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 March 31, 2009 and June 30, 2008 and our consolidated results of operations for the three and nine months ended March 31, 2009 and March 31, 2008 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 document.

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. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. 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.

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. We consider the following to be our critical accounting policies:

Securities

Critical Estimates. Debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and recorded at amortized cost. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income/loss. Declines in fair value of securities held to maturity and available for sale below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses.

In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Judgment and Uncertainties. Management's other-than-temporary impairment analysis contains uncertainties because the analysis requires management to use historical information as well as current economic data and financial condition of the issuer to make assumptions on the value of the issuer. This evaluation requires estimates that are susceptible to significant revision as more information becomes available.

Effect if Actual Results Differ from Assumptions. If actual results are not consistent with management's estimates or assumptions, we may be exposed to an other-than-temporary impairment loss that could be material and could have a negative impact on the company's earnings.

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 uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability 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.

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

Judgment and Uncertainties. Management determines the adequacy of the allowance for loan losses by analyzing and estimating losses inherent in the portfolio. The allowance for loan losses contains uncertainties because the calculation requires management to use historical information as well as current economic data to make judgments on the adequacy of the allowance. This evaluation requires estimates that are susceptible to significant revision as more information becomes available.

Effect if Actual Results Differ from Assumptions. Adverse changes in management's assessment of the factors used to determine the allowance for loan losses could lead to additional provisions. Actual loan losses could differ materially from management's estimates if actual losses and conditions differ significantly from the assumptions utilized, which could negatively affect the Company's financial condition and results of operations. These factors and conditions include general economic conditions within the Company's market, trends within industries, real estate and other collateral values, interest rates and the financial condition of the individual borrower.

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 asset 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, and adjustment to our deferred tax assets valuation allowance would be charged to income tax expense in the period such determination was made and could 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.

Comparison of Financial Condition (unaudited) at March 31, 2009 and June 30, 2008

Overview

Total Assets The Company's total assets increased by $33.9 million, or 6.2%, from $543.8 million at June 30, 2008 to $577.7 million at March 31, 2009. Net loans, including loans held for sale, increased $23.9 million, or 6.6%, to $384.7 million at March 31, 2009. A partial offset to this increase was a decrease in securities available for sale of $3.0 million, or 2.4%, to $120.9 million at March 31, 2009.

Investment Activities. Cash and cash equivalents increased by $11.7 million, or 34.9%, from $33.6 million at June 30, 2008 to $45.3 million at March 31, 2009. Securities available for sale decreased $3.0 million, or 2.4%, to $120.9 million at March 31, 2009. An increase in mortgage-backed securities was more than offset by declines in obligations issued by government-sponsored enterprises and common stock. The following table sets forth at the dates indicated information regarding the amortized cost and fair values of the Company's investment securities.

                                 At March 31,                   At June 30,
                                     2009                          2008
                          Amortized Cost   Fair Value   Amortized Cost   Fair Value
                                           (Dollars In Thousands)
   Securities available
   for sale:
   Government-sponsored
   enterprises                   $15,479      $15,663          $36,962      $37,196
   Mortgage-backed
   securities                    104,180      104,680           85,892       85,433
   Total debt securities         119,659      120,343          122,854      122,629

   Marketable equity
   securities:
   Common stock                      994          569            1,661        1,263
   Total marketable
   equity securities                 994          569            1,661        1,263
   Total securities
   available for sale            120,653      120,912          124,515      123,892
   Restricted equity
   securites:
   Federal Home Loan Bank
   of Boston stock                 5,233        5,233            5,233        5,233
   Total securities             $125,886     $126,145         $129,748     $129,125

Net Loans. Total net loans, excluding loans held for sale of $921,000, at March 31, 2009 were $383.8 million, an increase of $23.9 million, or 6.6%, from $359.9 million at June 30, 2008. 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 March 31, 2009     At June 30, 2008
                                         Amount     Percent    Amount     Percent
                                                 (Dollars In Thousands)
    Mortgage loans on real estate:
    Residential                          $125,172     32.49 %  $121,864     33.75 %
    Commercial                            123,534     32.07     117,636     32.58
    Home equity                            58,565     15.20      57,790     16.01
    Construction                           17,564      4.56      11,308      3.13
    Total mortgage loans on real estate   324,835     84.32     308,598     85.47

