Georgetown Bancorp, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Georgetown Bancorp, Inc.	ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - Georgetown Bancorp, Inc.	ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - Georgetown Bancorp, Inc.	ex31_1.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 June 30, 2011

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 incorporation or organization)	(I.R.S. Employer 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 August 5, 2011.

Form 10-Q

GEORGETOWN BANCORP, INC.

Table of Contents

Part I.	Financial Information	Page

Item 1:	Financial Statements (Unaudited)

	Consolidated Statements of Financial Condition at June 30, 2011 and December 31, 2010	1

	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2011 and 2010	2

	Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2011 and 2010	3

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010	4

	Notes to Consolidated Financial Statements	6

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4:	Controls and Procedures	33

Part II.	Other Information

Item 1:	Legal Proceedings	34
Item 1A:	Risk Factors	34
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3:	Defaults upon Senior Securities	34
Item 4:	[Removed and Reserved]	34
Item 5:	Other Information	34
Item 6:	Exhibits	34

SIGNATURES		35

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

GEORGETOWN BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

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ASSETS

	At			At
	June 30,			December 31,
	2011			2010
	(Unaudited)
	(In thousands)

Cash and due from banks	$	1,860		$	1,490
Short-term investments		4,920			1,808
Total cash and cash equivalents		6,780			3,298

Securities available for sale, at fair value		6,420			7,219
Securities held to maturity, at amortized cost		2,730			3,202
Federal Home Loan Bank stock, at cost		3,111			3,111
Loans held for sale		237			685
Loans, net of allowance for loan losses of $1,660,000 at
June 30, 2011 and $1,651,000 at December 31, 2010		172,846			178,524
Premises and equipment, net		3,911			3,961
Accrued interest receivable		711			777
Bank-owned life insurance		2,646			2,597
Prepaid FDIC insurance		421			514
Other assets		1,113			1,127

Total assets	$	200,926		$	205,015

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits	$	151,200		$	151,463
Securities sold under agreements to repurchase		422			491
Short-term Federal Home Loan Bank advances		3,000			3,500
Long-term Federal Home Loan Bank advances		25,152			28,182
Mortgagors' escrow accounts		588			598
Accrued expenses and other liabilities		1,038			1,612
Total liabilities		181,400			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		9,311			8,999
Accumulated other comprehensive income		103			120
Unearned compensation - ESOP (32,693 and 36,789 shares unallocated
at June 30, 2011 and December 31, 2010, respectively)		(327	)		(368	)
Unearned compensation - Restricted stock (36,552 and 24,000 shares non-vested
at June 30, 2011 and December 31, 2010, respectively)		(198	)		(100	)
Treasury stock, at cost (133,347 and 138,863 shares at June 30, 2011
and December 31, 2010, respectively)		(1,136	)		(1,184	)
Total stockholders' equity		19,526			19,169

Total liabilities and stockholders' equity	$	200,926		$	205,015

See accompanying notes to consolidated financial statements.

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GEORGETOWN BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

--------------------------------------------------------------

(unaudited)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2011			2010		2011		2010
	(In thousands, except share data)

Interest and dividend income:
Loans, including fees	$	2,685		$	2,656	$	5,383	$	5,193
Securities		92			149		191		306
Short-term investments		-			1		-		1
Total interest and dividend income		2,777			2,806		5,574		5,500

Interest expense:
Deposits		413			537		830		1,049
Short-term Federal Home Loan Bank advances		2			7		7		13
Long-term Federal Home Loan Bank advances		231			328		478		673
Securities sold under agreements to repurchase		-			-		1		1
Total interest expense		646			872		1,316		1,736

Net interest income		2,131			1,934		4,258		3,764
Provision for loan losses		681			76		745		165
Net interest income, after provision for loan losses		1,450			1,858		3,513		3,599

Non-interest income:
Customer service fees		131			155		265		313
Mortgage banking income, net		43			71		110		197
Income from bank-owned life insurance		25			25		49		50
Other		(1	)		-		-		1
Total non-interest income		198			251		424		561

Non-interest expenses:
Salaries and employee benefits		954			901		1,959		1,773
Occupancy and equipment expenses		182			181		385		386
Data processing expenses		108			111		217		219
Professional fees		104			61		209		153
Advertising expenses		71			88		158		170
FDIC insurance		54			60		101		117
Other general and administrative expenses		234			194		437		377
Total non-interest expenses		1,707			1,596		3,466		3,195

(Loss) income before income taxes		(59	)		513		471		965

Income tax (benefit) provision		(39	)		178		159		344

Net (loss) income	$	(20	)	$	335	$	312	$	621

Weighted-average number of common shares outstanding:
Basic		2,646,420			2,620,213		2,641,606		2,612,301
Diluted		2,646,420			2,620,213		2,641,803		2,612,301

Earnings per share:
Basic	$	(0.01	)	$	0.13	$	0.12	$	0.24
Diluted	$	(0.01	)	$	0.13	$	0.12	$	0.24

See accompanying notes to consolidated financial statements.

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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		-		-			621		-			-			-			-			621
Net unrealized gain on securities
available for sale, net of related
tax effects of $36,000		-		-			-		66			-			-			-			66
Total comprehensive income																					687

Common stock held by ESOP allocated or
committed to be allocated (4,096 shares)		-		(20	)		-		-			41			-			-			21

Restricted stock granted in connection with
equity incentive plan (25,000 shares)		-		130			-		-			-			(130	)		-			-

Forfeiture of restricted stock (1,000 shares)		-		(5	)		-		-			-			5			-			-

Share based compensation - options		-		4			-		-			-			-			-			4
Share based compensation - restricted stock		-		-			-		-			-			10			-			10

Balance at June 30, 2010	$	278	$	11,438		$	8,167	$	193		$	(409	)	$	(115	)	$	(1,184	)	$	18,368

Balance at December 31, 2010	$	278	$	11,424		$	8,999	$	120		$	(368	)	$	(100	)	$	(1,184	)	$	19,169

Comprehensive income:
Net income		-		-			312		-			-			-			-			312
Net unrealized loss on securities
available for sale, net of related
tax effects of $11,000		-		-			-		(17	)		-			-			-			(17	)
Total comprehensive income																					295

Common stock held by ESOP allocated or
committed to be allocated (4,096 shares)		-		(13	)		-		-			41			-			-			28

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		-		11			-		-			-			-			-			11
Share based compensation - restricted stock		-		-			-		-			-			25			-			25

Balance at June 30, 2011	$	278	$	11,495		$	9,311	$	103		$	(327	)	$	(198	)	$	(1,136	)	$	19,526

See accompanying notes to consolidated financial statements.

