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 SEPTEMBER 30, 2012

or

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER : 333-137359

Hampden Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Delaware	20-5714154
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

19 Harrison Ave.

Springfield, Massachusetts 01102

(Address of principal executive offices) (Zip Code)

(413) 736-1812

(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 (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

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

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

As of November 5, 2012, there were 5,864,905 shares of the registrant’s common stock outstanding.

HAMPDEN BANCORP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF

HAMPDEN BANCORP, INC. AND SUBSIDIARIES

			Page No.
PART I — FINANCIAL INFORMATION
	Item 1 Financial Statements of Hampden Bancorp, Inc. and Subsidiaries
		Consolidated Balance Sheets (unaudited) as of  September 30, 2012 and June 30, 2012	3
		Consolidated Statements of Income (unaudited) for the three months ended September 30, 2012 and  2011	4
		Consolidated Statements of Comprehensive Income (unaudited) for the three months ended September 30, 2012 and 2011	5
		Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three months ended  September 30, 2012 and  2011	6
		Consolidated Statements of Cash Flows (unaudited) for the three months ended  September 30, 2012 and 2011	7-8
		Notes to Condensed Consolidated Financial Statements	9
	Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
	Item 3 Quantitative and Qualitative Disclosures About Market Risks		36
	Item 4 Controls and Procedures		36
PART II — OTHER INFORMATION
	Item 1 Legal Proceedings		36
	Item 1A Risk Factors		36
	Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		37
	Item 3 Defaults Upon Senior Securities		37
	Item 4 Mine Safety Disclosures		37
	Item 5 Other Information		37
	Item 6 Exhibits		38
SIGNATURES			40

2

PART 1 – FINANCIAL INFORMATION

Item 1: Financial Statements of Hampden Bancorp, Inc. and Subsidiaries

HAMPDEN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

ASSETS
	September 30,			June 30,
	2012			2012
	(Unaudited)
Cash and due from banks	$	11,474		$	12,334
Federal funds sold and other short-term investments		34,927			15,589
Cash and cash equivalents		46,401			27,923
Securities available for sale, at fair value		141,718			143,851
Federal Home Loan Bank of Boston stock, at cost		5,153			4,959
Loans held for sale		890			927
Loans, net of allowance for loan losses of $5,172
at September 30, 2012 and $5,148 at June 30, 2012		420,201			406,344
Other real estate owned		1,554			1,826
Premises and equipment, net		5,222			5,159
Accrued interest receivable		1,666			1,675
Deferred tax asset, net		3,141			3,402
Bank-owned life insurance		16,339			16,205
Other assets		3,871			3,686
	$	646,156		$	615,957
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits	$	452,907		$	434,832
Securities sold under agreements to repurchase		4,822			7,315
Short-term borrowings		10,000			3,000
Long-term debt		84,746			76,661
Mortgagors' escrow accounts		1,048			1,010
Accrued expenses and other liabilities		5,601			5,979
Total liabilities		559,124			528,797
Commitments and contingencies
Preferred stock ($.01 par value, 5,000,000 shares authorized, none issued or outstanding)		-			-
Common stock ($.01 par value, 25,000,000 shares authorized; 7,951,548
issued; 5,860,605 outstanding at September 30, 2012 and 5,968,395 outstanding
at June 30, 2012)		80			80
Additional paid-in-capital		79,135			78,995
Unearned compensation - ESOP (392,196 shares unallocated at September 30, 2012 and
402,796 shares unallocated at June 30, 2012)		(3,922	)		(4,028	)
Unearned compensation - equity incentive plan		(142	)		(225	)
Retained earnings		32,995			32,473
Accumulated other comprehensive income		2,523			2,117
Treasury stock, at cost (2,090,943 shares at September 30, 2012 and 1,983,153 shares at
June 30, 2012)		(23,637	)		(22,252	)
Total stockholders' equity		87,032			87,160
	$	646,156		$	615,957

See accompanying notes to unaudited consolidated financial statements.

