, the FASB issued ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.”  The objective of this ASU is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  This ASU prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements.  The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011.  Early adoption is not permitted.








(5)           Securities

A summary of securities is as follows:

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
                         
At March 31, 2011
                       
                         
Securities available for sale
                       
                         
    Government-sponsored
                       
        enterprise obligations
  $ 2,505     $ 2     $ (48 )   $ 2,459  
    Residential mortgage-backed
                               
  securities
    3,601       193       -       3,794  
                                 
           Total securities
                               
               available for sale
  $ 6,106     $ 195     $ (48 )   $ 6,253  
                                 
Securities held to maturity
                               
                                 
    Residential mortgage-backed
                               
  securities
  $ 2,938     $ 178     $ -     $ 3,116  
                                 
                                 
           
Gross
   
Gross
         
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
                                 
At December 31, 2010
                               
                                 
Securities available for sale
                               
                                 
    Government-sponsored
                               
        enterprise obligations
  $ 3,006     $ 4     $ (36 )   $ 2,974  
    Residential mortgage-backed
                               
  securities
    4,028       217       -       4,245  
                                 
           Total securities
                               
               available for sale
  $ 7,034     $ 221     $ (36 )   $ 7,219  
                                 
Securities held to maturity
                               
                                 
    Residential mortgage-backed
                               
  securities
  $ 3,202     $ 196     $ -     $ 3,398  
 
All residential mortgage-backed securities have been issued by government-sponsored enterprises.





The amortized cost and estimated fair value of debt securities by contractual maturity at March 31, 2011 are as follows.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Available for Sale
   
Held to Maturity
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
Cost
   
Value
   
Cost
   
Value
 
   
(In thousands)
 
After 1 year through
                       
    5 years
  $ 505     $ 505     $ -     $ -  
After 5 years through
                               
    10 years
    500       502       -       -  
Over 10 years
    1,500       1,452       -       -  
      2,505       2,459       -       -  
Residential mortgage-backed
                               
    securities
    3,601       3,794       2,938       3,116  
                                 
    $ 6,106     $ 6,253     $ 2,938     $ 3,116  
 
There were no sales of securities for the three months ended March 31, 2011 and 2010.

Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position is as follows:

   
Less Than Twelve Months
   
Greater Than Twelve Months
 
   
Gross
         
Gross
       
   
Unrealized
   
Fair
   
Unrealized
   
Fair
 
   
Losses
   
Value
   
Losses
   
Value
 
   
(In thousands)
 
At March 31, 2011:
                       
                         
Securities available for sale
                       
                         
    Government-sponsored
 
 
                   
        enterprise obligations
  $ 48     $ 1,452     $ -     $ -  
                                 
                                 
At December 31, 2010:
                               
                                 
Securities available for sale
                               
                                 
    Government-sponsored
                               
        enterprise obligations
  $ 36     $ 1,464     $ -     $ -  
                                 
 
At March 31, 2011, one security classified as available-for-sale had an unrealized loss with aggregate depreciation of 3.20% from the security’s amortized cost basis, which management believes to be temporary.





 
 (6)                Loans and Servicing
 
Loans
 
A summary of loans is as follows:
 
   
At
   
At
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
                         
Residential loans:
                       
    One-to-four family
  $ 70,241       38.34 %   $ 70,685       39.25 %
    Home equity loans
                               
     and lines of credit
    16,971       9.26       17,305       9.61  
Total residential mortgage loans
    87,212       47.60       87,990       48.86  
                                 
Commercial loans:
                               
    One-to-four family investment property
    14,112       7.70       11,892       6.60  
    Multi-family real estate
    14,062       7.67       14,121       7.84  
    Commercial real estate
    27,485       15.00       27,688       15.38  
    Commercial business
    12,561       6.86       12,475       6.93  
Total commercial loans
    68,220       37.23       66,176       36.75  
                                 
Construction loans:
                               
    One-to-four family
    16,563       9.04       16,725       9.29  
    Multi-family
    9,828       5.36       7,730       4.29  
    Non-residential
    726       0.40       733       0.41  
Total construction loans
    27,117       14.80       25,188       13.99  
                                 
Consumer
    674       0.37       726       0.40  
                                 
Total loans:
    183,223       100.00 %     180,080       100.00 %
                                 
Other items:
                               
Net deferred loan costs
    93               95          
Allowance for loan losses
    (1,719 )             (1,651 )        
                                 
Total loans, net
  $ 181,597             $ 178,524          
                                 

 

An analysis of the allowance for loan losses follows at March 31, 2011 and December 31, 2010:
 
   
Residential
   
Commercial
   
Construction
             
   
One-to-four
family
   
Home equity
 loans and
lines of credit
   
One-to-four
family
investment
property
   
Multi-family
real estate
   
Commercial
real estate
   
Commercial
business
   
One-to-four
family
   
Multi-family
   
Non-
residential
   
Consumer
   
Total
 
   
(In thousands)
 
At March 31, 2011
                                                                 
                                                                   
Allowance for loan losses
                                                                 
                                                                   
Beginning Balance
  $ 233     $ 320     $ 60     $ 106     $ 431     $ 304     $ 93     $ 83     $ 6     $ 15     $ 1,651  
    Charge-offs
    -       -       -       -       -       -       -       -       -       -       -  
    Recoveries
    3       -       -       -       -       -       -       -       -       1       4  
    Provision
    (39 )     (18 )     25       7       11       12       31       32       5       (2 )     64  
Ending Balance
  $ 197     $ 302     $ 85     $ 113     $ 442     $ 316     $ 124     $ 115     $ 11     $ 14     $ 1,719  
                                                                                         
Ending balance:
                                                                                       
    individually evaluated
                                                                                       
      for impairment
  $ -     $ 44     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ 44  
                                                                                         
Ending balance:
                                                                                       
    collectively evaluated
                                                                                       
      for impairment
  $ 197     $ 258     $ 85     $ 113     $ 442     $ 316     $ 124     $ 115     $ 11     $ 14     $ 1,675  
                                                                                         
Loans
                                                                                       
                                                                                         
Ending Balance
  $ 70,241     $ 16,971     $ 14,112     $ 14,062     $ 27,485     $ 12,561     $ 16,563     $ 9,828     $ 726     $ 674     $ 183,223  
                                                                                         
Ending balance:
                                                                                       
    individually evaluated
                                                                                       
      for impairment
  $ -     $ 741     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ 741  
                                                                                         
Ending balance:
                                                                                       
    collectively evaluated
                                                                                       
      for impairment
  $ 70,241     $ 16,230     $ 14,112     $ 14,062     $ 27,485     $ 12,561     $ 16,563     $ 9,828     $ 726     $ 674     $ 182,482  
                                                                                         
