Legacy Bancorp, Inc. - FORM 10-Q

Attached files

file	filename
EX-32 - EX-32 - Legacy Bancorp, Inc.	b86444exv32.htm
EX-31.1 - EX-31.1 - Legacy Bancorp, Inc.	b86444exv31w1.htm
EX-31.2 - EX-31.2 - Legacy Bancorp, Inc.	b86444exv31w2.htm

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 MARCH 31, 2011


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER : 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)

(413) 443-4421
(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
(Do not check if a smaller reporting company)

Smaller reporting company o

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 May 9, 2011 was 8,631,732.

LEGACY BANCORP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


			Page No.
Part I — Financial Information

	Item 1	Financial Statements

		Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010		2

		Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010		3

		Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2011 and 2010		4

		Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010		5

		Notes to Condensed Consolidated Financial Statements		7

	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

	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		28

	Item 4	(Removed and Reserved)		28

	Item 5	Other Information		28

	Item 6	Exhibits		29

EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION

Item 1: Financial Statements

LEGACY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)


	March 31,			December 31,
	2011			2010
	(Unaudited)
ASSETS
Cash and due from banks	$	13,947		$	12,186
Short-term investments		13,680			14,906

Cash and cash equivalents		27,627			27,092

Securities — available for sale		191,853			185,688
Securities — held to maturity		97			97
Restricted equity securities and other investments — at cost		16,863			16,546
Loans held for sale		785			3,839
Loans, net of allowance for loan losses of $8,694 in 2011 and $9,010 in 2010		592,739			607,102
Premises and equipment, net		18,823			19,142
Accrued interest receivable		2,577			2,631
Goodwill, net		11,558			11,558
Mortgage servicing rights		776			737
Other intangible assets		2,675			2,888
Net deferred tax asset		12,428			12,684
Bank-owned life insurance		17,058			17,047
Foreclosed assets		2,365			2,216
Other assets		7,333			7,610


	$	905,557		$	916,877


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	78,115		$	75,116
Interest-bearing		598,680			610,129

Total deposits		676,795			685,245

Securities sold under agreements to repurchase		3,671			5,329
Federal Home Loan Bank advances		105,385			105,388
Mortgagors’ escrow accounts		1,006			1,211
Accrued expenses and other liabilities		6,886			8,145

Total liabilities		793,743			805,318


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 March 31, 2011 and December 31, 2010; 8,631,732 outstanding at March 31, 2011 and December 31, 2010)		103			103
Additional paid-in-capital		103,125			103,168
Unearned compensation — ESOP		(6,956	)		(6,956	)
Unearned compensation — Equity Incentive Plans		(853	)		(1,053	)
Retained earnings		39,434			39,114
Accumulated other comprehensive loss		(455	)		(233	)
Treasury stock, at cost (1,676,868 shares at March 31, 2011 and December 31, 2010)		(22,584	)		(22,584	)

Total stockholders’ equity		111,814			111,559


	$	905,557		$	916,877

See accompanying notes to consolidated financial statements

LEGACY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)


	Three Months Ended March 31,
	2011			2010
	(Unaudited)
Interest and dividend income:
Loans	$	8,018		$	9,296
Securities:
Taxable		870			1,185
Tax-exempt		20			167
Short-term investments		4			6

Total interest and dividend income		8,912			10,654

Interest expense:
Deposits		1,844			2,439
Federal Home Loan Bank advances		1,016			1,449
Other borrowed funds		5			10

Total interest expense		2,865			3,898

Net interest income		6,047			6,756
Provision for loan losses		41			2,421

Net interest income, after provision for loan losses		6,006			4,335

Non-interest income:
Customer service fees		724			722
Portfolio management fees		543			280
Income from bank-owned life insurance		140			154
Insurance, annuities and mutual fund fees		51			20
Gain on sales of securities, net		27			101
Impairment losses on investments		(36	)		(299	)
Gain on sales of loans, net		139			60
Miscellaneous		14			11

Total non-interest income		1,602			1,049

Non-interest expenses:
Salaries and employee benefits		2,826			3,475
Occupancy and equipment		1,018			991
Data processing		699			694
Professional fees		302			323
Advertising		89			319
FDIC deposit insurance		305			269
Foreclosed assets, net		330			118
Other general and administrative		944			984

Total non-interest expenses		6,513			7,173

Income (loss) before income taxes		1,095			(1,789	)
Provision (benefit) for income taxes		372			(545	)

Net income (loss)	$	723		$	(1,244	)


Earnings (loss) per share
Basic	$	0.09		$	(0.15	)
Diluted	$	0.09		$	(0.15	)

Weighted average shares outstanding
Basic		8,014,817			8,028,621
Diluted		8,052,772			8,028,621

See accompanying notes to consolidated financial statements

LEGACY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(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, 2009		8,734,712		$	103	$	102,788		$	(7,322	)	$	(2,078	)	$	48,998		$	711		$	(21,833	)	$	121,367

Comprehensive income (loss):
Net income (loss)		—			—		—			—			—			(1,244	)		—			—			(1,244	)
Net unrealized gain/loss on securities available for sale, net of reclassification adjustment and tax effects		—			—		—			—			—			—			333			—			333

Total comprehensive income (loss)																									(911	)

Cash dividends declared ($0.05 per share)		—			—		—			—			—			(408	)		—			—			(408	)
Common stock repurchased — 5% stock repurchase																									—
Program announced March 2009		(15,200	)		—		—			—			—			—			—			(145	)		(145	)
Stock option expense		—			—		69			—			—			—			—			—			69
Restricted stock expense		—			—		—			—			220			—			—			—			220
Common stock held by ESOP committed to be released (13,745 shares)		—			—		—			183			—			(51	)		—			—			132

Balance at March 31, 2010		8,719,512		$	103	$	102,857		$	(7,139	)	$	(1,858	)	$	47,295		$	1,044		$	(21,978	)	$	120,324


Balance at December 31, 2010		8,631,732		$	103	$	103,168		$	(6,956	)	$	(1,053	)	$	39,114		$	(233	)	$	(22,584	)	$	111,559

Comprehensive income (loss):
Net income (loss)		—			—		—			—			—			723			—			—			723
Net unrealized gain/loss on securities available for sale, net of reclassification adjustment and tax effects		—			—		—			—			—			—			(222	)		—			(222	)

Total comprehensive income (loss)																									501

Cash dividends declared ($0.05 per share)		—			—		—			—			—			(403	)		—			—			(403	)
Stock option expense net of cumulative forfeitures		—			—		(48	)		—			—			—			—			—			(48	)
Restricted stock expense		—			—		5			—			200			—			—			—			205