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GEORGETOWN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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(unaudited)

	Six Months Ended
	June 30,
	2011			2010
	(In thousands)
Cash flows from operating activities:
Net income	$	312		$	621
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses		745			165
Accretion of securities, net		(4	)		(10	)
Amortization of deferred loan fees and costs, net		(46	)		(11	)
Depreciation and amortization expense		129			168
Decrease in accrued interest receivable		66			10
Income from bank-owned life insurance		(49	)		(50	)
Stock-based compensation expense		64			35
Loans originated for sale		(4,732	)		(11,738	)
Principal balance of loans sold		5,180			10,700
Prepaid FDIC insurance		93			109
Net change in other assets and liabilities		(549	)		524
Net cash provided by operating activities		1,209			523

Cash flows from investing activities:
Activity in securities available for sale:
Maturities, prepayments and calls		1,755			4,013
Purchases		(983	)		(3,000	)
Maturities, prepayments and calls
of securities held to maturity		475			576
Loan originations, net		4,979			(9,340	)
Principal balance of portfolio loans sold		-			157
Purchase of premises and equipment		(79	)		(94	)
Net cash provided (used) by investing activities		6,147			(7,688	)

(continued)

See accompanying notes to consolidated financial statements.

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GEORGETOWN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

---------------------------------------------------------------------

(unaudited)

(concluded)

	Six Months Ended
	June 30,
	2011			2010
	(In thousands)
Cash flows from financing activities:
Net change in deposits		(263	)		10,656
Net change in securities sold under agreements
to repurchase		(69	)		(10	)
Net change in Federal Home Loan Bank advances with
maturities of three months or less		(500	)		1,200
Proceeds of Federal Home Loan Bank advances
with maturities greater than three months		-			2,500
Repayments of Federal Home Loan Bank advances
with maturities greater than three months		(3,030	)		(3,529	)
Net change in mortgagors' escrow accounts		(10	)		43
Return of vested restricted shares to treasury stock		(2	)		-
Net cash (used) provided by financing activities		(3,874	)		10,860

Net change in cash and cash equivalents		3,482			3,695

Cash and cash equivalents at beginning of period		3,298			3,645

Cash and cash equivalents at end of period	$	6,780		$	7,340

Supplementary information:
Interest paid on deposit accounts	$	829		$	1,046
Interest paid on borrowings		498			684
Income taxes paid		507			-

See accompanying notes to consolidated financial statements.

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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- and six-month periods ended June 30, 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						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

Net (loss) income available to common stockholders	$	(20,000	)	$	335,000		$	312,000		$	621,000

Basic common shares:
Weighted average shares outstanding		2,643,903			2,638,387			2,642,279			2,638,387
Less: Weighted average unallocated ESOP shares		(34,035	)		(42,229	)		(35,059	)		(43,252	)
Add: Weighted average unvested restricted stock
shares with non-forfeitable dividend rights		36,552			24,055			34,386			17,166
Basic weighted average common shares outstanding		2,646,420			2,620,213			2,641,606			2,612,301

Dilutive potential common shares		-			-			197			-

Diluted weighted average common shares outstanding		2,646,420			2,620,213			2,641,803			2,612,301

Basic earnings per share	$	(0.01	)	$	0.13		$	0.12		$	0.24

Diluted earnings per share	$	(0.01	)	$	0.13		$	0.12		$	0.24

Options to purchase 42,348 and 24,000 shares were not included in the computation of diluted earnings per share for the three months ended June 30, 2011 and 2010, respectively, because to do so would have been antidilutive. Of the 42,348 options to purchase shares, 21,748 were not included in the computation of diluted earnings for the six months ended June 30, 2011, because to do so would have

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been antidilutive. Options to purchase 24,000 shares were not included in the computation of diluted earnings per share for the six months ended June 30, 2010, 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 June 30, 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 ended 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.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards.” The amendments in this ASU explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. Under this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive

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statements. An entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. An entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.

(5)

Securities

A summary of securities is as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In thousands)

At June 30, 2011

Securities available for sale

Government-sponsored
enterprise obligations	$	2,004	$	1	$	(25	)	$	1,980
Residential mortgage-backed
securities		4,259		202		(21	)		4,440

Total securities
available for sale	$	6,263	$	203	$	(46	)	$	6,420

Securities held to maturity

Residential mortgage-backed
securities	$	2,730	$	180	$	-		$	2,910

			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.

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The amortized cost and estimated fair value of debt securities by contractual maturity at June 30, 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	$	504	$	505	$	-	$	-
Over 10 years		1,500		1,475		-		-
		2,004		1,980		-		-
Residential mortgage-backed
securities		4,259		4,440		2,730		2,910

	$	6,263	$	6,420	$	2,730	$	2,910

There were no sales of securities for the six months ended June 30, 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 June 30, 2011:

Securities available for sale

Government-sponsored
enterprise obligations	$	25	$	1,475	$	-	$	-
Residential mortgage-backed
securities		21		963		-		-

Total securities
available for sale	$	46	$	2,438	$	-	$	-

At December 31, 2010:

Securities available for sale

Government-sponsored
enterprise obligations	$	36	$	1,464	$	-	$	-

At June, 2011, two securities classified as available-for-sale had an unrealized loss with aggregate depreciation of 1.85% from the securities’ amortized cost basis, which management believes to be temporary.

