- Quarterly Report (10-Q)

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ____

COMMISSION FILE NUMBER : 000-51525

LEGACY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware		20-3135053
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

99 NORTH STREET
PITTSFIELD, MASSACHUSETTS 01201
(Address of principal executive offices) (Zip Code)

[phone]
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ 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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12(b)-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

The number of shares of Common Stock outstanding as of August 4, 2010 was 8,686,812.

 

 

 

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LEGACY BANCORP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page No.
Part I — Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009			2
Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009			3
Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2010 and 2009			4
Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009			5
Notes to Condensed Consolidated Financial Statements			7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3 Quantitative and Qualitative Disclosures about Market Risks			27
Item 4 Controls and Procedures			27
Part II — Other Information
Item 1 Legal Proceedings			28
Item 1A Risk Factors			28
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 3 Defaults Upon Senior Securities			29
Item 4 (Removed and Reserved)			29
Item 5 Other Information			29
Item 6 Exhibits			30
EX-31.1
EX-31.2
EX-32

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PART I — FINANCIAL INFORMATION

Item 1: Financial Statements

LEGACY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)

		June 30,				December 31,
		2010				2009
		(Unaudited)
ASSETS
Cash and due from banks		$	13,028			$	11,281
Short-term investments			18,859				28,874
Cash and cash equivalents			31,887				40,155
Securities — Available for sale			184,560				167,426
Securities — Held to maturity			97				97
Restricted equity securities and other investments — at cost			18,998				17,193
Loans held for sale			804				706
Loans, net of allowance for loan losses of $9,468 in 2010 and $11,089 in 2009			646,781				652,628
Premises and equipment, net			19,515				19,568
Accrued interest receivable			3,191				3,306
Goodwill, net			11,558				9,730
Other intangible assets			3,816				2,654
Net deferred tax asset			9,231				10,202
Bank-owned life insurance			16,651				16,263
Foreclosed assets			1,336				1,195
Other assets			7,814				5,142
		$	956,239			$	946,265
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	70,651			$	75,232
Interest-bearing			604,125				576,146
Total deposits			674,776				651,378
Securities sold under agreements to repurchase			3,927				6,386
Federal Home Loan Bank advances			148,595				160,352
Mortgagors’ escrow accounts			930				1,058
Accrued expenses and other liabilities			9,125				5,724
Total liabilities			837,353				824,898
Commitments and contingencies
Stockholders’ Equity
Preferred Stock ($.01 par value, 10,000,000 shares authorized, none issued or outstanding)			—				—
Common Stock ($.01 par value, 40,000,000 shares authorized and 10,308,600 issued at June 30, 2010 and December 31, 2009; 8,701,712 outstanding at June 30, 2010 and 8,734,712 outstanding at December 31, 2009)			103				103
Additional paid-in-capital			102,951				102,788
Unearned Compensation — ESOP			(6,956	)			(7,322	)
Unearned Compensation — Equity Incentive Plans			(1,729	)			(2,078	)
Retained earnings			45,395				48,998
Accumulated other comprehensive income			1,191				711
Treasury stock, at cost (1,606,888 shares at June 30, 2010 and 1,573,888 shares at December 31, 2009)			(22,069	)			(21,833	)
Total stockholders’ equity			118,886				121,367
		$	956,239			$	946,265

See accompanying notes to consolidated financial statements

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LEGACY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
		(Unaudited)								(Unaudited)
Interest and dividend income:
Loans		$	9,027			$	9,803			$	18,323			$	19,835
Securities:
Taxable			1,243				1,613				2,428				3,359
Tax-Exempt			160				168				327				322
Short-term investments			7				3				13				7
Total interest and dividend income			10,437				11,587				21,091				23,523
Interest expense:
Deposits			2,278				2,798				4,717				5,804
Federal Home Loan Bank advances			1,402				1,859				2,851				3,813
Other borrowed funds			8				18				19				36
Total interest expense			3,688				4,675				7,587				9,653
Net interest income			6,749				6,912				13,504				13,870
Provision for loan losses			3,756				1,506				6,176				2,234
Net interest income after provision for loan losses			2,993				5,406				7,328				11,636
Non-interest income:
Customer service fees			764				725				1,485				1,404
Portfolio management fees			480				269				761				490
Income from bank owned life insurance			142				156				297				329
Insurance, annuities and mutual fund fees			64				37				83				59
Gain on sales of securities, net			1,129				60				1,230				42
Impairment losses on securities, net			(66	)			(1,430	)			(365	)			(3,011	)
Gain on sales of loans, net			70				370				131				570
Miscellaneous			48				11				59				23
Total non-interest income			2,631				198				3,681				(94	)
Non-interest expenses:
Salaries and employee benefits			3,717				3,451				7,193				6,896
Occupancy and equipment			991				1,021				1,982				2,070
Data processing			760				671				1,454				1,334
Professional fees			268				232				591				477
Advertising			381				379				700				705
FDIC deposit insurance			271				665				540				897
Other general and administrative			1,377				1,231				2,479				2,348
Total non-interest expenses			7,765				7,650				14,939				14,727
Loss before income taxes			(2,141	)			(2,046	)			(3,930	)			(3,185	)
Benefit for income taxes			(765	)			(553	)			(1,310	)			(900	)
Net loss		$	(1,376	)		$	(1,493	)		$	(2,620	)		$	(2,285	)
Earnings (loss) per share
Basic		$	(0.17	)		$	(0.19	)		$	(0.33	)		$	(0.29	)
Diluted		$	(0.17	)		$	(0.19	)		$	(0.33	)		$	(0.29	)
Weighted average shares outstanding
Basic			8,020,690				7,979,133				8,024,633				7,978,768
Diluted			8,020,690				7,979,133				8,024,633				7,978,768

See accompanying notes to consolidated financial statements

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LEGACY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Dollars in thousands, except per share amounts)
(Unaudited)

																		Unearned								Accumulated
										Additional				Unearned				Compensation -								Other								Total
		Common Stock								Paid-in				Compensation -				Equity				Retained				Comprehensive				Treasury				Stockholders’
		Shares				Amount				Capital				ESOP				Incentive Plan				Earnings				Income (Loss)				Stock				Equity
Balance at December 31, 2008			8,781,912			$	103			$	102,475			$	(8,055	)		$	(2,727	)		$	58,534			$	(4,722	)		$	(21,466	)		$	124,142
Comprehensive income (loss):
Net income (loss)			—				—				—				—				—				(2,285	)			—				—				(2,285	)
Net unrealized gain/loss on securities available for sale, net of reclassification adjustment and tax effects			—				—				—				—				—				—				1,638				—				1,638
Total comprehensive income (loss)																																			(647	)
Cash dividends declared ($0.05 per share)			—				—				—				—				—				(804	)			—				—				(804	)
Common stock repurchased - 5% stock repurchase																																			—
Program announced March 2009			(22,200	)																											(236	)			(236	)
Stock option expense			—				—				237				—				—				—				—				—				237
Restricted stock expense			—				—				—				—				420				—				—				—				420
Common stock held by ESOP committed to be released (27,490 shares)			—				—				(92	)			366				—				—				—				—				274
Balance at June 30, 2009			8,759,712			$	103			$	102,620			$	(7,689	)		$	(2,307	)		$	55,445			$	(3,084	)		$	(21,702	)		$	123,386
Balance at December 31, 2009			8,734,712			$	103			$	102,788			$	(7,322	)		$	(2,078	)		$	48,998			$	711			$	(21,833	)		$	121,367
Comprehensive income (loss):
Net income (loss)			—				—				—				—				—				(2,620	)			—				—				(2,620	)
Net unrealized gain/loss on securities available for sale, net of reclassification adjustment and tax effects			—				—				—				—				—				—				480				—				480
Total comprehensive income (loss)																																			(2,140	)
Cash dividends declared ($0.05 per share)			—				—				—				—				—				(803	)			—				—				(803	)
Common stock repurchased - 5% stock repurchase
Program announced March 2009			(43,000	)			—				—				—				—				—				—				(400	)			(400	)
Stock option expense			—				—				143				—				—				—				—				—				143
Restricted stock expense			—				—				20				—				442				—				—				—				462
Issuance of restricted stock			10,000				—				—				—				(93	)			(71	)			—				164				—
Common stock held by ESOP committed to be released (27,490 shares)			—				—				—				366				—				(109	)			—				—				257
Balance at June 30, 2010			8,701,712			$	103			$	102,951			$	(6,956	)		$	(1,729	)		$	45,395			$	1,191			$	(22,069	)		$	118,886

See accompanying notes to consolidated financial statements

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LEGACY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

		Six months ended June 30,
		2010				2009
Cash flows from operating activities:
Net loss		$	(2,620	)		$	(2,285	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses			6,176				2,234
Net amortization of securities			394				249
Amortization of intangible assets			389				345
Depreciation and amortization expense			794				807
(Gain) loss on sales/impairment of securities, net			(865	)			2,969
Loss on sales/writedowns of foreclosed real estate, net			264				—
Gain on sales of loans, net			(131	)			(570	)
Loans originated for sale			(11,245	)			(42,660	)
Proceeds from sales of loans			11,278				43,108
Share-based compensation expense			605				657
Deferred tax provision (benefit)			728				(434	)
Employee Stock Ownership Plan expense			257				274
Net change in:
Bank-owned life insurance			(388	)			(331	)
Accrued interest receivable			115				72
Other assets			(2,672	)			157
Accrued expenses and other liabilities			3,401				(1,678	)
Net cash provided by operating activities			6,480				2,914
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales			20,370				28,868
Maturities, prepayments and calls			64,421				34,567
Purchases			(100,408	)			(91,245	)
Purchase of other investments			(2,130	)			(673	)
Maturities, Prepayments and calls of other investments			2				—
Loan originations and purchases, net of principal payments			(1,977	)			21,209
Additions to premises and equipment			(741	)			(565	)
Additions to goodwill			(1,828	)			—
Additions to other intangible assets			(1,551	)			—
Net cash received in branch acquisition			—				9,031
Proceeds from sales of foreclosed assets			1,243				—
Net cash provided (used) by investing activities			(22,599	)			1,192

(continued)

See accompanying notes to consolidated financial statements.