    Other loans:
    Commercial                             39,444     10.24      32,509      9.00
    Consumer                               20,939      5.44      19,967      5.53
    Total other loans                      60,383     15.68      52,476     14.53
    Total loans                           385,218    100.00 %   361,074    100.00 %
    Other items:
    Net deferred loan costs                 2,546                 2,257
    Allowance for loan losses             (4,005)               (3,453)

    Total loans, net                     $383,759              $359,878

Commercial loans increased $6.9 million, or 21.3%, to $39.4 million, and commercial real estate loans increased $5.9 million, or 5.0%, to $123.5 million. Construction loans increased $6.3 million, or 55.3%, to $17.6 million, and residential mortgage loans increased $3.3 million, or 2.7%, to $125.2 million. The Company sold $13.3 million of mortgage loans for the nine months ending to March 31, 2009 in order to reduce interest rate risk. Consumer loans increased by $972,000, or 4.9%, to $20.9 million. Home equity loans also increased $775,000, or 1.3%, to $58.6 million at March 31, 2009.

Non-Performing Assets. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated.

                                                     At March 31,   At June 30,
                                                         2009          2008
                                                       (Dollars in Thousands)
   Non-accrual loans:
   Residential mortgage                                    $2,721          $684
   Commercial mortgage                                        800           703
   Construction                                             1,129             -
   Commercial                                                 660         3,212
   Home equity, consumer and other                            489           226
   Total non-accrual loans                                  5,799         4,825

   Loans greater than 90 days delinquent and still accruing:
   Residential mortgage                                         -             -
   Commercial mortgage                                          -             -
   Commercial                                                   -             -
   Home equity, consumer and other                              -             -
   Total loans 90 days delinquent and still accruing            -             -
   Total non-performing loans                               5,799         4,825
   Other real estate owned                                    409             -
   Total non-performing assets                             $6,208        $4,825

   Ratios:
   Non-performing loans to total loans                      1.51%         1.34%
   Non-performing assets to total assets                    1.07%         0.89%

Loans are placed on non-accrual status either when reasonable doubt exists as to the full timely collection of interest and principal or when a loan becomes 90 days past due unless an evaluation clearly indicates that the loan is well-secured and in the process of collection. Non-accrual loans totaled $5.8 million, or 1.00% of total assets, at March 31, 2009 compared to $4.8 million, or 0.89% of total assets, at June 30, 2008. There was an increase in residential mortgage non-accrual loans of $2.0 million, an increase in construction non-accrual loans of $1.1 million, an increase in commercial real estate non-accrual loans of $97,000 and an increase in consumer non-accrual loans of $263,000 at March 31, 2009. These increases were partially offset by a decrease in commercial non-accrual loans of $2.6 million at March 31, 2009.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. 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 if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company generally does not separately identify individual consumer and residential loans for impairment disclosures. At March 31, 2009, impaired loans totaled $3.5 million with an established valuation allowance of $361,000.

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.

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. At March 31, 2009, the Company had five properties of $409,000 classified as OREO. Two of these properties were commercial real estate loans worth $409,000 and three properties were manufactured home loans worth $64,000. The manufactured home loans had a specific reserve as of March 31, 2009 for the full value of the properties of $64,000.

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

                                  Three Months Ended           Nine Months Ended
                                       March 31,                   March 31,
                                  2009           2008         2009            2008
                                (Dollars in Thousands)       (Dollars in Thousands)
 Balance at beginning of
 period                             $3,912        $2,972        $3,453         $2,810
 Charge-offs:
   Mortgage loans on real
 estate                                  -             -             -           (28)
   Other loans:
   Commercial business               (185)             -         (753)              -
   Consumer and other                 (23)           (4)          (71)           (10)
   Total other loans                 (208)           (4)         (824)           (10)
   Total charge-offs                 (208)           (4)         (824)           (38)
 Recoveries:
   Mortgage loans on real
 estate                                  -             -             -             26
   Other loans:
   Commercial business                   -             -           261              2
   Consumer and other                    1             -             3              2
   Total other loans                     1             -           264              4
   Total recoveries                      1             -           264             30
 Net (charge-offs) recoveries        (207)           (4)         (560)            (8)
 Provision for loan losses             300           108         1,112            274
 Balance at end of period           $4,005        $3,076        $4,005         $3,076

