UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,D.C.20549




Form 10-K




þ
            
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)
              OF THE SECURITIES EXCHANGE ACT
      OF 1934FOR THE FISCAL
      YEAR ENDED JUNE 30, 2008oro
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)
              OF THE SECURITIES EXCHANGE ACT
      OF 1934FOR 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
              (Zip
      Code)(Address of
      principal executive offices)




(413) 736-1812


(Registrant’s
telephone number, including area code)




Securities registered pursuant to
section 12(b) of the Act:
 Title
      of each class
                
                Name
      of each exchange on which registeredCommon
      Stock ($0.01 par value per share)
                
                The NASDAQGlobalMarket





Securities registered pursuant to
section 12(g) of the Act:


None




Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities
Act.  Yes      No þ.




Indicate
by check mark whether the registrant is not required to file reports pursuant to
section 13 or Section 15(d) of the
Act.  Yes      No þ.




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Act of 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 .




Indicate
by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Se. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.  þ.




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 definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):


Large
accelerated fileroAccelerated
fileroNon-accelerated
fileroSmaller
reporting companyþ


(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      No þ.




Based
upon the closing price of the registrant’s common stock as of December 31, 2007,
the aggregate market value of the voting and non-voting common stock held by
non-affiliates of the Registrant (without admitting that any person whose shares
are not included in such calculation is an affiliate) was
$67,431,011.




The
number of shares of Common Stock outstanding as of September 5, 2008 was
7,941,796.




Documents Incorporated By
Reference:




The
following documents (or parts thereof) are incorporated by reference into the
following parts of this Form 10-K: Certain information required in Part III of
this Annual Report on Form 10-K is incorporated from the Registrant’s Proxy
Statement for the Annual Meeting of Shareholders to be held on November 6,
2008.



















HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


ANNUAL
REPORT ON FORM 10-K


FOR
THE FISCAL YEAR ENDED JUNE 30, 2008


TABLE
OF CONTENTS




Page
  No.Part IItem Item
      1.
            
            
            Business
            
            
            3Item Item
      1A.
            
            
            Risk
      Factors
            
            
            29Item Item
      1B.
            
            
            Unresolved
      Staff Comments
            
            
            31Item Item
      2.
            
            
            Properties
            
            
            32Item Item
      3.
            
            
            Legal
      Proceedings
            
            
            32Item Item
      4.
            
            
            Submission
      of Matters to a Vote of Security Holders
            
            
            32Part IIItem Item
      5.
            
            
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            
            
            33Item Item
      6.
            
            
            Selected
      Financial Data
            
            
            36Item Item
      7.
            
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            
            38Item Item
      7A.
            
            
            Quantitative
      and Qualitative Disclosures about Market Risk
            
            
            48Item Item
      8.
            
            
            Financial
      Statements and Supplementary Data
            
            
            48Item Item
      9.
            
            
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
            
            
            48Item Item
      9A(T).
            
            
            Controls
      and Procedures
            
            
            49Item Item
      9B.
            
            
            Other
      Information
            
            
            49Part IIIItem Item
      10.
            
            
            Directors,
      Executive Officers and Corporate Governance
            
            
            50Item Item
      11.
            
            
            Executive
      Compensation
            
            
            50Item Item
      12.
            
            
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            
            
            50Item Item
      13.
            
            
            Certain
      Relationships and Related Transactions, and Director
      Independence
            
            
            51Item Item
      14.
            
            
            Principal
      Accounting Fees and Services
            
            
            51Part IVItem Item
      15.
            