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LEGACY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(Dollars in thousands)

		Six months ended June 30,
		2010				2009
		(Unaudited)
Cash flows from financing activities:
Net increase in deposits			23,398				18,256
Net (decrease) increase in securities sold under agreements to repurchase			(2,459	)			1,245
Repayment of Federal Home Loan Bank advances			(16,625	)			(21,503	)
Proceeds from Federal Home Loan Bank advances			4,868				—
Net increase in mortgagors’ escrow accounts			(128	)			(83	)
Repurchase of common stock			(400	)			(236	)
Payment of dividends on common stock			(803	)			(804	)
Net cash provided (used) by financing activities			7,851				(3,125	)
Net change in cash and cash equivalents			(8,268	)			981
Cash and cash equivalents at beginning of period			40,155				33,595
Cash and cash equivalents at end of period		$	31,887			$	34,576
Supplemental cash flow information:
Interest paid on deposits		$	4,758			$	5,901
Interest paid on Federal Home Loan Bank advances			2,858				3,907
Interest paid on other borrowed funds			19				36
Income taxes paid			220				710
Non-cash activities:
Real estate acquired through foreclosure			1,648				—

See accompanying notes to consolidated financial statements.

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LEGACY BANCORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Legacy Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries, LB Funding Corporation and Legacy Banks (the “Bank”). The accounts of the Bank include all of its wholly-owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the information reflects all adjustments (consisting solely of normal recurring adjustments) that are necessary for a fair presentation. Financial tables are presented in thousands ($000’s) unless otherwise indicated. The results shown for the interim period ended June 30, 2010 are not necessarily indicative of the results to be obtained for the year ending December 31, 2010. These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission for the year ended December 31, 2009.

2. Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance changing the accounting principles and disclosures requirements related to securitizations and special-purpose entities. Specifically, this guidance eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This guidance also expands existing disclosure requirements to include more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The recognition and measurement provisions regarding transfers of financial assets shall be applied to transfers that occur on or after the effective date. The Company adopted this new guidance on January 1, 2010, as required, and it did not have any impact on the Company’s consolidated financial statements.

In March 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-09 amending FASB ASC Topic 855 to exclude SEC reporting entities from the requirement to disclose the date on which subsequent events have been evaluated. It further modifies the requirement to disclose the date on which subsequent events have been evaluated in reissued financial statements to apply only to such statements that have been restated to correct an error or to apply U.S. GAAP retrospectively. The Company has complied with ASU No. 2010-09.

In January 2010, the FASB issued ASU No. 2010-06- Fair Value Measurements and Disclosures amending Topic 820. The ASU provides for additional disclosures of transfers between assets and liabilities valued under Level 1 and 2 inputs as well as additional disclosures regarding those assets and liabilities valued under Level 3 inputs. The new disclosures are effective for interim and annual reporting periods beginning after December 15, 2009 except for those provisions addressing Level 3 fair value measurements which provisions are effective for fiscal years, and periods therein, beginning after December 15, 2010. The adoption of this Statement did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU No. 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. The adoption of this Update will require significant additional disclosures in the December 31, 2010 financial statements and subsequent financial statements.

3. Earnings Per Share

Basic earnings per share is determined by dividing net income by the weighted-average number of net outstanding shares of common stock for the period. The net outstanding shares of common stock equals the gross number of shares of common stock issued less the average unallocated shares of the Legacy Banks Employee Stock Ownership Plan (“ESOP”), the average number of treasury shares and the average number of unvested shares related to restricted stock awards. Diluted earnings per share is determined by dividing net income by the average number of net outstanding common shares computed as if all potential common shares have been issued by the Company. Potential common shares to be issued would include those related to outstanding options and unvested stock awards. The diluted earnings per share calculation for the three and six months ended June 30, 2010 excludes 828,480 of stock options and 198,890 unvested shares of restricted stock whose effect would have been antidilutive. Earnings per share have been computed as follows:

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		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Net loss applicable to common stock (000’s)		$	(1,376	)		$	(1,493	)		$	(2,620	)		$	(2,285	)
Average number of shares issued			10,308,600				10,308,600				10,308,600				10,308,600
Less: average unallocated ESOP shares			(535,897	)			(590,725	)			(542,731	)			(597,710	)
Less: average treasury shares			(1,598,178	)			(1,540,002	)			(1,589,860	)			(1,533,382	)
Less: average unvested restricted stock awards			(153,835	)			(198,740	)			(151,376	)			(198,740	)
Average number of basic shares outstanding			8,020,690				7,979,133				8,024,633				7,978,768
Plus: dilutive unvested restricted stock awards			—				—				—				—
Plus: diluted stock option shares			—				—				—				—
Average number of diluted shares outstanding			8,020,690				7,979,133				8,024,633				7,978,768
Basic earnings (loss) per share		$	(0.17	)		$	(0.19	)		$	(0.33	)		$	(0.29	)
Diluted earnings (loss) per share		$	(0.17	)		$	(0.19	)		$	(0.33	)		$	(0.29	)

4. Comprehensive Income (Loss)

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the equity section of the balance sheet, such items, along with net income are components of comprehensive income.

The components of other comprehensive income (loss) and related tax effects for available-for-sale securities follows:

		Six Months Ended June 30,
		2010				2009
Securities
Net unrealized holding gains  on available for sale (AFS) securities		$	1,911			$	1,193
Reclassification adjustment for gains on sales of AFS securities			(1,230	)			(42	)
Reclassification adjustment for OTTI losses on AFS securities			42				1,474
			723				2,625
Tax effect			(243	)			(987	)
Net-of-tax amount		$	480			$	1,638

The components of accumulated other comprehensive income (loss) included in stockholders’ equity are as follows:

		June 30,				December 31,
		2010				2009
		(Dollars in thousands)
Securities
Net unrealized holding gains on available for sale securities		$	2,459			$	1,736
Tax effects			(907	)			(664	)
Net-of-tax amount			1,552				1,072
Directors’ Fee Plan
Unrecognized net actuarial loss and prior service costs			(611	)			(611	)
Tax effect			250				250
Net-of-tax amount			(361	)			(361	)
		$	1,191			$	711

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5. Dividends

On June 2, 2010, the Company declared a cash dividend of $0.05 per share of common stock which was paid on July 1, 2010 to shareholders of record as of the close of business on June 20, 2010.

6. Commitments and Other Contingencies

Outstanding loan commitments and other contingencies totaled $101.2 million at June 30, 2010, compared to $134.3 million as of December 31, 2009. Loan commitments and other contingencies primarily consist of commitments to originate new loans as well as the outstanding unused portions of home equity and other lines of credit, unadvanced funds on construction loans and commercial real estate partnership capital commitments.

The Company provides certain health and dental care and life insurance benefits for certain retired employees. The total expense recognized in connection with these post-retirement benefits for the three and six month period ended June 30, 2010 was $3,000 and $6,000 respectively.

7. Wealth Management Company Acquisition

On April 30, 2010, Legacy Banks acquired substantially all of the assets of the Renaissance Investment Group, Inc., a wealth management company located in Pittsfield, Massachusetts. The purchase price included an estimated contingent portion which is based upon forecasted gross revenue through September 30, 2011. The estimated contingent component may increase or decrease based upon actual gross revenue recorded over that period. The purchase price allocation resulted in approximately $1.6 million of customer list and other intangibles, $1.8 million of goodwill and $5,000 of property and equipment. The goodwill and customer list intangible is expected to be deducted for tax purposes over a period of 15 years.

The consolidated financial statements of the Company for the six months ended June 30, 2010 include $201,000 of gross revenue and $193,000 of operating expenses, including approximately $27,000 of amortization of acquisition related intangibles. Through June 30, 2010, the Company has also expensed approximately $54,000 of professional fees directly related to the acquisition. The Company anticipates further efficiencies as it continues to consolidate its wealth management division, Legacy Portfolio Management, into Renaissance.

8. Securities

The amortized cost and estimated fair value of securities, with gross unrealized gains and losses, follows:

		June 30, 2010
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities Available for Sale
Debt securities:
Government-sponsored enterprises (GSE)		$	109,661			$	718			$	(5	)		$	110,374
Municipal			12,060				298				(30	)			12,328
Corporate and other			1,315				28				—				1,343
GSE residential mortgage-backed			16,768				865				(2	)			17,631
U.S. Government guaranteed residential mortgage-backed			39,217				887				(49	)			40,055
Total debt securities			179,021				2,796				(86	)			181,731
Marketable equity securities			3,080				74				(325	)			2,829
Total securities available for sale		$	182,101			$	2,870			$	(411	)		$	184,560
Securities Held to Maturity
Other bonds and obligations		$	97			$	—			$	—			$	97

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		December 31,2009
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities Available for Sale
Debt securities:
Government-sponsored enterprises (GSE)		$	80,393			$	138			$	(555	)		$	79,976
Municipal			17,521				398				(44	)			17,875
Corporate and other			1,321				30				—				1,351
GSE residential mortgage-backed			29,591				983				(71	)			30,503
U.S. Government guaranteed residential mortgage-backed			33,625				248				(237	)			33,636
Total debt securities			162,451				1,797				(907	)			163,341
Marketable equity securities			3,239				889				(43	)			4,085
Total securities available for sale		$	165,690			$	2,686			$	(950	)		$	167,426
Securities Held to Maturity
Other bonds and obligations		$	97			$	—			$	—			$	97

The amortized cost and estimated fair value of debt securities by contractual maturity at June 30, 2010 is as follows. Expected maturities will differ from contractual maturities because borrowers 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
Within 1 year		$	5,067			$	5,087			$	—			$	—
Over 1 year to 5 years			70,166				70,736				82				82
Over 5 years to 10 years			32,721				32,982				—				—
Over 10 years			15,082				15,240				15				15
Total bonds and obligations			123,036				124,045				97				97
Mortgage-backed			55,985				57,686				—				—
Total debt securities		$	179,021			$	181,731			$	97			$	97

For the three months ended June 30, 2010 and 2009, proceeds from the sale and call of securities available for sale amounted to $25.6 million and $21.4 million respectively. Gross gains of $1,154,000 and $356,000, respectively, and gross losses of $34,000 and $296,000, respectively, were realized on those sales. Gross gains on called securities were $41,000, and gross losses were $32,000 in the three months ended 2010.

