Hampden Bancorp 10Q 2012 Q2 Quarterly report

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 DECEMBER 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 : 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 February 2, 2012, there were 6,086,896 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		3

Consolidated Balance Sheets (unaudited) as of December 31, 2011 and June 30, 2011		3

Consolidated Statements of Income (unaudited) for the three and six months ended December 31, 2011 and 2010		4

Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the six months ended December 31, 2011 and 2010		5

Consolidated Statements of Cash Flows (unaudited) for the six months ended December 31, 2011 and 2010		6-7

Notes to Condensed Consolidated Financial Statements		8

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

Item 3 Quantitative and Qualitative Disclosures About Market Risks		40

Item 4 Controls and Procedures		40

PART II — OTHER INFORMATION

Item 1 Legal Proceedings		40

Item 1A Risk Factors		40

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		41

Item 3 Defaults Upon Senior Securities		41

Item 4 Mine Safety Disclosures		41

Item 5 Other Information		41

Item 6 Exhibits		42

SIGNATURES		44

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
	December 31,			June 30,
	2011			2011
	(Unaudited)
Cash and due from banks	$	11,024		$	11,499
Federal funds sold and other short-term investments		13,920			19,648
Cash and cash equivalents		24,944			31,147

Securities available for sale, at fair value		106,139			111,919
Federal Home Loan Bank of Boston stock, at cost		5,233			5,233
Loans held for sale		1,318			400
Loans, net of allowance for loan losses of $5,569
at December 31, 2011 and $5,473 at June 30, 2011		398,501			397,708
Other real estate owned		1,075			1,264
Premises and equipment, net		5,153			5,409
Accrued interest receivable		1,502			1,541
Deferred tax asset, net		4,999			4,904
Bank-owned life insurance		15,939			10,735
Other assets		3,430			3,066
	$	568,233		$	573,326

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits	$	426,987		$	417,255
Securities sold under agreements to repurchase		6,468			7,233
Long-term debt		41,223			47,478
Mortgagors' escrow accounts		1,017			930
Accrued expenses and other liabilities		6,176			6,914
Total liabilities		481,871			479,810

Commitments (Note 5)

Preferred stock ($.01 par value, 5,000,000 shares authorized, none issued or outstanding)		-			-
Common stock ($.01 par value, 25,000,000 shares authorized, 7,950,379 issued;
6,103,850 outstanding at December 31, 2011 and 6,799,499 at June 30, 2011)		80			80
Additional paid-in-capital		78,742			78,517
Unearned compensation - ESOP (423,995 shares unallocated at December 31, 2011 and
445,195 shares unallocated at June 30, 2011)		(4,240	)		(4,452	)
Unearned compensation - equity incentive plan		(487	)		(871	)
Retained earnings		31,154			30,327
Accumulated other comprehensive income		1,606			1,757
Treasury stock, at cost (1,846,529 shares at December 31, 2011 and 1,150,880 shares at June 30, 2011)		(20,493	)		(11,842	)
Total stockholders' equity		86,362			93,516
	$	568,233		$	573,326

See accompanying notes to unaudited consolidated financial statements.

HAMPDEN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

	Three Months Ended December 31,				Six Months Ended December 31,
	2011		2010		2011		2010
	(Unaudited)				(Unaudited)
Interest and dividend income:
Loans, including fees	$	5,418	$	5,675	$	10,944	$	11,488
Debt securities		682		782		1,390		1,626
Dividends		4		2		8		3
Federal funds sold and other short-term investments		8		15		12		26
Total interest and dividend income		6,112		6,474		12,354		13,143

Interest expense:
Deposits		1,046		1,429		2,211		3,021
Borrowings		345		521		764		1,098
Total interest expense		1,391		1,950		2,975		4,119

Net interest income		4,721		4,524		9,379		9,024
Provision for loan losses		100		300		400		600
Net interest income, after provision for loan losses		4,621		4,224		8,979		8,424

Non-interest income:
Customer service fees		416		449		919		932
Gain on sales or calls/impairment of securities, net		-		1		-		8
Gain on sales of loans, net		197		208		306		390
Increase in cash surrender value of bank owned life insurance		105		105		203		211
Other		44		17		155		75
Total non-interest income		762		780		1,583		1,616

Non-interest expense:
Salaries and employee benefits		2,470		2,395		4,950		4,771
Occupancy and equipment		461		443		922		897
Data processing services		130		178		323		348
Advertising		194		183		418		356
Net loss (gain) on other real estate owned		50		-		50		(15	)
FDIC insurance and assessment expenses		67		150		127		308
Other general and administrative		957		898		1,904		1,774
Total non-interest expense		4,329		4,247		8,694		8,439

Income before income taxes		1,054		757		1,868		1,601

Income tax provision		360		266		639		567
Net income	$	694	$	491	$	1,229	$	1,034

Earnings per share
Basic	$	0.12	$	0.08	$	0.20	$	0.16
Diluted	$	0.12	$	0.08	$	0.20	$	0.16

Weighted average shares outstanding
Basic		5,861,220		6,187,615		6,029,351		6,282,785
Diluted		5,951,755		6,241,092		6,120,809		6,326,979

See accompanying notes to unaudited consolidated financial statements.

HAMPDEN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands)

												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, 2010		7,117,274		$	79	$	77,959		$	(4,876	)	$	(1,450	)	$	29,781		$	1,869		$	(8,589	)	$	94,773

Comprehensive income:
Net income		-			-		-			-			-			1,034			-			-			1,034
Net unrealized loss on securities available
for sale, net of reclassification
adjustment and tax effects		-			-		-			-			-			-			(458	)		-			(458	)
Total comprehensive income																									576
Cash dividends paid ($0.06 per share)		-			-		-			-			-			(387	)		-			-			(387	)
Common stock repurchased		(295,330	)		-		-			-			-			-			-			(2,976	)		(2,976	)
Stock-based compensation		-			-		283			-			226			-			-			-			509
ESOP shares allocated or committed to be allocated (21,200 shares)		-			-		(1	)		212			-			-			-			-			211
Balance at December 31, 2010		6,821,944		$	79	$	78,241		$	(4,664	)	$	(1,224	)	$	30,428		$	1,411		$	(11,565	)		92,706

Balance at June 30, 2011		6,799,499		$	80	$	78,517		$	(4,452	)	$	(871	)	$	30,327		$	1,757		$	(11,842	)	$	93,516
Comprehensive income:
Net income		-			-		-			-			-			1,229			-			-			1,229
Net unrealized loss on securities available for
sale, net of tax effects		-			-		-			-			-			-			(151	)		-			(151	)
Total comprehensive income																									1,078
Cash dividends paid ($0.06 per share)		-			-		-			-			-			(367	)		-			-			(367	)
Common stock repurchased		(695,649	)		-		-			-			-			-			-			(8,651	)		(8,651	)
Stock-based compensation		-			-		163			-			349			-			-			-			512
Tax benefit from Equity Incentive Plan vesting		-			-		4			-			-			-			-			-			4
Forfeiture of restricted stock		-			-		-			-			35			(35	)		-			-			-
ESOP shares allocated or committed to be allocated (21,200 shares)		-			-		58			212			-			-			-			-			270
Balance at December 31, 2011		6,103,850		$	80	$	78,742		$	(4,240	)	$	(487	)	$	31,154		$	1,606		$	(20,493	)	$	86,362

See accompanying notes to unaudited consolidated financial statements.

HAMPDEN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	Six Months Ended December 31,
	2011			2010
	(Unaudited)
Cash flows from operating activities:
Net income	$	1,229		$	1,034
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses		400			600
Changes in fair value of mortgage servicing rights		(120	)		(135	)
Net amortization of securities		78			67
Depreciation and amortization		400			383
Gain on sales or calls of securities, net		-			(8	)
Loans originated for sale		(8,477	)		(14,031	)
Proceeds from loan sales		7,865			14,215
Gain on sales of loans, net		(306	)		(390	)
Write-down of other real estate owned		50			-
Gain on other real estate owned		-			(15	)
Increase in cash surrender value of bank-owned life insurance		(203	)		(211	)
Deferred tax benefit		(4	)		-
Employee Stock Ownership Plan expense		270			211
Stock-based compensation		512			509
Tax benefit from Equity Incentive Plan vesting		(4	)		-
Net change in:
Accrued interest receivable		39			168
Other assets		(244	)		(645	)
Accrued expenses and other liabilities		(734	)		1,223
Net cash provided by operating activities		751			2,975

Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities and calls		1,000			26,318
Principal payments		15,272			16,191
Purchases		(10,812	)		(43,282	)
Proceeds from sale of other real estate owned		315			375
Loan originations, net of principal payments		(1,369	)		18,040
Purchase of bank-owned life insurance		(5,001	)		-
Purchase of premises and equipment		(144	)		(622	)
Net cash provided (used) by investing activities		(739	)		17,020

(continued)

See accompanying notes to unaudited consolidated financial statements.

HAMPDEN BANCORP, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)

(Dollars in thousands)

	Six Months Ended December 31,
	2011			2010
	(Unaudited)
Cash flows from financing activities:
Net change in deposits		9,732			(8,980	)
Net change in repurchase agreements		(765	)		2,899
Repayment of long-term debt		(6,255	)		(11,856	)
Net change in mortgagors' escrow accounts		87			32
Tax benefit from Equity Incentive Plan vesting		4			-
Repurchase of common stock		(8,651	)		(2,976	)
Payment of dividends on common stock		(367	)		(387	)
Net cash used by financing activities		(6,215	)		(21,268	)

Net change in cash and cash equivalents		(6,203	)		(1,273	)

Cash and cash equivalents at beginning of period		31,147			30,033

Cash and cash equivalents at end of period	$	24,944		$	28,760

Supplemental cash flow information:
Interest paid on deposits	$	2,211		$	3,021
Interest paid on borrowings		823			1,127
Income taxes paid		27			48
Transfer from loans to other real estate owned		176			438

See accompanying notes to unaudited consolidated financial statements.

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 two wholly-owned subsidiaries, Hampden Investment Corporation, which engages 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 December 31, 2011 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, 2011 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 15, 2011.

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, deferred income taxes, other real estate owned and other-than-temporary impairment of investment securities.

2. Recent Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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. This guidance was adopted by the Company as of July 1, 2011 and did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements. This update removes from the assessment of effective control for repurchase agreements (1) the criterion used to assess effective control relating to the transferor’s ability to repurchase or redeem financial assets even in the event of a default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. This update is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. This guidance was adopted by the Company as of January 1, 2012, and did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This update clarifies and expands the disclosures pertaining to unobservable inputs in Level 3 fair value measurements. The guidance also requires, for public companies, disclosure of the level within the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. The amendments in this update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. This guidance was adopted by the Company as of January 1, 2012, and did not have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued 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, although early application is permitted. Management does not expect this guidance to have a material effect 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.