            
            Exhibits, Financial
      Statement Schedules
            
            
            52Signatures
            
            
            54


2


Part I





Item 1.
            Business




General





Hampden
Bancorp, Inc., a Delaware corporation, was formed by Hampden Bank to become the
stock holding company for Hampden Bank upon completion of Hampden Bancorp, MHC’s
conversion from a mutual bank holding company to a stock bank holding company.
Hampden Bancorp, Inc. and Hampden Bank completed the conversion of the holding
company structure of Hampden Bank and the related stock offering on January 16,
2007 with the issuance of 7,949,879 shares (including 378,566 shares issued to
the Hampden Bank Charitable Foundation) raising net proceeds of $73.4 million.
The information set forth in this Annual Report on Form 10-K for Hampden
Bancorp, Inc. and it’s subsidiaries (the “Company”), Hampden Bank, and Hampden
LS, Inc., including the consolidated financial statements and related financial
data, relates primarily to Hampden Bank. Hampden Bancorp, Inc. contributed funds
to Hampden LS, Inc. to enable it to make a 15-year loan to the employee stock
ownership plan to allow it to purchase shares of the Company 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. During any period prior to
January 16, 2007, the Company was newly organized and owned no assets.
Therefore, the financial information for any period prior to January 16, 2007
presented in this Annual Report on Form  10-K is that of Hampden
Bancorp, MHC and its subsidiary.




Hampden
Bank, the longest standing bank headquartered in Springfield, Massachusetts, is
a full-service, community-oriented financial institution offering products and
services to individuals, families, and businesses through eight offices located
in Hampden County in Massachusetts. Hampden Bank was originally organized as a
Massachusetts state-chartered mutual savings bank dating back to 1852. Hampden
Bank’s deposits are insured by the Federal Deposit Insurance Corporation
(“FDIC”) as well as by the Depositors Insurance Fund, (“DIF”). Hampden Bank is a
member of the Federal Home Loan Bank of Boston (“FHLB”) and is regulated by the
FDIC and the Massachusetts Division of Banks. Hampden Bank’s business consists
primarily of making loans to its customers, including residential mortgages,
commercial real estate loans, commercial loans and consumer loans, and investing
in a variety of investment and mortgage-backed securities. Hampden Bank funds
these lending and investment activities with deposits from the general public,
funds generated from operations and select borrowings. Hampden Bank also
provides access to insurance and investment products through its Financial
Services Division, Hampden Financial.





Available
Information





The Company’s website is https://www.hampdenbank.com.
The Company makes available free of charge through its website, its annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and any amendments to those reports filed or furnished pursuant to the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as
reasonably practicable after such material is electronically filed with, or
furnished to, the Securities and Exchange Commission (the “SEC”). The
information contained on our website is not incorporated by reference into, and
does not form any part of, this Annual Report on Form 10-K. We have included our
website address as a factual reference and do not intend it to be an active link
to our website.





Market
Area





Hampden Bank
offers financial products and services designed to meet the financial needs of
our customers. Our primary deposit-gathering area is concentrated in the
Massachusetts cities and towns of Springfield, West Springfield, Longmeadow,
Agawam and Wilbraham. We offer Remote Deposit Capture to our customers, which
allows us to expand our deposit gathering outside of our normal deposit area.
Our lending area is broader than our deposit-gathering area and includes
Hampden, Hampshire, Franklin, and Berkshire counties of Massachusetts as well as
portions of northern Connecticut.




Hampden
Bank is headquartered in Springfield, Massachusetts. All of Hampden Bank's
offices are located in Hampden County. Springfield is the third largest city in
Massachusetts, located in south western Massachusetts, 90 miles west of Boston
and 30 miles north of Hartford, Connecticut, connected by major interstate
highways. A diversified mix of industry groups operate within Hampden County,
including manufacturing, health care, higher education, wholesale/retail trade
and service. The major employers in the area include MassMutual Financial Group,
Top-Flite Golf Company, Dow Jones & Co., Baystate Health System,
several area universities and colleges, and Big Y Supermarkets. The county in
which Hampden Bank currently operates includes a mixture of suburban, rural, and
urban markets. Hampden Bank's market area is projected to experience modest
population and household growth through 2010. Based on census data, Hampden
County is expected to grow in population from 462,529 in 2005 to 471,661 in
2010. This is a projected increase of 1.97%. The strongest growth is projected
in the 55+ age group and $50,000+ household categories. From 2005 through 2010,
the median household income is projected to increase by 19.2% from $47,505 to
$56,636.