Balance at March 31, 2011		8,631,732		$	103	$	103,125		$	(6,956	)	$	(853	)	$	39,434		$	(455	)	$	(22,584	)	$	111,814

See accompanying notes to consolidated financial statements

LEGACY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)


	Three Months Ended March 31,
	2011			2010
	(Unaudited)
Cash flows from operating activities:
Net income (loss)	$	723		$	(1,244	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		41			2,421
Net amortization of securities		149			205
Amortization of mortgage servicing rights		33			23
Amortization of other intangible assets		213			154
Depreciation and amortization expense		374			395
(Gain) loss on sales/impairment of securities, net		9			198
Loss on sales/writedowns of foreclosed real estate, net		213			75
Gain on sales of loans, net		(139	)		(60	)
Loans originated for sale		(6,860	)		(5,667	)
Proceeds from sales of loans		9,981			5,415
Share-based compensation expense		157			289
Deferred tax provision		390			1,195
Employee Stock Ownership Plan expense		—			132
Net change in:
Bank-owned life insurance		(143	)		(156	)
Accrued interest receivable		54			115
Other assets		277			(2,517	)
Accrued expenses and other liabilities		(1,259	)		1,323

Net cash provided by operating activities		4,213			2,296

Cash flows from investing activities:
Activity in available-for-sale securities:
Sales		2,097			2,141
Maturities, prepayments and calls		22,935			28,010
Purchases		(31,675	)		(42,494	)
Purchase of other investments		(353	)		(196	)
Loan originations and purchases, net of principal payments		13,827			9,986
Redemption of bank-owned life insurance		132			—
Additions to premises and equipment		(55	)		(481	)
Proceeds from sales of foreclosed assets		133			—

Net cash provided (used) by investing activities		7,041			(3,034	)

(continued)

See accompanying notes to consolidated financial statements.

LEGACY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(Dollars in thousands)


	Three Months Ended March 31,
	2011			2010
	(Unaudited)
Cash flows from financing activities:
Net (decrease) increase in deposits		(8,450	)		9,866
Net decrease in securities sold under agreements to repurchase		(1,658	)		(221	)
Repayment of Federal Home Loan Bank advances		(13,760	)		(13,021	)
Proceeds from Federal Home Loan Bank advances		13,757			3,018
Net (decrease) increase in mortgagors’ escrow accounts		(205	)		37
Repurchase of common stock		—			(145	)
Payment of dividends on common stock		(403	)		(408	)

Net cash used by financing activities		(10,719	)		(874	)


Net change in cash and cash equivalents		535			(1,612	)

Cash and cash equivalents at beginning of period		27,092			40,155


Cash and cash equivalents at end of period	$	27,627		$	38,543


Supplemental cash flow information:
Interest paid on deposits	$	1,915		$	2,497
Interest paid on Federal Home Loan Bank advances		1,134			1,433
Interest paid on other borrowed funds		5			10
Income taxes paid		20			100
Non-cash activities:
Real estate acquired through foreclosure		495			708

See accompanying notes to consolidated financial statements.

LEGACY BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Recent Developments

On December 21, 2010, Legacy Bancorp, Inc. (“Legacy” or the “Company”) and Berkshire Hills Bancorp, Inc. (“Berkshire”) jointly announced the execution of a definitive agreement whereby Berkshire will acquire Legacy in a 90% stock and 10% cash transaction. As a result of the merger, Legacy’s shareholders will become shareholders of Berkshire and will receive 0.56385 shares of Berkshire common stock plus $1.30 cash for each share of Legacy common stock they own. The transaction is expected to be completed during the third quarter of 2011, subject to the approval of regulators and shareholders of both companies. Berkshire’s common stock is listed on the NASDAQ Global Select Market under the trading symbol “BHLB”. On May 9, 2011, the closing sales price of a share of Berkshire common stock was $21.13.

2. 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 March 31, 2011 are not necessarily indicative of the results to be obtained for the year ending December 31, 2011. 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, 2010.

3. Recent Accounting Pronouncements

In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU 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. The Company adopted this Update as of January 1, 2011 and this adoption did not have a significant impact on the Company’s consolidated financial statements. The Company has provided the disclosures required as of March 31, 2011 in Note 9.

In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This Update provides additional guidance and clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring (“TDR”). This Update is effective for the first interim or annual period beginning on or after June 15, 2011, with retrospective application to the beginning of the annual period of adoption. The measurement of impairment should be done prospectively in the period of adoption for loans that are newly identified as TDRs upon adoption of this Update. In addition, the TDR disclosures required by ASU 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses should be provided beginning in the period of adoption of this Update. The Company will adopt this Update on July 1, 2011 and is currently evaluating the impact of adoption on its consolidated financial statements.

In April 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements. This update revises the criteria for assessing effective control for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The update will be effective for interim and annual reporting periods beginning on or after December 15, 2011, early adoption is prohibited, and the amendments will be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.

4. 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. Earnings per share have been computed as follows:


	Three Months Ended March 31,
	2011			2010

Net income (loss) applicable to common stock (000’s)	$	723		$	(1,244	)

Average number of shares issued		10,308,600			10,308,600
Less: average unallocated ESOP shares		(522,755	)		(549,640	)
Less: average treasury shares		(1,676,868	)		(1,581,449	)
Less: average unvested restricted stock awards		(94,160	)		(148,890	)

Average number of basic shares outstanding		8,014,817			8,028,621

Plus: dilutive unvested restricted stock awards		31,141			—
Plus: diluted stock option shares		6,814			—

Average number of diluted shares outstanding		8,052,772			8,028,621


Basic earnings (loss) per share	$	0.09		$	(0.15	)
Diluted earnings (loss) per share	$	0.09		$	(0.15	)

5. 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:


	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands)
Securities
Net unrealized holding (losses) gains on available for sale (AFS) securities	$	(329	)	$	631
Reclassification adjustment for gains on sales of AFS securities		(27	)		(101	)

		(356	)		530
Tax effect		134			(197	)

Net-of-tax amount	$	(222	)	$	333

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


	March 31,			December 31,
	2011			2010
	(Dollars in thousands)
Securities
Net unrealized holding gains on available for sale securities	$	(469	)	$	(112	)
Tax effects		183			48

Net-of-tax amount		(286	)		(64	)


Directors’ Fee Plan
Unrecognized net actuarial loss and prior service costs		(285	)		(285	)
Tax effect		116			116

Net-of-tax amount		(169	)		(169	)


	$	(455	)	$	(233	)

6. Dividends

On March 9, 2011, the Company declared a cash dividend of $0.05 per share of common stock which was paid on April 1, 2011 to shareholders of record as of the close of business on March 20, 2011.