Earnings per share for the three and six month periods ended December 31, 2011 and 2010 have been computed as follows:

	Three Months Ended December 31,						Six Months Ended December 31,
	2011			2010			2011			2010

Net income applicable to common stock (in thousands)	$	694		$	491		$	1,229		$	1,034

Average number of shares issued		7,950,379			7,949,879			7,950,379			7,949,879
Less: average unallocated ESOP shares		(430,951	)		(473,347	)		(436,269	)		(478,665	)
Less: average treasury stock		(1,544,815	)		(1,103,781	)		(1,369,466	)		(1,005,445	)
Less: average unvested restricted stock awards		(113,393	)		(185,136	)		(115,293	)		(182,984	)
Average number of basic shares outstanding		5,861,220			6,187,615			6,029,351			6,282,785

Plus: dilutive unvested restricted stock awards		56,227			53,477			50,949			44,194
Plus: dilutive stock option shares		34,308			-			40,509			-
Average number of diluted shares outstanding		5,951,755			6,241,092			6,120,809			6,326,979

Basic earnings per share	$	0.12		$	0.08		$	0.20		$	0.16
Diluted earnings per share	$	0.12		$	0.08		$	0.20		$	0.16

There were 553,000 stock options that were excluded from the diluted earnings per share for the three and six months ended December 31, 2010 because their effect was anti-dilutive.

4. Dividends

On November 1, 2011, the Company declared a cash dividend of $0.03 per common share which was paid on November 30, 2011 to stockholders of record as of the close of business on November 14, 2011.

On February 7, 2012, the Company declared a cash dividend of $0.04 per common share which is payable on February 28, 2012 to stockholders of record as of the close of business on February 14, 2012.

5. Loan Commitments

Outstanding loan commitments totaled $83.6 million at December 31, 2011 and $72.1 million as of June 30, 2011. 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 Financial 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.

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 are 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 present value 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 mortgage escrow accounts: The fair values for non-certificate accounts and mortgage 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.

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 December 31, 2011 and June 30, 2011 was not material.

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

The following tables present the balance of assets measured at fair value on a recurring basis as of December 31, 2011 and June 30, 2011:

	Level 1		Level 2		Level 3		Total
December 31, 2011	(In Thousands)
Debt securities:
Corporate bonds	$	-	$	953	$	-	$	953
Residential mortgage-backed securities:
Agency		-		100,502		-		100,502
Non-agency		-		4,629		-		4,629
Total debt securities		-		106,084		-		106,084
Marketable equity securities		55		-		-		55
Mortgage servicing rights		-		-		403		403
Total assets at fair value	$	55	$	106,084	$	403	$	106,542

June 30, 2011
Debt securities:
Government-sponsored enterprises	$	-	$	1,000	$	-	$	1,000
Corporate bonds		-		999		-		999
Residential mortgage-backed securities:
Agency		-		103,540		-		103,540
Non-agency		-		6,327		-		6,327
Total debt securities		-		111,866		-		111,866
Marketable equity securities		53		-		-		53
Mortgage servicing rights		-		-		445		445
Total assets at fair value	$	53	$	111,866	$	445	$	112,364

The table below presents, for the three and six months ended December 31, 2011 and 2010, the changes in Level 3 assets that are measured at fair value on a recurring basis:

Mortgage Servicing Rights

	Three Months Ended December 31,						Six Months Ended December 31,
	2011			2010			2011			2010
	(In Thousands)						(In Thousands)
Beginning balance	$	439		$	481		$	445		$	501
Total realized and unrealized gains (losses) included in net income		(93	)		(80	)		(120	)		(135	)
Total unrealized gains (losses) included in other comprehensive income		-			-			-			-
Capitalized servicing assets		57			36			78			71
Transfers in and/or out of Level 3		-			-			-			-
Ending balance	$	403		$	437		$	403		$	437

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 December 31, 2011 and June 30, 2011.

	Level 1		Level 2		Level 3
December 31, 2011	(In Thousands)
Impaired loans	$	-	$	-	$	918
Other real estate owned		-		-		1,075
Total assets	$	-	$	-	$	1,993

June 30, 2011
Impaired loans	$	-	$	-	$	2,677
Other real estate owned		-		-		1,264
Total assets	$	-	$	-	$	3,941

During the six months ended December 31, 2011 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 a $206,000 loss on impaired loans for the three months ended December 31, 2011 compared to a gain of $245,000 for the three months ended December 31, 2010. The Company had a $26,000 loss on impaired loans for the six months ended December 31, 2011 compared to a loss of $201,000 for the six months ended December 31, 2010. These gains/losses were recognized in earnings through the provision for loan loss. The Company charges off any collateral shortfall on collaterally dependent impaired commercial loans. Independent appraisals or tax assessments are obtained and updated annually 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 $50,000 write-down on OREO for the three and six months ended December 31, 2011. The Company had a $15,000 gain on the sale of OREO for the three and six months ended December 31, 2010. At December 31, 2011 and 2010, 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.

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

	December 31,				June 30,
	2011				2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	24,944	$	24,944	$	31,147	$	31,147
Securities available for sale		106,139		106,139		111,919		111,919
Federal Home Loan Bank stock		5,233		5,233		5,233		5,233
Loans held for sale		1,318		1,318		400		400
Loans, net		398,501		417,288		397,708		408,365
Accrued interest receivable		1,502		1,502		1,541		1,541
Mortgage servicing rights (1)		403		403		445		445

Financial liabilities:
Deposits		426,987		430,042		417,255		420,184
Securities sold under agreements to repurchase		6,468		6,468		7,233		7,233
Long-term debt		41,223		42,163		47,478		50,283
Mortgagors' escrow accounts		1,017		1,017		930		930

(1) Included in other assets.

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:

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Debt securities:
Corporate bonds	$	996	$	-	$	(43	)	$	953
Residential mortgage-backed securities:
Agency		97,710		2,814		(22	)		100,502
Non-agency		4,876		57		(304	)		4,629
Total debt securities		103,582		2,871		(369	)		106,084
Marketable equity securities		51		4		-			55
Total securities available for sale	$	103,633	$	2,875	$	(369	)	$	106,139

	June 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Debt securities:
Government-sponsored enterprise obligations	$	1,000	$	-	$	-		$	1,000
Corporate bonds		996		3		-			999
Residential mortgage-backed securities:
Agency		100,758		2,810		(28	)		103,540
Non-agency		6,366		90		(129	)		6,327
Total debt securities		109,120		2,903		(157	)		111,866
Marketable equity securities		51		2		-			53
Total securities available for sale	$	109,171	$	2,905	$	(157	)	$	111,919

The amortized cost and estimated fair value of debt securities by contractual maturity at December 31, 2011 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.

	December 31, 2011
	Amortized Cost		Fair Value
	(In Thousands)
Within 1 year	$	-	$	-
Over 1 year through 5 years		996		953
Total bonds and obligations		996		953
Residential mortgage-backed securities:
Agency		97,710		100,502
Non-agency		4,876		4,629
Total debt securities	$	103,582	$	106,084

At December 31, 2011 and June 30, 2011, the carrying value of securities pledged to secure repurchase agreements was $8,514,000 and $9,824,000, respectively.

Information pertaining to securities with gross unrealized losses at December 31, 2011 and June 30, 2011, 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)
December 31, 2011:
Corporate bonds	$	-	$	-	$	43	$	953	$	43	$	953
Residential mortgage-backed securities:
Agency		13		3,025		9		1,770		22		4,795
Non-agency		10		189		294		2,324		304		2,513
	$	23	$	3,214	$	346	$	5,047	$	369	$	8,261
June 30, 2011:
Residential mortgage-backed securities:
Agency	$	21	$	10,890	$	7	$	838	$	28	$	11,728
Non-agency		3		211		126		2,506		129		2,717
	$	24	$	11,101	$	133	$	3,344	$	157	$	14,445

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 December 31, 2011, twenty-six debt securities had unrealized losses with aggregate depreciation of 4.3% 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 Federal 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 December 31, 2011, we held fifteen securities issued by private mortgage originators that had unrealized losses which had an amortized cost of $2.8 million and a fair value of $2.5 million. All of these investments are “Senior” Class tranches and have underlying credit enhancement. These securities were originated between 2002 and 2005 and are performing in accordance with contractual terms. 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 December 31, 2011.

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 December 31, 2011						At June 30, 2011
	Amount			Percent			Amount			Percent			Change			% Change
	(Dollars In Thousands)
Mortgage loans on real estate:
1-4 family residential	$	118,289			29.47	%	$	121,462			30.32	%	$	(3,173	)		(2.61	) %
Commercial		150,716			37.55			151,395			37.79			(679	)		(0.45	) %
Home equity:
First lien		23,991			5.98			22,092			5.52			1,899			8.60	%
Second lien		41,166			10.26			40,883			10.21			283			0.69	%
Construction:
Residential		3,807			0.95			3,635			0.91			172			4.73	%
Commercial		1,808			0.45			1,630			0.41			178			10.92	%
Total mortgage loans on real estate		339,777			84.66			341,097			85.15			(1,320	)		(0.39	) %

Other loans:
Commercial		35,106			8.75			35,739			8.92			(633	)		(1.77	) %
Consumer:
Manufactured homes		20,781			5.18			20,073			5.01			708			3.53	%
Automobile and other secured loans		4,394			1.09			2,270			0.57			2,124			93.57	%
Other		1,290			0.32			1,399			0.35			(109	)		(7.79	) %
Total other loans		61,571			15.34			59,481			14.85			2,090			3.51	%
Total loans		401,348			100.00	%		400,578			100.00	%	$	770
Other items:
Net deferred loan costs		2,722						2,603
Allowance for loan losses		(5,569	)					(5,473	)
Total loans, net	$	398,501					$	397,708

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, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The Company charges off any collateral shortfall on collaterally dependent impaired commercial loans.

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 year ended June 30, 2011 or the six months ended December 31, 2011.

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 are analyzed to determine their potential risk of loss. This process concentrates on non-accrual and classified loans with risk ratings of six or higher. 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 90% of the value of the property serving as collateral at time of origination. Under our current underwriting standards, loan originations are made in amounts such that balances 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 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 non-speculative real estate loans. The underlying cash flows generated by the properties are 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, and resultant decreased consumer spending, will 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 third parties. The Company has the ability to select the automobile loans it wishes to purchase based on credit quality.

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 a broker funded cash reserve account for manufactured home loans that can be used for any pre-payments and losses.

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

Impaired loans

A loan is considered impaired when, based on current information and events, it is probable that a creditor 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.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment unless such loans are subject to a troubled debt restructuring agreement.

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. 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.