At December 31, 2010
                                                                                       
                                                                                         
Allowance for loan losses
                                                                                       
                                                                                         
Ending Balance
  $ 233     $ 320     $ 60     $ 106     $ 431     $ 304     $ 93     $ 83     $ 6     $ 15     $ 1,651  
                                                                                         
Ending balance:
                                                                                       
    individually evaluated
                                                                                       
      for impairment
  $ -     $ 36     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ 36  
                                                                                         
Ending balance:
                                                                                       
    collectively evaluated
                                                                                       
      for impairment
  $ 233     $ 284     $ 60     $ 106     $ 431     $ 304     $ 93     $ 83     $ 6     $ 15     $ 1,615  
                                                                                         
Loans
                                                                                       
                                                                                         
Ending Balance
  $ 70,685     $ 17,305     $ 11,892     $ 14,121     $ 27,688     $ 12,475     $ 16,725     $ 7,730     $ 733     $ 726     $ 180,080  
                                                                                         
Ending balance:
                                                                                       
    individually evaluated
                                                                                       
      for impairment
  $ 208     $ 45     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ 253  
                                                                                         
Ending balance:
                                                                                       
    collectively evaluated
                                                                                       
      for impairment
  $ 70,477     $ 17,260     $ 11,892     $ 14,121     $ 27,688     $ 12,475     $ 16,725     $ 7,730     $ 733     $ 726     $ 179,827  
 


The following is a summary of past-due and non-accrual loans at March 31, 2011 and December 31, 2010:
 
   
Loans delinquent for:
   
 
   
 
         
90 days
       
   
 
   
 
   
90 days
   
Total
   
Total
   
Total
   
or more
   
Non-accrual
 
   
30 - 59 Days
   
60 - 89 Days
   
or more
   
Past Due
   
Current
   
Loans
   
and accruing
   
Loans
 
   
(In thousands)
 
At March 31, 2011:
                                               
                                                 
Residential loans:
                                               
    One-to-four family
  $ -     $ -     $ -     $ -     $ 70,241     $ 70,241     $ -     $ -  
    Home equity loans and  lines of credit
    -       697       44       741       16,230       16,971       -       741  
                                                                 
 Commercial loans:
                                                               
    One-to-four family investment property
    -       -       -       -       14,112       14,112       -       -  
    Multi-family real estate
    -       -       -       -       14,062       14,062       -       -  
    Commercial real estate
    925       313       -       1,238       26,247       27,485       -       -  
    Commercial business
    -       825       -       825       11,736       12,561       -       -  
                                                                 
Construction loans:
                                                               
    One-to-four family
    732       -       -       732       15,831       16,563       -       -  
    Multi-family
    -       -       -       -       9,828       9,828       -       -  
    Non-residential
    490       -       -       490       236       726       -       -  
                                                                 
Consumer
    16       4       -       20       654       674       -       -  
                                                                 
Total
  $ 2,163     $ 1,839     $ 44     $ 4,046     $ 179,177     $ 183,223     $ -     $ 741  
                                                                 
At December 31, 2010:
                                                               
                                                                 
Residential loans:
                                                               
    One-to-four family
  $ 391     $ 138     $ -     $ 529     $ 70,156     $ 70,685     $ -     $ -  
    Home equity loans and  lines of credit
    19       -       45       64       17,241       17,305       -       45  
                                                                 
 Commercial loans:
                                                               
    One-to-four family investment property
    -       -       -       -       11,892       11,892       -       -  
    Multi-family real estate
    -       -       -       -       14,121       14,121       -       -  
    Commercial real estate
    314       -       -       314       27,374       27,688       -       -  
    Commercial business
    -       -       -       -       12,475       12,475       -       -  
                                                                 
Construction loans:
                                                               
    One-to-four family
    -       -       -       -       16,725       16,725       -       -  
    Multi-family
    -       -       -       -       7,730       7,730       -       -  
    Non-residential
    -       -       -       -       733       733       -       -  
                                                                 
Consumer
    9       1       -       10       716       726       -       -  
                                                                 
Total
  $ 733     $ 139     $ 45     $ 917     $ 179,163     $ 180,080     $ -     $ 45  

 
 

The following is an analysis of impaired loans at March 31, 2011 and December 31, 2010:
         
Unpaid
         
Average
   
Interest
 
   
Recorded
   
Principal
   
Related
   
Recorded
   
Income
 
   
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
 
   
(In thousands)
 
At March 31, 2011
                             
                               
Impaired loans without a valuation allowance
                             
                               
Residential loans:
                             
    One-to-four family
  $ -     $ -     $ -     $ -     $ -  
    Home equity loans and  lines of credit
    697       697       -       100       -  
 Commercial loans:
                                       
    One-to-four family investment property
    -       -       -       -       -  
    Multi-family real estate
    -       -       -       -       -  
    Commercial real estate
    -       -       -       -       -  
    Commercial business
    -       -       -       -       -  
Construction loans:
                                       
    One-to-four family
    -       -       -       -       -  
    Multi-family
    -       -       -       -       -  
    Non-residential
    -       -       -       -       -  
Consumer
    -       -       -       -       -  
Total impaired with no related allowance
  $ 697     $ 697     $ -     $ 100     $ -  
                                         
Impaired loans with a valuation allowance
                                       
                                         
Residential loans:
                                       
    One-to-four family
  $ -     $ -     $ -     $ -     $ -  
    Home equity loans and  lines of credit
    44       44       44       44       -  
Commercial loans:
                                       
    One-to-four family investment property
    -       -       -       -       -  
    Multi-family real estate
    -       -       -       -       -  
    Commercial real estate
    -       -       -       -       -  
    Commercial business
    -       -       -       -       -  
Construction loans:
                                       
    One-to-four family
    -       -       -       -       -  
    Multi-family
    -       -       -       -       -  
    Non-residential
    -       -       -       -       -  
Consumer
    -       -       -       -       -  
Total with an allowance recorded
  $ 44     $ 44     $ 44     $ 44     $ -  
                                         
At December 31, 2010
                                       
                                         
Impaired loans without a valuation allowance
                                       
                                         
Residential loans:
                                       
    One-to-four family
  $ 208     $ 208     $ -     $ 209     $ 5  
    Home equity loans and  lines of credit
    -       -       -       -       -  
 Commercial loans:
                                       
    One-to-four family investment property
    -       -       -       -       -  
    Multi-family real estate
    -       -       -       -       -  
    Commercial real estate
    -       -       -       -       -  
    Commercial business
    -       -       -       -       -  
Construction loans:
                                       