3

HAMPDEN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

	Three Months Ended September 30,
	2012			2011
	(Unaudited)
Interest and dividend income:
Loans, including fees	$	5,456		$	5,526
Debt securities		742			708
Dividends		7			4
Federal funds sold and other short-term investments		4			4
Total interest and dividend income		6,209			6,242
Interest expense:
Deposits		958			1,165
Borrowings		450			419
Total interest expense		1,408			1,584
Net interest income		4,801			4,658
Provision for loan losses		50			300
Net interest income, after provision for loan losses		4,751			4,358
Non-interest income:
Customer service fees		516			504
Gain on sales of loans, net		195			109
Increase in cash surrender value of bank-owned life insurance		134			98
Other		121			110
Total non-interest income		966			821
Non-interest expense:
Salaries and employee benefits		2,480			2,480
Occupancy and equipment		448			461
Data processing services		239			194
Advertising		149			224
Net gain on other real estate owned		(12	)		-
FDIC insurance and assessment		80			60
Other general and administrative		1,080			945
Total non-interest expense		4,464			4,364
Income before income taxes		1,253			815
Income tax provision		492			279
Net income	$	761		$	536
Earnings per share
Basic	$	0.14		$	0.09
Diluted	$	0.14		$	0.09
Weighted average shares outstanding
Basic		5,495,803			6,197,529
Diluted		5,584,946			6,289,909

See accompanying notes to unaudited consolidated financial statements.

4

HAMPDEN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

The components of comprehensive income and related tax effects are as follows:

	Three Months Ended September 30,
	2012		2011
	(Unaudited)
Net income	$	761	$	536
Other comprehensive income:
Unrealized holding gains on available-for-sale securities		669		140
Tax effect		263		48
Net-of-tax amount		406		92
Comprehensive income	$	1,167	$	628

See accompanying notes to unaudited consolidated financial statements.

5

HAMPDEN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 (Dollars in thousands, except per share data)

											Unearned						Accumulated
						Additional		Unearned			Compensation -						Other
	Common Stock					Paid-in		Compensation			Equity			Retained			Comprehensive		Treasury
	Shares			Amount		Capital		- ESOP			Incentive Plan			Earnings			Income		Stock			Total
	(Unaudited)
Balance at June 30, 2011		6,799,499		$	80	$	78,517	$	(4,452	)	$	(871	)	$	30,327		$	1,757	$	(11,842	)	$	93,516
Net income		-			-		-		-			-			536			-		-			536
Other comprehensive income		-			-		-		-			-			-			92		-			92
Cash dividends paid ($0.03 per share)		-			-		-		-			-			(189	)		-		-			(189	)
Common stock repurchased		(138,763	)		-		-		-			-			-			-		(1,792	)		(1,792	)
Stock-based compensation		-			-		81		-			176			-			-		-			257
Tax benefit from Equity Incentive Plan
vesting		-			-		4		-			-			-			-		-			4
ESOP shares allocated or committed to
be allocated (10,600 shares)		-			-		32		106			-			-			-		-			138
Balance at September 30, 2011		6,660,736		$	80	$	78,634	$	(4,346	)	$	(695	)	$	30,674		$	1,849	$	(13,634	)	$	92,562
Balance at June 30, 2012		5,968,395		$	80	$	78,995	$	(4,028	)	$	(225	)	$	32,473		$	2,117	$	(22,252	)	$	87,160
Net income		-			-		-		-			-			761			-		-			761
Other comprehensive income		-			-		-		-			-			-			406		-			406
Cash dividends paid ($0.04 per share)		-			-		-		-			-			(239	)		-		-			(239	)
Common stock repurchased		(107,790	)		-		-		-			-			-			-		(1,385	)		(1,385	)
Stock-based compensation		-			-		113		-			83			-			-		-			196
ESOP shares allocated or committed to
be allocated (10,600 shares)		-			-		27		106			-			-			-		-			133
Balance at September 30, 2012		5,860,605		$	80	$	79,135	$	(3,922	)	$	(142	)	$	32,995		$	2,523	$	(23,637	)	$	87,032

See accompanying notes to unaudited consolidated financial statements.