The following table presents the Company’s loans by risk rating at December 31, 2011 and June 30, 2011:

December 31, 2011
	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	$	115,809	$	126,085	$	23,923	$	40,691	$	3,807	$	1,498
Loans rated 6		586		11,714		68		45		-		310
Loans rated 7		982		12,647		-		192		-		-
Loans rated 8		912		270		-		238		-		-
Loans rated 9		-		-		-		-		-		-
	$	118,289	$	150,716	$	23,991	$	41,166	$	3,807	$	1,808

	Commercial		Manufactured Homes		Automobile and Other Secured Loans		Other Consumer		Total
	(In Thousands)
Loans rated 1-5	$	27,922	$	20,433	$	4,392	$	1,289	$	365,849
Loans rated 6		3,276		209		2		1		16,211
Loans rated 7		3,878		19		-		-		17,718
Loans rated 8		30		120		-		-		1,570
Loans rated 9		-		-		-		-		-
	$	35,106	$	20,781	$	4,394	$	1,290	$	401,348


June 30, 2011
	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	$	118,283	$	122,696	$	21,941	$	40,270	$	3,635	$	1,321
Loans rated 6		1,126		21,118		151		251		-		-
Loans rated 7		1,435		6,029		-		47		-		309
Loans rated 8		618		1,552		-		315		-		-
Loans rated 9		-		-		-		-		-		-
	$	121,462	$	151,395	$	22,092	$	40,883	$	3,635	$	1,630

	Commercial		Manufactured Homes		Automobile and Other Secured Loans		Other Consumer		Total
	(In Thousands)
Loans rated 1-5	$	26,745	$	19,803	$	2,259	$	1,398	$	358,351
Loans rated 6		5,192		202		8		1		28,049
Loans rated 7		3,767		19		3		-		11,609
Loans rated 8		35		49		-		-		2,569
Loans rated 9		-		-		-		-		-
	$	35,739	$	20,073	$	2,270	$	1,399	$	400,578

The results of this quarterly process are summarized, and appropriate recommendations and loan loss allowances are approved, by the Loan Review Committee. All supporting documentation with regard to the evaluation process, loan loss experience, allowance levels and the schedules of classified loans is maintained by the Company. The Committee is chaired by the Company’s Chief Financial Officer. The allowance for loan loss calculation is presented to the Board of Directors on a quarterly basis with recommendations on its adequacy.

The following are summaries of past due and non-accrual loans:

	December 31, 2011
									Past Due 90
	30-59 Days		60-89 Days		90 Days		Total		Days or More		Loans on
	Past Due		Past Due		or Greater		Past Due		and Still Accruing		Non-accrual
	(In Thousands)
Mortgage loans on real estate:
1-4 family residential	$	1,630	$	-	$	1,181	$	2,811	$	-	$	2,100
Commercial		2,346		-		60		2,406		-		1,532
Home equity:
First lien		-		-		-		-		-		-
Second lien		-		25		258		283		-		334
Construction:
Residential		-		-		-		-		-		-
Commercial		-		-		-		-		-		-
Commercial		38		-		1,383		1,421		-		1,416
Consumer:
Manufactured homes		288		31		120		439		-		120
Automobile and other secured loans		12		-		-		12		-		-
Other		28		-		-		28		-		-
Total	$	4,342	$	56	$	3,002	$	7,400	$	-	$	5,502


	June 30, 2011
									Past Due 90
	30-59 Days		60-89 Days		90 Days		Total		Days or More		Loans on
	Past Due		Past Due		or Greater		Past Due		and Still Accruing		Non-accrual
	(In Thousands)
Mortgage loans on real estate:
1-4 family residential	$	566	$	734	$	1,489	$	2,789	$	-	$	2,635
Commercial		148		-		1,294		1,442		-		1,719
Home equity:
First lien		-		-		41		41		-		41
Second lien		-		-		273		273		-		386
Construction:
Residential		-		-		-		-		-		-
Commercial		-		-		-		-		-		-
Commercial		19		759		532		1,310		-		1,366
Consumer:
Manufactured homes		95		-		68		163		-		68
Automobile and other secured loans		10		-		-		10		-		-
Other		-		-		-		-		-		-
Total	$	838	$	1,493	$	3,697	$	6,028	$	-	$	6,215

The following are summaries of impaired loans:

	December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In Thousands)
Impaired loans without a valuation allowance:
Mortgage loans on real estate:
1-4 family residential	$	567	$	567	$	-
Commercial		1,532		1,555		-
Home equity:
Second lien		314		314		-
Construction:
Commercial		310		310		-
Other loans:
Commercial		3,271		3,399		-
Manufactured homes		100		100		-
Total		6,094		6,245		-

Impaired loans with a valuation allowance:
Mortgage loans on real estate:
1-4 family residential		1,533		1,556		321
Commercial		8,565		8,588		253
Other loans:
Commercial		1,500		1,523		16
Total		11,598		11,667		590
Total impaired loans	$	17,692	$	17,912	$	590


	June 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In Thousands)
Impaired loans without a valuation allowance:
Mortgage loans on real estate:
1-4 family residential	$	737	$	737	$	-
Commercial		4,008		5,344		-
Home equity:
First lien		42		50		-
Second lien		406		406		-
Construction:
Commercial		310		310		-
Other loans:
Commercial		3,216		3,344
Manufactured homes		68		68		-
Total		8,787		10,259		-

Impaired loans with a valuation allowance:
Mortgage loans on real estate:
1-4 family residential		1,897		1,903		284
Commercial		8,237		8,237		290
Other loans:
Commercial		1,698		1,698		21
Total		11,832		11,838		595
Total impaired loans	$	20,619	$	22,097	$	595

At December 31, 2011, the Company had three impaired loans that had $252,000 committed to be advanced. The majority of the $252,000 committed to be advanced is to one holder that has been current with its payments. The $17.7 million of impaired loans include $5.5 million of non-accrual loans and $10.4 million of accruing troubled debt restructured loans as of December 31, 2011. The remaining $1.8 million are loans that the Company believes, based on current information and events, that 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. Of the $17.7 million of impaired loans, $13.7 million, or 77.3%, are current with all payment terms. As of June 30, 2011, the $20.6 million of impaired loans above included $6.2 million of non-accrual loans and $10.9 million of accruing troubled debt restructured loans. The remaining $3.3 million are loans that the Company believes, based on current information and events, that 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. Of the $20.6 million of impaired loans, $14.2 million, or 69.0%, were current with all payment terms as of June 30, 2011.

Information pertaining to impaired loans for the three and six months ended December 31, 2011 and 2010 follows:

	For The Three Months Ended December 31, 2011
	1-4 Family Residential		Commercial Real Estate		Home Equity First Lien		Home Equity Second Lien		Residential Construction		Commercial Construction		Commercial		Manufactured Homes			Automobile and Other Secured Loans		Other Consumer		Total
	(In Thousands)
Average investment in impaired loans	$	2,292	$	12,133	$	-	$	329	$	-	$	310	$	5,038	$	80		$	-	$	-	$	20,182

Interest income recognized on impaired loans	$	32	$	148	$	-	$	2	$	-	$	5	$	47	$	(2	)	$	-	$	-	$	232

Interest income recognized on a cash basis on impaired loans	$	32	$	125	$	-	$	2	$	-	$	5	$	48	$	-		$	-	$	-	$	212


	For The Three Months Ended December 31, 2010
	1-4 Family Residential		Commercial Real Estate		Home Equity First Lien		Home Equity Second Lien		Residential Construction		Commercial Construction		Commercial		Manufactured Homes			Automobile and Other Secured Loans		Other Consumer		Total
	(In Thousands)
Average investment in impaired loans	$	2,172	$	8,405	$	50	$	219	$	-	$	1,024	$	5,897	$	-		$	-	$	1	$	17,768

Interest income recognized on impaired loans	$	15	$	134	$	-	$	2	$	-	$	34	$	150	$	-		$	-	$	-	$	335

Interest income recognized on a cash basis on impaired loans	$	14	$	86	$	-	$	2	$	-	$	28	$	140	$	-		$	-	$	-	$	270

	For The Six Months Ended December 31, 2011
	1-4 Family Residential		Commercial Real Estate		Home Equity First Lien		Home Equity Second Lien		Residential Construction		Commercial Construction		Commercial		Manufactured Homes			Automobile and Other Secured Loans		Other Consumer		Total
	(In Thousands)
Average investment in impaired loans	$	2,332	$	11,379	$	-	$	334	$	-	$	310	$	5,118	$	100		$	-	$	-	$	19,573

Interest income recognized on impaired loans	$	49	$	346	$	-	$	2	$	-	$	10	$	128	$	(2	)	$	-	$	-	$	533

Interest income recognized on a cash basis on impaired loans	$	54	$	333	$	-	$	2	$	-	$	10	$	127	$	1		$	-	$	-	$	527


	For The Six Months Ended December 31, 2010
	1-4 Family Residential		Commercial Real Estate		Home Equity First Lien		Home Equity Second Lien		Residential Construction		Commercial Construction		Commercial		Manufactured Homes			Automobile and Other Secured Loans		Other Consumer		Total
	(In Thousands)
Average investment in impaired loans	$	1,595	$	8,661	$	33	$	155	$	-	$	759	$	6,066	$	-		$	-	$	1	$	17,270

Interest income recognized on impaired loans	$	31	$	315	$	-	$	3	$	-	$	74	$	212	$	-		$	-	$	-	$	635

Interest income recognized on a cash basis on impaired loans	$	30	$	266	$	-	$	3	$	-	$	68	$	203	$	-		$	-	$	-	$	570

Information pertaining to the allowance for loan losses and recorded investment in loans for the three and six months ended December 31, 2011 and 2010 follows:

	1-4 Family Residential			Commercial Real Estate			Home Equity First Lien			Home Equity Second Lien			Residential Construction		Commercial Construction			Commercial			Manufactured Homes		Automobile and Other Secured Loans		Other Consumer			Total
Three Months Ended December 31, 2011	(In Thousands)
Allowance:
Beginning balance	$	1,015		$	3,010		$	199		$	337		$	36	$	37		$	1,041		$	-	$	-	$	56		$	5,731
Charge-offs		(56	)	��	(17	)		-			(24	)		-		-			(206	)		-		-		(2	)		(305	)
Recoveries		27			16			-			-			-		-			-			-		-		-			43
Provision		65			75			43			(11	)		1		(14	)		(41	)		-		18		(36	)		100
Ending balance	$	1,051		$	3,084		$	242		$	302		$	37	$	23		$	794		$	-	$	18	$	18		$	5,569
Ending balance: Individually evaluated for impairment	$	321		$	253		$	-		$	-		$	-	$	-		$	16		$	-	$	-	$	-		$	590
Ending balance: Collectively evaluated for impairment	$	730		$	2,831		$	242		$	302		$	37	$	23		$	778		$	-	$	18	$	18		$	4,979
Loans:
Ending balance	$	118,289		$	150,716		$	23,991		$	41,166		$	3,807	$	1,808		$	35,106		$	20,781	$	4,394	$	1,290		$	401,348
Ending balance: Individually evaluated for impairment	$	2,100		$	10,097		$	-		$	314		$	-	$	310		$	4,771		$	100	$	-	$	-		$	17,692
Ending balance: Collectively evaluated for impairment	$	116,189		$	140,619		$	23,991		$	40,852		$	3,807	$	1,498		$	30,335		$	20,681	$	4,394	$	1,290		$	383,656