    One-to-four family
    -       -       -       -       -  
    Multi-family
    -       -       -       -       -  
    Non-residential
    -       -       -       -       -  
Consumer
    -       -       -       -       -  
Total impaired with no related allowance
  $ 208     $ 208     $ -     $ 209     $ 5  
                                         
Impaired loans with a valuation allowance
                                       
                                         
Residential loans:
                                       
    One-to-four family
  $ -     $ -     $ -     $ -     $ -  
    Home equity loans and  lines of credit
    45       45       36       47       1  
Commercial loans:
                                       
    One-to-four family investment property
    -       -       -       -       -  
    Multi-family real estate
    -       -       -       -       -  
    Commercial real estate
    -       -       -       -       -  
    Commercial business
    -       -       -       -       -  
Construction loans:
                                       
    One-to-four family
    -       -       -       -       -  
    Multi-family
    -       -       -       -       -  
    Non-residential
    -       -       -       -       -  
Consumer
    -       -       -       -       -  
Total with an allowance recorded
  $ 45     $ 45     $ 36     $ 47     $ 1  


The following table represents the Company’s loans by risk rating at March 31, 2011 and December 31, 2010:
 
   
Residential
   
Commercial
   
Construction
             
   
One-to-four
family
   
Home equity
 loans and
lines of credit
   
One-to-four
family
 investment
 property
   
Multi-family
real estate
   
Commercial
real estate
   
Commercial
 business
   
One-to-four
 family
   
Multi-family
   
Non-
residential
   
Consumer
   
Total
 
   
(In thousands)
 
At March 31, 2011:
                                                             
                                                                   
Classification:
                                                                 
  Pass
  $ 70,241     $ 16,230     $ 13,717     $ 14,062     $ 23,930     $ 11,719     $ 15,831     $ 9,828     $ 236     $ 674     $ 176,468  
  Special mention
    -       -       395       -       3,555       842       732       -       490       -       6,014  
  Substandard
    -       697       -       -       -       -       -       -       -       -       697  
  Doubtful
    -       -       -       -       -       -       -       -       -       -       -  
  Loss
    -       44       -       -       -       -       -       -       -       -       44  
    Total loans
  $ 70,241     $ 16,971     $ 14,112     $ 14,062     $ 27,485     $ 12,561     $ 16,563     $ 9,828     $ 726     $ 674     $ 183,223  
                                                                                         
At December 31, 2010:
                                                                                 
                                                                                         
Classification:
                                                                                       
  Pass
  $ 70,477     $ 17,260     $ 11,495     $ 14,121     $ 24,119     $ 12,475     $ 16,725     $ 7,730     $ 733     $ 726     $ 175,861  
  Special mention
    -       -       397       -       3,569       -       -       -       -       -       3,966  
  Substandard
    208       45       -       -       -       -       -       -       -       -       253  
  Doubtful
    -       -       -       -       -       -       -       -       -       -       -  
  Loss
    -       -       -       -       -       -       -       -       -       -       -  
    Total loans
  $ 70,685     $ 17,305     $ 11,892     $ 14,121     $ 27,688     $ 12,475     $ 16,725     $ 7,730     $ 733     $ 726     $ 180,080  

 
 



 
Credit Quality Information
 
The Company utilizes an eleven grade internal loan rating system for commercial real estate, construction and residential mortgages and commercial business loans as follows:

Loans rated 1 - 5:  Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 6:  Loans in this category are considered “marginally acceptable.”  These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 6.5:  Loans in this category are considered “management attention.”  These loans are placed on a “watch list” and are being closely monitored by management because of some borrower management weaknesses and non-monetary defaults.

Loans rated 7:  Loans in this category are considered “special mention.”  These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 8:  Loans in this category are considered “substandard.”  These loans have a well defined weakness that jeopardize the liquidation of the debt and is inadequately protected by the current sound worth and paying capacity of the borrower or pledged collateral. There is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Loans rated 9:  Loans in this category are considered “doubtful.”  Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 10:  Loans in this category are considered uncollectible “loss” and it has been determined uncollectible and the chance of loss in inevitable. Loans in this category will be charged-off.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial business loans.

 
Loans serviced for others and mortgage servicing rights
 
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others were $47,229,000 and $45,028,000 at March 31, 2011 and December 31, 2010, respectively.

The risks inherent in the mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates. The fair value of servicing rights was $497,000 at March 31, 2011 and was determined using the quarterly average 10-year, U.S. Treasury rate plus 5.0%, adjusted to reflect the current credit spreads and conditions in the market as a discount rate. Prepayment assumptions, which are impacted by loan rates and terms, are calculated using a moving average of prepayment data published by the Public Securities Association.





The following summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity-related valuation allowances:
 
             
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
   
(In thousands)
 
             
Mortgage servicing rights:
           
Balance at beginning of period
  $ 424     $ 183  
Additions
    30       16  
Disposals
    -       -  
Amortization
    (25 )     (2 )
Balance at end of period
    429       197  
                 
Valuation allowances:
               
Balance at beginning of period
    4       -  
Additions
    -       -  
Recoveries
    -       -  
Write-downs
    -       -  
Balance at end of period
    4       -  
                 
Mortgage servicing assets, net
  $ 425     $ 197  
                 
Fair value of mortgage servicing assets
  $ 497     $ 209  
                 
 
(7)           Secured Borrowings and Collateral
 
Federal Home Loan Bank advances
 
At March 31, 2011, all Federal Home Loan Bank (“FHLB”) of Boston advances were secured by a blanket security agreement on qualified collateral, principally first mortgage loans on owner-occupied residential property in the amount of $55.6 million, government-sponsored enterprise obligations with a fair value of $1.5 million and mortgage-backed securities with a fair value of $6.9 million.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are funds borrowed from customers on an overnight basis. The amount of securities collateralizing the agreements to repurchase remains in securities and the obligation to repurchase securities sold is reflected as a liability in the consolidated balance sheets.  Securities sold under agreements to repurchase amounted to $380,000 at March 31, 2011 and were secured by Government-sponsored enterprise obligations with a fair value of $1.0 million.  The weighted average interest rate on these agreements was 0.50% at March 31, 2011.
 
(8)           Fair Value Measurements
 
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 reliability of the assumptions used to determine fair value as follows:

Level l - Valuation is based on quoted prices in active markets for identical assets or liabilities. Level l assets and liabilities generally include debt and equity securities that are traded in an active exchange market. At March 31, 2011, the Company had no assets or liabilities valued using Level 1 measurements.