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(6)

Loans and Servicing

Loans

A summary of loans is as follows:

	At						At
	June 30,						December 31,
	2011						2010
	Amount			Percent			Amount			Percent
	(Dollars in thousands)

Residential loans:
One-to-four family	$	67,014			38.44	%	$	70,685			39.25	%
Home equity loans
and lines of credit		16,904			9.69			17,305			9.61
Total residential mortgage loans		83,918			48.13			87,990			48.86

Commercial loans:
One-to-four family investment property		12,769			7.32			11,892			6.60
Multi-family real estate		14,514			8.32			14,121			7.84
Commercial real estate		25,085			14.39			27,688			15.38
Commercial business		11,219			6.43			12,475			6.93
Total commercial loans		63,587			36.46			66,176			36.75

Construction loans:
One-to-four family		16,773			9.62			16,725			9.29
Multi-family		8,859			5.08			7,730			4.29
Non-residential		629			0.36			733			0.41
Total construction loans		26,261			15.06			25,188			13.99

Consumer		618			0.35			726			0.40

Total loans:		174,384			100.00	%		180,080			100.00	%

Other items:
Net deferred loan costs		122						95
Allowance for loan losses		(1,660	)					(1,651	)

Total loans, net	$	172,846					$	178,524

Table of Contents

An analysis of the allowance for loan losses at June 30, 2011 and December 31, 2010 is below. For additional information please refer to Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

	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 June 30, 2011

Allowance for loan losses

Beginning Balance	$	233		$	320		$	60	$	106		$	431		$	304		$	93	$	83	$	6	$	15		$	1,651
Charge-offs		-			(741	)		-		-			-			(2	)		-		-		-		(1	)		(744	)
Recoveries		5			-			-		-			-			1			-		-		-		2			8
Provision		(11	)		704			17		10			(25	)		(21	)		37		33		5		(4	)		745
Ending Balance	$	227		$	283		$	77	$	116		$	406		$	282		$	130	$	116	$	11	$	12		$	1,660

Ending balance:
individually evaluated
for impairment	$	41		$	13		$	-	$	-		$	-		$	-		$	-	$	-	$	-	$	-		$	54

Ending balance:
collectively evaluated
for impairment	$	186		$	270		$	77	$	116		$	406		$	282		$	130	$	116	$	11	$	12		$	1,606

Loans

Ending Balance	$	67,014		$	16,904		$	12,769	$	14,514		$	25,085		$	11,219		$	16,773	$	8,859	$	629	$	618		$	174,384

Ending balance:
individually evaluated
for impairment	$	296		$	13		$	-	$	-		$	-		$	825		$	317	$	-	$	-	$	-		$	1,451

Ending balance:
collectively evaluated
for impairment	$	66,718		$	16,891		$	12,769	$	14,514		$	25,085		$	10,394		$	16,456	$	8,859	$	629	$	618		$	172,933

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

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The following is a summary of past-due and non-accrual loans at June 30, 2011 and December 31, 2010. For additional information please refer to Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

	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 June 30, 2011:

Residential loans:
One-to-four family	$	364	$	296	$	-	$	660	$	66,354	$	67,014	$	-	$	296
Home equity loans and lines of credit		19		-		-		19		16,885		16,904		-		13

Commercial loans:
One-to-four family investment property		-		-		-		-		12,769		12,769		-		-
Multi-family real estate		-		-		-		-		14,514		14,514		-		-
Commercial real estate		312		-		-		312		24,773		25,085		-		-
Commercial business		-		-		825		825		10,394		11,219		-		825

Construction loans:
One-to-four family		-		732		-		732		16,041		16,773		-		317
Multi-family		1,517		-		-		1,517		7,342		8,859		-		-
Non-residential		-		-		-		-		629		629		-		-

Consumer		7		-		-		7		611		618		-		-

Total	$	2,219	$	1,028	$	825	$	4,072	$	170,312	$	174,384	$	-	$	1,451

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

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The following is an analysis of impaired loans at June 30, 2011 and December 31, 2010.

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(In thousands)

At June 30, 2011

Impaired loans without a valuation allowance

Residential loans:
One-to-four family	$	-	$	-	$	-	$	-	$	-
Home equity loans and lines of credit		-		-		-		-		-
Commercial loans:
One-to-four family investment property		-		-		-		-		-
Multi-family real estate		-		-		-		-		-
Commercial real estate		-		-		-		-		-
Commercial business		825		825		-		118		-

Construction loans:
One-to-four family		317		317		-		45		19
Multi-family		-		-		-		-		-
Non-residential		-		-		-		-		-

Consumer		-		-		-		-		-

Total impaired with no related allowance	$	1,142	$	1,142	$	-	$	163	$	19

Impaired loans with a valuation allowance

Residential loans:
One-to-four family	$	296	$	296	$	41	$	42	$	1
Home equity loans and lines of credit		13		13		13		2		-

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	$	309	$	309	$	54	$	44	$	1

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

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The following table represents the Company’s loans by risk rating at June 30, 2011 and December 31, 2010. For additional information please refer to Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

	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 June 30, 2011:

Classification:
Pass	$	66,718	$	16,891	$	12,375	$	14,514	$	21,301	$	9,456	$	15,234	$	7,342	$	629	$	618	$	165,078
Special mention		-		-		394		-		464		298		-		1,517		-		-		2,673
Substandard		296		13		-		-		3,320		1,465		1,539		-		-		-		6,633
Doubtful		-		-		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-		-
Total loans	$	67,014	$	16,904	$	12,769	$	14,514	$	25,085	$	11,219	$	16,773	$	8,859	$	629	$	618	$	174,384

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

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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 $49,092,000 and $45,028,000 at June 30, 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 $455,000 at June 30, 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.

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The following summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity-related valuation allowances:

	Six Months Ended
	June 30,
	2011			2010
	(In thousands)

Mortgage servicing rights:
Balance at beginning of period	$	424		$	183
Additions		54			47
Disposals		-			-
Amortization		(51	)		(8	)
Balance at end of period		427			222

Valuation allowances:
Balance at beginning of period		4			-
Additions		12			-
Recoveries		-			-
Write-downs		-			-
Balance at end of period		16			-

Mortgage servicing assets, net	$	411		$	222

Fair value of mortgage servicing assets	$	455		$	237

(7)

Secured Borrowings and Collateral

Federal Home Loan Bank advances

At June 30, 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 $54.5 million, government-sponsored enterprise obligations with a fair value of $1.5 million and mortgage-backed securities with a fair value of $6.4 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 $422,000 at June 30, 2011 and were secured by Government-sponsored enterprise obligation with a fair value of $500,000 and a Residential mortgage-backed security with a fair value of $1.0 million. The weighted average interest rate on these agreements was 0.50% at June 30, 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 June 30, 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. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models,

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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 six month period ended June 30, 2011.

