Overview

Income. Our primary source of income is net interest and dividend income. Net interest and dividend income is the difference between interest and dividend 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. Other sources of income include earnings from customer service fees (mostly from service charges on deposit accounts), bank-owned life insurance, fees from investment management services and gains on the sale of securities and loans.

Provision for Loan Losses. The allowance for loan losses is maintained at a level representing management's best estimate of inherent losses in the loan portfolio, based upon management's evaluation of the portfolio's collectibility. The allowance is established through the provision for loan losses, which is charged against income. Charge-offs, if any, are charged to the allowance. Subsequent recoveries, if any, are credited to the allowance. Allocation of the allowance may be made for specific loans or pools of loans, but the entire allowance is available for the entire loan portfolio.

Expenses. The noninterest expenses we incur in operating our business consist of salaries and employee benefits, occupancy and equipment, data processing, federal deposit insurance and other general and administrative expenses. Following the offering, our noninterest expenses are likely to increase as a result of operating as a public company. These additional expenses will consist primarily of legal and accounting fees, expenses of stockholder communications and meetings and stock exchange listing fees.

Salaries and employee benefits consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for health insurance, retirement plans and other employee benefits. Following the offering, 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 or related stock options at specific points in the future.

Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, rental expenses, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using a straight-line method based on the estimated useful lives of the related assets, which range from 3 to 50 years, or the expected lease terms, if shorter. Data processing expenses are the fees we pay to third parties for the use of their software and for processing customer information, deposits and loans.

Federal deposit insurance premiums are payments we make to the Federal Deposit Insurance Corporation for insurance of our deposit accounts.

Other expenses include expenses for professional services, advertising, office supplies, postage, telephone, insurance and other miscellaneous operating expenses.

Critical Accounting Policies

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be 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 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 general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: owner and non-owner occupied residential real estate, home equity, multi-family commercial real estate, construction, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors:
levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in the Bank's policies or methodology pertaining to the general component of the allowance for loan losses during fiscal year 2012.

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

Residential real estate: Residential real estate includes owner and non-owner occupied real estate loans and home equity loans. The Bank originates most of the loans in this segment according to FNMA/FHLMC underwriting guidelines. Most loans in this segment are collateralized by 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. There are some non-owner occupied residential real estate loans with multiple investment properties that are evaluated as commercial real estate property.

Commercial real estate: Commercial real estate includes multi-family and certain non-owner occupied residential real estate. Loans in this segment are primarily income-producing properties throughout Massachusetts. The underlying cash flows generated by the properties are 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 periodically obtains rent rolls and continually monitors the cash flows of these loans.

Construction loans: Loans in this segment primarily include speculative real estate development loans for which payment is derived from sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

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.

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

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction 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. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal 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. 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.

The Bank periodically may 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 troubled debt restructuring ("TDR"). All TDRs are classified as impaired.

An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

Deferred Tax Assets. 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. Management reviews deferred tax assets on a quarterly basis to identify any uncertainties pertaining to realization of such assets. In determining whether a valuation allowance is required against deferred tax assets, management assesses historical and forecasted operating results, including a review of eligible carryforward periods, tax planning opportunities and other relevant considerations. We believe the accounting estimate related to the valuation allowance is a critical 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. Should actual factors and conditions differ materially from those used by management, the actual realization of net deferred tax assets could differ materially from the amounts recorded in the financial statements. If we were not able to realize all or part of our deferred tax assets in the future, an adjustment to the related valuation allowance would be charged to income tax expense in the period such determination was made and could have a negative impact on earnings. In addition, if actual factors and conditions differ materially from those used by management, we could incur penalties and interest imposed by taxing authorities.

Balance Sheet Analysis

Total Assets. Total assets increased by $7.9 million, from $66.2 million at September 30, 2011 to $74.1 million at September 30, 2012, primarily due to a $1.7 million increase in cash and cash equivalents, a $2.3 million increase in interest-bearing time deposits in other banks, and a $2.4 million increase in loans held-for-sale and a $1.0 million increase in loans, net. These increases were primarily offset by a $700,000 decrease in investments in available-for-sale securities.

Cash and Cash Equivalents. Cash and cash equivalents increased by $1.7 million, from $8.5 million at September 30, 2011 to $10.2 million at September 30, 2012, primarily due to a $7.5 million increase in total deposits. Federal funds sold and interest-bearing demand deposit balances decreased by

$1.0 million, from $6.1 million at September 30, 2011 to $5.1 million at September 30, 2012. We maintain funds in these accounts in order to improve the yield earned on excess liquidity.

Interest-Bearing Time Deposits in Other Banks. These deposits increased by $2.3 million, from $1.6 million at September 30, 2011 to $3.9 million at September 30, 2012. We maintain funds in these accounts in order to improve the yield earned on excess liquidity.