Three Months Ended December 31, 2010
Allowance:
Beginning balance	$	850		$	3,441		$	174		$	348		$	68	$	14		$	1,389		$	-	$	-	$	45		$	6,329
Charge-offs		-			(478	)		(13	)		-			-		-			(56	)		-		-		(8	)		(555	)
Recoveries		-			-			-			-			-		-			-			-		-		-			-
Provision		181			332			24			48			6		12			(299	)		-		-		(4	)		300
Ending balance	$	1,031		$	3,295		$	185		$	396		$	74	$	26		$	1,034		$	-	$	-	$	33		$	6,074
Ending balance: Individually evaluated for impairment	$	221		$	809		$	-		$	62		$	-	$	-		$	99		$	-	$	-	$	-		$	1,191
Ending balance: Collectively evaluated for impairment	$	810		$	2,486		$	185		$	334		$	74	$	26		$	935		$	-	$	-	$	33		$	4,883
Loans:
Ending balance	$	120,078		$	134,230		$	23,241		$	40,369		$	4,108	$	15,558		$	35,293		$	19,874	$	2,700	$	1,474		$	396,925
Ending balance: Individually evaluated for impairment	$	2,166		$	7,688		$	50		$	221		$	-	$	1,736		$	5,580		$	-	$	-	$	-		$	17,441
Ending balance: Collectively evaluated for impairment	$	117,912		$	126,542		$	23,191		$	40,148		$	4,108	$	13,822		$	29,713		$	19,874	$	2,700	$	1,474		$	379,484

	1-4 Family Residential			Commercial Real Estate			Home Equity First Lien			Home Equity Second Lien			Residential Construction		Commercial Construction			Commercial			Manufactured Homes		Automobile and Other Secured Loans		Other Consumer			Total
Six Months Ended December 31, 2011	(In Thousands)
Allowance:
Beginning balance	$	893		$	2,922		$	196		$	321		$	33	$	32		$	1,020		$	-	$	-	$	56		$	5,473
Charge-offs		(58	)		(60	)		-			(24	)		-		-			(212	)		-		-		(4	)		(358	)
Recoveries		35			16			3			-			-		-			-			-		-		-			54
Provision		181			206			43			5			4		(9	)		(14	)		-		18		(34	)		400
Ending balance	$	1,051		$	3,084		$	242		$	302		$	37	$	23		$	794		$	-	$	18	$	18		$	5,569
Ending balance: Individually evaluated for impairment	$	321		$	253		$	-		$	-		$	-	$	-		$	16		$	-	$	-	$	-		$	590
Ending balance: Collectively evaluated for impairment	$	730		$	2,831		$	242		$	302		$	37	$	23		$	778		$	-	$	18	$	18		$	4,979
Loans:
Ending balance	$	118,289		$	150,716		$	23,991		$	41,166		$	3,807	$	1,808		$	35,106		$	20,781	$	4,394	$	1,290		$	401,348
Ending balance: Individually evaluated for impairment	$	2,100		$	10,097		$	-		$	314		$	-	$	310		$	4,771		$	100	$	-	$	-		$	17,692
Ending balance: Collectively evaluated for impairment	$	116,189		$	140,619		$	23,991		$	40,852		$	3,807	$	1,498		$	30,335		$	20,681	$	4,394	$	1,290		$	383,656

Six Months Ended December 31, 2010
Allowance:
Beginning balance	$	1,175		$	2,267		$	165		$	331		$	60	$	-		$	2,264		$	-	$	-	$	52		$	6,314
Charge-offs		-			(478	)		(13	)		-			-		-			(341	)		-		-		(10	)		(842	)
Recoveries		2			-			-			-			-		-			-			-		-		-			2
Provision		(146	)		1,506			33			65			14		26			(889	)		-		-		(9	)		600
Ending balance	$	1,031		$	3,295		$	185		$	396		$	74	$	26		$	1,034		$	-	$	-	$	33		$	6,074
Ending balance: Individually evaluated for impairment	$	221		$	809		$	-		$	62		$	-	$	-		$	99		$	-	$	-	$	-		$	1,191
Ending balance: Collectively evaluated for impairment	$	810		$	2,486		$	185		$	334		$	74	$	26		$	935		$	-	$	-	$	33		$	4,883
Loans:
Ending balance	$	120,078		$	134,230		$	23,241		$	40,369		$	4,108	$	15,558		$	35,293		$	19,874	$	2,700	$	1,474		$	396,925
Ending balance: Individually evaluated for impairment	$	2,166		$	7,688		$	50		$	221		$	-	$	1,736		$	5,580		$	-	$	-	$	-		$	17,441
Ending balance: Collectively evaluated for impairment	$	117,912		$	126,542		$	23,191		$	40,148		$	4,108	$	13,822		$	29,713		$	19,874	$	2,700	$	1,474		$	379,484

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 December 31, 2011 and June 30, 2011, the Company was servicing loans for participants aggregating $26.1 million and $28.0 million, respectively.

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

This section is intended to help investors understand the financial performance of Hampden Bancorp, Inc. and its subsidiaries, through a discussion of the factors affecting our financial condition at December 31, 2011 and June 30, 2011 and our consolidated results of operations for the three and six months ended December 31, 2011 and 2010, and should be read in conjunction with the Company’s unaudited consolidated interim financial statements and notes thereto, appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Forward-Looking Statements

Certain statements herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and expectations of management, as well as the assumptions made using information currently available to management. Since these statements reflect the views of management concerning future events, these statements involve risks, uncertainties and assumptions. As a result, actual results may differ from those contemplated by these statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like "believe", "expect", "anticipate", "estimate", and "intend" or future or conditional verbs such as "will", "would", "should", "could", or "may." Certain factors that could have a material adverse affect on the operations Hampden Bank include, but are not limited to, increased competitive pressure among financial service companies, national and regional economic conditions, changes in interest rates, changes in consumer spending, borrowing and savings habits, legislative and regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and Federal Reserve Board, adverse changes in the securities markets, inability of key third-party providers to perform their obligations to Hampden Bank, changes in relevant accounting principles and guidelines and our ability to successfully implement our branch expansion strategy. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. The Company disclaims any intent or obligation to update any forward-looking statements, whether in response to new information, future events or otherwise. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain important factors, including those set forth below under Item 2 –“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this the Quarterly Report on Form 10-Q, as well as in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011, including the section titled Item 1A –“Risk Factors”. You should carefully review those factors and also carefully review the risks outlined in other documents that the Company files from time to time with the SEC. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities laws.

Critical Accounting Policies

We consider accounting policies that require management to exercise significant judgment or discretion, or make significant assumptions that have or could have a material impact on the carrying value of certain assets, liabilities, revenue, expenses, or related disclosures, to be critical accounting policies.

Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board.

Allowance for Loan Losses

Critical Estimates. 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 quarterly basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The analysis of the allowance for loan losses has two components: specific and general allocations, which are described on page 16.

Judgment and Uncertainties. 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:

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 and changes in government regulations, 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 were generally underwritten in amounts such that the combined first and second mortgage balances generally do not exceed 90% of the value of the property serving as collateral at time of origination. Under our current underwriting standards, loan originations are made in amounts such that balances 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.

Commercial construction loans – Loans in this segment primarily include non-speculative real estate loans, most of which are underwritten on a construction to permanent basis. Upon completion of the projects, the underlying cash flows generated by the properties are adversely impacted by a downturn in the economy, which in turn, will have an effect on the credit quality in this segment.

Manufactured home loans – Loans in this segment are generally 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 a broker funded cash reserve account for manufactured home loans that can be used for any pre-payments and losses.

Automobile and other secured loans – Loan 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 wishes to purchase based on credit.

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

Effect if Actual Results Differ from Assumptions. Although we believe we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary if the current operating environment deteriorates. Management uses the best information available; however, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change. In addition, the FDIC and the Massachusetts Division of Banks, as an integral part of their examination process, will periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.

Income Taxes

Critical Estimates. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. Quarterly, management reviews the deferred tax assets to identify any uncertainties to the collectability of the components of the deferred tax asset.

Judgment and Uncertainties. In determining the deferred tax asset valuation allowance, we use historical and forecasted operating results, based upon approved business plans, including a review of the eligible carryforward periods, tax planning opportunities and other relevant considerations. Management believes that the accounting estimate related to the valuation allowance is a critical accounting estimate because the underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance.

Effect if Actual Results Differ from Assumptions. Should actual factors and conditions differ materially from those used by management, the actual realization of net deferred tax assets or deferred tax liabilities could differ materially from the amounts recorded in the financial statements. If we were not able to realize all or part of our net deferred tax assets in the future, an adjustment to our deferred tax assets valuation allowance would be charged to income tax expense in the period such determination was made and would have a negative impact on the company’s earnings. In addition, if actual factors and conditions differ materially from those used by management, the Company could incur penalties and interest imposed by the Internal Revenue Service.

Other Real Estate Owned

Critical Estimates. Other Real Estate Owned (“OREO”) consists of all real estate, other than Company premises, actually owned or controlled by the Company and its consolidated subsidiaries, including real estate acquired through foreclosure, even if the Company has not yet received title to the property. OREO also includes property originally acquired for future expansion but no longer intended to be used for that purpose, and foreclosed real estate sold under contract and accounted for under the deposit method of accounting.

The Company is permitted to acquire and hold real property used in the operation of the Company or as the Company may acquire (by foreclosure or other transfer in lieu of foreclosure) in satisfaction of all or a part of a loan or in satisfaction of a judgment or decree in its favor. If the Company acquires real property by foreclosure or other transfer in lieu of foreclosure, it carries such real property on its books as OREO. OREO acquired by the Company is subject to certain regulatory requirements that limit the time such property can be held by the Company, require that information regarding the property be reported to the Company’s federal regulator, subject the acquisition of such property to federal appraisal requirements, restrict the use of such property, and govern the treatment of any disposal of the property. It is the policy of the Company to sell any real property acquired through the collection of debts due it within a reasonable period of time. During the time that the Company holds the real property, the Company shall write-down the carrying value of the property based upon the current appraised value of the property.

Accounting standards, which applies to all transactions in which the seller provides financing to the buyer of real estate, establishes five methods to account for the disposition of OREO. If a profit is involved in the sale of real estate, each method sets forth the manner in which the profit is to be recognized based on the terms of the sale. However, regardless of which method is used, any loss on the disposition of OREO is to be recognized immediately.

Judgment and Uncertainties. The Company obtains a new or updated valuation of OREO at the time of acquisition, including periodic reappraisals or reevaluations thereafter to ensure any material change in market conditions or the physical aspects of the property are recognized. To ensure the general validity of such appraised values, it is the responsibility of loan officers to compare sale prices and appraised values of properties previously held for their respective portfolio. Each parcel of OREO is to be reviewed and valued by loan officers on its own merits. The sale of OREO is also supported by this appraisal. A careful evaluation of all the relevant factors should enable the loan officer to make an accurate and reliable judgment with regard to classification. Any portion of the carrying value in excess of appraised value should be classified as a loss.