Assets and liabilities measured at fair value on a recurring basis at June 30, 2011 and December 31, 2010 are summarized below.


							Assets
	Level 1		Level 2		Level 3		at Fair Value
	(In thousands)
At June 30, 2011

Assets
Securities available for sale	$	-	$	6,420	$	-	$	6,420


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 June 30, 2011 are summarized below. The fair value adjustments relate to the amount of write down recorded during the six months ended June 30, 2011 on the assets held at June 30, 2011.

							Assets
	Level 1		Level 2		Level 3		at Fair Value
	(In thousands)
At June 30, 2011

Impaired loans	$	-	$	-	$	255	$	255
Other real estate owned		-		-		53		53
	$	-	$	-	$	308	$	308

							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

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	Fair Value Measurements
	Using Significant Unobservable Inputs
	Level 3
	Impaired Loans			Other Real Estate Owned

Beginning balance, December 31, 2010	$	9		$	53
Transfers in to level 3		255			-
Decrease due to loans charged off		(9	)		-
Ending balance, June 30, 2011	$	255		$	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 June 30, 2011 and December 31, 2010, the fair value of commitments outstanding is not significant since fees charged are not material.

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The estimated fair values and related carrying amounts of the Company’s financial instruments at June 30, 2011 and December 31, 2010, are as follows:

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(In thousands)
Financial assets:
Cash and cash equivalents	$	6,780	$	6,780	$	3,298	$	3,298
Securities available for sale		6,420		6,420		7,219		7,219
Securities held to maturity		2,730		2,910		3,202		3,398
FHLB stock		3,111		3,111		3,111		3,111
Loans held for sale		237		239		685		693
Loans, net		172,846		175,714		178,524		180,972
Accrued interest receivable		711		711		777		777
Capitalized mortgage servicing rights		411		455		420		461

Financial liabilities:
Deposits		151,200		151,521		151,463		151,859
Securities sold under agreements
to repurchase		422		422		491		491
Short-term FHLB advances		3,000		3,000		3,500		3,500
Long-term FHLB advances		25,152		25,715		28,182		28,774
Mortgagers' escrow accounts		588		588		598		598
Accrued interest payable		77		77		88		88

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(9)

Equity Incentive Plan

At June 30, 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 plan for the six months ended June 30, 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		9.17	$	-

Exercisable at end of period		5,796		$	6.72		8.65	$	-

	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 June 30, 2011, unrecognized share-based compensation expense related to non-vested options amounted to $88,000 and the unrecognized share-based compensation expense related to non-vested restricted stock amounted to $198,000. Both amounts are expected to be recognized over a weighted average period of 3.7 years.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $6.65 as of June 30, 2011 which would have been received by the option holders had all option holders exercised their options as of that date. There were no in-the-money options exercisable as of June 30, 2011, therefore the options have no intrinsic value.

For the six months ended June 30, 2011, the Company recognized compensation expense for stock options of $11,000 with a related tax benefit of $2,000. For the six months ended June 30, 2011, the Company recognized compensation expense for restricted stock awards of $25,000, with a related tax benefit of $10,000.

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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.

Operating results for the three and six months ended June 30, 2011 were negatively affected primarily by the charge-off of one, large, out-of-market, residential home equity loan. We believe this charge-off is not a reflection of a negative trend in our loan portfolio overall, as non-performing assets totaled .75% of total assets as of June 30, 2011 and remained below local and national averages. The Company continues to generate strong financial performance relative to its peers, driven by increasing net interest margins and core deposits.

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.

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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 Comptroller of Currency (“OCC”), 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 June 30, 2011 and December 31, 2010

Total assets decreased by $4.1 million, or 2.0%, to $200.9 million at June 30, 2011, from $205.0 million at December 31, 2010. The decrease in total assets resulted primarily from a decrease in net loans and investment securities, partially offset by an increase in short-term investments, as loan payoffs and maturing securities were used to pay off maturing FHLB advances and a portion of the funds remained in short term investments. Net loans decreased $5.7 million, or 3.2%, to $172.8 million at June 30, 2011, from $178.5 million at December 31, 2010, primarily due to a $3.7 million, or 5.2%, decrease in residential mortgage loans, a $2.6 million, or 9.4%, decrease commercial real estate loans and a $1.3 million, or 10.1%, decrease in commercial business loans, partially offset by a $1.1 million, or 14.6%, increase in construction loans collateralized by multi-family properties. Investment securities available for sale decreased $799,000, or 11.1%, to $6.4 million at June 30, 2011, from $7.2 million at December 31, 2010. Investment securities held to maturity decreased $472,000, or 14.7, to $2.7 million at June 30, 2011. At June 30, 2011, total investment securities were comprised of government-sponsored enterprise obligations and mortgage-backed securities, all of which were guaranteed by government-sponsored enterprises. As a result, our investment securities impairment considerations generally related to fluctuations in market interest rates. At June 30, 2011, no securities were deemed to be other–than-temporarily impaired. Total interest-earning assets decreased $4.3 million, or 2.2%, to $191.9 million at June 30, 2011, from $196.2 million at December 31, 2010.