3


Competition





The
Company faces intense competition in attracting deposits and loans. The
Company’s most direct competition for deposits has historically come from the
several financial institutions and credit unions operating in our market areas
and, to a lesser extent, from other financial service companies such as
brokerage firms and insurance companies. The Company also faces competition for
depositors' funds from money market funds, mutual funds and other corporate and
government securities. Banks owned by large super-regional bank holding
companies such as Bank of America Corporation, Sovereign Bancorp, Inc.,
Citizens Financial Group and TD Banknorth, Inc. also operate in the
Company’s market area. These institutions are significantly larger than the
Company, and, therefore, have significantly greater resources.




The
Company’s competition for loans comes primarily from financial institutions in
our market areas, and from other financial service providers such as mortgage
companies and mortgage brokers. Competition for loans also comes from a number
of non-depository financial service companies entering the mortgage market.
These include insurance companies, securities companies and specialty finance
companies. Competition for loans is expected to increase as a result of recent
competitors’ capital raising activities in 2007 and 2008 in the Company’s market
area.




The Company
expects competition to increase in the future as a result of legislative,
regulatory and technological changes and the continuing trend of consolidation
in the financial services industry. Technological advances, for example, have
lowered the barriers to market entry, allowed banks and other lenders to expand
their geographic reach by providing services over the Internet and made it
possible for non-depository institutions to offer products and services that
traditionally have been provided by banks. Changes in federal law permit
affiliation among banks, securities firms and insurance companies, which
promotes a competitive environment in the financial services industry.
Competition for deposits and the origination of loans could limit the Company’s
future growth.




Lending
Activities




General.
The Company's gross loan portfolio consisted of an aggregate of
$361.1 million at June 30, 2008, representing 66.4% of total assets at
that date. In its lending activities, the Company originates commercial real
estate loans, residential real estate loans secured by one-to-four-family
residences, residential and commercial construction loans, commercial and
industrial loans, home equity lines-of-credit, fixed rate home equity loans and
other personal consumer loans. While the Company makes loans throughout
Massachusetts, most of its lending activities are concentrated in Hampden and
Hampshire counties. Loans originated totaled $118.6 million in fiscal 2008
and $95.7 million in fiscal 2007. Residential mortgage loans sold into the
secondary market, on a servicing-retained basis, totaled $9.1 million
during fiscal 2008 and $8.6 million in fiscal 2007, and residential mortgage
loans sold into the secondary market, on a servicing-released basis, totaled
$7.2 million during fiscal 2008 and $3.7 million during fiscal
2007.
  4




The following
table summarizes the composition of the Company's loan portfolio as of the dates
indicated:








June
      30,2008
            
            2007
            
            2006
            
            2005
            
            2004Amount
            Percent
            
            Amount
            Percent
            
            Amount
            Percent
            
            Amount
            Percent
            
            Amount
            Percent(Dollars
      In Thousands)Mortgage
      loans on real estate:Residential
            $121,864
            33.75
            %
            $116,178
            35.21
            %
            $111,849
            34.88
            %
            $91,542
            33.57
            %
            $86,531
            34.38
            %Commercial
            117,636
            32.59
            
            90,538
            27.45
            
            91,226
            28.45
            
            88,766
            32.54
            
            90,551
            35.98Home
      Equity
            57,790
            16.01
            
            59,899
            18.15
            
            64,132
            20.00
            
            53,711
            19.70
            
            50,080
            19.90Construction
            11,308
            3.13
            
            21,251
            6.44
            
            22,314
            6.95
            
            11,996
            4.40
            
            4,850
            1.93Total
      mortgage loans on real estate
            308,598
            85.48
            
            287,866
            87.25
            
            289,521
            90.28
            
            246,015
            90.21
            
            232,012
            92.19Other
      loans:Commercial
            32,509
            9.00
            
            25,472
            7.71
            
            22,609
            7.05
            
            21,485
            7.88
            
            14,989
            5.96Consumer
      and other
            19,967
            5.52
            