7. Commitments and Other Contingencies

Outstanding loan commitments and other contingencies totaled $112.7 million at March 31, 2011, compared to $118.2 million as of December 31, 2010. 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.

8. Securities

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


			March 31, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)
Securities Available for Sale
Debt securities:
Government-sponsored enterprises (GSE)	$	144,881	$	125	$	(1,069	)	$	143,937
Municipal		1,599		25		(9	)		1,615
GSE residential mortgage-backed		5,775		228		—			6,003
U.S. Government guaranteed residential mortgage-backed		39,702		508		(378	)		39,832

Total debt securities		191,957		886		(1,456	)		191,387

Marketable equity securities		365		101		—			466

Total securities available for sale	$	192,322	$	987	$	(1,456	)	$	191,853


Securities Held to Maturity
Other bonds and obligations	$	97	$	—	$	—		$	97


			December 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)
Securities Available for Sale
Debt securities:
Government-sponsored enterprises (GSE)	$	132,221	$	244	$	(841	)	$	131,624
Municipal		3,145		36		(36	)		3,145
Corporate and other		401		1		—			402
GSE residential mortgage-backed		6,370		225		(1	)		6,594
U.S. Government guaranteed residential mortgage-backed		42,775		522		(330	)		42,967

Total debt securities		184,912		1,028		(1,208	)		184,732

Marketable equity securities		888		114		(46	)		956

Total securities available for sale	$	185,800	$	1,142	$	(1,254	)	$	185,688


Securities Held to Maturity
Other bonds and obligations	$	97	$	—	$	—		$	97

The amortized cost and estimated fair value of debt securities by contractual maturity at March 31, 2011 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
	(Dollars in thousands)

Within 1 year	$	8,791	$	8,825	$	—	$	—
Over 1 year to 5 years		113,652		112,978		82		82
Over 5 years to 10 years		12,099		11,974		—		—
Over 10 years		11,938		11,775		15		15

Total bonds and obligations		146,480		145,552		97		97
Mortgage-backed		45,477		45,835		—		—

Total debt securities	$	191,957	$	191,387	$	97	$	97

For the three months ended March 31, 2011 and 2010, proceeds from the sale and call of securities available for sale amounted to $6.1 million and $8.2 million respectively. Gross gains of $84,000 and $226,000, respectively, and gross losses of $60,000 and $111,000, respectively, were realized on those sales. Gross gains on called securities were $4,000 and $6,000, respectively and gross losses were $1,000 and $20,000, respectively in the three months ended 2011 and 2010.

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


	Less Than Twelve Months				Over Twelve Months
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
			(Dollars in thousands)
March 31, 2011:
Debt securities:
Government-sponsored enterprises (GSE)	$	1,069	$	104,056	$	—	$	—
Municipal		9		605		—		—
U.S. Government guaranteed residential mortgage-backed		338		14,894		40		1,199

Total debt securities		1,416		119,555		40		1,199
Marketable equity securities		—		—		—		—


Total temporarily impaired securities	$	1,416	$	119,555	$	40	$	1,199


December 31, 2010:
Debt securities:
Government-sponsored enterprises (GSE)	$	841	$	73,475	$	—	$	—
Municipal		36		1,577		—		—
GSE residential mortgage-backed		—		—		1		131
U.S. Government guaranteed residential mortgage-backed		330		17,235		—		—

Total debt securities		1,207		92,287		1		131
Marketable equity securities		46		302		—		—


Total temporarily impaired securities	$	1,253	$	92,589	$	1	$	131

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 March 31, 2011, 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
			(Dollars in thousands)

Government-sponsored enterprises (GSE)		133	$	105,125	$	1,069		1.0	%
Municipal		2		614		9		1.5	%
U.S. Government guaranteed residential mortgage-backed		22		16,472		378		2.3	%

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 or an agency thereof or by the 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 March 31, 2011.

For the quarter ended March 31, 2011 the Company recognized OTTI losses totaling $36,000 on its investment in 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 March 31, 2011, the Company had potential additional capital calls of approximately $3.9 million related to these partnership investments. These investments are not redeemable, but are transferrable. The partnerships have limited remaining lives ranging from two to seven years (2012 - 2017) over which the underlying assets are expected to be liquidated by the partnerships.

9. Loans

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 March 31, 2011						At December 31, 2010
	Amount			Percent			Amount			Percent
				(Dollars in thousands)
Mortgage loans on real estate:
Residential	$	257,034			42.83	%	$	266,166			43.30	%
Land notes		9,777			1.63			10,599			1.72
Home equity		72,679			12.11			74,328			12.09
Commercial		207,315			34.55			211,431			34.40
Commercial contruction		13,496			2.24			13,596			2.21

		560,301			93.36			576,120			93.72

Other loans:
Commercial		29,629			4.94			28,123			4.57
Consumer and other		10,196			1.70			10,518			1.71

		39,825			6.64			38,641			6.28


Total loans		600,126			100.00	%		614,761			100.00	%


Other Items:
Net deferred loan costs		1,307						1,351
Allowance for loan losses		(8,694	)					(9,010	)


Total Loans, net	$	592,739					$	607,102

The Company has transferred a portion of its originated commercial real estate and commercial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying consolidated balance sheets. The Company and participating lenders share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments (net of servicing fees) to participating lenders and disburses required escrow funds to relevant parties. At March 31, 2011 and December 31, 2010, the Company was servicing loans for participants aggregating $13.2 million and $11.7 million, respectively.

Information pertaining to the allowance for loan losses, by segment, at March 31, 2011 and December 31, 2010 follows:


	March 31, 2011
	Residential				Commercial		Home		Commercial		Consumer
	Residential		Land Notes		Mortgages		Equity		Business		and other		Total
Amount of allowance for loans individually evaluated for impairement	$	164	$	313	$	266	$	—	$	69	$	—	$	812
Amount of allowance for loans collectively evaluated for impairement	$	1,028	$	568	$	5,085	$	400	$	576	$	225	$	7,882
Loans individually evaluated for impairement	$	3,642	$	579	$	10,408	$	313	$	248	$	2	$	15,192
Loans collectively evaluated for impairement	$	253,392	$	9,198	$	210,403	$	72,366	$	29,381	$	10,194	$	584,934


	December 31, 2010
	Residential				Commercial		Home		Commercial		Consumer
	Residential		Land Notes		Mortgages		Equity		Business		and other		Total
Amount of allowance for loans individually evaluated for impairement	$	75	$	422	$	496	$	—	$	69	$	—	$	1,062
Amount of allowance for loans collectively evaluated for impairement	$	1,276	$	585	$	4,789	$	446	$	598	$	254	$	7,948
Loans individually evaluated for impairement	$	3,445	$	778	$	11,938	$	120	$	545	$	5	$	16,831
Loans collectively evaluated for impairement	$	262,721	$	9,821	$	213,089	$	74,208	$	27,578	$	10,513	$	597,930