Level 2 - Valuation is based on observable inputs other than Level l prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Leve1 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.




All of the Company’s securities that are measured at fair value are included in Level 2 and are based on pricing models from independent, third party pricing services that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. There are no liabilities measured at fair value. All of the Company’s impaired loans and other real estate owned that are measured at fair value are included in Level 3 and are based on the appraised value of the underlying collateral considering discounting factors, if deemed appropriate, and adjusted for selling costs. These appraised values may be discounted based on management’s historical knowledge, expertise or changes in market conditions from time of valuation. The Company did not have any significant transfers of assets or liabilities to or from Levels 1 and 2 of the fair value hierarchy during the three month period ended March 31, 2011.
 
Assets and liabilities measured at fair value on a recurring basis at March 31, 2011 and December 31, 2010 are summarized below.

                         
                     
Assets
 
   
Level 1
   
Level 2
   
Level 3
   
at Fair Value
 
   
(In thousands)
 
At March 31, 2011
                       
                         
Assets
                       
   Securities available for sale
  $ -     $ 6,253     $ -     $ 6,253  
                                 
                                 
At December 31, 2010
                               
                                 
Assets
                               
   Securities available for sale
  $ -     $ 7,219     $ -     $ 7,219  
                                 

The Company may also be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. Assets measured at fair value on a non-recurring basis at March 31, 2011 are summarized below. The fair value adjustments relate to the amount of write down recorded during the three months ended March 31, 2011 on the assets held at March 31, 2011.

   
 
               
Assets
 
   
Level 1
   
Level 2
   
Level 3
   
at Fair Value
 
   
(In thousands)
 
At March 31, 2011
                       
                         
Impaired loans
  $ -     $ -     $ 697     $ 697  
Other real estate owned
    -       -       53       53  
    $ -     $ -     $ 750     $ 750  
                                 
                                 
                           
Assets
 
   
Level 1
   
Level 2
   
Level 3
   
at Fair Value
 
   
(In thousands)
 
At December 31, 2010
                               
                                 
Impaired loans
  $ -     $ -     $ 9     $ 9  
Other real estate owned
    -       -       53       53  
    $ -     $ -     $ 62     $ 62  
                                 
 



   
Fair Value Measurements
 
   
Using Significant Unobservable Inputs
 
   
Level 3
 
   
Impaired Loans
   
Other Real Estate Owned
 
             
Beginning balance, December 31, 2010
  $ 9     $ 53  
Transfers in and/or out of level 3
    688       -  
Ending balance, March 31, 2011
  $ 697     $ 53  
                 
 
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts of cash and short-term investments approximate fair values.

Securities: Fair values for the Company's debt securities are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

Federal Home Loan Bank stock: Fair value is based on redemption provisions of the FHLB of Boston. The FHLB stock has no quoted market value.

Loans held for sale: Fair value is based on committed secondary market prices.

Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.  Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Capitalized mortgage servicing rights: Fair value is based on a quarterly, third-party valuation model that calculates the present value of estimated future net servicing income. The model utilizes a variety of assumptions, the most significant of which are loan prepayment assumptions and the discount rate used to discount future cash flows. Prepayment assumptions, which are impacted by loan rates and terms, are calculated using a moving average of prepayment data published by the Public Securities Association and modeled against the serviced loan portfolio by the third party valuation specialist. The discount rate is the quarterly average 10-year, U.S. Treasury rate plus 5.0% and adjusted to reflect the current credit spreads and conditions in the market. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances.

Deposits: The fair values for non-certificate accounts are, by definition, equal to the amount payable on demand at the reporting date which is the carrying amount.  Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Securities sold under agreements to repurchase: The fair value estimate of securities sold under agreements to repurchase approximates carrying value as they mature daily and bear market interest rates.

Short-term FHLB advances: The fair value of short-term FHLB advances approximate carrying value, as they generally mature within 90 days.

Long-term FHLB advances: The fair value for long-term FHLB advances is estimated using discounted cash flow analyses based on current market borrowing rates for similar types of borrowing arrangements.
 
Accrued interest:  The carrying amounts of accrued interest approximate fair value.

Off-balance-sheet instruments:  Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.  At March 31, 2011 and December 31, 2010, the fair value of commitments outstanding is not significant since fees charged are not material.






The estimated fair values and related carrying amounts of the Company’s financial instruments at March 31, 2011 and December 31, 2010, are as follows:

   
March 31, 2011
   
December 31, 2010
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Amount
   
Value
   
Amount
   
Value
 
   
(In thousands)
 
Financial assets:
                       
  Cash and cash equivalents
  $ 3,294     $ 3,294     $ 3,298     $ 3,298  
  Securities available for sale
    6,253       6,253       7,219       7,219  
  Securities held to maturity
    2,938       3,116       3,202       3,398  
  FHLB stock
    3,111       3,111       3,111       3,111  
  Loans held for sale
    -       -       685       693  
  Loans, net
    181,597       183,833       178,524       180,972  
  Accrued interest receivable
    814       814       777       777  
  Capitalized mortgage servicing rights
    425       497       420       461  
                                 
Financial liabilities:
                               
  Deposits
    150,197       150,542       151,463       151,859  
  Securities sold under agreements
                               
      to repurchase
    380       380       491       491  
  Short-term FHLB advances
    6,800       6,800       3,500       3,500  
  Long-term FHLB advances
    27,167       27,705       28,182       28,774  
  Mortgagers' escrow accounts
    597       597       598       598  
  Accrued interest payable
    89       89       88       88  








(9)           Equity Incentive Plan

At March 31, 2011, the Company had one equity incentive plan, which was described more fully in Note 13 of the consolidated financial statements and notes thereto for the year ended December 31, 2010.

The following table presents the activity for the 2010 Plan for the three months ended March 31, 2011:

   
Stock Options
 
   
Number of
Shares
   
Weighted
Average
 Exercise Price
   
Weighted
Average
Remaining
Contractual
Term (years)
   
Aggregate
 Intrinsic
Value
 
                         
Outstanding at beginning of year
    24,000     $ 6.72              
  Granted
    25,998     $ 6.88              
  Forfeited
    (7,650 )   $ 6.81              
                             
Outstanding at end of period
    42,348     $ 6.80       9.42     $ 8,378  
                                 
Exercisable at end of period
    5,796     $ 6.72       8.90     $ 1,623  
                                 
 
   
Non-vested
 
   
Restricted Stock
 
   
Number of
Shares
   
Weighted
Average
 Grant Date
Value
 
             
Outstanding at beginning of year
    24,000     $ 5.20  
  Granted
    25,998     $ 6.50  
  Forfeited
    (7,650 )   $ 5.92  
  Vested
    (5,796 )   $ 5.20  
                 
Outstanding at end of period
    36,552     $ 5.97  
                 
 
As of March 31, 2011, unrecognized share-based compensation expense related to non-vested options amounted to $95,000 and the unrecognized share-based compensation expense related to non-vested restricted stock amounted to $213,000.  Both amounts are expected to be recognized over a weighted average period of 3.9 years.
 