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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
	June 30,						December 31,
	2011						2010
	Amount			Percent			Amount			Percent
	(Dollars in thousands)

Residential loans:
One-to-four family	$	67,014			38.44	%	$	70,685			39.25	%
Home equity loans
and lines of credit		16,904			9.69			17,305			9.61
Total residential mortgage loans		83,918			48.13			87,990			48.86

Commercial loans:
One-to-four family investment property		12,769			7.32			11,892			6.60
Multi-family real estate		14,514			8.32			14,121			7.84
Commercial real estate		25,085			14.39			27,688			15.38
Commercial business		11,219			6.43			12,475			6.93
Total commercial loans		63,587			36.46			66,176			36.75

Construction loans:
One-to-four family		16,773			9.62			16,725			9.29
Multi-family		8,859			5.08			7,730			4.29
Non-residential		629			0.36			733			0.41
Total construction loans		26,261			15.06			25,188			13.99

Consumer		618			0.35			726			0.40

Total loans:		174,384			100.00	%		180,080			100.00	%

Other items:
Net deferred loan costs		122						95
Allowance for loan losses		(1,660	)					(1,651	)

Total loans, net	$	172,846					$	178,524

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Assets Quality. 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 June 30,			At December 31,
	2011			2010
	(Dollars in thousands)

Non-accrual loans:
Residential mortgage loans	$	309		$	45
Commercial loans		825			-
Construction loans		317			-
Consumer		-			-

Total non-accrual loans		1,451			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		1,451			253

Real estate owned		53			53

Total non-performing assets	$	1,504		$	306

Ratios:
Non-performing loans to total loans		0.83	%		0.14	%
Non-performing assets to total assets		0.75	%		0.15	%

Non-performing assets increased $1.2 million to $1.5 million at June 30, 2011 compared to $306,000 at December 31, 2010. These balances represented 0.75% of total assets at June 30, 2011 and 0.15% of total assets at December 31, 2010. One commercial loan classified as non-accrual at June 30, 2011 totaling $825,000 was fully paid off in July 2011 with no loss to the Company.

Loans classified as substandard increased $6.4 million to $6.6 million at June 30, 2011 from $253,000 at December 31, 2010. The increase was the result of a more conservative review of technical deficiencies in our special mention loans, resulting in a migration from special mention to substandard. One commercial loan classified as substandard at June 30, 2011 totaling $825,000 was fully paid off in July 2011 with no loss to the Company. The substandard loans include $2.3 million in construction loans where the construction is complete, the properties are on the market to be sold and the loans are well collateralized. All of these credits continue to be aggressively managed.

The allowance for loan losses was $1.7 million at June 30, 2011. Loan charge-offs were $744,000 and loan recoveries were $8,000 for the six months ended June 30, 2011, as compared to loan charge-offs of $89,000 and loan recoveries of $7,000 for the same period in 2010. The increase in loan charge-offs was primarily due to one, large, out-of-market, residential home equity loan that was charged off during the three months ended June 30, 2011. The allowance represented 0.95% and of total loans at June 30, 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 114.40% at June 30, 2011 and 652.57% at December 31, 2010.

Total deposits decreased by $263,000, or 0.2%, to $151.2 million at June 30, 2011, from $151.5 million at December 31, 2010. The deposit decreases were primarily due to decreases in money market accounts and savings accounts, partially offset by increases in demand deposit accounts and certificates of deposit. Money market accounts decreased $2.5 million, or 4.4%, primarily in business money market accounts. A portion of those balances transferred into business checking accounts. Savings accounts decreased $775,000, or 6.3%. Balances in on-us accounts temporarily increased $1.4 million, or 200.6%, as checks written against the treasurers’ check account had not cleared as of June 30, 2011. Demand deposits increased $1.2 million, or 7.5%, primarily in business demand deposits, which increased $2.4 million, or 36.8%, and benefited from transfers from business money market accounts. Certificates of deposit increased $701,000, or 1.4%.

Total borrowings from the FHLB decreased $3.5 million, or 11.1%, as loan payoffs and maturing securities were used to pay off maturing FHLB advances. Short-term borrowings decreased $500,000, or 14.3% and long-term borrowings decreased $3.0 million, or 10.8%.

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Total stockholders’ equity increased $357,000, or 1.9%, to $19.5 million at June 30, 2011, from $19.2 million at December 31, 2010, primarily due to net income of $312,000. The net unrealized gains on securities available for sale of $157,000 at June 30, 2011 were attributable to changes in market interest rates.

Comparison of Operating Results for the Three Months Ended June 30, 2011 and 2010

General. The net loss for the three months ended June 30, 2011 was $20,000, or $.01 per basic and diluted share, compared to net income of $335,000, or $.13 per basic and diluted share for the three months ended June 30, 2010. The decrease in net income was primarily due to an increase in the provision for loan losses. The provision for loan losses increased primarily as a result of one residential home equity loan that was charged off.

Interest Income. Interest income decreased by $29,000, or 1.0%, to $2.8 million for the three months ended June 30, 2011. The decrease in interest income was primarily due to a decrease in the average balance of interest-earning assets of $7.5 million, or 3.8%, to $191.0 million for the three months ended June 30, 2011, from $198.5 million for the same period in 2010, partially offset by a 17 basis point increase in the average yield on interest-earning assets to 5.82% for the three months ended June 30, 2011, from 5.65% for the same period in 2010.

Interest income on loans increased $29,000, or 1.1%, to $2.7 million for the three months ended June 30, 2011. The increase was due to an increase in the average balance of loans of $815,000, or 0.5%, to $178.0 million for the three months ended June 30, 2011, from $177.2 million for the three months ended June 30, 2010 and by a 4 basis point increase in the average loan yield to 6.03% for the three months ended June 30, 2011, from 5.99% for the same period in 2010.

Interest and dividend income on investment securities decreased $57,000, or 38.3%, for the three months ended June 30, 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 $6.1 million, or 33.5%, to $12.1 million for the three months ended June 30, 2011, from $18.2 million for the three months ended June 30, 2010 and by a decrease in average investment yields of 23 basis points, reflecting lower market interest rates, to 3.04% for the three months ended June 30, 2011, from 3.27% for the three months ended June 30, 2010.

Interest Expense. Interest expense decreased $226,000, or 25.9%, to $646,000 for the three months ended June 30, 2011 from $872,000 for the three months ended June 30, 2010. The decrease in interest expense was primarily due to a 44 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 June 30, 2011, from 2.02% for the same period in 2010 and by a decrease in the average balance of interest-bearing liabilities of $8.9 million, or 5.2%, to $163.8 million for the three months ended June 30, 2011, from $172.8 million for the same period in 2010.