The following table sets forth activity in the Bank’s allowance for loan losses for the periods indicated:


	For the three months ended March 31, 2011
	Residential			Land			Commercial			Home			Commercial		Consumer
	Mortgages			Notes			Mortgages			Equity			Business		& Other			Total

Beginning balance	$	1,351		$	1,007		$	5,285		$	446		$	667	$	254		$	9,010
Charge-offs		(54	)		—			(349	)		—			—		(33	)		(436	)
Recoveries		—			—			—			—			70		9			79
Provision		91			(126	)		70			(9	)		—		15			41

Ending balance	$	1,388		$	881		$	5,006		$	437		$	737	$	245		$	8,694


	For the three months ended March 31, 2010
	Residential			Land			Commercial			Home			Commercial			Consumer
	Mortgages			Notes			Mortgages			Equity			Business			& Other			Total

Beginning balance	$	1,041		$	36		$	8,922		$	348		$	561		$	181		$	11,089
Charge-offs		(35	)		—			(5,177	)		—			(198	)		(20	)		(5,430	)
Recoveries		—			—			—			—			—			19			19
Provision		(5	)		(2	)		2,231			(4	)		206			(5	)		2,421

Ending balance	$	1,001		$	34		$	5,976		$	344		$	569		$	175		$	8,099

The allowance consists of general, allocated and unallocated components, as further described below.

General component: The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, land notes, commercial real estate, home equity loans, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. While there were no changes in the Company’s general policies or methodology pertaining to the general component of the allowance for loan losses during 2010, certain general reserve ratios were increased during 2010 mainly to reflect the greater risks and uncertainties resulting from the current economy. There were no adjustments to the general reserve ratios for the three months ended March 31, 2011.

The qualitative factors for the general component of the allowance for loan losses are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate — For residential mortgage loans to be held in portfolio, Legacy Banks lends up to a maximum loan-to-value ratio of 100% for first-time home buyers and 95% for other buyers on mortgage loans secured by owner-occupied property, with the general condition that private mortgage insurance is required for loans with a loan-to-value ratio in excess of 80%. A licensed appraiser appraises all properties securing residential first mortgage purchase loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment. Land loans are also included in residential real estate.

Commercial real estate — Loans in this segment are primarily income-producing properties throughout the Company’s market area, with a segment located out of market generated through the Company’s former national commercial real estate lending program which was discontinued in 2010. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management periodically obtains the borrower’s updated financial information and continually monitors the cash flows of these loans. Commercial construction loans are included in the commercial real estate segment and are considered to have higher risks due to their ultimate repayment being sensitive to interest rate changes, demand and supply of alternative real estate, the availability of long-term financing, and changes in general economic conditions. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses of the developers and property owners.

Home equity loans — Loans in this segment primarily include home equity lines-of-credit and loans that are secured by first or second mortgages on one-to-four family owner occupied properties, and are available to be drawn upon for 10 years, at the end of which time they become term loans amortized over 10 years. Interest rates on home equity lines normally adjust based on the prime rate of interest as published by the Wall Street Journal.

Commercial loans — Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

Consumer and other loans — Certain loans in this segment are unsecured and repayment is dependent on the credit quality of the individual borrower. This segment includes manufactured housing loans.

Allocated component: The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial 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. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company generally does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

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

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 troubled debt restructuring (“TDR”). All TDRs are initially classified as impaired.

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

The Company also maintains a reserve for unfunded credit commitments to provide for the risk of loss inherent in these arrangements. This reserve is determined using a methodology similar to the analysis of the allowance for loan losses, taking into consideration probabilities of future funding requirements. This reserve for unfunded commitments is included in other liabilities and amounted to $266,000 and $269,000 at March 31, 2011 and December 31, 2010, respectively.

The following is a summary of past due and non-accrual loans, by class, at March 31, 2011 and December 31, 2010:


	March 31, 2011
									Past due 90
					Greater				days or more		Loan on
	30-59 Days		60-89 Days		Than 90		Total Past		and still		non-
	Past Due		Past Due		Days		Due		accruing		accrual

Mortgage loans on real estate
Residential	$	1,424	$	—	$	3,524	$	4,948	$	—	$	3,524
Land notes		248		82		313		643		—		313
Home equity		930		14		277		1,221		—		277
Commercial		2,166		—		6,485		8,651		—		6,485
Commercial Construction		—		—		1,589		1,589		—		1,589
Other Loans
Commercial		245		108		183		536		—		183
Consumer and other		13		1		2		16		—		2

	$	5,026	$	205	$	12,373	$	17,604	$	—	$	12,373


	December 31, 2010
									Past due 90
					Greater				days or more		Loan on
	30-59 Days		60-89 Days		Than 90		Total Past		and still		non-
	Past Due		Past Due		Days		Due		accruing		accrual

Mortgage loans on real estate
Residential	$	1,400	$	799	$	3,445	$	5,644	$	—	$	3,445
Land notes		139		89		422		650		—		422
Home equity		178		14		120		312		—		120
Commercial		—		125		7,247		7,372		—		7,247
Commercial Construction		—		—		1,190		1,190		—		1,190
Other Loans
Commercial		415		166		315		896		—		315
Consumer and other		290		1		5		296		—		5

	$	2,422	$	1,194	$	12,744	$	16,360	$	—	$	12,744

The following is a summary of impaired loans, by class, at March 31, 2011 and December 31, 2010:


							For the three months ended
	At March 31, 2011						March 31, 2011
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance:
Residential real estate	$	2,576	$	2,576	$	—	$	3,275	$	23
Land notes		266		266		—		266		—
Home equity		313		313		—		385		—
Commercial real estate		6,838		9,918		—		7,364		46
Commercial construction		1,589		6,035		—		1,236		—
Commercial		145		367		—		150		7
Consumer and other		2		2		—		8		—

Total		11,729		19,477		—		12,684		76

Impaired loans with a valuation allowance:
Residential real estate	$	1,066	$	1,066	$	164	$	887	$	—
Land notes		313		313		313		313		—
Home equity		—		—		—		—		—
Commercial real estate		1,981		1,981		266		1,985		26
Commercial construction		—		—		—		—		—
Commercial		103		103		69		104		2
Consumer and other		—		—		—		—		—