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $7.00 as of March 31, 2011 which would have been received by the option holders had all option holders exercised their options as of that date.
 
For the three months ended March 31, 2011, the Company recognized compensation expense for stock options of $4,000 with a related tax benefit of $800.  For the three months ended March 31, 2011, the Company recognized compensation expense for restricted stock awards of $10,000, with a related tax benefit of $4,000.
 


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

This document may contain certain forward-looking statements, such as statements of the Company’s or the Bank’s plans, objectives, expectations, estimates and intentions. Forward-looking statements may be identified by the use of words such as “expects”, “subject”, and “believe”, “will”, “intends”, “will be” or “would”. These statements are subject to change based on various important factors (some of which are beyond the Company’s or the Bank’s control) and actual results may differ materially. Accordingly, readers should not place undue reliance on any forward-looking statements, which reflect management’s analysis of factors only as of the date of which they are given. These factors include general economic conditions, trends in interest rates, the ability of our borrowers to repay their loans, the ability of the Company or the Bank to effectively manage its growth, and results of regulatory examinations, among other factors. The foregoing list of important factors is not exclusive. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including Current Reports on Form 8-K.




Except as required by applicable law and regulation, the Company does not undertake – and specifically disclaims any obligation – to publicly release the result of any revisions that 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.


Overview

The Company’s results of operations depend primarily on net interest and dividend income, which is the difference between the interest and dividend income earned on its interest-earning assets, such as loans and securities, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income, primarily from fees and service charges. Gains on sales of loans are additional sources of non-interest income. The Company’s non-interest expense primarily consists of employee compensation and benefits, occupancy and equipment expense, advertising, data processing, professional fees and other operating expenses.

Our financial performance for the three months ended March 31, 2011 continued to improve, as the Company’s net income increased 16% compared to the same period last year. Our improved financial performance continued to be driven by an expanding net interest margin, primarily due to originations of higher-yielding commercial loans, a significant portion of which are collateralized by one-to-four family and multi-family properties, and the controlling of interest expense. The asset quality of our loan portfolio remained stable during the quarter.

Critical Accounting Policies

Our critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to our allowance for loan losses and the valuation of our deferred tax assets.
 
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 uncollectability of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.
 
The allowance for loan losses is evaluated on a monthly basis by management and is based upon management’s monthly review of the collectability of the loans in light of known and inherent risks in the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.  Additionally, as part of the evaluation of the level of the allowance for loan losses, on a quarterly basis management analyzes several qualitative loan portfolio risk factors including, but not limited to, charge-off history, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
 
The allowance for loan losses consists of specific, general and unallocated components.  The specific component relates to loans that are classified as impaired.  For such loans that are classified as impaired, an allowance for loan losses is established when the discounted cash flows or the fair value of the existing collateral (less cost to sell) of the impaired loan is lower than the carrying value of that loan.  The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors.  An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses.
 
A loan is considered impaired when, based on current information and events, it is probable that the Bank 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.
 
The Bank periodically may 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 troubled debt restructuring ("TDR").  All TDRs are initially classified as impaired.
 
Adjustable-rate mortgage loans decrease the risk associated with changes in market interest rates by periodically repricing, but involve other risks because, as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents and, therefore, the effectiveness of adjustable-rate mortgage loans may be limited during periods of rapidly rising interest rates.
 
Loans secured by commercial real estate, multi-family and one-to-four family investment properties, generally involve larger principal amounts and a greater degree of risk than one-to-four family residential mortgage loans. Because payments on loans secured by commercial real estate, including multi-family and one-to-four family investment properties, are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.
 




 
Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
 
Construction and development financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value that is insufficient to assure full repayment.
 
Actual loan losses may be significantly more than the allowances we have established, which could have a material negative effect on our financial results.  In addition, the Office of Thrift Supervision (“OTS”), as an integral part of its examination process, will periodically review our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance, based on its judgments about information available to it at the time of its examination.
 
Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled.  As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted accordingly through the provision for income taxes.  The Company’s base amount of its federal income tax reserve for loan losses is a permanent difference for which there is no recognition of a deferred tax liability.  However, the loan loss allowance maintained for financial reporting purposes is a temporary difference with allowable recognition of a related deferred tax asset, if it is deemed realizable. The Company exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax assets and liabilities. These judgments require projections of future taxable income. These judgments and estimates, which are inherently subjective, are reviewed periodically as regulatory and business factors change. The deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all or some portion of the deferred tax asset will not be realized.
 
Comparison of Financial Condition at March 31, 2011 and December 31, 2010
 
Total assets increased by $1.2 million, or 0.6%, to $206.2 million at March 31, 2011, from $205.0 million at December 31, 2010. The increase in total assets resulted primarily from an increase in net loans, partially offset by a decrease in investment securities, as maturing securities were used to fund loan originations. Net loans increased $3.1 million, or 1.7%, to $181.6 million at March 31, 2011, from $178.5 million at December 31, 2010, primarily due to a $2.2 million, or 18.7%, increase in commercial real estate loans collateralized by one-to-four family residential investment properties and a $2.1 million, or 27.1% increase in construction loans collateralized by multi-family properties, partially offset by a $778,000, or 0.9%, decrease in residential mortgage loans. Investment securities available for sale decreased $966,000, or 13.4%, to $6.3 million at March 31, 2011, from $7.2 million at December 31, 2010. Investment securities held to maturity decreased $264,000, or 8.3%, to $2.9 million at March 31, 2011. At March 31, 2011, total investment securities were comprised of government-sponsored enterprise obligations and mortgage-backed securities, all of which are guaranteed by government-sponsored enterprises. As a result, our investment securities impairment considerations generally related to fluctuations in market interest rates. At March 31, 2011, no securities were deemed to be other–than-temporarily impaired. Total interest-earning assets increased $578,000, or 0.3%, to $196.8 million at March 31, 2011, from $196.2 million at December 31, 2010.
 

 

 




 
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan as of the dates indicated.
 