6

HAMPDEN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	Three Months Ended September 30,
	2012			2011
	(Unaudited)
Cash flows from operating activities:
Net income	$	761		$	536
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses		50			300
Changes in fair value of mortgage servicing rights		(42	)		(28	)
Net amortization of securities		177			473
Depreciation and amortization		177			199
Loans originated for sale		(5,874	)		(3,643	)
Proceeds from loan sales		6,106			3,355
Gain on sales of loans, net		(195	)		(109	)
Realized gain on sale of other real estate owned		(12	)		-
Increase in cash surrender value of bank-owned
life insurance		(134	)		(98	)
Deferred tax benefit		(2	)		(5	)
Employee Stock Ownership Plan expense		133			138
Stock-based compensation		196			257
Tax benefit from Equity Incentive Plan vesting		-			(4	)
Net change in:
Accrued interest receivable		9			42
Other assets		(143	)		(633	)
Accrued expenses and other liabilities		(378	)		(1,627	)
Net cash provided by (used in) operating activities		829			(847	)
Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities and calls		-			1,000
Principal payments		10,111			7,140
Purchases		(7,486	)		(5,656	)
Purchase of loans		(199	)		-
Loan (originations), net of principal payments		(13,759	)		2,095
Purchase of Federal Home Loan Bank stock		(194	)		-
Proceeds from sale of other real estate owned		335			67
Purchase of premises and equipment		(240	)		(74	)
Net cash (used in) provided by investing activities		(11,432	)		4,572

(continued)

See accompanying notes to unaudited consolidated financial statements.

7

HAMPDEN BANCORP, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)

(Dollars in thousands)

	Three Months Ended September 30,
	2012			2011
	(Unaudited)
Cash flows from financing activities:
Net change in deposits		18,075			1,140
Net change in repurchase agreements		(2,493	)		(318	)
Net change in short-term borrowings		7,000			-
Proceeds from issuance of long-term debt		17,720			-
Repayment of long-term debt		(9,635	)		(5,184	)
Net change in mortgagors' escrow accounts		38			37
Tax benefit from Equity Incentive Plan vesting		-			4
Repurchase of common stock		(1,385	)		(1,792	)
Payment of dividends on common stock		(239	)		(189	)
Net cash provided by (used in) financing activities		29,081			(6,302	)
Net change in cash and cash equivalents		18,478			(2,577	)
Cash and cash equivalents at beginning of period		27,923			31,147
Cash and cash equivalents at end of period	$	46,401		$	28,570
Supplemental cash flow information:
Interest paid on deposits	$	958		$	1,165
Interest paid on borrowings		212			479
Income taxes paid		650			12
Transfers from loans to other real estate owned		51			61

See accompanying notes to unaudited consolidated financial statements.

8

HAMPDEN BANCORP, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of presentation and consolidation

The consolidated financial statements include the accounts of Hampden Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries, Hampden Bank (the “Bank”) and Hampden LS, Inc.  Hampden Bank is a Massachusetts chartered stock savings bank. The Company contributed funds to Hampden LS, Inc. to enable it to make a 15-year loan to the employee stock ownership plan (the “ESOP”) to allow it to purchase shares of the Company’s common stock as part of the completion of the initial public offering.Hampden Bank has three wholly-owned subsidiaries, Hampden Investment Corporation and Hampden Investment Corporation II, which engage in buying, selling, holding and otherwise dealing in securities, and Hampden Insurance Agency, which ceased selling insurance products in November of 2000 and remains inactive.  All significant intercompany accounts and transactions have been eliminated in consolidation.

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. The results shown for the interim period ended September 30, 2012 are not necessarily indicative of the results to be obtained for a full year. These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2012 included in the Company’s most recent Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) on September 18, 2012.

In preparing the consolidated interim financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the statement of financial condition and reported amounts of revenues and expenses for the periods presented. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and deferred income taxes.

2. Recent Accounting Pronouncements

        In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This update amends the disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholder’s equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes, as modified by ASU 2011-12, are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. This guidance was adopted by the Company as of July 1, 2012, and did not have a material impact on the Company’s consolidated financial statements.

        In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05, to effectively defer only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income.  The change is effective for fiscal years, and interim periods within those years, ending after December 31, 2011.