For the six months ended June 30, 2010 and 2009, proceeds from the sale and call of securities available for sale amounted to $33.8 million and $56.6 million respectively. Gross gains of $1,379,000 and $742,000, respectively, and gross losses of $145,000 and $700,000, respectively, were realized on those sales. Gross gains on called securities were $47,000, and gross losses were $51,000 in the six months ended 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 follows:

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		Less Than Twelve Months								Over Twelve Months
		Gross								Gross
		Unrealized				Fair				Unrealized				Fair
		Losses				Value				Losses				Value
June 30, 2010:
Debt securities:
Government-sponsored enterprises (GSE)		$	5			$	5,748			$	—			$	—
Municipal			—				—				30				2,242
GSE residential mortgage-backed			—				—				2				385
U.S. Government guaranteed residential mortgage-backed			20				2,265				29				3,317
Total debt securities			25				8,013				61				5,944
Marketable equity securities			264				1,570				61				502
Total temporarily impaired securities		$	289			$	9,583			$	122			$	6,446
December 31, 2009:
Debt securities:
Government-sponsored enterprises (GSE)		$	555			$	46,751			$	—			$	—
Municipal			2				818				42				2,472
GSE residential mortgage-backed			38				2,983				33				1,779
U.S. Government guaranteed residential mortgage-backed			237				19,171				—				—
Total debt securities			832				69,723				75				4,251
Marketable equity securities			35				472				8				226
Total temporarily impaired securities		$	867			$	70,195			$	83			$	4,477

Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. At June 30, 2010, temporarily impaired debt and mortgage-backed securities have unrealized losses from the Company’s amortized cost basis as follows:

										Gross
		# of				Amortized				Unrealized				% of
		Securities				Cost				Loss				Depreciation
Government-sponsored enterprises (GSE)			5			$	5,753			$	5				0.1	%
Municipal			5				2,272				30				1.3	%
GSE residential mortgage-backed			1				387				2				0.5	%
U.S. Government guaranteed residential mortgage-backed			8				5,631				49				0.9	%

The unrealized losses on the Company’s investment in debt securities and mortgage-backed securities issued by the U.S. government, government-sponsored enterprises and municipal governments were generally caused by interest rate changes. These investments are guaranteed or sponsored by the U.S. Government, an agency thereof, or by a municipal government. Accordingly, it is expected that the securities would not be settled at a price less than the par value of the investment. Because the decline in market value is attributable to changes in interest rates and not to credit quality, and because the Company has not decided to sell the securities, and it is more likely than not it will not have to sell the securities before recovery of its cost basis, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2010.

At June 30, 2010, twenty-three marketable equity securities have unrealized losses with aggregate depreciation of 13.6% from the Company’s cost basis. Although some issuers may have shown declines in earnings as a result of the weakened economy, the Company has evaluated the near-term prospects of the issuers in relation to the severity and duration of the depreciation of value and has analyzed the issuer’s financial condition and financial performance as well as industry analysts’ reports. Based on that evaluation as well as the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2010.

For the quarter ended June 30, 2010 the Company recognized OTTI losses totaling $42,000 on its investment in one marketable equity security. For the six months ended June 30, 2010 the Company recognized OTTI losses totaling $341,000 on its investment in one marketable equity security as well as certain commercial real estate partnerships which are carried at cost and evaluated for impairment quarterly based on an analysis of the financial statements of the partnerships and underlying real estate projects. At June 30, 2010 the Company had potential additional capital calls of approximately $4.4 million related to these partnership investments. These investments are not redeemable and the Company does not intend to sell any part of these investments at this time. The partnerships have a limited life of up to seven years over which the underlying assets are expected to be liquidated by the partnerships.

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9. Fair Values of Assets and Liabilities

The Company groups its assets and 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 1 — Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 — Valuation is based on observable inputs other than Level 1 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 unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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

Cash and cash equivalents — The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets.

Interest-bearing deposits in banks — The carrying amounts of interest-bearing deposits maturing within ninety days approximate their fair values. Fair values of other interest-bearing deposits are estimated using discounted cash flow analyses based on current market rates for similar types of deposits.

Securities available for sale — The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. These securities include marketable equity securities. Securities measured at fair value in Level 2 are based on independent market-based prices received from a third-party pricing service who utilizes 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. These securities include debt and mortgage-backed securities issued by government-sponsored enterprises including Federal Home Loan Mortgage Corporation (FHLMC) Federal National Mortgage Association (FNMA) and Government National Mortgage Association (GNMA) bonds, municipal bonds and corporate and other securities. The Company does not have any securities measured at fair value in Level 3 as of June 30, 2010.

Federal Home Loan Bank stock — The fair value is based upon the redemption value of the stock which equates to its carrying value.

Restricted equity securities and other investments — The carrying value of restricted equity securities represents redemption value and, therefore, approximates fair value. The fair value of other non-marketable equity securities is estimated based on consideration of credit exposure. Investments measures at fair value in Level 3 include the Bank’s investment in certain real estate partnerships, the value of which are based on an analysis of the financial statements of the partnerships and underlying real estate projects.

Loans receivable — Fair values for certain mortgage loans (e.g., one-to-four family residential) are based on quoted market prices of similar loans sold in conjunction with securitization transactions adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans and consumer 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. Non-performing loans are assumed to be carried at their current fair value.

Deposit liabilities — The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of certificates of deposit (CDs) originated by the company are valued using a replacement cost of funds approach and are discounted to a 12 district FHLB average curve. Fair values for brokered time deposits are also valued using a replacement cost of funds approach and are discounted to the brokered CD curve.

Short-term borrowings — For short-term borrowings maturing within ninety days, carrying values approximate fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Long-term borrowings — The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

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Accrued interest — The carrying amounts of accrued interest approximate fair value.

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

		June 30, 2010
		Level 1				Level 2				Level 3				Fair Value
Assets
Debt Securities:
Government-sponsored enterprises (GSE)		$	—			$	110,374			$	—			$	110,374
Municipal bonds			—				12,328				—				12,328
Corporate bonds and other obligations			—				1,343				—				1,343
GSE residential mortgage-backed			—				17,631				—				17,631
U.S. Government guaranteed residential mortagage-backed			—				40,055				—				40,055
Common stock			2,829				—				—				2,829
Securities available for sale			2,829				181,731				—				184,560
Total assets		$	2,829			$	181,731			$	—			$	184,560

		December 31, 2009
		Level 1				Level 2				Level 3				Fair Value
Assets
Debt Securities:
Government-sponsored enterprises (GSE)		$	—			$	79,976			$	—			$	79,976
Municipal bonds			—				17,875				—				17,875
Corporate bonds and other obligations			—				1,351				—				1,351
GSE residential mortgage-backed			—				30,503				—				30,503
U.S. Government guaranteed residential mortagage-backed			—				33,636				—				33,636
Common stock			4,085				—				—				4,085
Securities available for sale			4,085				163,341				—				167,426
Total assets		$	4,085			$	163,341			$	—			$	167,426

There were no transfers to or from Levels 1 and 2 during the six months ended June 30, 2010. There were no liabilities measured at fair value at June 30, 2010 or December 31, 2009.

Also, the Company may be required, from time to time, to measure certain other assets or liabilities on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets as of June 30, 2010 and 2009. The gains or losses represent the amount of the write-down recorded during the periods noted on the assets held at period end.

																		Six Months
														Quarter Ended				Ended
		June 30, 2010												June 30, 2010				June 30, 2010
														Total				Total
		Level 1				Level 2				Level 3				Gains/(Losses)				Gains/(Losses)
Assets
Impaired loans		$	—			$	—			$	18,801			$	(3,302	)		$	(5,405	)
Other investments			—				—				6,357				(24	)			(323	)
Foreclosed assets			—				—				1,336				(189	)			(264	)
Total assets		$	—			$	—			$	26,494			$	(3,515	)		$	(5,992	)

																		Six Months
														Quarter Ended				Ended
		June 30, 2009												June 30, 2009				June 30, 2009
														Total				Total
		Level 1				Level 2				Level 3				Gains/(Losses)				Gains/(Losses)
Assets
Impaired loans		$	—			$	10,489			$	—			$	(1,502	)		$	(2,056	)
Total assets		$	—			$	10,489			$	—			$	(1,502	)		$	(2,056	)

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Impaired loans level 3: Certain impaired loans held for investment were written down to the fair value, less costs to sell, of the underlying collateral securing these loans of $18.8 million, resulting in a loss of $3.3 million and $5.4 million, respectively, for the three and six months ended June 30, 2010, which was recognized in earnings through the provision for loan losses. The fair value of the collateral used by the Company represents that amount expected to be received from the sale of the property as determined by an independent, licensed or certified appraiser in accordance with Uniform Standards of Professional Appraisal Practice, using observable market data and discounted as considered necessary by management based on the date of valuation and new information deemed relevant to the valuation.