   
At
   
At
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
                         
Residential loans:
                       
    One-to-four family
  $ 70,241       38.34 %   $ 70,685       39.25 %
    Home equity loans
                               
     and lines of credit
    16,971       9.26       17,305       9.61  
Total residential mortgage loans
    87,212       47.60       87,990       48.86  
                                 
Commercial loans:
                               
    One-to-four family investment property
    14,112       7.70       11,892       6.60  
    Multi-family real estate
    14,062       7.67       14,121       7.84  
    Commercial real estate
    27,485       15.00       27,688       15.38  
    Commercial business
    12,561       6.86       12,475       6.93  
Total commercial loans
    68,220       37.23       66,176       36.75  
                                 
Construction loans:
                               
    One-to-four family
    16,563       9.04       16,725       9.29  
    Multi-family
    9,828       5.36       7,730       4.29  
    Non-residential
    726       0.40       733       0.41  
Total construction loans
    27,117       14.80       25,188       13.99  
                                 
Consumer
    674       0.37       726       0.40  
                                 
Total loans:
    183,223       100.00 %     180,080       100.00 %
                                 
Other items:
                               
Net deferred loan costs
    93               95          
Allowance for loan losses
    (1,719 )             (1,651 )        
                                 
Total loans, net
  $ 181,597             $ 178,524          
                                 


Non-performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. Delinquent loans that are 90 days or more past due are generally considered non-performing assets.

   
At March 31,
   
At December 31,
 
   
2011
   
2010
 
   
(Dollars in thousands)
 
             
Non-accrual loans:
           
Residential mortgage loans
  $ 741     $ 45  
Commercial loans
    -       -  
Construction loans
    -       -  
Consumer
    -       -  
                 
Total non-accrual loans
    741       45  
                 
Loans greater than 90 days delinquent
               
and still accruing:
               
Residential mortgage loans
    -       -  
Commercial loans
    -       -  
Construction loans
    -       -  
Consumer
    -       -  
                 
Total loans greater than 90 days delinquent
               
   and still accruing
    -       -  
                 
Restructured loans
    -       208  
                 
Total non-performing loans
    741       253  
                 
Real estate owned
    53       53  
                 
Total non-performing assets
  $ 794     $ 306  
                 
Ratios:
               
Non-performing loans to total loans
    0.40 %     0.14 %
Non-performing assets to total assets
    0.39 %     0.15 %
                 
 
Asset quality continued to be stable, as non-performing assets increased $488,000 to $794,000 at March 31, 2011 compared to $306,000 at December 31, 2010, primarily due to one residential loan. These balances represented 0.39% of total assets at March 31, 2011 and 0.15% of total assets at December 31, 2010. The allowance for loan losses was $1.7 million at March 31, 2011, an increase of $68,000 from December 31, 2010. There were no loan charge-offs and loan recoveries were $4,000 for the three months ended March 31, 2011, as compared to loan charge-offs of $5,000 and loan recoveries of $2,000 for the same period in 2010. The allowance represented 0.94% and of total loans at March 31, 2011 and 0.92% of total loans at December 31, 2010. At these levels, the allowance for loan losses as a percentage of non-performing loans was 231.98% at March 31, 2011 and 652.57% at December 31, 2010.
 
Total deposits decreased by $1.3 million, or 0.8%, to $150.2 million at March 31, 2011, from $151.5 million at December 31, 2010. The deposit decreases were primarily due to decreases in demand deposit and money market accounts, partially offset by increases in certificate of deposits and NOW accounts. Demand deposit accounts decreased $1.7 million, or 10.0% and money market accounts decreased $601,000, or 1.0%, due to normal operating fluctuations. Certificates of deposit increased $649,000, or 1.3% and NOW accounts increased $450,000, or 3.0%.
 
Total borrowings from the FHLB increased $2.3 million, or 7.2%, as proceeds were used to fund loan demand. Short-term borrowings increased $3.3 million, or 94.3% and long-term borrowings decreased $1.0 million, or 3.6%.
 
Total stockholders’ equity increased $334,000, or 1.7%, to $19.5 million at March 31, 2011, from $19.2 million at December 31, 2010, primarily due to net income of $332,000. The net unrealized gains on securities available for sale of $96,000 at March 31, 2011 were attributable to changes in market interest rates.

Comparison of Operating Results for the Three Months Ended March 31, 2011 and 2010
 
General. Net income for the three months ended March 31, 2011 was $332,000, or $.13 per basic and diluted share, compared to net income of $286,000, or $.11 per basic and diluted share for the three months ended March 31, 2010. The increase in net income was primarily due to an increase in net interest income, partially offset by a decrease in non-interest income and an increase in non-interest expense.
 
Interest Income. Interest income increased by $103,000, or 3.8%, to $2.8 million for the three months ended March 31, 2011. The increase in interest income was primarily due to an increase in the average balance of interest-earning assets of $3.2 million, or 1.7%, to $196.1 million for the three months ended March 31, 2011, from $192.9 million for the same period in 2010 and by an 11 basis point increase in the average yield on interest-earning assets to 5.70% for the three months ended March 31, 2011, from 5.59% for the same period in 2010.
 




 
Interest income on loans increased $161,000, or 6.3%, to $2.7 million for the three months ended March 31, 2011. The increase was due to an increase in the average balance of loans of $10.9 million, or 6.3%, to $182.8 million for the three months ended March 31, 2011, from $171.9 million for the three months ended March 31, 2010. The average loan yield was unchanged at 5.90% for the three months ended March 31, 2011 and 2010.
 
Interest and dividend income on investment securities decreased $58,000, or 36.9%, for the three months ended March 31, 2011, compared to the same period in 2010. The decrease in interest income was due to a decrease in the average balance of investment securities of $5.9 million, or 31.4%, to $12.9 million for the three months ended March 31, 2011, from $18.8 million for the three months ended March 31, 2010 and by a decrease in average investment yields of 27 basis points, reflecting lower market interest rates, to 3.07% for the three months ended March 31, 2011, from 3.34% for the three months ended March 31, 2010.
 
Interest Expense. Interest expense decreased $194,000, or 22.5%, to $670,000 for the three months ended March 31, 2011 from $864,000 for the three months ended March 31, 2010. The decrease in interest expense was primarily due to a 48 basis point decrease in the average cost of interest-bearing liabilities, reflecting the lowering of deposit interest rates offered, the maturing of higher-rate deposits and a shortening of the term of FHLB borrowings, to 1.58% for the three months ended March 31, 2011, from 2.06% for the same period in 2010, partially offset by an increase in the average balance of interest-bearing liabilities of $1.9 million, or 1.1%, to $169.4 million for the three months ended March 31, 2011, from $167.4 million for the same period in 2010.
 