3. Earnings Per Share

Basic earnings per share (“EPS”) excludes dilution and is calculated by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents (such as stock options and unvested restricted stock) were issued during the period. Unallocated common shares held by the ESOP are shown as a reduction in stockholders' equity and are included in the weighted-average number of common shares outstanding for both basic and diluted EPS calculations as they are committed to be released.

9

Earnings per share for the three month periods ended September 30, 2012 and 2011 have been computed as follows:

	Three Months Ended September 30,
	2012			2011
Net income applicable to common stock (in thousands)	$	761		$	536
Average number of shares issued		7,951,548			7,950,379
Less: average unallocated ESOP shares		(399,192	)		(441,588	)
Less: average treasury stock		(2,007,664	)		(1,194,116	)
Less: average unvested restricted stock awards		(48,889	)		(117,146	)
Average number of basic shares outstanding		5,495,803			6,197,529
Plus: dilutive unvested restricted stock awards		29,316			45,672
Plus: dilutive stock option shares		59,827			46,708
Average number of diluted shares outstanding		5,584,946			6,289,909
Basic earnings per share	$	0.14		$	0.09
Diluted earnings per share	$	0.14		$	0.09

4. Dividends

On August 7, 2012, the Company declared a cash dividend of $0.04 per common share which was paid on August 31, 2012 to stockholders of record as of the close of business on August 16, 2012.

On November 6, 2012, the Company declared a cash dividend of $0.04 per common share which is payable on November 30, 2012 to stockholders of record as of the close of business on November 16, 2012.

5. Loan Commitments

Outstanding loan commitments totaled $104.2 million at September 30, 2012 and $96.3 million as of June 30, 2012. Loan commitments primarily consist of commitments to originate new loans as well as the outstanding unused portions of home equity, business and other lines of credit, and unused portions of construction loans.

6. Fair Value of Assets and Liabilities

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

Level 1:	Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
Level 2:	Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; and quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology are derived principally from or can be corroborated by observable market data by correlation or other means.
Level 3:	Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Transfers between levels are recognized at the end of the reporting period, if applicable.

10

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

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

Securities available for sale: The fair values used by the Company are obtained from an independent pricing service, which represents either quoted market prices for identical securities, quoted market prices for comparable securities or fair values determined by pricing models that consider observable market data, such as interest rate volatilities, credit spreads and prices from market makers and live trading systems and other market indicators, industry and economic events.  These values are not adjusted by the Company.

Federal Home Loan Bank of Boston stock: The carrying amount of Federal Home Loan Bank (“FHLB”) stock approximates fair value based upon the redemption provisions of the FHLB of Boston.

Loans held for sale: Fair value of loans held for sale is estimated based on commitments on hand from investors or prevailing market prices.

Loans: Fair values for loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. This analysis assumes no prepayment. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Mortgage servicing rights: Mortgage servicing rights (“MSR”) are the rights of a mortgage servicer to collect mortgage payments and forward them, after deducting a fee, to the mortgage holder. The fair value of servicing rights is estimated using a discounted cash flow model. The fair value of MSR is highly sensitive to changes in assumptions. Changes in prepayment speed assumptions generally have the most significant impact on the fair value of our MSR. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSR. As interest rates rise, mortgage loan prepayments slow down, which results in an increase in the fair value of MSR. Thus, any measurement of the fair value of our MSR is limited by the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different point in time.

Deposits and mortgagors’ escrow accounts: The fair values for non-certificate accounts and mortgagors’ escrow accounts are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificate accounts are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities of time deposits.

Securities sold under agreements to repurchase: The carrying amount of repurchase agreements approximates fair value based on the short duration of the agreements.

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 debt: The fair values of the Company's advances are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

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

Off-balance-sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The estimated fair value of off-balance sheet financial instruments at September 30, 2012 and June 30, 2012 was not material.

The Company does not measure any liabilities at fair value on either a recurring or non-recurring basis.