Other investments level 3: Equity investments in certain real estate partnerships were deemed impaired and adjusted to fair value based on an analysis of the financial statements of the partnerships and underlying real estate projects. This adjustment resulted in a loss of $24,000 and $323,000, respectively, for the three and six months ended June 30, 2010 which was recognized through OTTI charges.

Foreclosed assets level 3: Foreclosed assets were deemed impaired and adjusted to fair value through either the provision for loan losses or other expenses as a loss on other real estate owned. The fair value of foreclosed assets is that amount expected to be received from the sale of the property as determined by an independent, licensed or certified appraiser in accordance with Uniform Standards of Professional Appraisal Practice, using observable market data.

Summary of Fair Values of Financial Instruments

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

		June 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Financial assets:
Cash and cash equivalents		$	31,887			$	31,887			$	40,155			$	40,155
Securities — Available for sale			184,560				184,560				167,426				167,426
Securities — Held to maturity			97				97				97				97
Federal Home Loan Bank of
Boston stock			10,932				10,932				10,932				10,932
Savings Bank Life Insurance stock			1,709				1,709				1,709				1,709
Other investments			6,357				6,357				4,552				4,552
Loans and loans held for sale			647,585				659,126				653,334				656,978
Accrued interest receivable			3,191				3,191				3,306				3,306
Financial liabilities:
Deposits			674,776				681,463				651,378				656,038
Repurchase agreements			3,927				3,927				6,386				6,386
FHLB advances			148,595				157,938				160,352				167,331
Mortgagors’ escrow accounts			930				930				1,058				1,058

10. Subsequent Events

On July 26, 2010 the Company announced that the Board of Directors of the Company and the Bank had voted to terminate the Bank’s Employee Stock Ownership Plan (the “Plan”), effective August 1, 2010. As of June 30, 2010, the Plan held 784,641 shares, or approximately 9% of the Company’s total outstanding shares of common stock, of which 549,792 shares are unallocated. The Bank will file a request for a favorable determination letter with the Internal Revenue Service on the tax-qualified status of the Plan on termination. On and after termination of the Plan, no further contributions will be made on the outstanding Plan loan. Those payments previously made in the current Plan year will cause the release of approximately 27,490 shares from the unallocated stock fund and those shares will be allocated to participants for the year in which the Plan terminates. In connection with the termination of the Plan and upon receipt of the favorable determination letter from the Internal Revenue Service, it is anticipated that the Plan Trustee will transfer approximately 522,302 shares to LB Funding Corp., a wholly-owned subsidiary of the Company, to satisfy the Plan loan. Upon such transfer, the 522,302 shares would be treated as treasury stock. If the shares in the unallocated stock fund are insufficient to repay the outstanding loan in full, the Company intends to forgive the remaining balance, subject to Internal Revenue Service approval.

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

The following analysis discusses the changes in financial position and results of operations of Legacy Bancorp, Inc. and subsidiaries, and should be read in conjunction with both the unaudited consolidated interim financial statements and the notes thereto, appearing in Part I, Item 1 of this report, as well as the “Management’s Discussion and Analysis” section included in the Company’s most recent Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission for the year ended December 31, 2009.

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Forward-Looking Statements

Certain statements herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and expectations of management, as well as the assumptions made using information currently available to management. Since these statements reflect the views of management concerning future events, these statements involve risks, uncertainties and assumptions. As a result, actual results may differ from those contemplated by these statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe”, “expect”, “anticipate”, “estimate”, and “intend” or future or conditional verbs such as “will”, “would”, “should”, “could”, or “may”. Certain factors that could cause actual results to differ materially from expected results include, but are not limited to: changes in the interest rate environment, changes in general economic conditions, the level of future deposit premiums, the effect of developments in the secondary market affecting our loan pricing, changes in consumer spending, borrowing and savings habits, changes in our organization, compensation and benefit plans, legislative and regulatory changes that adversely affect the businesses in which the Company is engaged and changes in the securities market. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company disclaims any intent or obligation to update any forward-looking statements, whether in response to new information, future events or otherwise.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. We consider the following to be critical accounting policies:

Allowance for Loan Losses. The determination of the allowance for loan losses is considered critical due to the high degree of judgment involved, the subjectivity of the underlying assumptions used, and the potential for changes in the economic environment that could result in material changes in the amount of the allowance for loan losses considered necessary. The allowance is evaluated on a regular basis by management and is based on a periodic review of the collectibility of the loans in light of historical experience, the nature and size of the loan portfolio, adverse situations that may affect borrowers’ ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. Please refer to the Allowance for Loan Losses section within Item 2 for a more detailed discussion of the allowance.

Income Taxes. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance related to deferred tax assets is established when, in management’s judgment, it is more likely than not that all or a portion of such deferred tax assets will not be realized.

In determining whether a valuation allowance is necessary, the Company considers the level of taxable income in prior years to the extent that carrybacks are permitted under current tax law, as well as estimates of future pre-tax and taxable income and tax planning strategies that would, if necessary, be implemented. The Company expects to realize the remaining deferred tax assets over the allowable carryback period or in future years. However, if an unanticipated event occurred that materially changed pre-tax and taxable income in future periods, an increase in the valuation allowance may become necessary.

Other-Than-Temporary Impairment (OTTI). Marketable equity securities are evaluated for OTTI based on the severity and duration of the impairment and, if deemed to be other than temporary, the declines in fair value are reflected in earnings as realized losses. For debt securities, OTTI is required to be recognized (1) if the Company intends to sell the security; (2) if it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes.

Fair Values of Assets and Liabilities: The Company groups its assets and liabilities generally 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. Please refer to note 9: Fair Values of Assets and Liabilities within Item 1 for a more detailed discussion of fair value.

Goodwill. Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. The Company recorded goodwill in connection with the purchase of a financial institution in 1997. Additionally, the Company recorded goodwill in connection with the purchase of branch offices in 2007 located in Eastern New York State, and in March 2009 located in Haydenville, Massachusetts. Most recently, in the second quarter of 2010, the Company recorded goodwill in connection with the acquisition of a wealth management company located in Pittsfield, Massachusetts. The total book value of goodwill is approximately $11.6 million and $9.7 million as of June 30, 2010 and 2009, respectively.

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Generally, financial information is to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Company evaluates its performance and allocates resources based on a single segment concept. Accordingly, there are no separately identified material operating segments for which discrete financial information is available. The Company does not derive revenues from, or have assets located in foreign countries, nor does it derive revenues from any single customer that represents 10% or more of its total revenues. Therefore, all of the Company’s operations are considered by management to be aggregated in one reportable segment, and the entire amount of goodwill is allocated to this one reporting segment.

The fair value of goodwill is analyzed at least annually and this analysis utilizes three separate methodologies. First, a market approach is used which incorporates a review of comparable market transactions for peer companies, relying on recent merger and acquisition data from these comparable transactions to estimate the price multiple at which the Company would be acquired in a hypothetical market transaction. The second approach used was the asset approach, or replacement cost approach which entails stating the recorded assets and liabilities of the Company on a fair market value basis, and the value of the Company’s equity is determined as the difference between the total fair value amounts for assets and liabilities. The third approach utilized was the income approach which constructed a discounted cash flow model from financial projections. The concluded fair value is calculating by weighting the values obtained based on the relevance of the methodology based on the facts and circumstances for the Company on the valuation date. The greatest weight (50%) was placed on the market approach given the amount of data obtainable on comparable transactions. A 30% weight was applied to the asset approach due to the precision of the fair value estimates provided. Lastly, a 20% or smallest weight was applied to the income approach/discounted cash flow model due to the inherent uncertainty in forecasting future performance, and the appropriate market discount rate. Impairment, if any, identified under this analysis is recognized in the period identified. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our common shares or our regulatory capital levels. The Company performs an annual impairment test as of June 30. The impairment testing as of June 30, 2010 and 2009 indicated that no impairment charge was required as of those dates. The analysis indicated that the fair value of the Company’s equity exceeded its carrying value by 13.8% and 14.4% as of June 30, 2010 and 2009, respectively.

This discussion has highlighted those accounting policies that management considers to be critical; however all accounting policies are important. See the discussion of each of the policies included in Note 1 to the consolidated financial statements in the most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission to gain a better understanding of how our financial performance is measured and reported.

Comparison of Financial Condition at June 30, 2010 and December 31, 2009

Overview: Total assets remained relatively flat, increasing $10.0 million, or 1.1% from $946.3 million at December 31, 2009 to $956.2 million at June 30, 2010. Within the overall balance sheet, investment securities increased while short term investments and net loans decreased. On the liability side, an increase in total deposits was partially offset by a decrease in borrowings from the Federal Home Loan Bank of Boston (FHLBB), as discussed below.

Investment Activities : Cash and short-term investments decreased by $8.3 million, or 20.6%, from $40.2 million at December 31, 2009 to $31.9 million at June 30, 2010. Available for sale securities increased $17.1 million, or 10.2%, from $167.4 million at December 31, 2009 to $184.6 million, or 19.3% of total assets, at June 30, 2010. The portfolio consists primarily of debt obligations issued by certain government-sponsored agencies and municipalities. Additionally, the portfolio includes mortgage-backed securities with a fair value of $57.7 million, all of which are issued or backed by the Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA) or other government-sponsored agencies. Restricted equity securities and other investments totaled $19.0 million at June 30, 2010 and consisted primarily of stock in the Federal Home Loan Bank of Boston (FHLBB) totaling $10.9 million, which must be held as a condition of membership in the Federal Home Loan Bank System and as a condition to Legacy Banks’ borrowing under the FHLBB advance program. Other investments also include interests in certain commercial real estate investment partnerships of $6.2 million. At June 30, 2010 the Company had potential additional capital calls of approximately $4.4 million related to these partnership investments. The remaining $1.9 million consisted of investments in Savings Bank Life Insurance of Massachusetts, the Community Investment Fund, Depositors Insurance Fund and other investments. The following table sets forth at the dates indicated information regarding the amortized cost and fair values of the Company’s investment securities.