Interest expense on interest-bearing deposits decreased $95,000, or 18.6%, to $417,000 for the three months ended March 31, 2011, from $512,000 for the same period in 2010. The decrease was primarily due to a 44 basis point decrease in the average cost of interest-bearing deposits to 1.24% for the three months ended March 31, 2011, from 1.68% for the same period in 2010, partially offset by an increase in the average balance of interest-bearing deposits of $12.6 million, or 10.3%, to $134.7 million for the three months ended March 31, 2011 from $122.1 million for the same period in 2010.
 
Interest expense on FHLB short-term and long-term advances decreased $99,000, or 28.2%, to $252,000 for the three months ended March 31, 2011, from $351,000 for the same period in 2010. The decrease was primarily due to a decrease in the average balance of FHLB short-term and long-term advances of $10.6 million, or 23.6%, to $34.3 million for the three months ended March 31, 2011 from $44.9 million for the same period in 2010 and by a 19 basis point decrease in the average cost of FHLB short-term and long-term advances to 2.94% for the three months ended March 31, 2011, from 3.13% for the same period in 2010.
 
Net Interest Income. Net interest income increased $297,000, or 16.2%, to $2.1 million for the three months ended March 31, 2011, from $1.8 million for the same period in 2010. The increase in net interest income was primarily the result of a 55 basis point increase in net interest margin to 4.34% for the three months ended March 31, 2011, from 3.79% for the same period in 2010 and by the $1.3 million or 5.1%, increase in net average interest-earning assets to $26.7 million for the three months ended March 31, 2011, from $25.4 million for the same period in 2010.
 
Provision for Loan Losses. The provision for loan losses for the three months ended March 31, 2011 was $64,000 compared to $89,000 for the three months ended March 31, 2010. There were no loan charge-offs and loan recoveries were $4,000 for the three months ended March 31, 2011, as compared to loan charge-offs of $5,000 and loan recoveries of $2,000 for the same period in 2010.
 
Non-interest Income. Non-interest income decreased $84,000, or 27.1%, to $226,000 for the three months ended March 31, 2011, from $310,000 for the same period in 2010. The decrease was primarily related to a decline in net mortgage banking income and customer service fees. Net mortgage banking income decreased $59,000, or 46.8% to $67,000 for the three months ended March 31, 2011, from $126,000 for the same period in 2010. Included in the March 2010 income was a $70,000 net gain on secondary market activities, representing the increase in secondary market commitments and related fair value measurements. There was no net gain on secondary market activities for the three months ending March 31, 2011, based on immateriality. The decrease in customer service fees was primarily related to a decline in checking account overdraft fees of $33,000, or 36.0%, partially offset by an increase in ATM service charges of $7,000, or 18.4%.
 
Non-interest Expense. Non-interest expense increased $160,000, or 10.0%, to $1.8 million for the three months ended March 31, 2011. The increase in non-interest expense was primarily due to an increase in salaries and benefits, other general and administrative expenses and professional fees, partially offset by a decrease in Federal Deposit Insurance Corporation (“FDIC”) deposit insurance. Salaries and benefits expense increased $133,000, or 15.3%, primarily due to the costs associated with additional staff and the replacement of existing staff at higher salaries. Other general and administrative expenses increased $20,000, or 10.9%, for the three months ended March 31, 2011. Professional fees increased $13,000, or 14.1%, primarily due to consulting and legal expense.
 
Income Taxes. The income before income taxes of $530,000 for the three months ended March 31, 2011 resulted in an income tax provision of $198,000 for the three months ended March 31, 2011, as compared to income before income taxes of $452,000 and a related income tax provision of $166,000 for the three months ended March 31, 2010. The effective tax rates for the three months ended March 31, 2011 and 2010 were 37.3% and 36.6%, respectively.
 

 
 
Average Balance Sheet. The following table sets forth certain information regarding the Company’s average balance sheet for the periods indicated, including the average yields on its interest-earning assets and the average costs of its interest-bearing liabilities. Average yields are calculated by dividing the interest income produced by the average balance of interest-bearing assets. Average costs are calculated by dividing the interest expense produced by the average balance of interest-bearing liabilities. The average balances for the period are derived from average balances that are calculated daily. The average yields and costs include fees that are considered adjustments to such average yields and costs.
 
 
At March 31,
   
Three Months Ended March 31,
 
   
2011
   
2011
   
2010
 
         
Weighted
   
Average
               
Average
             
   
Outstanding
   
Average
   
Outstanding
         
Yield/
   
Outstanding
         
Yield/
 
   
Balance
   
Rate
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
               
(Dollars in thousands)
                         
Interest-earning assets:
                                               
Loans
  $ 183,316       5.90 %   $ 182,802     $ 2,698       5.90 %   $ 171,936     $ 2,537       5.90 %
Investment securities (1)
    12,302       3.08 %     12,889       99       3.07 %     18,788       157       3.34 %
Short-term investments
    1,160       0.03 %     428       -       0.00 %     2,173       -       0.00 %
     Total interest-earning assets
    196,778       5.68 %     196,119       2,797       5.70 %     192,897       2,694       5.59 %
Non-interest-earning assets
    9,413               9,730       -               10,011       -          
Total assets
  $ 206,191             $ 205,849       2,797             $ 202,908       2,694          
                                                                 
Interest-bearing liabilities:
                                                               
Savings deposits
  $ 12,099       0.21 %   $ 12,159       6       0.20 %   $ 12,071       5       0.17 %
NOW accounts
    15,597       0.42 %     14,525       16       0.44 %     12,265       13       0.42 %
Money market accounts
    56,837       0.92 %     57,413       129       0.90 %     39,339       100       1.02 %
Certificates of deposit
    50,672       2.12 %     50,640       266       2.10 %     58,455       394       2.70 %
Total interest-bearing deposits
    135,205       1.25 %     134,737       417       1.24 %     122,130       512       1.68 %
FHLB advances
    33,967       2.90 %     34,288       252       2.94 %     44,907       351       3.13 %
Repurchase agreements
    380       0.50 %     345       1       1.16 %     411       1       0.97 %
    Total interest-bearing liabilities
    169,552       1.58 %     169,370       670       1.58 %     167,448       864       2.06 %
Non-interest-bearing liabilities:
                                                               
Demand deposits
    14,992               15,294                       15,836                  
Other non-interest-bearing liabilities
    2,144               1,791                       1,810                  
Total liabilities
    186,688               186,455                       185,094                  
Stockholders' equity
    19,503               19,394                       17,814                  
     Total liabilities and equity
  $ 206,191             $ 205,849                     $ 202,908                  
                                                                 
Net interest income
                          $ 2,127                     $ 1,830          
Net interest rate spread (2)
            4.10 %                     4.12 %                     3.53 %
Net interest-earning assets (3)
  $ 27,226             $ 26,749                     $ 25,449                  
Net interest margin (4)
                                    4.34 %                     3.79 %
Average of interest-earning
                                                               
     assets to interest-bearing
                                                               
       liabilities
            116.06 %                     115.79 %                     115.20 %
                     
(1)  Consists entirely of taxable investment securities.
                     