Loans Held-for-Sale. Loans held-for-sale increased by $2.4 million, from $4.4 million at September 30, 2011 to $6.8 million at September 30, 2012, due to normal pipeline variances.

Loans, Net. Loans, net, increased by $1.0 million, from $42.4 million at September 30, 2011 to $43.4 million at September 30, 2012. The low interest rate environment resulted primarily in increased demand for fixed rate residential mortgage loans, which we generally sell into the secondary market rather than retain in portfolio.

The following table sets forth the composition of our loan portfolio at the dates indicated.

                                                        At September 30,
                                        2012                  2011                  2010
(Dollars in thousands)            Amount    Percent     Amount    Percent     Amount    Percent
Real estate loans:
Residential mortgage             $ 28,171      64.68 % $ 27,896      65.44 % $ 29,298      66.87 %
Commercial real estate              7,080      16.25      6,555      15.38      6,782      15.48
Construction                          332       0.76        908       2.13        731       1.67
Multi-family                        1,168       2.68        931       2.18        950       2.17

Total real estate loans            36,751      84.37     36,290      85.13     37,761      86.19
Commercial loans                    1,550       3.56        928       2.17        795       1.82
Consumer loans:
Home equity lines of credit         4,545      10.43      4,926      11.56      4,703      10.73
Other                                 712       1.64        486       1.14        554       1.26

Total consumer loans                5,257      12.07 %    5,412      12.70 %    5,257      11.99 %

Total loans                        43,558     100.00 %   42,630     100.00 %   43,813     100.00 %

Deferred loan origination
fees, net                             144                    61                    68
Allowance for loan losses            (334 )                (315 )                (326 )

Net loans                        $ 43,368              $ 42,376              $ 43,555

Loan Maturity. The following tables set forth certain information at September 30, 2012 regarding dollar amount of loan principal repayments becoming due during the periods indicated. The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no

stated schedule of repayments and no stated maturity are reported as due in one year or less. The amounts shown below exclude net deferred loan fees.

                                                       September 30, 2012
                  Residential     Commercial                                    Multi-
                   Mortgage       Real Estate    Construction     Commercial    Family     Consumer     Total
(In thousands)       Loans           Loans           Loans          Loans        Loans      Loans       Loans
Amounts due
in:
One year or
less              $        287    $      1,073     $       332    $       190   $     -    $     356   $  2,238
More than one
year to five
years                       12             722               -          1,063       317          343      2,457
More than five
years to ten
years                      515           3,640               -            247       614          649      5,665
More than ten
years                   27,357           1,645               -             50       237        3,909     33,198

Total             $     28,171    $      7,080     $       332    $     1,550   $ 1,168    $   5,257   $ 43,558

Fixed vs. Adjustable Rate Loans. The following table sets forth the dollar amount of all scheduled maturities of loans at September 30, 2012 that are due after September 30, 2013 and have either fixed interest rates or adjustable interest rates. The amounts shown below exclude net deferred loan fees.

                                                 Floating or
                                      Fixed      Adjustable
                (In thousands)        Rates         Rates        Total
                Real estate loans:
                Residential          $  5,822    $     22,062   $ 27,884
                Commercial                523           5,484      6,007
                Construction                -               -          -
                Multi-family                -           1,168      1,168

                Total real estate       6,345          28,714     35,059
                Commercial loans          247           1,113      1,360
                Consumer loans          4,849              52      4,901

                Total                $ 11,441    $     29,879   $ 41,320

Securities. Our securities portfolio consists primarily of residential mortgage-backed securities issued by U.S. government agencies and government sponsored enterprises. Investments in available-for-sale securities decreased by $700,000, from $6.1 million at September 30, 2011 to $5.4 million at September 30, 2012, due to purchases of $1.8 million, offset by $2.4 million in maturities.

The following table sets forth the amortized cost and fair values of our securities portfolio at the dates indicated.

                                                     At September 30,
                                   2012                    2011                    2010
                            Amortized     Fair      Amortized     Fair      Amortized     Fair
(In thousands)                Cost        Value       Cost        Value       Cost        Value
Securities
available-for-sale::
Corporate debt
securities                  $      300   $   320    $      300   $   327    $      300   $   336
Mortgage-backed
securities                       4,827     5,072         5,510     5,784         6,461     6,721
U.S. Government and
federal agency
obligations                         52        52             -         -           100       100

Total                       $    5,179   $ 5,444    $    5,810   $ 6,111    $    6,861   $ 7,157

At September 30, 2012, we had no investments in a single company or entity (other than the U.S. Government or an agency of the U.S. Government), including both debt and equity securities, that had an aggregate book value in excess of 10% of our total equity.

The following table sets forth the stated maturities and weighted average yields of investment securities at September 30, 2012. Certain mortgage related securities have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below.