Effect if Actual Results Differ from Assumptions. Should any subsequent appraisals of the property indicate that a decrease in value has occurred since the initial acquisition, one of the following actions should be taken:

1.	A write down of the recorded investment (book value) to market value be taken; or
2.	An addition to the valuation reserve in an amount equal to or greater than the excess of recorded investment over market value should be established.

Comparison of Financial Condition at December 31, 2011 and June 30, 2011

Overview

Total Assets. The Company’s total assets decreased $5.1 million, or 0.9%, from $573.3 million at June 30, 2011 to $568.2 million at December 31, 2011. Stockholders’ equity decreased $7.2 million, or 7.7%, to $86.4 million at December 31, 2011 compared to June 30, 2011 due to the Company repurchasing 694,368 shares of Company stock for $8.6 million pursuant to the Company’s stock repurchase programs. Net loans increased $793,000, or 0.2%, to $398.5 million at December 31, 2011, and security balances decreased $5.8 million, or 5.2%, to $106.1 million as of December 31, 2011 compared to June 30, 2011. Cash and cash equivalents decreased $6.2 million, or 19.9%, to $24.9 million at December 31, 2011. A partial offset to these decreases was an increase in bank-owned life insurance of $5.2 million, or .48.5%, to $15.9 million at December 31, 2011. The Company purchased an additional $5.0 million of bank-owned life insurance as an additional earning asset that can offset a portion of the current costs of the employee benefits.

Total deposits increased $9.7 million, or 2.3%, from $417.3 at June 30, 2011 to $427.0 million at December 31, 2011; long-term debt decreased $6.3 million, or 13.2%, from $47.5 million at June 30, 2011 to $41.2 million at December 31, 2011; and total stockholders’ equity decreased $7.2 million or 7.7% from $93.5 million at June 30, 2011 to $86.4 million at December 31, 2011.

Investment Activities. The composition and fair value of the Company’s investment portfolio is included in Note 7 to the Company’s accompanying unaudited condensed consolidated financial statements. Securities available for sale decreased $5.8 million to $106.1 million at December 31, 2011. Obligations issued by government-sponsored enterprises, corporate bonds and mortgage-backed securities all decreased at December 31, 2011.

Net Loans. The composition of the Company’s loan portfolio is included in Note 8 to the Company’s accompanying unaudited condensed consolidated financial statements. The increase in automobile and other secured loans is due to the Company purchasing $2.6 million of automobile loans from a third party. There was a $2.2 million increase in home equity loans due to a special promotion that the Company is currently running. The decrease in commercial real estate and commercial loans is due to a decrease in loan demand at December 31, 2011 as compared to June 30, 2011.

During the origination of fixed rate mortgages, each loan is analyzed to determine if the loan will be sold into the secondary market or held in portfolio. The Company retains servicing for loans sold to Fannie Mae and earns a fee equal to 0.25% of the loan amount outstanding for providing these services. Loans which the Company originates to the standards of the buyer, which may differ from the Company’s underwriting standards, are generally sold to a third party along with the servicing rights without recourse. For the six months ended December 31, 2011, loans sold totaled $7.9 million. Of the $7.9 million of loans sold, $2.1 million were sold on a servicing-released basis, and $5.8 million were sold on a servicing-retained basis.

Non-Performing Assets. The following table sets forth the amounts of our non-performing assets at the dates indicated. The categories of our non-performing loans are included in Note 8 to the Company’s accompanying unaudited condensed consolidated financial statements.

	At December 31,			At June 30,
	2011			2011
	(Dollars in Thousands)

Total non-performing loans		5,502			6,215
Other real estate owned		1,075			1,264
Total non-performing assets	$	6,577		$	7,479

Troubled debt restructurings, not reported above	$	10,375		$	10,926

Ratios:
Non-performing loans to total loans		1.37	%		1.55	%
Non-performing assets to total assets		1.16	%		1.30	%

Generally, loans are placed on non-accrual status either when reasonable doubt exists as to the full collection of interest and principal or when a loan becomes 90 days past due, unless an evaluation clearly indicates that the loan is well-secured and in the process of collection. Past due status is based on the contractual terms of the loans. Of the $5.5 million in non-accrual loans, $3.0 million consisted of loans that were 90 days or greater past due, $2.3 million in loans that are current or less than 30 days past due and $182,000 in loans that are 30-89 days past due. From June 30, 2011 to December 31, 2011, residential mortgage non-performing loans have decreased $535,000, commercial real estate non-performing loans have decreased $187,000 and consumer, including home equity, non-performing loans have decreased 41,000. Commercial non-performing loans have increased $50,000. At December 31, 2011, the Company had seventeen TDRs (loans for which a portion of interest or principal has been forgiven, or the loans have been modified to lower the interest rate or extend the original term) totaling approximately $12.7 million, of which $2.3 million is on non-accrual status. All loans that are modified and a concession granted by the Company in light of the borrower’s financial difficulty are considered a TDR and are classified as impaired loans by the Company. The interest income recorded from these loans amounted to approximately $345,000 for the six month period ended December 31, 2011. At June 30, 2011, the Company had sixteen TDRs consisting of commercial and mortgage loans totaling approximately $11.9 million, of which $1.0 million was on non-accrual status. The interest income recorded from the restructured loans amounted to approximately $943,000 for the year ended June 30, 2011.

As of December 31, 2011, loans on non-accrual totaled $5.5 million which consisted of $3.0 million in loans that were 90 days or greater past due, $2.3 million in loans that are current or less than 30 days past due and $182,000 in loans that are 30-89 days past due. It is the Company’s policy to keep loans on non-accrual status subsequent to becoming current until the borrower can demonstrate their ability to make payments according to their loan terms. The $2.3 million in commercial real estate loans 30-59 days past due includes a $2.1 million loan that had a maturity date prior to December 31, 2011, however, the Company received the required documentation in January 2012 to extend the maturity date until 2014. As of December 31, 2011, 1-4 family residential non-accrual loans less than 90 days past due were $920,000, commercial real estate non-accrual loans less than 90 days past due were $1.5 million, commercial non-accrual loans less than 90 days past due were $33,000 and home equity second lien non-accrual loans less than 90 days past due were $76,000. All non-accrual loans, TDRs, and loans with risk ratings of six or higher are assessed by the Company for impairment. The $1.5 million in commercial real estate non-accrual loans less than 90 days past due includes a $1.1 million loan which is under agreement to be paid off prior to March 31, 2012.

In the normal course of business, the Company may modify a loan for a credit worthy borrower where the modified loan is not considered a TDR. In these cases, the modified terms are consistent with loan terms available to credit worthy borrowers and within normal loan pricing. The modifications to such loans are done according to our existing underwriting standards which include the review of historical financial statements, including current interim information if available, an analysis of the causes of the borrower’s decline in performance and projections to assess repayment ability going forward. These modified loans are not considered impaired loans by the Company. Although the few loan modifications that the Company has done appear to be successful so far, the Company does not have an extensive enough amount to be able to address success rates for modifications. Those loans not performing with the modified terms will be addressed and classified accordingly.

Non-accrual loans, including modified loans, return to accrual status once the borrower has shown the ability and an acceptable history of repayment. The borrower must be current with their payments in accordance with the loan terms for three months for residential loans and six months for commercial loans. The Company may also return a loan to accrual status if the borrower evidences sufficient cash flow to service the debt and provides additional collateral to support the collectability of the loan. For non-accrual and impaired loans that make payments, the Company recognizes cash interest payments as interest income when the Company does not have a collateral shortfall for the loan and the loan has not been charged off. If there is a collateral shortfall for the loan or it has been charged off, then the Company applies the entire payment to the principal balance on the loan.

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, the collateral, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan-by-loan basis 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. Impaired loans decreased to $17.7 million at December 31, 2011 from $ 20.6 million at June 30, 2011. The Company established specific reserves aggregating $590,000 and $595,000 for impaired loans at December 31, 2011 and June 30, 2011, respectively. Such reserves relate to eleven impaired loan relationships with a carrying value of $11.6 million, and are based on either management’s analysis of the expected cash flows for troubled debt restructurings or the collateral value at December 31, 2011. If impairment is measured based on the present value of expected future cash flows, the change in present value is recorded within the provision for loan loss.

The Company had one new TDR loan relationship in the six months ended December 31, 2011. The loan relationship consists of a home equity loan and a 1-4 family residential loan totaling $351,000. The Company capitalized the interest and expenses and restructured the payments for these loans. The restructure did not result in any impairment from the present value of expected future cash flows discounted at the loan’s effective interest rate. One TDR loan relationship that was restructured as of June 30, 2011 had payment defaults during the six months ended December 31, 2011. This loan relationship included four loans comprised of two 1-4 family residential loans totaling $220,000, one home equity loan totaling $26,000, and one commercial real estate loan totaling $182,000 as of December 31, 2011. As of December 31, 2010, there were no TDR loans that were restructured within the previous twelve months that had any payment defaults.

We believe that the determination of our allowance for loan losses, including amounts required for impaired loans, is consistent with generally accepted accounting principles and current regulatory guidance. While the Company believes that it has established adequate specifically 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 Company’s regulators periodically review the allowance for loan losses. These regulatory agencies may require the Company 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 Company’s financial condition and earnings. It is also possible that, in this current economic environment, additional loans will become impaired in future periods.

The Company classifies property acquired through foreclosure or acceptance of a deed in lieu of foreclosure as 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. At December 31, 2011, the Company had eleven properties with a carrying value of $1.1 million classified as OREO. Two of these properties were commercial real estate properties valued at $425,000, one property was a commercial loan valued at $137,000, two properties were 1-4 family residential properties valued at $166,000 and one property was a commercial construction project valued at $218,000. Five properties were manufactured homes valued at $241,000, however, there is a specific valuation reserve of $113,000 with respect to such properties. Any losses on the manufactured housing portfolio would first impact the broker funded cash reserve specifically maintained for manufactured housing loans.

Allowance for Loan Losses. The following table sets forth the Company’s allowance for loan losses for the periods indicated. The activity in the Company’s allowance for loan losses is included in Note 8 to the Company’s accompanying unaudited condensed consolidated financial statements.

	Three Months Ended December 31,						Six Months Ended December 31,
	2011			2010			2011			2010
	(Dollars in Thousands)						(Dollars in Thousands)

Balance at end of period	$	5,569		$	6,074		$	5,569		$	6,074

Ratios:
Net charge-offs to average loans outstanding		0.07	%		0.14	%		0.08	%		0.21	%
Allowance for loan losses to non-performing loans at end of period		101.22	%		71.02	%		101.22	%		71.02	%
Allowance for loan losses to total loans at end of period		1.39	%		1.53	%		1.39	%		1.53	%

It is the Company’s policy to classify all non-accrual loans as impaired loans. All impaired loans are measured on a loan-by -loan basis to determine if any specific allowance is required for the allowance for loan loss. Impairment is measured on a loan-by-loan basis 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. If the impaired loan has a shortfall in the expected future cash flows then a specific allowance will be placed on the loan in that amount. However, the Company may consider collateral values where it feels there is greater risk and the expected future cash flow allowance is not sufficient. Residential, commercial real estate and construction loans are secured by real estate. Except for one, all commercial loans are secured by all business assets and many also include primary or secondary mortgage positions on business and/or personal real estate. The other commercial loan is secured by shares of stock of a subsidiary to a borrower. In certain cases additional collateral may be obtained.