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		At June 30, 2010								At December 31, 2009
		Amortized								Amortized
		Cost				Fair Value				Cost				Fair Value
		(Dollars in Thousands)
Securities available for sale:
Government-sponsored enterprises (GSE)		$	109,661			$	110,374			$	80,393			$	79,976
Municipal bonds			12,060				12,328				17,521				17,875
Corporate bonds and other obligations			1,315				1,343				1,321				1,351
GSE residential mortgage-backed			16,768				17,631				29,591				30,503
U.S. Government guaranteed residential mortagage-backed			39,217				40,055				33,625				33,636
Total debt securities			179,021				181,731				162,451				163,341
Common stock			3,080				2,829				3,239				4,085
Total securities available for sale			182,101				184,560				165,690				167,426
Securities held to maturity:
Other bonds and obligations			97				97				97				97
Restricted equity securities and other investments:
Federal Home Loan Bank of Boston stock			10,932				10,932				10,932				10,932
Savings Bank Life Insurance			1,709				1,709				1,709				1,709
Real estate partnerships			6,205				6,205				4,397				4,397
Other investments			152				152				155				155
Total restricted equity securities and other investments			18,998				18,998				17,193				17,193
Total securities		$	201,196			$	203,655			$	182,980			$	184,716

Lending Activities: Total net loans, excluding loans held for sale, at June 30, 2010 were $646.8 million, a decrease of $5.8 million, or 0.9%, from $652.6 million at December 31, 2009. The following table sets forth the composition of the Bank’s loan portfolio (excluding loans held for sale) in dollar amounts and as a percentage of the respective portfolio at the dates indicated.

		At June 30, 2010								At December 31, 2009
		Amount				Percent				Amount				Percent
		(Dollars in Thousands)
Mortgage loans on real estate:
Residential		$	278,386				42.51	%		$	285,618				43.12	%
Commercial			261,787				39.97				263,910				39.85
Home equity			69,493				10.61				69,625				10.51
			609,666				93.09				619,153				93.48
Other loans:
Commercial			33,760				5.16				31,373				4.74
Consumer and other			11,492				1.75				11,791				1.78
			45,252				6.91				43,164				6.52
Total loans			654,918				100.00	%			662,317				100.00	%
Other Items:
Net deferred loan costs			1,331								1,400
Allowance for loan losses			(9,468	)							(11,089	)
Total Loans, net		$	646,781							$	652,628

Residential mortgages decreased $7.2 million, or 2.5% as the majority of the residential mortgage activity was in the 30 year fixed rate category, a product which the Bank generally sells in the secondary market with servicing retained. Commercial real estate loans decreased $2.1 million, or 0.8%, primarily due to loan payoffs and specific loan charge-offs during the quarter. Offsetting some of this decrease was growth in other commercial loans which increased $2.4 million, or 7.6%.

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Non-performing Assets: The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. No interest income from these loans was recorded in net income for the three and six month period ended June 30, 2010 while they were on non-accrual status. If the non-accrual loans had been current, the gross interest income that would have been recorded was approximately $263,000 and $522,000 for the three and six month period ended June 30, 2010, respectively. At June 30, 2010 the Bank had twenty-one troubled debt restructurings (loans for which a portion of interest or principal has been forgiven, or the loans have been modified to lower the interest rate or extend the original term) totaling approximately $11.3 million. Which included $10.8 million of commercial real estate loans and $454,000 of other commercial loans. The modifications to these loans generally include an extension of the maturity date or a change to interest only payments for a temporary period of time. The interest income recorded from these loans amounted to approximately $163,000 for the six month period ended June 30, 2010. The Bank had seven troubled debt restructurings totaling $10.8 million at December 31, 2009.

		At June 30,				At December 31,
		2010				2009
		(Dollars in Thousands)
Non-accrual loans:
Residential mortgage		$	3,672			$	4,822
Commercial mortgage			11,476				13,942
Commercial			583				743
Home equity, consumer and other			68				71
Total non-accrual loans			15,799				19,578
Loans greater than 90 days delinquent and still accruing:
Residential mortgage			—				—
Commercial mortgage			—				—
Commercial			—				—
Home equity, consumer and other			—				—
Total loans 90 days delinquent and still accruing			—				—
Total non-performing loans			15,799				19,578
Other real estate owned			1,336				1,195
Total non-performing assets (NPAs)		$	17,135			$	20,773
Troubled debt restructurings included in NPAs		$	4,475			$	5,904
Troubled debt restructurings not included in NPAs			6,792				4,886
Total troubled debt restructurings		$	11,267			$	10,790
Ratios:
Non-performing loans to total loans			2.41	%			2.96	%
Non-performing assets to total assets			1.79	%			2.20	%

Overall nonperforming loans (NPLs) were $15.8 million at June 30, 2010, a decrease of $3.8 million as compared to December 31, 2009. Part of this decrease was a result of the Bank charging off $7.8 million of loan balances, $4.0 million of which had been reserved for prior to December 31, 2009. The increase in charge-off activity relates to updated valuations of collateral dependent loans for the six months ended June 30, 2010. Collateral dependent loans are adjusted to fair value less selling costs by partial charge-offs once the loss is confirmed on a case by case basis after considering factors such as the borrower’s resources, expectation of foreclosure and alternative source of recovery. These charge-offs also reduced the overall ratio of nonperforming assets to total assets to 1.79% at June 30, 2010 as compared to 2.20% at December 31, 2009. The Bank continues to monitor all loans very closely and analyze their balance to the value of any underlying collateral, with the establishment of a specific reserve against the loan if deemed necessary. Loans are generally placed on non-accrual status either when reasonable doubt exists as to the full timely collection of interest and principal, or when a loan becomes 90 days past due.

Allowance for Loan Losses : In originating loans, the Bank recognizes that losses will be experienced on loans and that the risk of loss will vary with many factors, including the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan over the term of the loan. The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio, and as such, this allowance represents management’s best estimate of the probable known and inherent credit losses in the loan portfolio as of the date of the financial statements.

The Board and management take the following into consideration when determining the adequacy of the allowance for loan losses for each loan category or sub-category: (i) changes in the trend of the volume and severity of past due and classified loans, and trends in the volume of non-accrual loans, troubled debt restructurings and other loan modifications, (ii) changes in the trend of loan charge-offs and recoveries, (iii) changes in the nature, volume or terms of the loan portfolios, (iv) changes in lending policies or procedures, including the Bank’s loan review system, underwriting standards and collection, charge-off and recovery practices, and the degree of oversight by the Board, (v) changes in the experience, ability, and depth of lending management and staff, (vi) changes in national and local economic and business conditions and developments, including the condition of various industry and market segments, (vii) the existence and effect of any concentrations of credit and changes in the level of such concentrations, and (viii) the effect of external factors such as competition and

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legal and regulatory requirements on the level of estimated credit losses in the portfolios. The amount of the additions to the allowance charged to operating expense for any period is a reflection of various factors analyzed by management, including the amount of loan growth in the period as well as the type of loan growth. Additionally, the amount of charge-offs and recoveries in a given year will impact the amount of provision expense. The allowance for loan losses is evaluated on a regular basis by management and is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans classified as impaired, for which an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of the loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors, as outlined above.

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 original contractual terms of the loan agreement. Impaired loans with payments past due 90 days or greater are generally maintained on a non-accrual basis. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan-by-loan basis for commercial loans and commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. The Company 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 TDR. All TDRs are initially classified as impaired.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank generally does not separately identify individual consumer and residential loans for impairment disclosures. At June 30, 2010, impaired loans totaled $28.8 million with a corresponding specific reserve allowance of $2.6 million. This specific reserve is part of the overall loan loss reserve.

While the Bank believes that it has established adequate allocated and general allowances for losses on loans, adjustments to the allowance may be necessary if future conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the Bank’s regulators periodically review the allowance for loan losses. These regulatory agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination, thereby negatively affecting the Bank’s financial condition and earnings. The following table sets forth activity in the Bank’s allowance for loan losses for the periods indicated:

		At or for the three								At or for the six months
		months ended June 30,								ended June 30,
		2010				2009				2010				2009
		(Dollars in Thousands)
Balance at beginning of period		$	8,099			$	7,330			$	11,089			$	6,642
Charge-offs:
Mortgage loans on residential real estate:			—				—				(35	)			—
Mortgage loans on commercial real estate:			(2,172	)			—				(7,349	)			—
Other loans:
Commercial			(201	)			—				(398	)			(14	)
Consumer and other			(23	)			(69	)			(43	)			(126	)
Total other loans			(224	)			(69	)			(441	)			(140	)
Total charge-offs			(2,396	)			(69	)			(7,825	)			(140	)
Recoveries:
Mortgage loans on real estate			—				1				—				1
Other loans:
Commercial			—				18				—				30
Consumer and other			9				27				28				46
Total other loans			9				45				28				76
Total recoveries			9				46				28				77
Net recoveries (charge-offs)			(2,387	)			(23	)			(7,797	)			(63	)
Provision for loan losses			3,756				1,506				6,176				2,234
Balance at end of period		$	9,468			$	8,813			$	9,468			$	8,813
Ratios:
Net recoveries (charge-offs) to average loans outstanding - 12 month rolling average											(1.25	%)			(0.02	%)
Allowance for loan losses to non-performing loans at end of period											59.93	%			59.00	%
Allowance for loan losses to total loans at end of period											1.45	%			1.30	%

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Mortgage Servicing Rights: The Company had $503,000 of mortgage servicing rights on its balance sheet as of June 30, 2010 as compared to $514,000 at December 31, 2009. The Company recorded servicing fee income of $34,000 and $64,000 for the three and six month periods ended June 30, 2010, respectively. The amount of mortgage loans serviced by the Company for others amounted to approximately $82.1 million as of June 30, 2010.