Interest expense on interest-bearing deposits decreased $124,000, or 23.1%, to $413,000 for the three months ended June 30, 2011, from $537,000 for the same period in 2010. The decrease was primarily due to a 43 basis point decrease in the average cost of interest-bearing deposits to 1.24% for the three months ended June 30, 2011, from 1.67% for the same period in 2010, partially offset by an increase in the average balance of interest-bearing deposits of $3.9 million, or 3.0%, to $132.7 million for the three months ended June 30, 2011 from $128.8 million for the same period in 2010.

Interest expense on FHLB short-term and long-term advances decreased $102,000, or 30.4%, to $233,000 for the three months ended June 30, 2011, from $335,000 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 $12.8 million, or 29.3%, to $30.8 million for the three months ended June 30, 2011 from $43.5 million for the same period in 2010 and by a 5 basis point decrease in the average cost of FHLB short-term and long-term advances to 3.03% for the three months ended June 30, 2011, from 3.08% for the same period in 2010.

Net Interest Income. Net interest income increased $197,000, or 10.2%, to $2.1 million for the three months ended June 30, 2011, from $1.9 million for the same period in 2010. The increase in net interest income was primarily the result of a 56 basis point increase in net interest margin to 4.46% for the three months ended June 30, 2011, from 3.90% for the same period in 2010 and by the $1.4 million or 5.5%, increase in net average interest-earning assets to $27.1 million for the three months ended June 30, 2011, from $25.7 million for the same period in 2010.

Provision for Loan Losses. The provision for loan losses for the three months ended June 30, 2011 was $681,000 compared to $76,000 for the three months ended June 30, 2010. The increase in the provision was primarily due to one, residential home equity loan that was charged off during the three months ended June 30, 2011. Loan charge-offs were $744,000 and loan recoveries were $4,000 for the three months ended June 30, 2011, as compared to loan charge-offs of $84,000 and loan recoveries of $4,000 for the same period in 2010.

Non-interest Income. Non-interest income decreased $53,000, or 21.1%, to $198,000 for the three months ended June 30, 2011, from $251,000 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 $28,000, or 39.4% to $43,000 for the three months ended June 30, 2011, from $71,000 for the same period in 2010. The decline is reflective of the softening housing market. The decrease in customer service fees was primarily related to a decline in checking account overdraft fees of $30,000, or 36.5%, partially offset by an increase in ATM service charges of $7,000, or 15.7%.

Non-interest Expense. Non-interest expense increased $111,000, or 7.0%, to $1.7 million for the three months ended June 30, 2011. The increase in non-interest expense was primarily due to an increase in salaries and benefits, professional fees and other general and administrative expenses, partially offset by a decrease in advertising expense. Salaries and benefits expense increased $53,000, or 5.9%,

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primarily due to the costs associated with additional staff and the replacement of existing staff at higher salaries. Professional fees increased $43,000, or 70.5%, primarily due to internal auditing and consulting expense. Other general and administrative expenses increased $40,000, or 20.6%, for the three months ended June 30, 2011, primarily due to recruitment and donation expense. Advertising expense decreased $17,000, or 19.3%, for the three months ended June 30, 2011.

Income Taxes. The loss before income taxes of $59,000 resulted in an income tax benefit of $39,000 for the three months ended June 30, 2011, compared to income before income taxes of $513,000 and a related income tax provision of $178,000 for the three months ended June 30, 2010. The effective tax rates for the three months ended June 30, 2011 and 2010 were 66.0% and 34.8%, respectively. The increase in the effective tax rate for the three months ended June 30, 2011 was primarily due to the relationship of non-taxable income to the quarterly pre-tax loss.

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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 June 30,					Three Months Ended June 30,
	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	$	174,743		5.82	%	$	178,045	$	2,685		6.03	%	$	177,230	$	2,656		5.99	%
Investment securities (1)		12,261		3.03	%		12,107		92		3.04	%		18,213		149		3.27	%
Short-term investments		4,920		0.05	%		819		-		0.00	%		3,041		1		0.13	%
Total interest-earning assets		191,924		5.49	%		190,971		2,777		5.82	%		198,484		2,806		5.65	%
Non-interest-earning assets		9,002					10,986		-					10,464		-
Total assets	$	200,926				$	201,957		2,777				$	208,948		2,806

Interest-bearing liabilities:
Savings deposits	$	11,430		0.22	%	$	11,627		6		0.21	%	$	12,053		7		0.23	%
NOW accounts		14,869		0.43	%		14,489		16		0.44	%		13,289		24		0.72	%
Money market accounts		54,921		0.93	%		55,878		129		0.92	%		47,290		151		1.28	%
Certificates of deposit		50,723		2.04	%		50,706		262		2.07	%		56,215		355		2.53	%
Total interest-bearing deposits		131,943		1.24	%		132,700		413		1.24	%		128,847		537		1.67	%
FHLB advances		28,152		3.09	%		30,763		233		3.03	%		43,534		335		3.08	%
Repurchase agreements		422		0.50	%		382		-		0.00	%		391		-		0.00	%
Total interest-bearing liabilities		160,517		1.56	%		163,845		646		1.58	%		172,772		872		2.02	%
Non-interest-bearing liabilities:
Demand deposits		19,257					16,766							15,624
Other non-interest-bearing liabilities		1,626					1,746							2,458
Total liabilities		181,400					182,357							190,854
Stockholders' equity		19,526					19,600							18,094
Total liabilities and equity	$	200,926				$	201,957						$	208,948

Net interest income								$	2,131						$	1,934
Net interest rate spread (2)				3.93	%						4.24	%						3.63	%
Net interest-earning assets (3)	$	31,407				$	27,126						$	25,712
Net interest margin (4)											4.46	%						3.90	%
Average of interest-earning
assets to interest-bearing
liabilities				119.57	%						116.56	%						114.88	%

(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.