11

The following tables present the balance of assets measured at fair value on a recurring basis as of September 30, 2012 and June 30, 2012:

	Level 1		Level 2		Level 3		Total
September 30, 2012	(In Thousands)
Debt securities:
Corporate bonds	$	-	$	6,291	$	-	$	6,291
Residential mortgage-backed securities:
Agency		-		131,408		-		131,408
Non-agency		-		3,963		-		3,963
Total debt securities		-		141,662		-		141,662
Marketable equity securities		56		-		-		56
Mortgage servicing rights		-		-		440		440
Total assets measured at fair value on a recurring basis	$	56	$	141,662	$	440	$	142,158

June 30, 2012
Debt securities:
Corporate bonds	$	-	$	6,136	$	-	$	6,136
Residential mortgage-backed securities:
Agency		-		133,543		-		133,543
Non-agency		-		4,118		-		4,118
Total debt securities		-		143,797		-		143,797
Marketable equity securities		54		-		-		54
Mortgage servicing rights		-		-		445		445
Total assets measured at fair value on a recurring basis	$	54	$	143,797	$	445	$	144,296

The table below presents, for the three months ended September 30, 2012 and 2011, the changes in Level 3 assets that are measured at fair value on a recurring basis:

Mortgage Servicing Rights
	Three Months Ended September 30,
	2012			2011
	(In Thousands)
Beginning balance	$	445		$	445
Total realized and unrealized gains
(losses) included in net income		(42	)		(28	)
Total unrealized gains (losses) included
in other comprehensive income		-			-
Capitalized servicing assets		37			22
Transfers in and/or out of Level 3		-			-
Ending balance	$	440		$	439

12

Also, the Company may be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with GAAP.  These adjustments to fair value usually result from the application of lower-of-cost-or-market accounting or write-downs, charge-offs, and specific loss allocations 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 measured at fair value on a non-recurring basis as of September 30, 2012 and June 30, 2012.

	Level 1		Level 2		Level 3
September 30, 2012	(In Thousands)
Impaired loans	$	-	$	-	$	-
Other real estate owned		-		-		1,554
Total assets	$	-	$	-	$	1,554

June 30, 2012
Impaired loans	$	-	$	-	$	1,055
Other real estate owned		-		-		1,826
Total assets	$	-	$	-	$	2,881

During the three months ended September 30, 2012 there were no transfers from levels 1, 2, or 3.

The amount of impaired loans represents the carrying value of loans that include adjustments which are based on the estimated fair value of the underlying collateral. The fair value of collateral used by the Company represents the amount expected to be received from the sale of the property, net of selling costs, as determined by an independent, licensed or certified appraiser using observable market data. This data includes information such as selling price of similar properties, expected future cash flows or earnings of the subject property based on current market expectations, as well as relevant legal, physical and economic factors. The Company had no gain or loss on impaired loans for the three months ended September 30, 2012. The Company had a gain of $180,000 for the three months ended September 30, 2011. These gains/losses were recognized through the provision for loan losses. The Company charges off any collateral shortfall on collaterally dependent impaired loans. Independent appraisals or tax assessments are obtained and updated as required for commercial real estate and residential real estate loans that are considered impaired and collateral dependent.  Losses applicable to certain impaired loans are estimated using the appraised or assessed value adjusted for market related discounts associated with foreclosure auctions, short sales, inventory of like properties, general liquidity in the market place as well as selling and disposal costs.  These considerations are applied on a case by case basis. 

The Company classifies property acquired through foreclosure or acceptance of a deed in lieu of foreclosure as other real estate owned (“OREO”) in its consolidated financial statements. When property is placed into OREO, it is recorded at the fair value less estimated costs to sell at the date of foreclosure or acceptance of deed in lieu of foreclosure. At the time of transfer to OREO, any excess of carrying value over fair value is charged to the allowance for loan losses. Management, or its designee, inspects all OREO property periodically. Holding costs and declines in fair value result in charges to expense after the property is acquired. The Company had a $12,000 gain on the sale of OREO for the three months ended September 30, 2012. The Company did not have any gains or losses on OREO for the three months ended September 30, 2011. At September 30, 2012 and 2011, the amount of other real estate owned represents the carrying value and related charge-offs for which adjustments are based on current appraised value of the collateral or, where current appraised value is not obtained, management’s discounted estimate of the collateral. 