Deposits : The following table sets forth the Bank’s deposit accounts (excluding escrow deposits) at the dates indicated:

		At June 30, 2010								At December 31, 2009
		Balance				Percent				Balance				Percent
		(Dollars in Thousands)
Deposit type:
Demand		$	70,651				10.47	%		$	75,232				11.55	%
Regular savings			52,461				7.78				49,883				7.66
Relationship savings			142,538				21.12				125,328				19.24
Money market deposits			72,337				10.72				63,077				9.68
NOW deposits			46,516				6.89				48,546				7.45
Total transaction accounts			384,503				56.98				362,066				55.58
Term certificates less than $100,000			168,413				24.96				174,284				26.76
Term certificates $100,000 or more			121,860				18.06				115,028				17.66
Total certificate accounts			290,273				43.02				289,312				44.42
Total deposits		$	674,776				100.00	%		$	651,378				100.00	%

Deposits increased $23.4 million or 3.6% from $651.4 million at December 31, 2009 to $674.8 million at June 30, 2010. The increase in deposits was primarily in relationship savings and money market deposits which increased $17.2 million, or 13.7% and $9.3 million or 14.7%, respectively. These increases were partially offset by decreases primarily in demand and NOW deposits. At June 30, 2010 CDs represented 43.0% of total deposits, slightly less than at December 31, 2009.

Borrowings: Advances from the FHLBB and securities sold under agreements to repurchase have decreased $14.2 million, or 8.5%, to $152.5 million at June 30, 2010. The increase in overall deposits has allowed the Bank to pay off high rate FHLBB borrowings as they matured during the year.

Stockholders’ Equity: Overall stockholders’ equity decreased by $2.5 million, or 2.0% during the first six months of 2010. Total equity was impacted by the net loss of $2.6 million, the declaration of a dividend of $0.05 per share during the first and second quarter of 2010 and the purchase of 43,000 shares of stock at an average price of $9.30 per share as part of the Stock Repurchase Program announced in March 2009. These decreases to equity were partially offset by the amortization of unearned compensation and an increase in the unrealized gain on available-for-sale investment securities.

Comparison of Operating Results for the Three Months Ended June 30, 2010 and 2009

Net loss for the three months ended June 30, 2010 was $1.4 million, as compared to a net loss of $1.5 million for the same period in 2009. The decrease in the loss was primarily due to an increase in net gains on the sales of securities and a decrease in the charges taken on certain investments deemed to be other-than-temporarily-impaired, offset by an increase in the provision for loan losses, as discussed below.

Analysis of Net Interest Income

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

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred fees, and discounts and premiums that are amortized or accreted to interest income or expense. The Bank does not accrue interest on loans on non-accrual status, however, the balance of these loans is included in the total average balance, which has the effect of lowering average loan yields.

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		Three Months Ended June 30, 2010												Three Months Ended June 30, 2009
		Average												Average Outstanding
		Outstanding Balance				Interest				Yield/ Rate (1)				Balance				Interest				Yield/ Rate (1)
										(Dollars in thousands)
Interest-earning assets:
Loans — Net (2)		$	641,497			$	9,027				5.63	%		$	685,660			$	9,803				5.72	%
Investment securities			206,586				1,403				2.72	%			183,022				1,781				3.89	%
Short-term investments			16,122				7				0.17	%			18,488				3				0.06	%
Total interest-earning assets			864,205				10,437				4.83	%			887,170				11,587				5.22	%
Non-interest-earning assets			78,636												73,370
Total assets		$	942,841											$	960,540
Interest-bearing liabilities:
Savings deposits		$	51,976				34				0.26	%		$	51,768				44				0.34	%
Relationship savings			139,321				300				0.86	%			120,731				380				1.26	%
Money market			68,286				115				0.67	%			72,699				186				1.02	%
NOW accounts			44,823				32				0.29	%			44,548				45				0.40	%
Certificates of deposits			287,989				1,797				2.50	%			281,784				2,143				3.04	%
Total interest-bearing deposits			592,395				2,278				1.54	%			571,530				2,798				1.96	%
Borrowed funds			155,017				1,410				3.64	%			189,940				1,877				3.95	%
Total interest-bearing liabilities			747,412				3,688				1.97	%			761,470				4,675				2.46	%
Non-interest-bearing liabilities			72,859												72,890
Total liabilities			820,271												834,360
Equity			122,570												126,180
Total liabilities and equity		$	942,841											$	960,540
Net interest income						$	6,749											$	6,912
Net interest rate spread (3)											2.86	%											2.76	%
Net interest-earning assets (4)		$	116,793											$	125,700
Net interest margin (5)											3.12	%											3.12	%
Average interest-earning assets to interest-bearing liabilities											115.63	%											116.51	%

 

(1)		Yields and rates for the three months ended June 30, 2010 and 2009 are annualized.
(2)		Includes loans held for sale.
(3)		Net interest rate spread represents the difference between the yield on total average interest-earning assets and the cost of total average interest-bearing liabilities for the three months ended June 30, 2010 and 2009.
(4)		Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(5)		Net interest margin represents net interest income divided by average total interest-earning assets.

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of the Bank’s interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest- bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

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		Three Months Ended June 30,
		2010 vs. 2009
		Increase								Total
		(Decrease) Due to								Increase
		Volume				Rate				(Decrease)
		(Dollars in thousands)
Interest-earning assets:
Loans — Net		$	(624	)		$	(152	)		$	(776	)
Investment securities			283				(661	)			(378	)
Short-term investments			—				4				4
Total interest-earning assets			(341	)			(809	)			(1,150	)
Interest-bearing liabilities:
Savings deposits			—				(10	)			(10	)
Relationship savings			76				(156	)			(80	)
Money market			(10	)			(61	)			(71	)
NOW accounts			—				(13	)			(13	)
Certificates of deposits			49				(395	)			(346	)
Total deposits			115				(635	)			(520	)
Borrowed funds			(327	)			(140	)			(467	)
Total interest-bearing liabilities			(212	)			(775	)			(987	)
Change in net interest income		$	(129	)		$	(34	)		$	(163	)

Net interest income for the three months ended June 30, 2010 was $6.7 million, a decrease of $163,000, or 2.4%, over the same period of 2009. This decrease was primarily a result of a decrease in the net loan portfolio, as outlined below.

Interest income for the three months ended June 30, 2010 decreased $1.2 million, or 9.9%, to $10.4 million as compared to $11.6 million in the same period of 2009. This decrease was driven by both an overall decrease in market rates as well as a decrease in the net loan portfolio. The yield on interest-earning assets was 4.83% for the quarter, a decrease of 39 basis points from a yield of 5.22% in the second quarter of 2009, resulting in a decrease in interest income of $809,000. Average outstanding net loans decreased $44.2 million, or 6.4%, primarily due to commercial loan payoffs and charge-offs, as well as the volume of refinancing of fixed-rate residential mortgages, which the Bank sells into the secondary market. Some of the cash flow from the refinancing and sale of these mortgages was reinvested into investment securities, resulting in an increase of $23.6 million, or 12.9% in their average balance for the quarter as compared to the same period in 2009. This overall change in volume of earning assets resulted in a decrease in interest income of $341,000.

Interest expense decreased $987,000, or 21.1%, to $3.7 million for the three months ended June 30, 2010 as compared to $4.7 million during the same period in 2009. Average interest-bearing liabilities in the second quarter of 2010 decreased $14.1 million, or 1.8%, as compared to the same quarter of 2009, accounting for a decrease to interest expense of $212,000. The average cost of funds decreased to 1.97% for the three month period ended June 30, 2010, a decrease of 49 basis points from a cost of funds of 2.46% for the same period in 2009, resulting in a decrease in interest expense of $775,000.

Provision for loan loss expense increased $2.3 million to $3.8 million for the three months ended June 30, 2010 as compared to a provision expense of $1.5 million for the three months ended June 30, 2009. This increase reflected both the difference in the amount of and mix of loan growth for the period as well as higher specific reserves established against certain loans in 2010. Additionally, as part of a continuous review and analysis of current market and economic conditions by management, the Company adjusted the reserve ratio applied to certain loan categories in 2010. The charge-offs of specific non-performing loans also resulted in the reduction in the ratio of the allowance for loan losses to total loans to 1.45% at June 30, 2010, as compared to 1.67% at December 31, 2009 and 1.30% at June 30, 2009.

Non-interest income for the second quarter was $2.6 million, an increase of $2.4 million as compared to the same period of 2009. The primary cause of the increase was the decrease in the amount of writedowns taken on investments deemed to be OTTI as well as an increase in the net gain on the sale of investment securities. The Bank incurred $66,000 of OTTI credit losses on certain limited partnership and equity investments during the second quarter of 2010 as compared to a charge of $1.4 million on certain bonds, equities and limited partnership investments in the second quarter of 2009. Portfolio management fees increased $211,000, or 78.4% in the second quarter of 2010 as compared to the same period of 2009 primarily as a result of the Bank’s acquisition of the Renaissance Investment Group in April 2010. In 2010, the Bank also had increases in customer fees, insurance and other fees, partially offset by a decrease on the gain on sale of mortgages.