When calculating the general allowance component of the allowance for loan losses, the Company analyzes the trend in delinquencies. If there is an increase in the amount of delinquent loans in a particular loan category this may cause the Company to increase the general allowance requirement for that loan category. A partial charge-off on a non-performing loan will decrease the amount of non-performing and impaired loans, as well as any specific allowance requirement that loan may have had. This will also decrease our allowance for loan losses, as well as our allowance for loan losses to non-performing loans ratio and our allowance for loan losses to total loans ratio. The Company incorporates historical charge-offs, including charge-offs recognized in the current quarter, when calculating the general allowance component of the allowance for loan losses.

Loan Servicing. In the ordinary course of business, the Company sells real estate loans to the secondary market. The Company retains servicing on certain loans sold and earns servicing fees of .25% per annum based on the monthly outstanding balance of the loans serviced. The company recognizes servicing assets each time it undertakes an obligation to service loans sold. The Company’s mortgage servicing asset valuation is performed by an independent third party using a statistic valuation model representing the projection into the future of a single interest rate/market environment. The projected cash flows are then discounted back to present value. Discount rates, estimate of servicing costs and ancillary income, estimates of float earnings rates and delinquency information as well as an estimate of prepayments are used to calculate the value of the mortgage servicing asset.

The changes in servicing assets measured using fair value are as follows:

	Three Months Ended December 31,						Six Months Ended December 31,
	2011			2010			2011			2010
	(In thousands)						(In thousands)
Fair value at beginning of period	$	439		$	481		$	445		$	501
Capitalized servicing assets		57			36			78			71
Changes in fair value		(93	)		(80	)		(120	)		(135	)
Fair value at end of period	$	403		$	437		$	403		$	437

There are no recourse provisions for the loans that are serviced for others. The risks inherent in mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates. For the three month periods ended December 31, 2011, and 2010, amounts recognized for loan servicing fees amounted to $67,000 and $54,000, respectively, which are included in other non-interest income in the consolidated statements of income. For the six month periods ended December 31, 2011 and 2010, amounts recognized for loan servicing fees amounted to $118,000 and $119,000, respectively, which are included in other non-interest income in the consolidated statements of income. The unpaid principal balance of mortgages serviced for others was $56.6 million and $53.6 million at December 31, 2011 and June 30, 2011, respectively.

Deposits and Borrowed Funds. The following table sets forth the Company’s deposit accounts (excluding escrow deposits) for the periods indicated.

	At December 31,					At June 30,
	2011					2011
	Balance		Percent			Balance		Percent			Change			% Change
	(Dollars in Thousands)
Deposit type:
Demand deposits	$	59,337		13.90	%	$	51,300		12.29	%	$	8,037			15.67	%
Savings deposits		90,887		21.29			84,829		20.33			6,058			7.14
Money market		55,574		13.02			48,526		11.63			7,048			14.52
NOW accounts		40,409		9.46			39,062		9.36			1,347			3.45
Total transaction accounts		246,207		57.66			223,717		53.62			22,490			10.05
Certificates of deposit		180,780		42.34			193,538		46.38			(12,758	)		(6.59	)

Total deposits	$	426,987		100.00	%	$	417,255		100.00	%	$	9,732			2.33	%

Deposits increased $9.7 million, or 2.3%, to $427.0 million at December 31, 2011 from $417.3 million at June 30, 2011. The increase in deposits is due to the Company’s increased focus on obtaining core deposits.

Borrowings include advances from the FHLB, as well as securities sold under agreements to repurchase, and have decreased $7.0 million, or 12.8%, to $47.7 million at December 31, 2011 from $54.7 million at June 30, 2011. Repayments of advances from the FHLB were $6.3 million and repurchase agreements decreased $765,000.

Stockholders’ Equity. Stockholders’ equity decreased $7.2 million, or 7.7%, to $86.4 million at December 31, 2011 from $93.5 million at June 30, 2011. During the six months ended December 31, 2011, the Company repurchased 694,368 shares of Company stock for $8.6 million, at an average price of $12.43 per share pursuant to the Company’s third, fourth and fifth stock repurchase programs, which were previously announced in June 2010, December 2010, and November 2011, respectively. The Company’s third stock repurchase program was completed on August 26, 2011. The Company’s fourth stock repurchase program was completed on November 4, 2011. The Company’s fifth stock repurchase program was completed on December 21, 2011. In addition, the Company repurchased 1,281 shares of Company stock, at an average price of $13.10 per share, in the first quarter of fiscal 2012 in connection with the annual vesting of certain restricted stock grants issued pursuant to our 2008 Equity Incentive Plan. The Company repurchased these shares from the employee plan participant for settlement of tax withholding obligations. Our ratio of capital to total assets decreased to 15.2% at December 31, 2011 compared to 16.3% at June 30, 2011.

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

Net Income. The Company had net income for the three months ended December 31, 2011 of $694,000, or $0.12 per fully diluted share, as compared to $491,000, or $0.08 per fully diluted share, for the same period in 2010. The Company had an increase in net interest income of $197,000 for the three months ended December 31, 2011 compared to the three months ended December 31, 2010. There was a decrease in interest and dividend income, including fees, of $362,000, or 5.6%, for the three months ended December 31, 2011 compared to the three months ended December 31, 2010. This decrease in interest income was mainly due to a decrease in loan income of $257,000 and a decrease in debt securities income of $100,000. For the three month period ended December 31, 2011, interest expense decreased by $559,000, or 28.7%, compared to the three month period ended December 31, 2010. This decrease in interest expense included a decrease in deposit interest expense of $383,000 and a decrease in borrowing interest expense of $176,000, which was due to a decrease in the rates on deposits and a decrease in the average balance of borrowed funds from the Company paying off some higher rate borrowings and restructuring of debt in the first quarter of 2012. The provision for loan losses decreased $200,000 for the three month period ended December 31, 2011 compared to the same period in 2010. The decrease in the provision for loan losses is due to decreases in delinquent loans, decreases in non-accrual loans, and some improvement in general economic conditions. The increase in non-interest expense of $82,000, or 1.9%, for the three months ended December 31, 2011 compared to the same period in 2010 was primarily due to increases in salaries and employee benefits, professional fees, and a writedown on other real estate owned. Our combined federal and state effective tax rate was 34.2% for the three months ended December 31, 2011 compared to 35.1% for the same period in 2010.

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 costs, and discounts and premiums that are amortized or accreted to interest income or expense. The Company 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 December 31,
	2011								2010
	Average Outstanding Balance			Interest		Yield /Rate (1)			Average Outstanding Balance			Interest		Yield /Rate (1)
	(Dollars in Thousands)
Interest-earning assets:
Loans (2)	$	400,179		$	5,418		5.42	%	$	399,610		$	5,675		5.68	%
Investment securities		112,177			686		2.45	%		109,507			784		2.86	%
Federal funds sold and other short-term investments		18,635			8		0.17	%		32,123			15		0.19	%
Total interest earning assets		530,991			6,112		4.60	%		541,240			6,474		4.78	%
Allowance for loan losses		(5,824	)							(6,374	)
Total interest earning assets less allowance for loan losses		525,167								534,866
Non-interest earning assets		39,002								34,414
Total assets	$	564,169							$	569,280

Interest-bearing liabilities:
Savings deposits	$	90,157			64		0.28	%	$	81,195			93		0.46	%
Money market		54,121			54		0.40	%		46,462			65		0.56	%
NOW accounts		37,624			33		0.35	%		36,083			45		0.50	%
Certificates of deposit		181,445			895		1.97	%		202,522			1,226		2.42	%
Total deposits		363,347			1,046		1.15	%		366,262			1,429		1.56	%
Borrowed funds		48,711			345		2.83	%		59,444			521		3.51	%
Total interest-bearing liabilities		412,058			1,391		1.35	%		425,706			1,950		1.83	%
Demand deposits		56,515								45,860
Non-interest bearing liabilities		5,699								4,430
Total liabilities		474,272								475,996
Equity		89,897								93,284
Total Liabilities and equity	$	564,169							$	569,280


Net interest income				$	4,721							$	4,524
Net interest rate spread (3)							3.25	%							2.95	%
Net interest-earning assets (4)	$	118,933							$	115,534

Net interest margin (5)							3.56	%							3.34	%
Average interest-earning assets to interest-bearing liabilities							128.86	%							127.14	%


(1) Yields and rates for the three months ended December 31, 2011 and 2010 are annualized.
(2) Includes loans held for sale.
(3) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities for the period indicated.
(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 Company’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 December 31, 2011 vs. 2010
	Increase (Decrease) Due to						Total Increase (Decrease)
	Volume			Rate
	(Dollars in Thousands)
Interest income:
Loans (1)	$	8		$	(265	)	$	(257	)
Investment securities		19			(117	)		(98	)
Federal funds sold and other short-term investments		(6	)		(1	)		(7	)
Total interest income		21			(383	)		(362	)

Interest expense:
Savings deposits		9			(38	)		(29	)
Money market		10			(21	)		(11	)
NOW accounts		2			(14	)		(12	)
Certificates of deposits		(119	)		(212	)		(331	)
Total deposits		(98	)		(286	)		(384	)
Borrowed funds		(84	)		(91	)		(175	)
Total interest expense		(183	)		(376	)		(559	)
Change in net interest income	$	203		$	(6	)	$	197

(1) Includes loans held for sale.

Net Interest Income. Net interest income for the three months ended December 31, 2011 was $4.7 million, an increase of $197,000 or 4.4%, over the same period of 2010. This was primarily due to a decrease in interest expense of $559,000 for the three months ended December 31, 2011 over the same period in 2010. This decrease was due to a decrease of $13.6 million in the average balance of interest-bearing liabilities as well as a decrease of 48 basis points in the average cost of funds for the three months ended December 31, 2011 over the same period in 2010. A partial offset to this was a decrease in the average yield on interest earning assets of 18 basis points to 4.60% for the three months ended December 31, 2011 over the same period in 2010, as well as a decrease of $10.2 million in the average balance of interest earning assets for the three months ended December 31, 2011 over the same period in 2010.

Interest Income. Interest income for the three months ended December 31, 2011 decreased $362,000, or 5.6%, to $6.1 million over the same period of 2010. For the three months ended December 31, 2011, average outstanding loans increased $569,000 , or 0.1%, from the average for the three month period ended December 31, 2010. Due to interest rate risk, the Company has decided to sell some of its current originations of fixed rate mortgages, which is contributing to the decrease in interest income. The average yield on interest earning assets decreased 18 basis points to 4.60% for the three months ended December 31, 2011, compared to 4.78% for the same period in 2010.

