Overview

Our principal business is to acquire deposits from individuals and businesses in the communities surrounding our offices and to use these deposits to fund loans. We focus on providing our products and services to two segments of customers:
individuals and businesses.

Income. Our primary source of income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income. A secondary source of income is non-interest income, which includes revenue that we receive from providing products and services. The majority of our non-interest income generally comes from loan servicing fees and service charges on deposit accounts, as well as gains on sales of loans.

Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a regular basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

Expenses. The non-interest expenses we incur in operating our business consist of expenses for salaries and employee benefits, occupancy and equipment, data processing, marketing and advertising, professional services and various other miscellaneous expenses. Our largest non-interest expense is salaries and employee benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for health insurance, retirement plans and other employee benefits. We will recognize additional annual employee compensation expenses stemming from the adoption of new equity benefit plans. We cannot determine the actual amount of these new stock-related compensation and benefit expenses at this time because applicable accounting practices require that they be based on the fair market value of the shares of common stock at specific points in the future.

As a result of the mutual holding company reorganization and minority stock offering, we will incur additional non-interest expenses as a result of operating as a public company. These additional expenses will consist primarily of legal and accounting fees and expenses of stockholder communications and meetings.

Forward-Looking Statements

Certain statements herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. 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." These forward-looking 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 forward-looking statements as a result of any number of factors. These factors include, but are not limited to, risks related to the Company's continued ability to originate quality loans, fluctuation in interest rates, real estate conditions in the Company's lending areas, changes in the securities or financial markets, changes in loan delinquency and charge-off rates, general and local economic conditions, the Company's continued ability to attract and retain deposits, the Company's ability to control costs, new accounting pronouncements, and changing regulatory requirements. For more information about these factors, please see our recent Annual Report on Form 10-K. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. The Company does not undertake and specifically disclaims any obligation to publicly release updates or revisions to any such forward-looking statements as a result of 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 or on income, to be critical accounting policies. We consider the following to be our critical accounting policies.

Allowance for loan losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based on 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 the 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 allowance consists of specific and general components. The specific component relates to loans that are classified as impaired, whereby 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 relates to pools of non-impaired loans and is based on historical loss experience adjusted for qualitative factors.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Management considers factors including payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due when determining impairment. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. 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, the loan's obtainable market price, 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, we do not separately identify individual consumer and residential loans for impairment disclosures. At September 30, 2009 and June 30, 2009, the Company analyzed specific watchlist loans and ascertained that no impairment recognition was warranted, as defined by FASB standards.

Management believes that, based on information currently available, the allowance for loan losses is sufficient to cover losses inherent in our loan portfolio at this time. However, no assurances can be given that the level of the allowance will be sufficient to cover loan losses or that future adjustments to the allowance will not be necessary if economic and/or other conditions differ substantially from the economic and other conditions considered by management in evaluating the adequacy of the current level of the allowance.

Actual loan losses may be significantly more than the allowance we have established, which could have a material negative effect on our financial results.

Securities. We classify our investments as available for sale. These assets are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income or loss. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of individual equity securities that are deemed to be other than temporary are reflected in earnings when identified. For individual debt securities where the Bank does not intend to sell the security and it is not more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, the other-than- temporary decline in the fair value of the debt security related to
1) credit loss is recognized in earnings and 2) other factors is recognized in other comprehensive income or loss. Credit loss is deemed to exist if the present value of expected future cash flows using the effective rate at date of acquisition is less than the amortized cost basis of the debt security. For individual debt securities where the Bank intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the security's cost basis and its fair value at the balance sheet date. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized over the contractual life of the loans as an adjustment of the related loan yield using the interest method.

Loans past due 30 days or more are considered delinquent. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. Consumer loans are typically charged off when they are no more than 180 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. Cash payments on these loans are applied to principal balances until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Comparison of Financial Condition at September 30, 2009 and June 30, 2009

Total Assets. Total assets increased by $2.1 million, or 2.9%, from $74.4 million at June 30, 2009 to $76.5 million at September 30, 2009. This increase was largely the result of an increase of $2.2 million in the loan portfolio as well as an increase of $1.0 million in interest-earning deposits, partly offset by a reduction of $600,000 in certificate of deposit investments.

Cash and Cash Equivalents. Cash and correspondent bank balances increased by $1.0 million, or 40.7%, from $2.3 million at June 30, 2009 to $3.3 million at September 30, 2009. This increase was primarily the result of the maturities of certificate of deposit investments.

Certificates of Deposit. Certificate of deposit balances at other banks decreased by $600,000, or 13.2%, from $4.5 million at June 30, 2009 to $3.9 million at September 30, 2009. The Company had previously utilized low cost FHLB advances as a short-term strategy to invest in certificates of deposit, and those deposits are maturing.

Securities Available for Sale. Securities available for sale totaled $1.1 million at September 30, 2009, a decrease of $400,000, or 28.7%, from $1.5 million at June 30, 2009. This decrease was primarily the result of the sale of the CIT corporate bond.