Total		3,463		3,463		812		3,289		28

Total impaired loans	$	15,192	$	22,940	$	812	$	15,973	$	104


	At December 31, 2010
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
Impaired loans without a valuation allowance:
Residential real estate	$	2,912	$	2,963	$	—
Land notes		356		356		—
Home equity		120		120		—
Commercial real estate		7,324		10,235		—
Commercial construction		1,190		5,636		—
Commercial		433		690		—
Consumer and other		5		5		—

Total		12,340		20,005		—

Impaired loans with a valuation allowance:
Residential real estate	$	533	$	533	$	75
Land notes		422		422		422
Home equity		—		—		—
Commercial real estate		3,424		3,424		496
Commercial construction		—		—		—
Commercial		112		112		69
Consumer and other		—		—		—

Total		4,491		4,491		1,062

Total impaired loans	$	16,831	$	24,496	$	1,062

For the year ended December 31, 2010, the average balance of impaired loans was $26.4 million. No additional funds are committed to be advanced in connection with impaired loans. The $15.2 million of impaired loans at March 31, 2011 include $12.4 million of non-accrual loans and $811,000 of accruing troubled debt restructured loans as of March 31, 2011. The remaining $2 million are loans that the Company believes based on current information and events it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.

The Company utilizes a seven grade internal loan rating system for commercial real estate and commercial loans as follows:

Loans rated 1-3A: Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 4: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management. If not corrected or mitigated, the weakness may expose the bank to an increased risk of loss.

Loans rated 5: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 6: Loans in this category are considered “doubtful.” Weaknesses in these credits or relationships are so significant that the bank has identified a probable loss of principal. Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. These credits must be placed on non-accrual if not already classified as such.

Loans rated 7: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted. Weaknesses in these credits are so severe collection of any amount is unlikely and the loan shall no longer be carried as an asset on the banks books. These loans are charged to the Allowance for Loan and Lease Loss.

On at least an annual basis, the Bank formally reviews the ratings on all commercial real estate and commercial loans. Semi-annually, the Bank engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

The following table presents the Company’s loans by risk rating at March 31, 2011 and December 31, 2010:


	March 31, 2011				December 31, 2010
	Commercial				Commercial
	Real Estate		Commercial		Real Estate		Commercial

Loans rated 1-3A	$	182,296	$	24,458	$	177,985	$	20,474
Loans rated 4		15,959		2,251		17,900		1,988
Loans rated 5		22,556		2,869		29,142		5,603
Loans rated 6		—		51		—		58
Loans rated 7		—		—		—		—

	$	220,811	$	29,629	$	225,027	$	28,123

10. 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. 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.

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 unadjusted 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 available-for-sale securities measured at fair value in Level 3 as of March 31, 2011 or December 31, 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 measured at fair value in Level 3 include the Bank’s investment in certain real estate partnerships, the values of which are based on an analysis of the financial statements of the partnerships and underlying real estate projects, and adjusted by management to recognize unobservable inputs for specific characteristics of the investments, including, but not limited to, the investments’ liquidity and marketability, the Bank’s ownership percentage, and the nature and type of underlying investments within the funds.

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 and similar terms to borrowers of similar credit quality. Non-performing loans are assumed to be carried at 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 (CD) originated by the company are valued using a replacement cost 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.

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

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


	March 31, 2011
	Level 1		Level 2		Level 3		Fair Value
	(Dollars in thousands)
Assets
Debt Securities:
Government-sponsored enterprises (GSE)	$	—	$	143,937	$	—	$	143,937
Municipal bonds		—		1,615		—		1,615
GSE residential mortgage-backed		—		6,003		—		6,003
U.S. Government guaranteed residential mortgage-backed		—		39,832		—		39,832
Marketable equity securities		466		—		—		466

Securities available for sale		466		191,387		—		191,853

Total assets	$	466	$	191,387	$	—	$	191,853


	December 31, 2010
	Level 1		Level 2		Level 3		Fair Value
			(Dollars in thousands)
Assets
Debt Securities:
Government-sponsored enterprises (GSE)	$	—	$	131,624	$	—	$	131,624
Municipal bonds		—		3,145		—		3,145
Corporate bonds and other obligations		—		402		—		402
GSE residential mortgage-backed		—		6,594		—		6,594
U.S. Government guaranteed residential mortgage-backed		—		42,967		—		42,967
Marketable equity securities		956		—		—		956

Securities available for sale		956		184,732		—		185,688

Total assets	$	956	$	184,732	$	—	$	185,688

There were no transfers to or from Levels 1 and 2 during the three months ended March 31, 2011. There were no liabilities measured at fair value at March 31, 2011 or December 31, 2010.

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 March 31, 2011 and 2010. The gains or losses represent the amount of the write-down recorded during the periods noted on the assets held at period end.


							Quarter Ended
	March 31, 2011						March 31, 2011
							Total
	Level 1		Level 2		Level 3		Gains/(Losses)
	(Dollars in thousands)
Assets
Impaired loans	$	—	$	—	$	10,861	$	20
Other investments		—		—		4,132		(36	)
Foreclosed assets		—		—		2,365		(213	)

Total assets	$	—	$	—	$	17,358	$	(229	)


							Quarter Ended
	March 31, 2010						March 31, 2010
							Total
	Level 1		Level 2		Level 3		Gains/(Losses)
	(Dollars in thousands)
Assets
Impaired loans	$	—	$	—	$	16,380	$	(2,103	)
Other investments		—		—		4,449		(299	)
Foreclosed assets		—		—		1,781		(75	)

Total assets	$	—	$	—	$	22,610	$	(2,477	)

Impaired loans: 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 $10.8 million. Most of these writedowns occurred in prior periods. For the three month period ended March 31, 2011, adjustments related to these loans resulted in a net recovery of $20,000 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: The Bank maintains an equity investment in several commercial real estate funds. These funds invest in various types of commercial real estate throughout the country with the intent of generating an above-average rate of return. In 2010 these equity investments were deemed impaired and adjusted to fair value based on an analysis of the fund’s financial statements and underlying real estate projects. The values provided by the fund’s financial statements were adjusted by management to recognize unobservable inputs for specific characteristics of the investments, including, but not limited to, the investments’ liquidity and marketability, the Bank’s ownership percentage, and the nature and type of underlying investments within the funds. This adjustment is highly judgmental and resulted in a loss of $36,000 for the three month period ended March 31, 2011 which was recognized through OTTI charges.

Foreclosed assets: Certain properties in foreclosed assets were adjusted to fair value less costs to sell 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. If necessary, these appraised values were adjusted by management to recognize unobservable inputs for specific characteristics of the properties.

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.