Interest Expense. Interest expense decreased $559,000, or 28.7%, to $1.4 million for the three months ended December 31, 2011. This decrease was primarily due to a decrease in rates of deposits and a decrease in the average balance of certificates of deposits. The average cost of funds decreased to 1.35% for the three months ended December 31, 2011, a decrease of 48 basis points from a cost of funds of 1.83% for the same period in 2010. The decrease in the cost of funds is partially due to the result of the current low interest rate environment as well as an increase in transaction and money market deposit accounts. In July 2011, the Company restructured $23.3 million of Federal Home Loan Bank of Boston borrowings. After the restructuring, the weighted average cost of these borrowings was reduced by 1.31% to 3.03%. The decrease in the cost of funds is also due to the restructuring of these borrowings with the lower rates in effect for the quarter and an overall decrease in long-term debt.

Provision for Loan Losses. The Company’s provision for loan loss expense was $100,000 for the three months ended December 31, 2011 compared to $300,000 for the three months ended December 31, 2010. As of December 31, 2011, the Company’s total allowance for loan losses of $5.6 million increased from $5.5 million at June 30, 2011. The allowance for loan losses decreased to 1.39% of total loans as of December 31, 2011 compared to 1.53% of total loans as of December 31, 2010.

Non-interest Income. Total non-interest income totaled $762,000 for the three months ended December 31, 2011, a decrease of $18,000 from the same period a year ago. There was a decrease of $33,000 in customer service fees for the three months ended December 31, 2011 compared to the same period a year ago, which was due to a $44,000 decrease in ATM / debit card fees. A partial offset to this decrease was an increase of $27,000 in other non-interest income, which was primarily due to a $28,000 increase in OREO rental income. The Company is currently leasing one OREO property to a third party and has a purchase and sale with that third party to be exercised in approximately eighteen months.

Non-interest Expense. Non-interest expense increased $82,000, or 1.9%, to $4.3 million for the three months ended December 31, 2011 compared to the same period for 2010. This increase was largely due to an increase in salaries and employee benefits of $75,000, an increase in other general and administrative expenses of $59,000 and an increase in net loss on OREO of $50,000. These increases were partially offset by a decrease in FDIC insurance and assessment expense of $83,000 due to changes in the FDIC assessment formula.

Income Taxes. Income tax expense increased $94,000 for the three months ended December 31, 2011 compared to the same period for 2010. Our combined federal and state effective tax rate was 34.2% for the three months ended December 31, 2011 compared to 35.1% for the three months ended December 31, 2010.

Comparison of Operating Results for the Six Months Ended December 31, 2011 and December 31, 2010

Net Income. The Company had net income for the six months ended December 31, 2011 of $1.2 million, or $0.20 per fully diluted share, as compared to $1.0 million, or $0.16 per fully diluted share, for the same period in 2010. The Company had an increase in net interest income of $355,000 for the six months ended December 31, 2011 compared to the six months ended December 31, 2010. There was a decrease in interest and dividend income, including fees, of $789,000, or 6.0%, for the six months ended December 31, 2011 compared to the six months ended December 31, 2010. This decrease in interest income was mainly due to a decrease in loan income of $544,000 and a decrease in debt securities income of $236,000. For the six month period ended December 31, 2011, interest expense decreased by $1.1 million, or 27.8%, compared to the six month period ended December 31, 2010. This decrease in interest expense included a decrease in deposit interest expense of $810,000 and a decrease in borrowing interest expense of $334,000, which was due to a decrease in the rates on deposits and a decrease in the average balance of borrowed funds from the Company paying off some higher rate borrowings and restructuring of debt in the first quarter of 2012. The provision for loan losses decreased $200,000 for the six month period ended December 31, 2011 compared to the same period in 2010. The decrease in the provision for loan losses is due to decreases in delinquent loans, decreases in non-accrual loans, and some improvement in general economic conditions. The increase in non-interest expense of $255,000, or 3.0%, for the six months ended December 31, 2011 compared to the same period in 2010 was mainly due to increases in salaries and employee benefits, professional fees, and a writedown on other real estate owned. Our combined federal and state effective tax rate was 34.2% for the six months ended December 31, 2011 compared to 35.4% for the same period in 2010.

Analysis of Net Interest Income

	Six Months Ended December 31,
	2011								2010
	Average Outstanding Balance			Interest		Yield /Rate (1)			Average Outstanding Balance			Interest		Yield /Rate (1)
	(Dollars in Thousands)
Interest-earning assets:
Loans (2)	$	400,810		$	10,944		5.46	%	$	407,295		$	11,488		5.64	%
Investment securities		113,742			1,398		2.46	%		111,142			1,629		2.93	%
Federal funds sold and other short-term investments		17,912			12		0.13	%		28,997			26		0.18	%
Total interest earning assets		532,464			12,354		4.64	%		547,434			13,143		4.80	%
Allowance for loan losses		(5,678	)							(6,398	)
Total interest earning assets less allowance for loan losses		526,786								541,036
Non-interest earning assets		39,101								33,593
Total assets	$	565,887							$	574,629

Interest-bearing liabilities:
Savings deposits	$	88,660			132		0.30	%	$	81,630			208		0.51	%
Money market		51,959			107		0.41	%		44,535			134		0.60	%
NOW accounts		37,400			69		0.37	%		35,592			94		0.53	%
Certificates of deposit		185,035			1,903		2.06	%		207,352			2,585		2.49	%
Total deposits		363,054			2,211		1.22	%		369,109			3,021		1.64	%
Borrowed funds		50,958			764		3.00	%		61,930			1,098		3.55	%
Total interest-bearing liabilities		414,012			2,975		1.44	%		431,039			4,119		1.91	%
Demand deposits		54,397								45,377
Non-interest bearing liabilities		5,673								4,149
Total liabilities		474,082								480,565
Equity		91,805								94,064
Total Liabilities and equity	$	565,887							$	574,629


Net interest income				$	9,379							$	9,024
Net interest rate spread (3)							3.20	%							2.89	%
Net interest-earning assets (4)	$	118,452							$	116,395

Net interest margin (5)							3.52	%							3.30	%
Average interest-earning assets to interest-bearing liabilities							128.61	%							127.00	%


(1) Yields and rates for the six months ended December 31, 2011 and 2010 are annualized.
(2) Includes loans held for sale.
(3) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities for the period indicated.
(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.

	Six Months Ended December 31, 2011 vs. 2010
	Increase (Decrease) Due to						Total Increase (Decrease)
	Volume			Rate
	(Dollars in Thousands)
Interest income:
Loans (1)	$	(181	)	$	(363	)	$	(544	)
Investment securities		37			(268	)		(231	)
Federal funds sold and other short-term investments		(8	)		(6	)		(14	)
Total interest income		(152	)		(637	)		(789	)

Interest expense:
Savings deposits		17			(93	)		(76	)
Money market		20			(47	)		(27	)
NOW accounts		5			(30	)		(25	)
Certificates of deposits		(260	)		(422	)		(682	)
Total deposits		(219	)		(591	)		(810	)
Borrowed funds		(178	)		(156	)		(334	)
Total interest expense		(397	)		(747	)		(1,144	)
Change in net interest income	$	245		$	110		$	355

(1) Includes loans held for sale.

Net Interest Income. Net interest income for the six months ended December 31, 2011 was $9.4 million, an increase of $355,000 or 3.9%, over the same period of 2010. This was primarily due to a decrease in interest expense of $1.1 million for the six months ended December 31, 2011 over the same period in 2010. This decrease was due to a decrease of $17.0 million in the average balance of interest-bearing liabilities as well as a decrease of 47 basis points in the average cost of funds for the six months ended December 31, 2011 over the same period in 2010. A partial offset to this was a decrease in the average yield on interest earning assets of 16 basis points to 4.64% for the six months ended December 31, 2011 over the same period in 2010, as well as a decrease of $15.0 million in the average balance of interest earning assets for the six months ended December 31, 2011 over the same period in 2010.

Interest Income. Interest income for the six months ended December 31, 2011 decreased $789,000, or 6.0%, to $12.4 million over the same period of 2010. For the six months ended December 31, 2011, average outstanding loans decreased $6.5 million, or 1.6%, from the average for the six month period ended December 31, 2010. Due to interest rate risk, the Company has decided to sell some of its current originations of fixed rate mortgages, which is contributing to the decrease in average outstanding loans as well as the decrease in interest income. The average yield on interest earning assets decreased 16 basis points to 4.64% for the six months ended December 31, 2011, compared to 4.80% for the same period in 2010.

Interest Expense. Interest expense decreased $1.1 million, or 27.8%, to $3.0 million for the six months ended December 31, 2011. This decrease was primarily due to a decrease in rates of deposits and a decrease in the average balance of certificates of deposits. The average cost of funds decreased to 1.44% for the six months ended December 31, 2011, a decrease of 47 basis points from a cost of funds of 1.91% for the same period in 2010. The decrease in the cost of funds is partially due to the result of the current low interest rate environment as well as an increase in transaction and money market deposit accounts away from higher paying certificates of deposit. In July 2011, the Company restructured $23.3 million of Federal Home Loan Bank of Boston borrowings. After the restructuring, the weighted average cost of these borrowings was reduced by 1.31% to 3.03%. The decrease in the cost of funds is also due to the restructuring of these borrowings with the lower rates in effect for the six months and an overall decrease in long-term debt.

Provision for Loan Losses. The Company’s provision for loan loss expense was $400,000 for the six months ended December 31, 2011 compared to $600,000 for the six months ended December 31, 2010. As of December 31, 2011, the Company’s total allowance for loan losses of $5.6 million increased from $5.5 million at June 30, 2011. The allowance for loan losses decreased to 1.39% of total loans as of December 31, 2011 compared to 1.53% of total loans as of December 31, 2010.

Non-interest Income. Total non-interest income totaled $1.6 million for the six months ended December 31, 2011, a decrease of $33,000 from the same period a year ago. There was a decrease of $84,000 in the gain of sales of loans, net for the six months ended December 31, 2011 compared to the same period a year ago. A partial offset to this decrease was an increase of $80,000 in other non-interest income, which was primarily due to a $24,000 increase in excess servicing fees and a $53,000 increase in OREO rental income. The Company is currently leasing one OREO property to a third party and has a purchase and sale with that third party to be exercised in approximately eighteen months.

Non-interest Expense. Non-interest expense increased $255,000, or 3.0%, to $8.7 million for the six months ended December 31, 2011 compared to the same period for 2010. This increase was largely due to an increase in salaries and employee benefits of $179,000 and an increase in other general and administrative expenses of $130,000. These increases were partially offset by a decrease in FDIC insurance and assessment expense of $181,000 due to changes in the FDIC assessment formula.

Income Taxes. Income tax expense increased $72,000 for the six months ended December 31, 2011 compared to the same period for 2010. Our combined federal and state effective tax rate was 34.2% for the six months ended December 31, 2011 compared to 35.4% for the six months ended December 31, 2010.

Minimum Regulatory Capital Requirements. As of December 31, 2011, the most recent notification from the Federal Deposit Insurance Corporation categorized Hampden 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 has changed Hampden Bank’s category. The Company’s and Bank’s capital amounts and ratios (unaudited) as of December 31, 2011 and June 30, 2011 are presented in the table below.