 Ratios:
 Net (charge-offs) recoveries
 to average loans outstanding      (0.05%)         0.00%       (0.15%)          0.00%
 Allowance for loan losses to
 non-performing loans at
   end of period                    69.06%        85.28%        69.06%         85.28%
 Allowance for loan losses to
 total loans at end of period        1.04%         0.89%         1.04%          0.89%

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

                                       At March 31,           At June 30,
                                           2009                  2008
                                     Balance    Percent    Balance    Percent
                                             (Dollars in Thousands)
         Deposit type:
         Demand deposits              $37,066      9.70 %   $36,619     11.05 %
         Savings deposits              68,011     17.80      66,492     20.06
         Money market                  42,315     11.07      22,138      6.68
         NOW accounts                  22,538      5.90      16,797      5.07
         Total transaction accounts   169,930     44.46     142,046     42.86
         Certificates of deposit      212,236     55.54     189,395     57.14

         Total deposits              $382,166    100.00 %  $331,441    100.00 %

Deposits increased $50.8 million, or 15.3%, to $382.2 million at March 31, 2009 from $331.4 million at June 30, 2008. There were increases in time deposits of $22.8 million, increases in money market accounts of $20.2 million, increases in NOW accounts of $5.7 million, increases in savings accounts of $1.5 million, and increases in demand accounts of $447,000 from June 30, 2008 to March 31, 2009.

Borrowings include advances from the Federal Home Loan Bank of Boston ("FHLB"), as well as securities sold under agreements to repurchase, and have decreased $17.5 million, or 16.1%, to $91.2 million at March 31, 2009 from $108.7 million at June 30, 2008. Repayment of advances from the FHLB accounted for a $15.4 million decrease and repurchase agreements accounted for a $2.1 million decrease.

Stockholders' Equity. The Company repurchased 397,493 shares of Company stock, at an average price of $10.03 per share, in the first and second quarters of fiscal 2009 pursuant to, and completion of, the Company's Stock Repurchase Program announced in May 2008. The Company repurchased 11,930 shares of Company stock, at an average price of $8.89 per share, in the third quarter of fiscal 2009 in connection with the vesting of the restricted stock grants as part of our 2008 Equity Incentive Plan. The Company purchased these shares from the employee plan participants for settlement of tax withholding obligations. The Company also repurchased 1,065 shares of Company stock, at an average price of $9.05 per share, in the third quarter of fiscal 2009 pursuant to the Company's second Stock Repurchase Program announced in January 2009. These repurchases contributed to an overall net decrease in stockholders' equity of $3.3 million, to $97.1 million at March 31, 2009, compared to $100.4 million at June 30, 2008. Our ratio of capital to total assets decreased to 16.8% as of March 31, 2009, from 18.5% as of June 30, 2008. On December 1, 2008, the Company announced that due to its strong capital position it did not apply for participation in the U.S. Treasury's Capital Purchase Program, which is part of the federal government's Troubled Asset Relief Program ("TARP").

Comparison of Operating Results (unaudited) for the Three Months Ended March 31, 2009 and March 31, 2008

Net Income. The Company had a net loss for the three months ended March 31, 2009 of $57,000, or $(0.01) per fully diluted share, as compared to a net profit of $305,000, or $0.04 per fully diluted share, for the same period in 2008. For the three month period ended March 31, 2009, net interest income increased by $353,000 compared to the three month period ended March 31, 2008. A partial offset to this increase was a net loss on the sales and write-downs of investment securities of $178,000, including a charge for other than temporary impairment of $184,000 on equity securities for the three month period ended March 31, 2009. There was also an increase in the provision for loan loss of $192,000 for the three months ended March 31, 2009 compared to the same period in 2008. The increase in the provision for loan losses is due to increases in loan delinquencies, increases in non-accrual loans, growth in the loan portfolio, and general economic conditions. There was an increase in non-interest expense for the three months ended March 31, 2009 of $546,000 compared to the same period in 2008. This increase was largely due to an increase in other general and administrative expenses of $192,000, which was mainly due to an increase in deposit insurance expense of $99,000, and an increase in salary and employee benefit expenses, including those related to the equity incentive plan, of $189,000. Income tax expense decreased $46,000 to $93,000 for the three months ended March 31, 2009.

Analysis of Net Interest Income.

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

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred fees, and discounts and premiums that are amortized or accreted to interest income or expense. The 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.

. . .