                                                           More than                 More than
                                                          One Year to              Five Years to
                             One Year or Less             Five Years                 Ten Years               After Ten Years                 Total
                                        Weighted                  Weighted                   Weighted                   Weighted                  Weighted
                          Carrying      Average      Carrying     Average      Carrying      Average      Carrying      Average      Carrying     Average
(Dollars in thousands)     Value         Yield        Value        Yield        Value         Yield        Value         Yield        Value        Yield
Securities
available-for-sale:
Corporate debt            $       -             - %  $       -            - %   $      -             - %   $    320         11.45 %  $     320        11.45 %
Mortgage-backed
securities                    1,557          3.04        2,306         3.01          779          2.91          430          3.86        5,072         3.08
U.S. Government and
federal agency
obligations                       -             -            -            -            -             -           52          1.47 %         52         1.47

Total                     $   1,557          3.04 %  $   2,306         3.01 %   $    779          2.91 %   $    802          6.74 %  $   5,444         3.56 %

Deposits. Our primary sources of funds are retail deposit accounts held primarily by individuals and businesses within our primary market area. Total deposits increased by $7.5 million, from $60.8 million at September 30, 2011 to $68.3 million at September 30, 2012, primarily due to a $2.8 million increase in certificates of deposit, and a $4.7 million increase in non interest-bearing accounts.

The following table sets forth the balances of our deposit products at the dates indicated.

                                                        At September 30,
                                        2012                  2011                  2010
(Dollars in thousands)            Total     Percent     Total     Percent     Total     Percent
Noninterest-bearing demand
deposits                         $ 14,713      21.54 % $ 10,020      16.49 % $  8,830      15.24 %
Interest bearing deposits:
Money market                        8,599      12.59      8,360      13.76      8,300      14.32
Regular and other savings           8,561      12.54      8,766      14.43      7,856      13.56
Certificates of deposit            36,424      53.33     33,607      55.32     32,957      56.88

Total                            $ 68,297     100.00 % $ 60,753     100.00 % $ 57,943     100.00 %

The following table indicates the amount of jumbo certificates of deposit by time remaining until maturity at September 30, 2012. Jumbo certificates of deposit require minimum deposits of $100,000.

                                                          Jumbo
                                                     Certificates of
            Maturity Period at September 30, 2012       Deposits
                                                     (In thousands)
            Three months or less                      $         7,685
            Over three through six months                       4,707
            Over six through twelve months                      3,964
            Over twelve months                                  8,148

            Total                                     $        24,504

Borrowings. Generally, we use borrowings from the Federal Home Loan Bank of Boston to supplement our supply of funds for loans and securities. We did not have any Federal Home Loan Bank of Boston borrowings outstanding at both September 30, 2012 and September 30, 2011.

The following table sets forth selected information regarding our borrowed funds during the periods indicated.

                                                            At or For the Year Ended
                                                                  September 30,
(Dollars in thousands)                                     2012         2011      2010
Maximum amount outstanding at any month-end during the
period:
FHLB Advances                                             $      -     $ 1,760   $ 1,948
Average balance outstanding during the period:
FHLB Advances                                                    6         527       902
Weighted average interest rate during the period:
FHLB Advances                                                 0.28 %      0.99 %    3.10 %
Balance outstanding at end of period:
FHLB Advances                                             $      -     $     -   $ 1,302
Weighted average interest rate at end of period
FHLB Advances                                                    - %         - %    0.89 %

Comparison of Operating Results for the Years ended September 30, 2012 and 2011

Net Income. Net income decreased by $20,000, from $293,000 in 2011 to $273,000 in 2012 primarily due to a $197,000 increase in noninterest expense, a decrease of $106,000 in net interest and dividend income, and a $29,000 increase in the provision for loan losses, offset by a $293,000 increase in noninterest income.

Net Interest and Dividend Income. Net interest and dividend income decreased by $106,000 to $2.0 million in 2012 due to declining market interest rates. The yield on interest-earnings assets decreased from 4.65% in 2011 to 4.01% in 2012, which offset an increase in the average balance of interest-earning assets from $58.9 million to $64.0 million. The average rate paid on interest-bearing liabilities decreased from 1.32% in 2011 to 1.12% in 2012 which offset an increase in the average balance of interest-bearing liabilities from $50.0 million to $53.1million. The interest rate spread decreased from 3.33% in 2011 to 2.89% in 2012.

Average Balances and Yields/Rates. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Loan fees are included in interest income on loans and are insignificant.

                                                                    For the Years Ended September 30,
                                          2012                                     2011                                     2010
                            Average       Interest     Average       Average       Interest     Average       Average       Interest     Average
                          Outstanding     Earned/      Yield/      Outstanding     Earned/      Yield/      Outstanding     Earned/      Yield/
(Dollars in thousands)      Balance         Paid        Rate         Balance         Paid        Rate         Balance         Paid        Rate
Interest-earning
. . .