											Minimum
											To Be Well
						Minimum					Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
As of December 31, 2011:

Total capital (to risk weighted assets):
Consolidated	$	89,754		22.3	%	$	32,185		8.0	%		N/A		N/A
Bank		80,148		20.1			31,961		8.0		$	39,951		10.0	%

Tier 1 capital (to risk weighted assets):
Consolidated		84,716		21.1		$	16,093		4.0			N/A		N/A
Bank		75,145		18.8			15,980		4.0			23,971		6.0

Tier 1 capital (to average assets):
Consolidated		84,716		15.0		$	22,548		4.0			N/A		N/A
Bank		75,145		13.5			22,305		4.0			27,882		5.0

As of June 30, 2011:

Total capital (to risk weighted assets):
Consolidated	$	95,399		23.9	%	$	31,978		8.0	%		N/A		N/A
Bank		76,854		19.4			31,673		8.0		$	39,591		10.0	%

Tier 1 capital (to risk weighted assets):
Consolidated		90,396		22.6			15,989		4.0			N/A		N/A
Bank		71,898		18.2			15,836		4.0			23,754		6.0

Tier 1 capital (to average assets):
Consolidated		90,396		15.8			22,911		4.0			N/A		N/A
Bank		71,898		12.9			22,350		4.0			27,938		5.0

Liquidity Risk Management. Liquidity risk, or the risk to earnings and capital arising from an organization’s inability to meet its obligations without incurring unacceptable losses, is managed by the Company’s Chief Financial Officer, who monitors on a daily basis the adequacy of the Company’s liquidity position. Oversight is provided by the Asset/Liability Committee, which reviews the Company’s liquidity on a monthly basis, and by the Board of Directors of the Company, which reviews the adequacy of our liquidity resources on a quarterly basis.

The Company’s primary sources of funds are from deposits, amortization of loans, prepayments and the maturity of mortgage-backed securities and other investments, and other funds provided by operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing loans and investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. We maintain excess funds in cash and short-term interest-bearing assets that provide additional liquidity. At December 31, 2011, cash and cash equivalents totaled $24.9 million, or 4.4% of total assets.

The Company also relies on outside borrowings from the FHLB as an additional funding source. The Company uses FHLB borrowings to fund growth in the balance sheet and to assist in the management of its interest rate risk by match funding longer term fixed rate loans.

The Company uses it’s liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and borrowings, to fund other deposit withdrawals, to invest in other interest-earning assets and to meet operating expenses. The Company anticipates that it will continue to have sufficient funds and alternative funding sources to meet its commitments.

Off-Balance Sheet Arrangements. In the normal course of business, there are outstanding commitments which are not reflected in the accompanying consolidated balance sheets. 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 Company’s loan commitments and other contingencies outstanding as of December 31, 2011 and June 30, 2011.

	December 31, 2011		June 30, 2011
	(Dollars In Thousands)
Commitments to grant loans (1)	$	21,314	$	10,198
Commercial loan lines-of-credit (2)		24,096		23,214
Unused portions of home equity lines-of-credit (3)		32,408		31,921
Unused portion of construction loans (4)		2,734		2,046
Unused portion of mortgage loans		82		172
Unused portion of personal lines-of-credit (5)		1,909		1,940
Standby letters of credit (6)		1,056		2,620
Total loan commitments	$	83,599	$	72,111

(1) Commitments for loans are generally extended to customers for up to 60 days after which they expire.
(2) The majority of C&I loans are written on a demand basis.
(3) Unused portions of home equity lines of credit are available to the borrower for up to 20 years.
(4) Unused portions of construction loans are available to the borrower for up to eighteen months for development loans and up to one year for other construction loans.
(5) Unused portions of personal lines-of-credit are available to customers in "good standing" indefinitely.
(6) Standby letters of credit are generally available for one year or less.

Item 3: Quantitative and Qualitative Disclosures About Market Risks

There have been no material changes in the Company’s market risk during the six months ended December 31, 2011. See the discussion and analysis of quantitative and qualitative disclosures about market risk provided in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2011 for a general discussion of the qualitative aspects of market risk and discussion of the simulation model used by the Company to measure its interest rate risk.

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 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 Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective and designed to provide reasonable assurance that the information required to be disclosed by us is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply this judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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 six months ended December 31, 2011. See the discussion and analysis of risk factors, in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2011.

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

(a)	Unregistered Sales of Equity Securities – Not applicable

(b)	Use of Proceeds – Not applicable

(c)

Repurchase of Our Equity Securities – In June 2010, the Company announced that its Board of Directors authorized a third stock repurchase for the purchase of up to 357,573 shares of the Company’s common stock or approximately 5% of its outstanding common stock. The Company repurchased 33,943 shares of Company stock for $427,000, at an average price of $12.57 per share, in the quarter ended September 30, 2011 pursuant to the Company’s third stock repurchase program. The Company’s third stock repurchase program was completed on August 26, 2011. In December 2010, the Company announced that its Board of Directors authorized a fourth stock repurchase program for the purchase of up to 339,170 shares of the Company’s common stock or approximately 5% of its outstanding common stock. The Company repurchased 339,170 shares of Company stock for $4.4 million, at an average price of $13.01 per share, in the six months ended December 31, 2011 pursuant to the Company’s fourth stock repurchase program. The Company’s fourth stock repurchase program was completed on November 4, 2011.In November 2011, the Company announced that its Board of Directors authorized a fifth stock repurchase program for the purchase of up to 321,255 shares of the Company’s common stock or approximately 5% of its outstanding common stock. The Company repurchased 321,255 shares of Company stock for $3.8 million, at an average price of $11.81 per share, in the quarter ended December 31, 2011 pursuant to the Company’s fifth stock repurchase program. The Company’s fifth stock repurchase program was completed on December 21, 2011. In addition, the Company repurchased 1,281 shares of Company stock, at an average price of $13.10 per share, in the first quarter of fiscal 2012 in connection with the annual vesting of certain restricted stock grants issued pursuant to our 2008 Equity Incentive Plan. The Company repurchased these shares from the employee plan participant for settlement of tax withholding obligations.

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly announced Plans or Programs		(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 1, 2011 - October 31, 2011		232,400	$	13.00		232,400		3,231
November 1, 2011 - November 30, 2011		3,231	$	13.04		3,231		321,255
December 1, 2011 - December 31, 2011		321,255	$	11.81		321,255		-
		556,886	$	12.31		556,886

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

3.1		Certificate of Incorporation of Hampden Bancorp, Inc.(1)

3.2		Amended and Restated Bylaws of Hampden Bancorp, Inc.(2)

3.3		Text of Amendment #1 to Amended and Restated Bylaws of Hampden Bancorp, Inc.(3)

3.4		Text of Amendment #2 to Amended and Restated Bylaws of Hampden Bancorp, Inc.(12)

4.1		Stock Certificate of Hampden Bancorp, Inc.(1)

10.1		Hampden Bank Employee Stock Ownership Plan and Trust Agreement(4)

10.2.1		Hampden Bank Employee Stock Ownership Plan Loan Agreement(5)

10.2.2		Pledge Agreement(5)

10.2.3		Promissory Note(5)

10.3		Hampden Bank 401(k) Profit Sharing Plan and Trust(1)

10.4		Hampden Bank SBERA Pension Plan(1)

10.5.1		Employment Agreement between Hampden Bank and Thomas R. Burton(5)

10.5.2		Employment Agreement between Hampden Bank and Glenn S. Welch(5)

10.6.1		Form of 2010 Hampden Bank Change in Control Agreement(11)

10.6.2		Form of 2011 Hampden Bank Change in Control Agreement(13)

10.7		Executive Salary Continuation Agreement between Hampden Bank and Thomas R. Burton(1)

10.8		Form of Executive Salary Continuation Agreement between Hampden Bank and certain specific officers(1)

10.9		Form of Director Supplemental Retirement Agreements between Hampden Bank and certain directors(1)

10.10.1		Executive Split Dollar Life Insurance Agreement between Hampden Bank and Thomas R. Burton(1)

10.10.2		Executive Split Dollar Life Insurance Agreement between Hampden Bank and Robert S. Michel(1)

10.11		Amended and Restated Executive Salary Continuation Agreement between Hampden Bank and Thomas R. Burton(7)

10.12		2008 Equity Incentive Plan(8)

10.13		Form of Restricted Stock Agreement(9)

10.14		Form of Stock Option Grant Notice and Stock Option Agreement(9)

21.0		List of Subsidiaries(10)

31.1		Certification pursuant to Rule 13a-14(a)/15d-14(a) of Thomas R. Burton

31.2		Certification pursuant to Rule 13a-14(a)/15d-14(a) of Robert A. Massey

101*		The following materials from Hampden Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Unaudited Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements, tagged as blocks of text.

(1)	Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-137359), as amended, initially filed with the SEC on September 15, 2006.
(2)	Incorporated by reference to the Company's Current Report on Form 8-K (File No. 001-33144) as filed with the SEC on August 3, 2007.
(3)	Incorporated by reference to the Company’s Current Report on form 8-K (File No. 001-33144), as filed with the SEC on September 14, 2009.
(4)	Incorporated by reference to the Company's Quarterly Report on Form 10-Q (File No. 001-33144) for the quarter ended September 30, 2006.
(5)	Incorporated by reference to the Company's Current Report on Form 8-K (File No. 001-33144) as filed with the SEC on January 19, 2007.
(6)	Incorporated by reference to the Company’s Current Report on Form 8-K (File No. 001-33144), as filed with the SEC on November 9, 2009.
(7)	Incorporated by reference to the Company’s Annual Report on Form 10-K (File No. 001-33144) for the year ended June 20, 2007.
(8)	Incorporated by reference to the Company’s Proxy Statement on Form DEF 14A (File No. 001-33144), as filed with the SEC on December 27, 2007.
(9)	Incorporated by reference to the Company's Quarterly Report on Form 10-Q (File No. 001-33144) for the quarter ended September 30, 2008.
(10)	Incorporated by reference to the Company’s Annual Report on Form 10-K (File No. 001-33144) for the year ended June 30, 2010.
(11)	Incorporated by reference to the Company's Current Report on Form 8-K (File No. 001-33144) as filed with the SEC on November 4, 2010.
(12)	Incorporated by reference to the Company's Current Report on Form 8-K (File No. 001-33144) as filed with the SEC on June 9, 2011.
(13)	Incorporated by reference to the Company's Current Report on Form 8-K (File No. 001-33144) as filed with the SEC on November 3, 2011.

*Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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.

	HAMPDEN BANCORP, INC.

Date: February 9, 2012	/s/ Thomas R. Burton
	Thomas R. Burton
	Chief Executive Officer

Date: February 9, 2012	/s/ Robert A. Massey
	Robert A. Massey
	Chief Financial Officer, Senior Vice President and Treasurer

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Hampden Bancorp Inactive 10-Q2012 Q2 Quarterly report

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