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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 June 30, 2011
	Compared to the Three Months Ended
	June 30, 2010
	Increase (Decrease) Due to
	Volume			Rate			Net
	(In thousands)

Interest-earning assets:
Loans	$	12		$	17		$	29
Investment securities		(50	)		(7	)		(57	)
Short-term investments		(1	)		-			(1	)

Total interest-earning assets		(39	)		10			(29	)

Interest-bearing liabilities:
Savings deposits		-			(1	)		(1	)
NOW accounts		2			(10	)		(8	)
Money market accounts		27			(49	)		(22	)
Certificates of deposit		(35	)		(58	)		(93	)

Total interest-bearing deposits		(6	)		(118	)		(124	)

FHLB advances		(98	)		(4	)		(102	)

Total interest-bearing liabilities		(104	)		(122	)		(226	)

Change in net interest income	$	65		$	132		$	197

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Comparison of Operating Results for the Six Months Ended June 30, 2011 and 2010

General. Net income for the six months ended June 30, 2011 was $312,000, or $.12 per basic and diluted share, compared to net income of $621,000, or $.24 per basic and diluted share for the six months ended June 30, 2010. The decrease in net income was primarily due to an increase in the provision for loan losses. The provision for loan losses increased primarily as a result of one residential home equity loan that was charged off.

Interest Income. Interest income increased by $74,000, or 1.3%, to $5.6 million for the six months ended June 30, 2011. The increase in interest income was primarily due to a 14 basis point increase in the average yield on interest-earning assets to 5.76% for the six months ended June 30, 2011, from 5.62% for the same period in 2010, partially offset by a decrease in the average balance of interest-earning assets of $2.2 million, or 1.1%, to $193.5 million for the six months ended June 30, 2011, from $195.7 million for the same period in 2010.

Interest income on loans increased $190,000, or 3.7%, to $5.4 million for the six months ended June 30, 2011. The increase was due to an increase in the average balance of loans of $5.8 million, or 3.3%, to $180.4 million for the six months ended June 30, 2011, from $174.6 million for the six months ended June 30, 2010 and by a 2 basis point increase in the average yield on interest-earning assets to 5.97% for the six months ended June 30, 2011, from 5.95% for the same period in 2010.

Interest and dividend income on investment securities decreased $115,000, or 37.6%, for the six months ended June 30, 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 $6.0 million, or 32.5%, to $12.5 million for the six months ended June 30, 2011, from $18.5 million for the six months ended June 30, 2010 and by a decrease in average investment yields of 25 basis points, reflecting lower market interest rates, to 3.06% for the six months ended June 30, 2011, from 3.31% for the six months ended June 30, 2010.

Interest Expense. Interest expense decreased $420,000, or 24.2%, to $1.3 million for the six months ended June 30, 2011 from $1.7 million for the six months ended June 30, 2010. The decrease in interest expense was primarily due to a 46 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 six months ended June 30, 2011, from 2.04% for the same period in 2010, as well as a decrease in the average balance of interest-bearing liabilities of $3.5 million, or 2.1%, to $166.6 million for the six months ended June 30, 2011, from $170.1 million for the same period in 2010.

Interest expense on interest-bearing deposits decreased $219,000, or 20.9%, to $830,000 for the six months ended June 30, 2011, from $1.0 million for the same period in 2010. The decrease was primarily due to a 43 basis point decrease in the average cost of interest-bearing deposits to 1.24% for the six months ended June 30, 2011, from 1.67% for the same period in 2010, partially offset by a increase in the average balance of interest-bearing deposits of $8.2 million, or 6.5%, to $133.7 million for the six months ended June 30, 2011 from $125.5 million for the same period in 2010.

Interest expense on FHLB short-term and long-term advances decreased $201,000, or 29.3%, to $485,000 for the six months ended June 30, 2011, from $686,000 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 $11.7 million, or 26.5%, to $32.5 million for the six months ended June 30, 2011 from $44.2 million for the same period in 2010 and by a 12 basis point decrease in the average cost of FHLB short-term and long-term advances to 2.98% for the six months ended June 30, 2011, from 3.10% for the same period in 2010.

Net Interest Income. Net interest income increased $494,000, or 13.1%, to $4.3 million for the six months ended June 30, 2011, from $3.8 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 4.40% for the six months ended June 30, 2011, from 3.85% for the same period in 2010 and by the $1.3 million or 5.3%, increase in net average interest-earning assets to $26.9 million for the six months ended June 30, 2011, from $25.6 million for the same period in 2010.

Provision for Loan Losses. The provision for loan losses for the six months ended June 30, 2011 was $745,000 compared to $165,000 for the six months ended June 30, 2010. The increase in the provision was primarily due to one, residential home equity loan that was charged off during the three months ended June 30, 2011. Loan charge-offs were $744,000 and loan recoveries were $8,000 for the six months ended June 30, 2011, as compared to loan charge-offs of $89,000 and loan recoveries of $7,000 for the same period in 2010.

Non-interest Income. Non-interest income decreased $137,000, or 24.4%, to $424,000 for the six months ended June 30, 2011, from $561,000 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 $87,000, or 44.2% to $110,000 for the six months ended June 30, 2011, from $197,000 for the same period in 2010. The decline is reflective of the softening housing market. The decrease in customer service fees was primarily related to a decline in checking account overdraft fees of $62,000, or 36.8%, partially offset by an increase in ATM service charges of $14,000, or 16.9%.

Non-interest Expense. Non-interest expense increased $271,000, or 8.5%, to $3.5 million for the six months ended June 30, 2011. The increase in non-interest expense was primarily due to an increase in salaries and benefits, professional fees and other general and administrative expenses, partially offset by a decrease in advertising expense and Federal Deposit Insurance Corporation (“FDIC”) deposit insurance. Salaries and benefits expense increased $186,000, or 10.5%, primarily due to the costs associated with additional staff and the replacement of existing staff at higher salaries. Other general and administrative expenses increased $60,000, or 15.9%, for the six months ended June 30, 2011. Professional fees increased $56,000, or 36.6%, primarily due to internal auditing, consulting and legal expense. Advertising expense decreased

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$12,000, or 7.1%, for the six months ended June 30, 2011. FDIC deposit insurance decreased $16,000, or 13.7%, for the six months ended June 30, 2011.