	March 31, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
			(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	27,627	$	27,627	$	27,092	$	27,092
Securities — Available for sale		191,853		191,853		185,688		185,688
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		4,222		4,222		3,905		3,905
Loans and loans held for sale		593,524		607,248		610,941		626,967
Accrued interest receivable		2,577		2,577		2,631		2,631

Financial liabilities:
Deposits		676,795		682,351		685,245		691,501
Repurchase agreements		3,671		3,671		5,329		5,329
FHLB advances		105,385		112,081		105,388		112,882
Mortgagors’ escrow accounts		1,006		1,006		1,211		1,211

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, 2010.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in our future filings with the SEC, in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of our plans, objectives and expectations or those of our management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “continue,” “remain,” “will,” “should,” “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: local, regional, national and international economic conditions and the impact they may have on us and our customers and our assessment of that impact, changes in the level of non-performing assets and charge-offs; changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board; inflation, interest rate, securities market and monetary fluctuations; political instability; acts of war or terrorism; the timely development and acceptance of new products and services and perceived overall value of these products and services by users; changes in consumer spending, borrowings and savings habits; changes in the financial performance and/or condition of our borrowers; technological changes; acquisitions and integration of acquired businesses; the ability to increase market share and control expenses; changes in the competitive environment among financial holding companies and other financial service providers; the quality and composition of our loan or investment portfolio; the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we and our subsidiaries must comply; the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; changes in our organization, compensation and benefit plans; the costs and effects of legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews; greater than expected costs or difficulties related to the opening of new branch offices or the integration of new products and lines of business, or both; and/or our success at managing the risk involved in the foregoing items.

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 allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Please refer to note 9: Loans within Item 1 for a more detailed discussion of the allowance for loan losses.

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 10: 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 December 2007 and in March 2009. 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 March 31, 2011 and 2010, respectively.

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 is 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 is the income approach which constructs a discounted cash flow model from financial projections. The concluded fair value is calculated 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%, is placed on the market approach given the amount of data obtainable on comparable transactions. A 30% weight is applied to the asset approach due to the precision of the fair value estimates provided. Lastly, a 20% weight is 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 loss is recorded, it will have little or no impact on the tangible book value of our common shares or our regulatory capital levels.

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 March 31, 2011 and December 31, 2010

Overview: Total assets have decreased $11.3 million, or 1.2%, from $916.9 million at December 31, 2010 to $905.6 million at March 31, 2011. Within the overall balance sheet, investment securities increased while net loans decreased. On the liability side, the Company had an overall decrease in deposits of $8.5 million, as well as smaller decreases in repurchase agreements and other accrued liabilities, as discussed below.

Investment Activities: Cash and short-term investments increased by $535,000, or 2.0%, from $27.1 million at December 31, 2010 to $27.6 million at March 31, 2011. Available for sale securities increased $6.2 million, or 3.3%, from $185.7 million at December 31, 2010 to $191.9 million, or 21.2% of total assets, at March 31, 2011. The portfolio consists primarily of debt obligations issued by certain government-sponsored agencies, including municipalities. Additionally, the portfolio includes mortgage-backed securities with a fair value of $45.8 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 $16.9 million at March 31, 2011 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 $4.1 million. At March 31, 2011 the Company had potential additional capital calls of approximately $3.9 million related to these partnership investments. The remaining $1.8 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.


	At March 31, 2011				At December 31, 2010
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
			(Dollars in thousands)

Securities available for sale:
Government-sponsored enterprises (GSE)	$	144,881	$	143,937	$	132,221	$	131,624
Municipal bonds		1,599		1,615		3,145		3,145
Corporate bonds and other obligations		—		—		401		402
GSE residential mortgage-backed		5,775		6,003		6,370		6,594
U.S. Government guaranteed residential mortgage-backed		39,702		39,832		42,775		42,967

Total debt securities		191,957		191,387		184,912		184,732


Marketable equity securities		365		466		888		956


Total securities available for sale		192,322		191,853		185,800		185,688


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		4,132		4,132		3,815		3,815
Other investments		90		90		90		90


Total restricted equity securities and other investments		16,863		16,863		16,546		16,546


Total securities	$	209,282	$	208,813	$	202,443	$	202,331

Lending Activities: Total net loans, excluding loans held for sale, at March 31, 2011 were $592.7 million, a decrease of $14.3 million, or 2.4%, from $607.1 million at December 31, 2010. Residential mortgages decreased $9.1 million, or 3.4% as the majority of the residential mortgage activity was in the 15 and 30 year fixed rate categories, products which the Bank generally sells in the secondary market with servicing retained. Commercial real estate loans decreased $4.1 million, or 1.9%, during the quarter primarily due to loan payoffs. This decrease was offset somewhat by a $1.5 million, or 5.4% increase in other commercial loans. Please refer to note 9: Loans within Item 1 for a more detailed discussion of the loan balances.

Non-performing Assets: The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. If the non-accrual loans had been current, the gross interest income that would have been recorded was approximately $204,000 for the three month period ended March 31, 2011. At March 31, 2011 the Bank had nine loans totaling $3.3 million considered to be troubled debt restructurings (a loan for which a portion of interest or principal has been forgiven or the loan is modified at an interest rate less than current market rates). Of this amount, approximately $2.5 million is included as part of the $12.4 million of non-performing loans as of March 31, 2011. At December 31, 2010 Legacy Banks had fourteen loans totaling $4.5 million considered to be troubled debt restructurings.


	At March 31,			At December 31,
	2011			2010
	(Dollars in thousands)

Non-accrual loans:
Residential real estate	$	3,524		$	3,445
Land notes		313			422
Home equity		277			120
Commercial real estate		6,485			7,247
Commercial construction		1,589			1,190
Commercial		183			315
Consumer and other		2			5

Total non-accrual loans		12,373			12,744


Loans greater than 90 days delinquent and still accruing:
Residential real estate		—			—
Land notes		—			—
Home equity		—			—
Commercial real estate		—			—
Commercial construction		—			—
Commercial		—			—
Consumer and other		—			—

Total loans 90 days delinquent and still accruing		—			—


Total non-performing loans		12,373			12,744


Other real estate owned		2,365			2,216


Total non-performing assets (NPAs)	$	14,738		$	14,960


Troubled debt restructurings included in NPAs	$	2,492		$	2,451
Troubled debt restructurings not included in NPAs		811			2,098

Total troubled debt restructurings	$	3,303		$	4,549


Ratios:
Non-performing loans to total loans		2.06	%		2.07	%
Non-performing assets to total assets		1.63	%		1.63	%