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Non-interest expense increased $115,000, or 1.5%, to $7.8 million for the three months ended June 30, 2010 as compared to the same period of 2009. Increases in salaries and benefits, data processing, professional fees and other general and administration expense were partially offset by a decrease in FDIC insurance expense.

Income tax benefit increased $212,000 to $765,000 in the second quarter of 2010 from a benefit of $553,000 in the second quarter of 2009 partially as a result of the increase in net loss before taxes. The Company’s combined federal and state effective tax rate for the second quarter of 2010 was 35.7% as compared to 27.0% in the second quarter of 2009.

Comparison of Operating Results for the Six Months Ended June 30, 2010 and 2009

Net loss for the six months ended June 30, 2010 was $2.6 million, as compared to a net loss of $2.3 million for the same period in 2009. The increase in the loss was primarily due to an increase in the provision for loan losses, offset somewhat by an increase in net gains on the sales of securities and a decrease in the charges taken on certain investments deemed to be other-than-temporarily-impaired, as discussed below.

Analysis of Net Interest Income

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

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred fees, and discounts and premiums that are amortized or accreted to interest income or expense. The Bank does not accrue interest on loans on non-accrual status, however, the balance of these loans is included in the total average balance, which has the effect of lowering average loan yields.

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		Six Months Ended June 30, 2010												Six Months Ended June 30, 2009
		Average												Average
		Outstanding												Outstanding
		Balance				Interest				Yield/ Rate (1)				Balance				Interest				Yield/ Rate (1)
		(Dollars in thousands)
Interest-earning assets:
Loans — Net (2)		$	644,587			$	18,323				5.69	%		$	689,985			$	19,835				5.75	%
Investment securities			198,540				2,755				2.78	%			170,726				3,681				4.31	%
Short-term investments			15,934				13				0.16	%			20,295				7				0.07	%
Total interest-earning assets			859,061				21,091				4.91	%			881,006				23,523				5.34	%
Non-interest-earning assets			78,486												73,524
Total assets		$	937,547											$	954,530
Interest-bearing liabilities:
Savings deposits		$	51,109				67				0.26	%		$	50,960				93				0.36	%
Relationship savings			133,790				623				0.93	%			122,164				858				1.40	%
Money market			66,322				246				0.74	%			65,119				385				1.18	%
NOW accounts			44,517				65				0.29	%			43,024				94				0.44	%
Certificates of deposits			288,579				3,716				2.58	%			280,688				4,374				3.12	%
Total interest-bearing deposits			584,317				4,717				1.61	%			561,955				5,804				2.07	%
Borrowed funds			157,728				2,870				3.64	%			194,408				3,849				3.96	%
Total interest-bearing liabilities			742,045				7,587				2.04	%			756,363				9,653				2.55	%
Non-interest-bearing liabilities			72,389												72,367
Total liabilities			814,434												828,730
Equity			123,113												125,800
Total liabilities and equity		$	937,547											$	954,530
Net interest income						$	13,504											$	13,870
Net interest rate spread (3)											2.87	%											2.79	%
Net interest-earning assets (4)		$	117,016											$	124,643
Net interest margin (5)											3.14	%											3.15	%
Average interest-earning assets to interest-bearing liabilities											115.77	%											116.48	%

 

(1)		Yields and rates for the six months ended June 30, 2010 and 2009 are annualized.
(2)		Includes loans held for sale.
(3)		Net interest rate spread represents the difference between the yield on total average interest-earning assets and the cost of total average interest-bearing liabilities for the six months ended June 30, 2010 and 2009.
(4)		Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(5)		Net interest margin represents net interest income divided by average total interest-earning assets.

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of the Bank’s interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

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		Six Months Ended June 30,
		2010 vs. 2009
		Increase								Total
		(Decrease) Due to								Increase
		Volume				Rate				(Decrease)
		(Dollars in thousands)
Interest-earning assets:
Loans — Net		$	(1,305	)		$	(207	)		$	(1,512	)
Investment securities			785				(1,711	)			(926	)
Short-term investments			(2	)			8				6
Total interest-earning assets			(522	)			(1,910	)			(2,432	)
Interest-bearing liabilities:
Savings deposits			—				(26	)			(26	)
Relationship savings			92				(327	)			(235	)
Money market			7				(146	)			(139	)
NOW accounts			3				(32	)			(29	)
Certificates of deposits			127				(785	)			(658	)
Total deposits			229				(1,316	)			(1,087	)
Borrowed funds			(685	)			(294	)			(979	)
Total interest-bearing liabilities			(456	)			(1,610	)			(2,066	)
Change in net interest income		$	(66	)		$	(300	)		$	(366	)

Net interest income for the six months ended June 30, 2010 was $13.5 million, a decrease of $366,000, or 2.6%, over the same period of 2009. This decrease was a result of both the difference in net interest margin in each period as well as a decrease in the net loan portfolio, as outlined below.

Interest income for the six months ended June 30, 2010 decreased $2.4 million, or 10.3%, to $21.1 million as compared to $23.5 million in the same period of 2009. This decrease was mostly rate driven as the yield on interest-earning assets was 4.91% for the first half of 2010, a decrease of 43 basis points from a yield of 5.34% in the first half of 2009, resulting in a decrease in interest income of $1.9 million. Average outstanding net loans decreased $45.4 million, or 6.6%, primarily due to commercial loan payoffs and charge-offs, as well as the volume of refinancing of fixed-rate residential mortgages, which the Bank sells into the secondary market. Much of the cash flow from the refinancing and sale of these mortgages was reinvested into investment securities, resulting in an increase of $27.8 million, or 16.3% in their average balance for the first half of 2010 as compared to the same period in 2009. This overall change in volume of earning assets resulted in a decrease in interest income of $522,000.

Interest expense decreased $2.1 million, or 21.4%, to $7.6 million for the six months ended June 30, 2010 as compared to $9.7 million during the same period in 2009. Average interest-bearing liabilities in the first half of 2010 decreased $14.3 million, or 1.9%, as compared to the same period of 2009, accounting for a decrease to interest expense of $456,000. The average cost of funds decreased to 2.04% for the six month period ended June 30, 2010, a decrease of 51 basis points from a cost of funds of 2.55% for the same period in 2009, resulting in a decrease in interest expense of $1.6 million.

Provision for loan loss expense increased $3.9 million to $6.2 million for the six months ended June 30, 2010 as compared to a provision expense of $2.2 million for the six months ended June 30, 2009. This increase reflected both the difference in the amount of and mix of the net change in loan balances in each period, as well as higher specific reserves established against certain loans in 2010. Additionally, as part of a continuous review and analysis of current market and economic conditions by management, the Company adjusted the reserve ratio applied to certain loan categories in 2010. The charge-offs of specific non-performing loans also resulted in the reduction in the ratio of the allowance for loan losses to total loans to 1.44% at June 30, 2010, as compared to 1.67% at December 31, 2009 and 1.30% at June 30, 2009.

Non-interest income was $3.7 million in the first six months of 2010, an increase of $3.8 million as compared to the same period of 2009. The primary cause of the increase was the decrease in the amount of writedowns taken on investments deemed to be OTTI as well as an increase in the net gain on the sale of investment securities. The Bank incurred $365,000 of OTTI credit losses on certain limited partnership and equity investments during the first half of 2010 as compared to a charge of $3.0 million on certain bonds, equities and limited partnership investments in the second quarter of 2009. Portfolio management fees increased $271,000, or 55.3% in the 2010 as compared to the same period of 2009 primarily as a result of the Bank’s acquisition of the Renaissance Investment Group in April 2010. In 2010, the Bank also had increases in customer fees, insurance and other fees, partially offset by a decrease on the gain on sale of mortgages.

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Non-interest expense increased $212,000, or 1.4%, to $14.9 million for the first six months ended June 30, 2010 as compared to the same period of 2009. Increases in salaries and benefits, data processing, professional fees and other general and administration expense were partially offset by a decrease in occupancy expenses and FDIC insurance expense.

Income tax benefit increased $410,000 to $1.3 million in the first half of 2010 from a benefit of $900,000 in the first half of 2009 partially as a result of the increase in net loss before taxes. The Company’s combined federal and state effective tax rate for the first six months of 2010 was 33.3% as compared to 28.3% in the same period of 2009.

Minimum Regulatory Capital Requirements: As of June 30, 2010, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category. The Bank’s capital amounts and ratios as of June 30, 2010 and December 31, 2009 are presented in the table.