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all non-financial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

13

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows:

	September 30,
	2012
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	46,401	$	46,401	$	-	$	-	$	46,401
Securities available for sale		141,718		56		141,662		-		141,718
Federal Home Loan Bank stock		5,153		-		-		5,153		5,153
Loans held for sale		890		-		-		890		890
Loans, net		420,201		-		-		439,781		439,781
Accrued interest receivable		1,666		-		-		1,666		1,666
Mortgage servicing rights (1)		440		-		-		440		440
Financial liabilities:
Deposits		452,907		-		-		455,495		455,495
Securities sold under agreements to repurchase		4,822		-		-		4,822		4,822
Short-term borrowings		10,000		-		10,000		-		10,000
Long-term debt		84,746		-		86,412		-		86,412
Mortgagors' escrow accounts		1,048		-		-		1,048		1,048

(1) Included in other assets.

	June 30,
	2012
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	27,923	$	27,923	$	-	$	-	$	27,923
Securities available for sale		143,851		54		143,797		-		143,851
Federal Home Loan Bank stock		4,959		-		-		4,959		4,959
Loans held for sale		927		-		-		927		927
Loans, net		406,344		-		-		425,782		425,782
Accrued interest receivable		1,675		-		-		1,675		1,675
Mortgage servicing rights (1)		445		-		-		445		445
Financial liabilities:
Deposits		434,832		-		-		437,725		437,725
Securities sold under agreements to repurchase		7,315		-		-		7,315		7,315
Short-term borrowings		3,000		-		3,000		-		3,000
Long-term debt		76,661		-		78,220		-		78,220
Mortgagors' escrow accounts		1,010		-		-		1,010		1,010

(1) Included in other assets.

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7. Securities Available For Sale

The amortized cost and estimated fair value of securities available for sale, with gross unrealized gains and losses, are as follows:

	September 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Debt securities:
Corporate bonds	$	6,126	$	165	$	-		$	6,291
Residential mortgage-backed securities:
Agency		127,645		3,778		(15	)		131,408
Non-agency		3,914		66		(17	)		3,963
Total debt securities		137,685		4,009		(32	)		141,662
Marketable equity securities		51		5		-			56
Total securities available for sale	$	137,736	$	4,014	$	(32	)	$	141,718

	June 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Debt securities:
Corporate bonds	$	6,134	$	10	$	(8	)	$	6,136
Residential mortgage-backed securities:
Agency		130,157		3,419		(33	)		133,543
Non-agency		4,196		53		(131	)		4,118
Total debt securities		140,487		3,482		(172	)		143,797
Marketable equity securities		51		3		-			54
Total securities available for sale	$	140,538	$	3,485	$	(172	)	$	143,851

The amortized cost and estimated fair value of debt securities by contractual maturity at September 30, 2012 is set forth below. Expected maturities will differ from contractual maturities because the issuer may have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2012
	Amortized Cost		Fair Value
	(In Thousands)
Within 1 year	$	-	$	-
Over 1 year through 5 years		6,126		6,291
Total bonds and obligations		6,126		6,291
Residential mortgage-backed securities:
Agency		127,645		131,408
Non-agency		3,914		3,963
Total debt securities	$	137,685	$	141,662

At September 30, 2012 and June 30, 2012, the carrying value of securities pledged to secure repurchase agreements was $13.1 million and $13.3 million, respectively.

15

Information pertaining to securities with gross unrealized losses at  September 30, 2012 and June 30, 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

	Less Than Twelve Months				Over Twelve Months				Total
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
	(In Thousands)
September 30, 2012:
Residential mortgage-backed securities:
Agency	$	8	$	3,827	$	7	$	322	$	15	$	4,149
Non-agency		-		-		17		1,226		17		1,226
	$	8	$	3,827	$	24	$	1,548	$	32	$	5,375
June 30, 2012:
Corporate bonds	$	8	$	2,024	$	-	$	-	$	8	$	2,024
Residential mortgage-backed securities:
Agency		25		8,435		8		409		33		8,844
Non-agency		-		-		131		2,066		131		2,066
	$	33	$	10,459	$	139	$	2,475	$	172	$	12,934

Management conducts, at least on a quarterly basis, a review of our investment securities to determine if the value of any security has declined below its cost or amortized cost and whether such decline represents other-than-temporary impairment (“OTTI”).