Net Loans. Net loans increased $2.2 million, or 3.5%, from $62.2 million at June 30, 2009 to $64.4 million at September 30, 2009. The majority of growth has been in commercial real estate and commercial loans, which increased $800,000, or 6.3% and $1.0 million, or 40.6% respectively. The increases were primarily due to the market demand for commercial real estate and commercial loans. Residential mortgage loans increased $68,000, or 0.2%, home equity loans increased $178,000, or 1.6% and consumer installment loans increased $128,000, or 17.9%, from June 30, 2009 to September 30, 2009.

Deposits and Borrowed Funds. Deposits increased $2.0 million, or 4.1%, from $48.1 million at June 30, 2009 to $50.1 million at September 30, 2009. Demand accounts decreased $616,000, or 16.5%. NOW checking accounts increased $165,000, or 7.0%, and certificates of deposit increased $348,000, or 1.2%. Money market accounts increased $1.8 million, or 17.4% and savings accounts increased $260,000 or 8.5%. An increase in money market accounts resulted from the transfer of some maturing customer certificates of deposit and some large commercial checking account demand deposits being transferred and swept to money market accounts.

Total borrowings from the Federal Home Loan Bank of Boston ("FHLB") increased $238,000, or 1.2%, from $20.2 million at June 30, 2009 to $20.4 million at September 30, 2009.

Total Stockholders' Equity. Total equity decreased $10,000, or 0.2%, during the quarter ended September 30, 2009, primarily as a result of the net loss of $62,000 partly offset by the increase in unrealized gains on investment securities, net of tax, of $47,000.

Comparison of Operating Results for the Three Months Ended September 30, 2009 and September 30, 2008

Net Income. Net income decreased $69,000 to a net loss of $62,000 for the three months ended September 30, 2009 compared to net income of $7,000 for the three months ended September 30, 2008. The decrease was primarily the result of the $159,000 loss on sale on the CIT corporate bond, partly offset by an increase in net interest income of $63,000.

Net Interest Income. Net interest income increased $63,000, or 12.8%, from $490,000 for the three months ended September 30, 2008 to $553,000 for the three months ended September 30, 2009. The increase was primarily due to an increase of $2.0 million in net average interest earning assets.

Interest and Dividend Income. Interest income decreased $19,000, or 1.8%, from $1.03 million for the three months ended September 30, 2008 to $1.01 million for the three months ended September 30, 2009. This decrease was due principally to a decrease in yield, partly offset by a increase in the volume on interest-earning assets. Interest income decreased by $11,000 on loans and $8,000 on investment securities and other interest-earning deposits, including Federal Home Loan Bank stock. The average yield on the loan portfolio decreased from 6.78% for the three months ended September 30, 2008 to 6.08% for the three months ended September 30, 2009. The average yield on investments, including securities, FHLB stock and interest-bearing deposits decreased from 4.19% for the three months ended September 30, 2008 to 2.26% for the three months ended September 30, 2009.

Interest Expense. Interest expense decreased by $82,000, or 15.2%, to $459,000 for the three months ended September 30, 2009 from $540,000 for the three months ended September 30, 2008. The decrease was due to lower cost of funds. While average deposit balances increased, the average cost of these deposits decreased from 3.16% to 2.35%. Average borrowings from FHLB also increased, however, the average cost of the borrowings decreased from 5.07% to 3.68%.

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our 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). Changes due to the interaction between volume and rate were allocated pro rata between volume and rate.

                                                          Three Months Ended September 30, 2009
                                                                Compared to Three Months
                                                                Ended September 30, 2008
                                                                                              Net
                                                        Volume               Rate           change

Interest-earning assets:
Loans                                                $     95,000       $     (106,000 )   $ (11,000 )
Investment securities                                      (2,000 )             (3,000 )      (5,000 )
Federal Home Loan Bank stock                                2,000               (8,000 )      (6,000 )
Interest-earning deposits                                  19,000              (16,000 )       3,000
Total interest-earning assets                        $    114,000       $     (133,000 )   $ (19,000 )
Interest-bearing liabilities:
Savings deposits                                     $     (2,000 )     $        2,000     $       -
NOW accounts                                                1,000               (4,000 )      (3,000 )
Money market accounts                                      10,000              (31,000 )     (21,000 )
Certificates of deposit                                    (1,000 )            (57,000 )     (58,000 )
Total deposits                                              8,000              (90,000 )     (82,000 )
Federal Home Loan Bank of Boston advances                  60,000              (60,000 )           -
Total interest-bearing liabilities                   $     68,000       $     (150,000 )   $ (82,000 )
Change in net interest income                        $     46,000       $      (17,000 )   $  63,000

Provision for Loan Losses. The Company's provision for loan losses decreased $1,000 from $19,000 for the three months ended September 30, 2008 to $18,000 for the three months ended September 30, 2009. There were no loans charged off during the three months ended September 30, 2009 and none during the comparable period of 2008. The allowance for loan losses of $403,000 at September 30, 2009 represented 0.62% of total loans, compared to an allowance of $385,000, representing 0.62% of total loans at June 30, 2009. Our analysis of the adequacy of the allowance considers economic conditions, historical losses and management's estimate of losses inherent in the portfolio. For further discussion of our current methodology, please refer to "Critical Accounting Policies-Allowance for Loan Losses."