																		Minimum To Be Well
										Minimum								Capitalized Under
										Capital								Prompt Corrective
		Actual								Requirement								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
June 30, 2010:
Total capital to risk weighted assets		$	74,173				11.6	%		$	51,115				8.0	%		$	63,894				10.0	%
Tier 1 capital to risk weighted assets:			66,165				10.4				25,558				4.0				38,336				6.0
Tier 1 capital to average assets:			66,165				7.3				36,018				4.0				45,023				5.0
December 31, 2009:
Total capital to risk weighted assets:		$	81,484				12.3	%		$	52,824				8.0	%		$	66,030				10.0	%
Tier 1 capital to risk weighted assets:			72,811				11.0				26,412				4.0				39,618				6.0
Tier 1 capital to average assets:			72,811				8.0				36,232				4.0				45,290				5.0

Contractual Obligations . Additional information relating to payments due under contractual obligations is presented in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission for the year ended December 31, 2009. The following table presents information indicating various contractual obligations and commitments of the Company as of June 30, 2010 and the respective maturity dates:

		June 30, 2010
										More than
										One Year				Three Years
						One Year				through				through				Over Five
		Total				or Less				Three Years				Five Years				Years
		(Dollars in Thousands)
Federal Home Loan Bank of Boston advances		$	148,595			$	13,500			$	45,000			$	51,900			$	38,195
Securities sold under agreements to repurchase			3,927				3,927				—				—				—
Total contractual obligations		$	152,522			$	17,427			$	45,000			$	51,900			$	38,195

Off-Balance Sheet Arrangements: Other than loan commitments and other contingencies shown below, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and generally have fixed expiration dates or other termination clauses. The following table presents certain information about the Bank’s loan commitments and other contingencies outstanding as of June 30, 2010:

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		June 30, 2010
										More than				More than
										One Year				Three Years
						One Year or				through				Through Five				Over Five
		Total				Less				Three Years				Years				years
		(Dollars in Thousands)
Commitments to grant loans (1)		$	9,569			$	9,569			$	—			$	—			$	—
Commercial loan lines-of-credit			12,850				12,850				—				—				—
Unused portion of home equity loans (2)			62,972				2,074				9,282				15,082				36,534
Unused portion of construction loans (3)			2,689				2,689				—				—				—
Unused portion of overdraft lines-of-credit (4)			4,775				—				—				—				4,775
Unused portion of personal lines-of-credit (5)			752				—				—				—				752
Standby letters of credit (6)			3,221				3,221				—				—				—
Other commitments and contingencies (7)			4,383				—				4,383				—				—
Total loan and other commitments		$	101,211			$	30,403			$	13,665			$	15,082			$	42,061

 

(1)		Commitments for loans are extended to customers for up to 60 days after which they expire.
(2)		Unused portions of home equity loans are available to the borrower for up to 10 years.
(3)		Unused portions of residential construction loans are available to the borrower for up to one year. Commercial construction loans maturities may be longer than one year.
(4)		Unused portion of checking overdraft lines-of-credit are available to customers in “good standing” indefinitely.
(5)		Unused portion of personal lines-of-credit are available to customers in “good standing” indefinitely.
(6)		Standby letters of credit are generally available for less than one year.
(7)		Other commitments relate primarily to potential additional capital calls the Company is committed to contribute as part of its investment in certain real estate limited partnerships.

Item 3: Quantitative and Qualitative Disclosures about Market Risks

There has been no material change in the Company’s market risk during the six months ended June 30, 2010. See the discussion and analysis of quantitative and qualitative disclosures about market risk provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 for a general discussion of the qualitative aspects of market risk and discussion of the simulation model used by the Bank to measure its interest rate risk.

Item 4: Controls and Procedures

Disclosure Controls and Procedures: The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of end of the period covered by this report, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

Internal Control Over Financial Reporting: There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are 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

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

Item 1A. Risk Factors

In addition to the other information contained this Quarterly Report on Form 10-Q, the following risk factors represent material updates and additions to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission on March 15, 2010. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

Financial reform legislation recently enacted by Congress will, among other things, eliminate the Office of Thrift Supervision, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our costs of operations.

Congress recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

Certain provisions of the Dodd-Frank Act are expected to have a near term impact on the Company. For example, the new law provides that the Office of Thrift Supervision, which currently is the primary federal regulator for the Company, will cease to exist one year from the date of the new law’s enactment. The Board of Governors of the Federal Reserve System will supervise and regulate all savings and loan holding companies that were formerly regulated by the Office of Thrift Supervision, including the Company. Also effective one year after the date of enactment is a provision of the Dodd-Frank Act that eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on the Company’s interest expense.

The Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013.

The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and by authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Savings institutions such as Legacy Banks with $10 billion or less in assets will continued to be examined for compliance with the consumer laws by their primary bank regulators.

It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.

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

	(a)		Unregistered Sales of Equity Securities — Not applicable
	(b)		Use of Proceeds — Not applicable
	(c)		Repurchase of Our Equity Securities — In March 2009 the Company announced that its Board of Directors authorized a stock repurchase program (the “Stock Repurchase Program”) for the purchase of up to 439,095 shares of the Company’s common stock

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or approximately 5% of its outstanding common stock. Purchases under this Stock Repurchase Program in the second quarter of 2010 were as follows:

						(c) Total Number of		(d) Maximum Number or
						Shares Purchased as		Approximate Dollar Value of
		(a) Total Number				Part of		Shares that May Yet Be
		of Shares		(b) Average Price		Publicly announced Plans		Purchased Under the Plans or
Period		Purchased		Paid per Share		or Programs		Programs
April 1 — 30		12,200		$9.59		12,200		344,445
May 1 — 31		4,500		$9.18		4,500		339,945
June 1 — 30		11,100		$8.67		11,100		328,845

In the period from July 1, 2010 to August 4, 2010, the Company purchased an additional 14,900 shares under the repurchase program at an average price of $8.36 per share. Any further repurchases under the Stock Repurchase Program will be made through open market purchase transactions from time to time. The amount and exact timing of any repurchases will depend on market conditions and other factors, at the discretion of management of the Company. There is no assurance that the Company will repurchase shares during any period.

Item 3. Defaults Upon Senior Securities

None

Item 4. (Removed and Reserved)

Item 5 Other Information

None

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Item 6 : Exhibits

3.1		Certificate of Incorporation of Legacy Bancorp, Inc.(1)
3.2		Bylaws of Legacy Bancorp, Inc. (as amended) (1)
10.1		Legacy Banks ESOP Trust Agreement(2)
10.2		ESOP Plan Document (2)
10.3		ESOP Loan Documents (2)
10.4.1		Employment Agreement between Legacy Banks and J. Williar Dunlaevy (2)
10.4.2		Employment Agreement between Legacy Banks and Michael A. Christopher (2)
10.4.3		Employment Agreement between Legacy Banks and Steven F. Pierce (2)
10.4.4		Employment Agreement between Legacy Banks and Stephen M. Conley (2)
10.4.5		Employment Agreement between Legacy Banks and Richard M. Sullivan (2)
10.5.1		Employment Agreement between Legacy Bancorp, Inc. and J. Williar Dunlaevy (2)
10.5.2		Employment Agreement between Legacy Bancorp, Inc. and Michael A. Christopher (2)
10.5.3		Employment Agreement between Legacy Bancorp, Inc. and Steven F. Pierce (2)
10.5.4		Employment Agreement between Legacy Bancorp, Inc. and Stephen M. Conley (2)
10.5.5		Employment Agreement between Legacy Bancorp, Inc. and Richard M. Sullivan (2)
10.5.6		Separation Agreement and General Release dated as of November 5, 2007 between Legacy Bancorp, Inc., Legacy Banks and Michael A. Christopher (4)
10.5.7		Separation Agreement and General Release dated as of December 21, 2007 between Legacy Bancorp, Inc., Legacy Banks and Stephen M. Conley (5)
10.5.8		Consulting Agreement dated as of November 5, 2007 between Legacy Bancorp, Inc., Legacy Banks and Michael A. Christopher (4)
10.5.9		Purchase Agreement by and between First Niagara Bank and Legacy Banks dated as of July 25, 2007 (6)
10.5.10		Change In Control Agreement between Legacy Bancorp, Inc. and Paul H. Bruce (7)
10.5.11		Change In Control Agreement between Legacy Bancorp, Inc. and Kimberly A. Mathews (7)
10.5.12		Purchase Agreement by and between The Bank of Western Massachusetts and Legacy Banks dated as of December 15, 2008 (8)
10.5.13		Amended and Restated Employment Agreement effective as of November 20, 2008 by and between Legacy Bancorp, Inc., Legacy Banks and J. Williar Dunlaevy (9)
10.5.14		Amended and Restated Employment Agreement effective as of November 20, 2008 by and between Legacy Bancorp, Inc., Legacy Banks and Steven F. Pierce (9)
10.5.15		Amended and Restated Employment Agreement effective as of November 20, 2008 by and between Legacy Bancorp, Inc., Legacy Banks and Richard M. Sullivan (9)
10.5.16		Amended and Restated Supplemental Executive Retirement Agreement effective as of November 20, 2008 by and between Legacy Bancorp, Inc., Legacy Banks and J. Williar Dunlaevy (9)
10.5.17		Employment Agreement effective as of April, 2010 by and between Legacy Bancorp, Inc., Legacy Banks and Patrick J. Sullivan (10)
10.5.18		Separation Agreement and General Release dated as of May 11, 2010 between Legacy Bancorp, Inc., Legacy Banks and Steven F. Pierce (11)
10.11		2006 Equity Incentive Plan (3)
11.0		Statement re: Computation of Per Share Earnings is incorporated herein by reference to Notes to Consolidated Financial Statements within Part I, “Financial Statements”
31.1		Certification pursuant to Rule 13a-14(a)/15d-14(a) of J. Williar Dunlaevy
31.2		Certification pursuant to Rule 13a-14(a)/15d-14(a) of Paul H. Bruce
32		Certification pursuant to 18 U.S.C. Section 1350

 

(1)		Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2005 filed October 27, 2005.
(2)		Incorporated by reference from the Registration Statement on Form S-1 (No. 333-126481) filed July 8, 2005, as amended.
(3)		Incorporated by reference from the Registrant’s Definitive Proxy Statement on Form DEF 14A filed September 28, 2006
(4)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed November 5, 2007.
(5)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed December 21, 2007.
(6)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed July 25, 2007.
(7)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed October 30, 2008.
(8)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed December 16, 2008.
(9)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed November 25, 2008.
(10)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed March 4, 2010.
(11)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed May 11, 2010.

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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.

	LEGACY BANCORP, INC.
Date: August 6, 2010	/s/ J. Williar Dunlaevy
	J. Williar Dunlaevy
	Chief Executive Officer and Chairman of the Board
Date: August 6, 2010	/s/ Paul H. Bruce
	Paul H. Bruce
	Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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