At September 30, 2012 and June 30, 2012, no marketable equity securities had unrealized losses.

At September 30, 2012, eleven debt securities had unrealized losses with aggregate depreciation of 0.6% from the Company's amortized cost basis. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analyst's reports. Because the majority of these securities have been issued by the U.S. Government or its agencies and as management has not decided to sell these securities, nor is it likely that the Company will be required to sell these securities, no declines are deemed to be other than temporary. At September 30, 2012, we held six securities issued by private mortgage originators that had unrealized losses which had an amortized cost of $1.2 million and a fair value of $1.2 million. All of these investments are “Senior” Class tranches and have underlying credit enhancement. Management estimates the loss projections for each security by evaluating the industry rating, amount of delinquencies, amount of foreclosure, amount of other real estate owned, average credit scores, average amortized loan to value and credit enhancement.  Based on this review, management determines whether credit losses have occurred. Management has determined that no credit losses have occurred as of September 30, 2012.

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8. Loans

The following table sets forth the composition of the Company’s loan portfolio (not including loans held for sale) in dollar amounts and as a percentage of the total loan portfolio at the dates indicated.

	At September 30, 2012						At June 30, 2012
	Amount			Percent			Amount			Percent			Change			% Change
	(Dollars In Thousands)
Mortgage loans on real estate:
1-4 family residential	$	110,913			26.24	%	$	112,294			27.48	%	$	(1,381	)		(1.23	) %
Commercial		156,850			37.11			152,965			37.43			3,885			2.54	%
Home equity:
First lien		33,715			7.98			31,609			7.73			2,106			6.66	%
Second lien		42,116			9.97			41,374			10.12			742			1.79	%
Construction:
Residential		4,749			1.12			4,149			1.02			600			14.46	%
Commercial		6,611			1.56			2,404			0.59			4,207			175.00	%
Total mortgage loans on real estate		354,954			83.99			344,795			84.37			10,159			2.95	%
Other loans:
Commercial		39,297			9.30			35,567			8.70			3,730			10.49	%
Consumer:
Manufactured homes		21,368			5.06			21,169			5.18			199			0.94	%
Automobile and other secured loans		5,956			1.41			6,385			1.56			(429	)		(6.72	) %
Other		1,060			0.25			769			0.19			291			37.84	%
Total other loans		67,681			16.01			63,890			15.63			3,791			5.93	%
Total loans		422,635			100.00	%		408,685			100.00	%	$	13,950			3.41	%
Other items:
Net deferred loan costs		2,738						2,807
Allowance for loan losses		(5,172	)					(5,148	)
Total loans, net	$	420,201					$	406,344

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses has two components: specific and general allocations, which are further described below.

Specific allocation

Specific allocations are made for loans determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or fair value of collateral for collateral dependent loans. The Company charges off any collateral shortfall on collaterally dependent impaired loans.

A loan is considered impaired when, based on current information and events, it is probable that the bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Impaired loans are generally placed on non-accrual status either when there is reasonable doubt as to the full collection of payments or when the loans become 90 days past due unless an evaluation clearly indicates that the loan is well secured and in the process of collection. Impairment is measured on a loan by loan basis for commercial 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, adjusted for market conditions and selling expenses, if the loan is collateral dependent.

The Company may periodically agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a TDR. All TDRs are initially classified as impaired and may be evaluated for removal from impaired status after one year of current payments for a modified loan with a market rate.

17

General allocation

The general allocation is determined by segregating the remaining loans by type of loan and payment history. Consideration is given to historical loss experience and qualitative factors such as delinquency trends, changes in underwriting standards or lending policies, procedures and practices, experience and depth of management and lending staff, and general economic conditions. This analysis establishes loss factors that are applied to the loan groups to determine the amount of the general allocations. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may be significantly more than the allowance for loan losses that have been established which could have a material negative effect on financial results. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the three months ended September 30, 2012.