Non-interest Income (Loss). Total non-interest income decreased $71,000, or 186.8%, to a loss of $109,000 for the three months ended September 30, 2009, compared to a loss of $38,000 for the three months ended September 30, 2008. This decrease was primarily the result of a loss on a sale of the CIT corporate bond.

Non-interest Expenses. Non-interest expenses increased $123,000, or 31.0%, to $518,000 for the three months ended September 30, 2009, compared to $396,000 for the three months ended September 30, 2008. The increase was primarily the result of increases in FDIC insurance premiums and special assessments of $49,000, company expenses of $4,000 in advertising, $4,000 in compliance fees, $9,000 in independent audit, $10,000 in internal audit fees, and $14,000 in legal fees. Salaries and benefits, computer charges and other operating expenses also increased commensurate with the growth of the Company.

Income Taxes. Income tax expense decreased by $61,000, to a tax benefit of $30,000 for the three months ended September 30, 2009, reflecting an effective tax rate of 32.4%, compared to a $31,000 expense for the three months ended September 30, 2008, reflecting an effective tax rate of 81.5%. The decrease in income taxes was due to pre-tax loss of $91,000 for the three months ended September 30, 2009 compared to pre-tax income of $38,000 for the comparable period of 2008, partly offset by capital losses in the three months ended September 30, 2008 for which the Company does not expect to receive a tax benefit.

Average Daily Balance Sheet. 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. We do not accrue interest on loans in 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.

                                                           For the Three Months Ended September 30
                                                     2009                                           2008
                                     Average                                        Average
                                   Outstanding                                    Outstanding
                                     Balance          Interest     Yield/Rate       Balance          Interest     Yield/Rate
                                                                   (Dollars in Thousands)

Interest-earning assets:
Loans                            $        63,527     $       965     6.08%      $        57,591     $       976     6.78%
Investment securities(1)                   1,195              14     4.64%                1,373              19     5.60%
Federal Home Loan Bank stock               1,183               -     0.00%                  901               7     3.03%
Interest-earning deposits                  5,879              33     2.24%                3,011              29     3.89%
Total interest-earning assets             71,784     $     1,012     5.64%               62,876     $     1,031     6.56%
Non-interest-earning assets                4,126                                          4,233
Total assets                     $        75,910                                $        67,109

Interest-bearing liabilities:
Savings deposits                 $         3,284     $         7     0.89%      $         4,102     $         7     0.68%
NOW accounts                               2,490               5     0.76%                2,084               7     1.41%
Money market accounts                     11,382              43     1.52%                9,674              64     2.66%
Certificates of deposit                   28,397             213     3.00%               28,459             272     3.81%
Total interest-bearing
deposits                                  45,553             268     2.35%               44,319             350     3.16%
FHLB advances                             20,738             191     3.68%               15,077             191     5.07%
Total interest-bearing
liabilities                      $        66,291     $       459     2.77%      $        59,396     $       541     3.64%

Non-interest-bearing
liabilities:
Demand deposits                  $         3,446                                $         2,570
Other non-interest-bearing
liabilities                                  209                                            309
Total liabilities                         69,946                                         62,275
Total capital                              5,964                                          4,834
Total liabilities and capital    $        75,910                                $        67,109

Net interest income                                  $       553                                    $       490
Net interest rate spread(2)                                          2.87%                                          2.92%
Net interest-earning assets(3)   $         5,493                                $         3,480
Net interest margin(4)                                               3.08%                                          3.12%
Average of interest-earning
assets to interest-bearing
liabilities                               108.29 %                                       105.86 %


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Liquidity

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, loan sales and maturities of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage and mortgage-backed security prepayments are greatly influenced by general interest rates, economic conditions and competition.

We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and federal funds sold. Our most liquid assets are cash and cash equivalents and interest-earning deposits. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2009, cash and cash equivalents totaled $3.3 million, including interest-earning deposits of $1.9 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $1.1 million at September 30, 2009, and certificates of deposit at other banks totaled $4.0 million. At September 30, 2009, we had $20.4 million of outstanding borrowings from FHLB, and the ability to borrow an additional $3.6 million. FHLB Boston has disclosed, in its Annual Report on Form 10-K for the period ended December 31, 2008, that over time, current market trends may have a negative impact on FHLB Boston's own liquidity. We are currently exploring additional sources of liquidity that could complement FHLB borrowings in the future.

At September 30, 2009, the Company had $3.1 million in loan commitments outstanding and $4.0 million in unused lines of credit.

Certificates of deposit due to mature within one year of September 30, 2009 . . .