Chicopee Bancorp (CBNK)

Comparison of Operating Results for the Years Ended December 31, 2008 and December 31, 2007

General. For the year ended December 31, 2008, the Company reported net income of $22,000 compared to net income of $1.6 million for the year ended December 31, 2007.

Net Interest Income. Net interest income, on a tax equivalent basis, totaled $14.5 million for the year ended December 31, 2008, an increase of $93,000, or 0.64%, from $14.4 million for the same period in 2007. The increase reflects growth in average earning assets of $38.3 million, or 8.9%, which exceeded the effect of $45.8 million of increased interest bearing liabilities and a constant interest rate spread. Net interest margin, on a tax equivalent basis, decreased 25 basis points to 3.10% for the year ended December 31, 2008 from 3.35% for the same period in 2007, primarily attributable to the declining interest rate environment.

Interest and Dividend Income. Interest and dividend income, on a tax equivalent basis, decreased $501,000, or 1.9%, to $25.7 million for the year ended December 31, 2008 from $26.2 million in 2007, largely reflecting the decrease in interest rates earned. Average interest-earning assets totaled $469.0 million for the year ended December 31, 2008 compared to $430.8 million for the same period last year, representing an increase of $38.3 million, or 8.9%. Average loans increased $27.1 million, or 7.2%, primarily due to strong origination partially mitigated by amortization. Average investment securities increased $9.6 million, or 22.1%, mainly attributable to additional purchases of held-to-maturity securities. The tax equivalent yield on interest-earning assets decreased 61 basis points to 5.48% for the year ended December 31, 2008 from 6.09% for the year ended December 31, 2007, largely attributable to lower market rates of interest for 2008.

Interest Expense. Total interest expense decreased $594,000, or 5.0%, to $11.2 million for the year ended December 31, 2008 from $11.8 million in 2007, resulting primarily from lower rates paid on interest-bearing liabilities. Average interest-bearing liabilities totaled $369.3 million for the year ended December 31, 2008, representing an increase of $45.8 million, or 14.2%, from $323.5 million for the same period in 2007, mainly due to an increase in interest-bearing borrowings. Average interest-bearing deposits grew $4.5 million, or 1.5%, to $300.2 million for the year ended December 31, 2008, primarily attributable to increased balances in money market accounts. Average money market accounts increased $6.6 million, or 17.3%, to $44.6 million for the year ended December 31, 2008, due to the increase in commercial relationships. Average certificate of deposit balances increased $3.0 million, or 1.5%, to $201.0 million for the year ended December 31, 2008. Average borrowings increased $41.3 million, or 148.2%, to $69.1 million for the year ended December 31, 2008, due to the increase in loans. The rate paid on interest-bearing liabilities decreased 61 basis points to 3.03% for the year ended December 31, 2008 from 3.64% in 2007, reflecting the lower interest rate environment.

Provision for Loan Losses. The Company’s provision for loan losses increased by $92,000 to $315,000 for the year ended December 31, 2008 from $223,000 for the same period in 2007. The increase was primarily due to the increase in loan balances, in particular the increase in commercial real estate loans, and the increase in non-accrual loans.

The allowance for loan losses was $3.3 million, or 0.79% of total loans, as of December 31, 2008, as compared to $3.1 million, or 0.80% of total loans, as of December 31, 2007. An analysis of the changes in the allowance for loan losses is presented under “Risk Management – Analysis and Determination of the Allowance for Loan Losses.”

Non-interest Income. Total non-interest income decreased $494,000, or 18.2%, to $2.2 million for the year ended December 31, 2008 compared to $2.7 million for the same period in 2007. The 2008 results included net losses from the sales of available-for-sale securities of $57,000, compared to net gains of $835,000 in 2007, a decrease in income of $892,000 or 106.8%. Fee income increased $404,000, or 21.3%, to $2.3 million for the year ended December 31, 2008 from $1.9 million for the comparable period in 2007 reflecting expansion in deposit balances and transaction volume.

Non-interest Expenses. Non-interest expenses increased $1.7 million, or 11.8%, to $15.9 million for the year ended December 31, 2008 from $14.2 million for the same period in 2007 largely attributable to the increase in Equity Incentive Plan expenses of $630,000, the result of recording a full year of expense in 2008 compared to only half a year in 2007. In addition, the increase in non-interest expense for the year is associated with the costs of temporarily outsourcing the Company’s IT and Sarbanes Oxley internal audit functions, which was the primary reason for the increase in audit expenses of $194,000, and expenses associated with the development of two new branches, including additional salaries and employee benefit expense of $478,000.

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Income Taxes. The Company’s income tax expense decreased $642,000 to a tax expense of $376,000 for the year ended December 31, 2008 compared to $1.0 million in 2007 mainly attributable to the decrease in income before income taxes of $2.2 million. As of December 31, 2008, a valuation allowance of $1.3 million has been established against deferred tax assets related to the uncertain utilization of the charitable contribution carry forward created primarily by the donation to the Foundation as part of the conversion. Of the $1.3 million valuation allowance, $300,000 was applied in the second half of 2008. The judgment applied by management considers the likelihood that sufficient taxable income will be realized within the carry forward period in light of our tax planning strategies and changes in the market conditions.