On a quarterly basis, management’s Loan Review Committee reviews the current status of various loan assets in order to evaluate the adequacy of the allowance for loan losses. In this evaluation process specific loans with risk ratings of six or higher are analyzed to determine their potential risk of loss. This process concentrates on non-accrual and classified loans. Any loan determined to be impaired is evaluated for potential loss exposure. Any shortfall results in a charge-off if the likelihood of loss is evaluated as probable. The Company’s policy for charging off uncollectible loans is based on an analysis of the financial condition of the borrower and/or the collateral value. To determine the adequacy of collateral on a particular loan, an estimate of the fair market value of the collateral is based on the most current appraised value, discounted cash flow valuation or other available information.

The qualitative factors are assessed based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate – The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent unless there is private mortgage insurance. All loans in this segment are collateralized by 1-4 family 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.

Commercial real estate – Loans in this segment are primarily income-producing properties throughout Massachusetts and Connecticut. The underlying cash flows generated by the properties can be 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 requires annual borrower financial statements, obtains rent rolls annually and continually monitors the cash flows of these loans.

Home equity loans - Loans in this segment are secured by first or second mortgages on 1-4 family owner occupied properties, and are generally underwritten in amounts such that the combined first and second mortgage balances generally do not exceed 85% of the value of the property serving as collateral at time of origination. The lines-of-credit are available to be drawn upon for 10 to 20 years, at the end of which time they become term loans amortized over 5 to 10 years. Interest rates on home equity lines normally adjust based on the month-end prime rate published in the Wall Street Journal.

Residential construction loans – Loans in this segment primarily include construction to permanent non-speculative real estate loans. All loans in this segment are collateralized by 1-4 family 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.

Commercial construction loans – Loans in this segment primarily include construction to permanent non-speculative real estate loans. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy, which in turn, will have an effect on the credit quality in this segment.

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 may have an effect on the credit quality in this segment.

Automobile and other secured loans – Loans in this segment include consumer non-real estate secured loans that the Company originates as well as automobile loans that the Company purchases from a third party. The Company has the ability to select the automobile loans it purchases based on its own underwriting standards.

Manufactured home loans – Loans in this segment are secured by first liens on properties located primarily in the Northeast. Repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates, will have an effect on the credit quality in this segment. The Company has broker funded cash reserve accounts for manufactured home loans that can be used for pre-payments and losses. These reserve accounts totaled $499,000 at September 30, 2012 and $601,000 at June 30, 2012 and are included in deposit accounts.

Other consumer loans – Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

18

Credit Quality Information

The Company utilizes a nine grade internal loan rating system for all loans as follows:

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

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

Loans rated 7: 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 8: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 9: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted. These loans are generally charged off at each quarter end.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, commercial construction and commercial loans. The Company 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. All credits rated 6 or worse are reviewed on a quarterly basis by management and semi-annually a statistically significant percentage is reviewed by a third party. At origination, management assigns risk ratings to 1-4 family residential loans, home equity loans, residential construction loans, manufactured home loans, and other consumer loans. The Company updates these risk ratings as needed based primarily on delinquency, bankruptcy, or tax delinquency.

19

The following table presents the Company’s loans by risk rating at September 30, 2012 and June 30, 2012:

September 30, 2012
	1-4 Family Residential		Commercial  Real Estate		Home Equity  First Lien		Home Equity  Second Lien		Residential Construction		Commercial Construction
	(In Thousands)
Loans rated 1-5	$	108,974	$	134,399	$	33,567	$	41,797	$	4,749	$	6,611
Loans rated 6		1,000		6,507		37		294		-		-
Loans rated 7		553		15,944		111		25		-		-
Loans rated 8		386		-		-		-		-		-
Loans rated 9		-		-		-		-		-		-
	$	110,913	$	156,850	$	33,715	$	42,116	$	4,749	$	6,611

	Commercial		Manufactured Homes		Automobile and Other Secured Loans		Other Consumer		Total
	(In Thousands)
Loans rated 1-5	$	33,431	$	20,888	$	5,949	$	1,053	$	391,418
Loans rated 6		891		249		7		3		8,988
Loans rated 7		4,975		69		-		2		21,679
Loans rated 8		-		162		-		2		550
Loans rated 9		-		-		-		-		-
	$	39,297	$	21,368	$	5,956	$	1,060	$	422,635