Income Taxes. The income before income taxes of $471,000 for the six months ended June 30, 2011 resulted in an income tax provision of $159,000 for the six months ended June 30, 2011, as compared to income before income taxes of $965,000 and a related income tax provision of $344,000 for the six months ended June 30, 2010. The effective tax rates for the six months ended June 30, 2011 and 2010 were 33.8% and 35.6%, respectively.

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	At June 30,					Six Months Ended June 30,
	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	$	174,743		5.82	%	$	180,411	$	5,383		5.97	%	$	174,598	$	5,193		5.95	%
Investment securities (1)		12,261		3.03	%		12,495		191		3.06	%		18,499		306		3.31	%
Short-term investments		4,920		0.05	%		625		-		0.00	%		2,609		1		0.08	%
Total interest-earning assets		191,924		5.49	%		193,531		5,574		5.76	%		195,706		5,500		5.62	%
Non-interest-earning assets		9,002					10,361		-					10,239		-
Total assets	$	200,926				$	203,892		5,574				$	205,945		5,500

Interest-bearing liabilities:
Savings deposits	$	11,430		0.22	%	$	11,892		12		0.20	%	$	12,062		12		0.20	%
NOW accounts		14,869		0.43	%		14,507		32		0.44	%		12,780		37		0.58	%
Money market accounts		54,921		0.93	%		56,641		258		0.91	%		43,336		252		1.16	%
Certificates of deposit		50,723		2.04	%		50,673		528		2.08	%		57,329		748		2.61	%
Total interest-bearing deposits		131,943		1.24	%		133,713		830		1.24	%		125,507		1,049		1.67	%
FHLB advances		28,152		3.09	%		32,516		485		2.98	%		44,217		686		3.10	%
Repurchase agreements		422		0.50	%		363		1		0.55	%		401		1		0.50	%
Total interest-bearing liabilities		160,517		1.56	%		166,592		1,316		1.58	%		170,125		1,736		2.04	%
Non-interest-bearing liabilities:
Demand deposits		19,257					16,034							15,729
Other non-interest-bearing liabilities		1,626					1,768							2,136
Total liabilities		181,400					184,394							187,990
Stockholders' equity		19,526					19,498							17,955
Total liabilities and equity	$	200,926				$	203,892						$	205,945

Net interest income								$	4,258						$	3,764
Net interest rate spread (2)				3.93	%						4.18	%						3.58	%
Net interest-earning assets (3)	$	31,407				$	26,939						$	25,581
Net interest margin (4)											4.40	%						3.85	%
Average of interest-earning
assets to interest-bearing
liabilities				119.57	%						116.17	%						115.04	%

(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.

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	For the Six Months Ended June 30, 2011
	Compared to the Six Months Ended
	June 30, 2010
	Increase (Decrease) Due to
	Volume			Rate			Net
	(In thousands)

Interest-earning assets:
Loans	$	173		$	17		$	190
Investment securities		(99	)		(16	)		(115	)
Short-term investments		(1	)		-			(1	)

Total interest-earning assets		73			1			74

Interest-bearing liabilities:
Savings deposits		-			-			-
NOW accounts		5			(10	)		(5	)
Money market accounts		77			(71	)		6
Certificates of deposit		(87	)		(133	)		(220	)

Total interest-bearing deposits		(5	)		(214	)		(219	)

FHLB advances		(182	)		(19	)		(201	)

Total interest-bearing liabilities		(187	)		(233	)		(420	)

Change in net interest income	$	260		$	234		$	494

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 June 30, 2011, cash and cash equivalents totaled $6.8 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $6.4 million at June 30, 2011. Our policies also allow for access to the wholesale funds market for up to 50.0% of total assets, or $100.5 million. At June 30, 2011, we had $28.2 million in FHLB advances outstanding and $996,000 in brokered certificates of deposit, allowing the Company access to an additional $71.3 million in wholesale funds based on policy guidelines.

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At June 30, 2011, we had $6.7 million in loan commitments outstanding. In addition to commitments to originate loans, we had $24.4 million in unadvanced funds to borrowers.

Related to our secondary market activities, we had $972,000 of forward loan sale commitments at June 30, 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 June 30, 2011 totaled $41.3 million, or 27.3% 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 June 30, 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 six months ended June 30, 2011, we originated $32.7 million of loans. We also sold $5.2 million in residential mortgage loans for the six months ended June 30, 2011.

Financing activities consist primarily of activity in deposit accounts, FHLB borrowings and advances and the sale of residential mortgages. We experienced a net increase in total deposits of $263,000 for the six months ended June 30, 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 decrease of $3.5 million during the six months ended June 30, 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 June 30, 2011, the Bank exceeded all of its regulatory capital requirements and is considered “well capitalized” under regulatory guidelines.

The Office of Thrift Supervision (“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 June 30, 2011, the Bank’s Tier one capital ratio was 9.11% compared to the requested target of 7.50%. As of June 30, 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 six months ended June 30, 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.

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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

The Standard & Poor’s downgrade in the U.S. government’s sovereign credit rating, and in the credit ratings of instruments issued, insured or guaranteed by certain related institutions, agencies and instrumentalities, could result in risks to the Company and general economic conditions that we are not able to predict.

On August 5, 2011, Standard & Poor’s downgraded the United States long-term debt rating from its AAA rating to AA+. On August 8, 2011, Standard & Poor's downgraded the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-term U.S. debt. Instruments of this nature are key assets on the balance sheets of financial institutions, including the Bank. These downgrades could adversely affect the market value of such instruments, and could adversely impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. We cannot predict if, when or how these changes to the credit ratings will affect economic conditions. These ratings downgrades could result in a significant adverse impact to the Company, and could exacerbate the other risks to which the Company is subject, including those described under Risk Factors in the Company’s 2010 Annual Report on Form 10-K.

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 June 30, 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

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

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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: August 12, 2011	/s/ Robert E. Balletto
	Robert E. Balletto
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: August 15, 2011	/s/ Joseph W. Kennedy
	Joseph W. Kennedy
	Senior Vice President, Chief Financial Officer and Treasurer
	(Principal Accounting and Financial Officer)

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