Overall nonperforming loans (NPLs) were $12.4 million at March 31, 2011, a decrease of $371,000 as compared to December 31, 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 borrowers’ resources, expectation of foreclosure and alternative sources of recovery. 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: 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. Please refer to note 9: Loans within Item 1 for a more detailed discussion of the allowance for loan losses. The following table sets forth summary activity in the Bank’s allowance for loan losses for the periods indicated:


	At or for the three months
	ended March 31,
	2011			2010
	(Dollars in thousands)

Balance at beginning of period	$	9,010		$	11,089

Total charge-offs		(436	)		(5,430	)
Total recoveries		79			19

Net recoveries (charge-offs)		(357	)		(5,411	)
Provision for loan losses		41			2,421


Balance at end of period	$	8,694		$	8,099


Ratios:
Net recoveries (charge-offs) to average loans outstanding — 12 month rolling average		(1.16	%)		(0.88	%)
Allowance for loan losses to non-performing loans at end of period		70.27	%		66.56	%
Allowance for loan losses to total loans at end of period		1.45	%		1.25	%

Mortgage Servicing Rights: The Company had $776,000 of mortgage servicing rights on its balance sheet as of March 31, 2011 as compared to $737,000 at December 31, 2010. The Company recorded servicing fee income of $39,000 for the three month period ended March 31, 2011. The amount of mortgages serviced by the Company for others amounted to approximately $112.5 million as of March 31, 2011.

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


	At March 31, 2011					At December 31, 2010
	Balance		Percent			Balance		Percent
			(Dollars in thousands)

Deposit type:
Demand	$	78,115		11.54	%	$	75,116		10.96	%
Regular savings		54,610		8.07			53,504		7.81
Relationship savings		144,431		21.34			142,110		20.74
Money market deposits		62,701		9.26			68,611		10.01
NOW deposits		47,243		6.98			48,197		7.03

Total transaction accounts		387,100		57.20			387,538		56.55

Term certificates less than $100,000		156,416		23.11			162,408		23.70
Term certificates $100,000 or more		133,279		19.69			135,299		19.75

Total certificate accounts		289,695		42.80			297,707		43.45

Total deposits	$	676,795		100.00	%	$	685,245		100.00	%

Deposits decreased $8.5 million, or 1.2%, from $685.2 million at December 31, 2010 to $676.8 million at March 31, 2011. Deposits decreased primarily in money market accounts and certificate of deposits (CD’S) which decreased $5.9 million, or 8.6%, and $8.0 million, or 2.7%, respectively. These decreases were partially offset by increases in demand accounts, relationship savings and regular savings accounts. At March 31, 2011, CDs represented 42.8% of total deposits.

Borrowings: Advances from the Federal Home Loan Bank of Boston and securities sold under agreements to repurchase have decreased $1.7 million, or 1.5%, to $109.1 million at March 31, 2011.

Stockholders’ Equity: Overall stockholders’ equity increased by $255,000, or 0.2%, during the first quarter of 2011. Total equity was impacted by net income of $723,000 and the amortization of unearned compensation. These increases to equity were partially offset by an increase in the unrealized loss on available-for-sale investment securities as well as the declaration of a dividend of $0.05 per share during the first quarter of 2011.

Comparison of Operating Results for the Three Months Ended March 31, 2011 and 2010

Net income for the three months ended March 31, 2011 was $723,000, as compared to a net loss of $1.2 million for the same period in 2010. The improvement to net income included a decrease in the provision for loan losses charges, improved non-interest income and lower operating expenses, offset somewhat by a decrease in net interest income, 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.


	Three Months Ended March 31, 2011							Three Months Ended March 31, 2010
	Average							Average
	Outstanding							Outstanding
	Balance		Interest		Yield/ Rate⁽¹⁾			Balance		Interest		Yield/ Rate⁽¹⁾
					(Dollars in thousands)

Interest-earning assets:
Loans — net (2)	$	601,640	$	8,018		5.33	%	$	647,710	$	9,296		5.74	%
Investment securities		205,265		890		1.73	%		190,406		1,352		2.84	%
Short-term investments		9,722		4		0.16	%		15,743		6		0.15	%

Total interest-earning assets		816,627		8,912		4.37	%		853,859		10,654		4.99	%
Non-interest-earning assets		82,124							78,336

Total assets	$	898,751						$	932,195

Interest-bearing liabilities:
Savings deposits	$	52,035		27		0.21	%	$	50,232		33		0.26	%
Relationship savings		141,340		181		0.51	%		128,198		324		1.01	%
Money market		63,938		68		0.43	%		64,336		131		0.81	%
NOW accounts		46,054		26		0.23	%		44,208		34		0.31	%
Certificates of deposit		294,141		1,542		2.10	%		289,174		1,917		2.65	%

Total interest-bearing deposits		597,508		1,844		1.23	%		576,148		2,439		1.69	%
Borrowed funds		110,720		1,021		3.69	%		160,469		1,459		3.64	%

Total interest-bearing liabilities		708,228		2,865		1.62	%		736,617		3,898		2.12	%
Non-interest-bearing liabilities		77,985							71,916

Total liabilities		786,213							808,533
Equity		112,538							123,662

Total liabilities and equity	$	898,751						$	932,195


Net interest income			$	6,047						$	6,756


Net interest rate spread (3)						2.75	%						2.87	%
Net interest-earning assets (4)	$	108,399						$	117,242


Net interest margin (5)						2.96	%						3.16	%
Average interest-earning assets to interest-bearing liabilities						115.31	%						115.92	%


(1)		Yields and rates are annualized.

(2)		Includes loans held for sale and non-accrual loans.

(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.

(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.


	Three Months Ended March 31,
	2011 vs. 2010
	Increase						Total
	(Decrease) Due to						Increase
	Volume			Rate			(Decrease)
	(Dollars in thousands)

Interest-earning assets:
Loans — net	$	(638	)	$	(640	)	$	(1,278	)
Investment securities		115			(577	)		(462	)
Short-term investments		(2	)		—			(2	)


Total interest-earning assets		(525	)		(1,217	)		(1,742	)


Interest-bearing liabilities:
Savings deposits		1			(7	)		(6	)
Relationship savings		37			(180	)		(143	)
Money market		(1	)		(62	)		(63	)
NOW accounts		1			(9	)		(8	)
Certificates of deposit		34			(409	)		(375	)


Total deposits		72			(667	)		(595	)
Borrowed funds		(458	)		20			(438	)


Total interest-bearing liabilities		(386	)		(647	)		(1,033	)


Change in net interest income	$	(139	)	$	(570	)	$	(709	)

Net interest income for the three months ended March 31, 2011 was $6.0 million, a decrease of $709,000, or 10.5%, over the same period of 2010. 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 three months ended March 31, 2011 decreased $1.7 million, or 16.4%, to $8.9 million as compared to $10.7 million in the same period of 2010. This decrease was driven by both an overall decrease in the Company’s yield on interest-earning assets as well as a decrease in the net loan portfolio. The yield on interest-earning assets was 4.37% for the quarter, a decrease of 62 basis points from a yield of 4.99% in the first quarter of 2010, resulting in a decrease in interest income of $1.2 million. Average outstanding net loans decreased $46.1 million, or 7.1%, primarily due to commercial loan sales, 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 $14.9 million, or 7.8% in their average balance for the quarter as compared to the same period in 2010. This overall change in volume of earning assets resulted in a decrease in interest income of $525,000.