(2)  Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
     
(3)  Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
         
(4)  Net interest margin represents net interest income divided by average total interest-earning assets.
         


Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.
 
   
For the Three Months Ended March 31, 2011
 
   
Compared to the Three Months Ended
 
   
March 31, 2010
 
   
Increase (Decrease) Due to
       
   
Volume
   
Rate
   
Net
 
   
(In thousands)
 
                   
Interest-earning assets:
                 
Loans
  $ 160     $ 1     $ 161  
Investment securities
    (49 )     (9 )     (58 )
Short-term investments
    -       -       -  
 
                       
     Total interest-earning assets
    111       (8 )     103  
                         
Interest-bearing liabilities:
                       
Savings deposits
    -       1       1  
NOW accounts
    2       1       3  
Money market accounts
    46       (17 )     29  
Certificates of deposit
    (53 )     (75 )     (128 )
                         
 Total interest-bearing deposits
    (5 )     (90 )     (95 )
                         
FHLB advances
    (83 )     (16 )     (99 )
                         
     Total interest-bearing liabilities
    (88 )     (106 )     (194 )
 
                       
Change in net interest income
  $ 199     $ 98     $ 297  
                         
 
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 and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company recently began to sell loans to the secondary market and expects to continue to utilize this strategy in future periods.

We regularly adjust our investments in liquid assets based upon our assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities.
 
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2011, cash and cash equivalents totaled $3.3 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $6.3 million at March 31, 2011. Our policies also allow for access to the wholesale funds market for up to 50.0% of total assets, or $103.1 million. At March 31, 2011, we had $34.0 million in FHLB advances outstanding and $996,000 in brokered certificates of deposit, allowing the Company access to an additional $68.1 million in wholesale funds based on policy guidelines.
 
At March 31, 2011, we had $5.4 million in loan commitments outstanding. In addition to commitments to originate loans, we had $23.5 million in unadvanced funds to borrowers.
 




 
Related to our secondary market activities, we had $611,000 of forward loan sale commitments at March 31, 2011. These forward loan sale commitments were used to offset the interest rate risk associated with mortgage loans, which have had their interest rate locked by our customers.
 
Certificates of deposit due within one year of March 31, 2011 totaled $40.1 million, or 26.7% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit or other wholesale funding options. 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, 2011. 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.
 
We have no material commitments or demands that are likely to affect our liquidity other than set forth below. In the event loan demand were to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we would access our borrowing capacity with the FHLB and other wholesale market sources.
 
Our primary investing activities are the origination of loans and the purchase of securities. During the three months ended March 31, 2011, we originated $16.7 million of loans. We also sold $2.7 million in residential mortgage loans for the three months ended March 31, 2011.
 
 Financing activities consist primarily of activity in deposit accounts, FHLB borrowings and advances and the sale of residential mortgages. We experienced a net decrease in total deposits of $1.3 million for the three months ended March 31, 2011. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive.
 
FHLB borrowings and advances reflected a net increase of $2.3 million during the three months ended March 31, 2011. FHLB borrowings and advances have primarily been used to fund loan demand.
 
Capital Management. The Bank is subject to various regulatory capital requirements 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, 2011, the Bank exceeded all of its regulatory capital requirements and is considered “well capitalized” under regulatory guidelines.

The OTS, as the primary federal regulator of federal savings banks, periodically recommends certain of those institutions take voluntary steps to reduce risk to the institutions and the federal deposit insurance fund. In light of the current economic environment, the OTS requested and the Bank’s board of directors agreed on October 27, 2010 to certain voluntary constraints on the Bank’s leveraged growth strategy. The OTS has agreed to revisit these voluntary constraints from time to time. The voluntary constraints are as follows: (i) the Bank will maintain a Tier one (core) capital ratio of at least 7.1%; and (ii) in the event the Tier one (core) capital ratio decreases below 7.5%, the ratio of “high-risk” loans, as defined, to Tier one (core) capital would not exceed 350%; the ratio of classified assets to Tier one (core) capital (plus the allowance for loan losses) would not exceed 15%; and the ratio of nonperforming assets to total assets would not exceed 1.5%. As of March 31, 2011, the Bank’s Tier one capital ratio was 8.88% compared to the requested target of 7.50%. As of March 31, 2011, the Company had approximately $625,000 of cash available to down-stream to the Bank to support its future capital needs.

Off-Balance Sheet Arrangements. For the three months ended March 31, 2011, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 
Item 3.   Quantitative and Qualitative Disclosure About Market Risk

 
Not applicable to smaller reporting companies.
 
Item 4.   Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure (1) that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and (2) that they are alerted in a timely manner about material information relating to the Company required to be filed in its periodic SEC filings.
 
There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 




 
PART II. OTHER INFORMATION
 
Item 1.   Legal Proceedings

Neither the Company nor the Bank is engaged in pending legal proceedings material to the Company’s consolidated financial condition or results of operations.
 
Item 1A. Risk Factors

Not applicable to smaller reporting companies.
 
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

 
a) Not applicable
 
 
b) Not applicable
 
 
c) The Company did not repurchase any shares during the quarter ended March 31, 2011.
 
Item 3.   Defaults Upon Senior Securities

 
None
 
Item 4.   [Removed and Reserved]
 
Item 5.   Other Information
 
 
a)  Not applicable
 
b) There were no material changes to the procedures by which security holders may recommend nominees to the Company’s board of directors during the period covered by this Form 10-Q.
 
Item 6.   Exhibits

31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act





GEORGETOWN BANCORP, INC.

SIGNATURES

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


 
GEORGETOWN BANCORP, INC.
 
 
                  (Registrant)
 
     
     
     
     
Date: May 9, 2011
/s/ Robert E. Balletto
 
 
Robert E. Balletto
 
President and Chief Executive Officer
 
(Principal Executive Officer)
     
     
 
/s/ Joseph W. Kennedy
 
 
Joseph W. Kennedy
 
Senior Vice President, Chief Financial Officer and Treasurer
 
(Principal Accounting and Financial Officer)

 
 
30