Interest expense decreased $1.0 million, or 26.5%, to $2.9 million for the three months ended March 31, 2011 as compared to $3.9 million during the same period in 2010. Average interest-bearing liabilities decreased $28.4 million, or 3.9%, in the first quarter of 2010 as compared to the same quarter of 2010, resulting in a decrease in interest expense of $386,000. The average cost of funds decreased to 1.62% for the three month period ended March 31, 2011, a decrease of 50 basis points from a cost of funds of 2.12% for the same period in 2010, resulting in a decrease in interest expense of $647,000.

Provision for loan losses decreased $2.4 million to $41,000 for the three months ended March 31, 2011 as compared to a provision expense of $2.4 million for the three months ended March 31, 2010, primarily reflecting management’s analysis, workout and charge-off of potential problem credits during the prior year. These actions, coupled with generally stable credit conditions during the first quarter of 2011 allowed for this significant reduction in the loan loss provision. The allowance for loan losses to total loans was 1.45% at March 31, 2011, as compared to 1.47% at December 31, 2010 and 1.25% at March 31, 2010.

Non-interest income for the first quarter of 2011 was $1.6 million, an increase of $553,000 as compared to $1.0 million in the same period of 2010, primarily due to higher portfolio management fees as well as a decrease in the amount of writedowns taken on investments deemed to be OTTI. Portfolio management fees increased $263,000, or 93.9%, in the first quarter of 2011 as compared to the same period of 2010 as a result of the Bank’s acquisition of substantially all of the assets of the Renaissance Investment Group in April 2010. The Bank incurred $36,000 of OTTI losses on certain limited partnership investments during the first quarter of 2011 as compared to a charge of $299,000 on the same investments in the first quarter of 2010. In 2011, the Bank also had increases in gains on the sale of mortgages.

Non-interest expense decreased $660,000, or 9.2%, to $6.5 million for the three months ended March 31, 2011 as compared to the same period of 2010. Salaries and benefits decreased $649,000, or 18.7% primarily as a result of the termination of certain employee benefits,

including the employee stock ownership plan (ESOP) and retiree post-retirement benefits. Decreases in advertising and professional fees were partially offset by increases in occupancy, deposit insurance and expenses related to other real estate owned (OREO), which is included in other general and administrative expenses.

Income tax expense was $372,000 in the first quarter of 2011 as compared to a tax benefit of $545,000 in the same period in 2010. The Company had an effective tax rate of 34.0% in 2011 as compared to 30.5% a year earlier. The increase in the effective rate is primarily due to the Company’s reduction of tax-exempt municipal investments within the past 12 months.

Minimum Regulatory Capital Requirements: As of March 31, 2011, 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 March 31, 2011 and December 31, 2010 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
						(Dollars in thousands)
March 31, 2011:
Total capital to risk weighted assets	$	74,344		12.6	%	$	47,384		8.0	%	$	59,230		10.0	%
Tier 1 capital to risk weighted assets:		66,880		11.3			23,692		4.0			35,538		6.0
Tier 1 capital to average assets:		66,880		7.8			34,463		4.0			43,079		5.0

December 31, 2010:
Total capital to risk weighted assets:	$	72,341		12.0	%	$	48,249		8.0	%	$	60,311		10.0	%
Tier 1 capital to risk weighted assets:		64,754		10.7			24,124		4.0			36,187		6.0
Tier 1 capital to average assets:		64,754		7.2			36,155		4.0			45,194		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, 2010. The following table presents information indicating various contractual obligations and commitments of the Company as of March 31, 2011 and the respective maturity dates:


	March 31, 2011
					More than		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	$	105,385	$	2,000	$	43,000	$	22,200	$	38,185
Securities sold under agreements to repurchase		3,671		3,671		—		—		—


Total contractual obligations	$	109,056	$	5,671	$	43,000	$	22,200	$	38,185

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 March 31, 2011:


	March 31, 2011
					More than		More than
					One Year		Years Three
			One Year		through		Through		Over Five
	Total		or Less		Three Years		Five Years		years
	(Dollars in thousands)

Commitments to grant loans ⁽¹⁾	$	10,581	$	10,581	$	—	$	—	$	—
Commercial loan lines-of-credit		21,254		21,254		—		—		—
Unused portion of home equity loans ⁽²⁾		67,560		2,977		10,297		15,393		38,893
Unused portion of construction loans ⁽³⁾		1,448		1,448		—		—		—
Unused portion of overdraft lines-of-credit⁽⁴⁾		4,333		—		—		—		4,333
Unused portion of personal lines-of-credit⁽⁵⁾		689		—		—		—		689
Standby letters of credit⁽⁶⁾		2,871		2,871		—		—		—
Other commitments and contingencies⁽⁷⁾		3,934		—		3,934		—		—

Total loan and other commitments	$	112,670	$	39,131	$	14,231	$	15,393	$	43,915


(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 three months ended March 31, 2011. 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, 2010 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.

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

There have been no material changes in the Company’s risk factors during the three months ended March 31, 2011. See the discussion and analysis of risk factors provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 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.

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 — None

Item 3. Defaults Upon Senior Securities

None

Item 4. (Removed and Reserved)

Item 5 Other Information

None

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)
10.5.19		Change In Control Agreement between Legacy Bancorp, Inc. and Richard M. Sullivan (12)
10.5.20		Definitive Merger Agreement between Legacy Bancorp, Inc. and Berkshire Hills Bancorp (13)
10.11		Amended and Restated 2006 Equity Incentive Plan (13)
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.

(12)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed November 1, 2010.

(13)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed December 22, 2010.

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: May 10, 2011	/s/ J. Williar Dunlaevy
	J. Williar Dunlaevy
	Chief Executive Officer and Chairman of the Board


Date: May 10, 2011	/s/ Paul H. Bruce
	Paul H. Bruce
	Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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Legacy Bancorp, Inc. Reports

Legacy Bancorp, Inc. - FORM 10-Q - May 10, 2011

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Legacy Bancorp, Inc. Reports