            16,644
            5.04
            
            8,574
            2.67
            
            5,202
            1.91
            
            4,674
            1.85Total
      other loans
            52,476
            14.52
            
            42,116
            12.75
            
            31,183
            9.72
            
            26,687
            9.79
            
            19,663
            7.81Total
      loans
            361,074
            100.00
            %
            329,982
            100.00
            %
            320,704
            100.00
            %
            272,702
            100.00
            %
            251,675
            100.00
            %Other
      items:Net
      deferred loan costs (fees)
            2,257
            
            
            1,902
            
            
            872
            
            
            211
            
            
            (94)Allowance
      for loan losses
            (3,453)
            
            
            (2,810)
            
            
            (3,695)
            
            
            (3,644)
            
            
            (3,471)Total
      loans, net
            $359,878
            
            
            $329,074
            
            
            $317,881
            
            
            $269,269
            
            
            $248,110








Residential Real
Estate Loans.  The
Company offers fixed-rate and adjustable-rate residential mortgage loans. The
majority of these loans have maturities up to 30 years and maximum loan amounts
of up to $1.0 million. In its residential mortgage loan originations, the
Company lends up to a maximum loan-to-value ratio of 100% for first-time home
buyers and immediately sells all of its 100% loan-to-value ratio
loans.  For fiscal year 2008, the Company originated 44 loans with a
loan-to-value ratio of 95% or greater, of which 95% were sold. Hampden Bank
has an Asset Liability Committee, which evaluates whether the Company should
retain or sell any fixed rate loans that have maturities greater than 15 years.
As of June 30, 2008, the residential real estate mortgage loan portfolio totaled
$121.9 million, or 33.8% of the total gross loan portfolio on that date, and had
an average yield of 5.7%. Of the residential mortgage loans outstanding on that
date, $96.6 million were adjustable-rate loans with an average yield of 5.6% and
$25.3 million were fixed-rate mortgage loans with an average yield of 6.0%.
Residential mortgage loan originations totaled $38.0 million and $23.8 million
for fiscal 2008 and 2007, respectively.




A
licensed appraiser appraises all properties securing residential first mortgage
purchase loans and all real estate transactions greater than $250,000. If
appropriate, flood insurance is required for all properties securing real estate
loans made by the Company.





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.  Some loans which the Company originates have a higher risk
profile or are outside of our normal underwriting standards than the Company is
willing to accept.  These loans are sold to a third party along with
the servicing rights.





At June
30, 2008, fixed rate monthly payment loans held in the Company’s portfolio
totaled $25.3 million, or 20.7% of total residential real estate mortgage loans
at that date. The total of loans serviced for others as of June 30, 2008 is
$31.9 million.




The
adjustable-rate mortgage loans (“ARM Loans”) offered by the Company make up the
largest portion of the residential mortgage loans held in portfolio. At June 30,
2008, ARM Loans totaled $96.6 million or 79.3% of total residential loans
outstanding at that date. The Company originates ARMs with a maximum
loan-to-value ratio of up to 95% with Private Mortgage Insurance. Generally, any
ARM loan with a loan-to-value ratio greater than 90% requires Private Mortgage
Insurance. ARMs are offered for terms of up to 30 years with initial interest
rates that are fixed for 1, 3, 5, 7 or 10 years. After the initial fixed-rate
period, the interest rates on the loans are reset based on the relevant U.S.
Treasury Constant Maturity Treasury Index, or CMT Index, plus add-on margins of
varying amounts, for periods of 1, 3, and 5 years. Interest rate /adjustments on
such loans typically range from 2.0% to 3.0% during any adjustment period and
5.0% to 6.0% over the life of the loan. Periodic adjustments in the interest
rate charged on ARM Loans help to reduce the Company’s exposure to changes in
interest rates. However, ARM Loans generally possess an element of credit risk
not inherent in fixed-rate mortgage loans, because borrowers are potentially
exposed to increases in debt service requirements over the life of the loan in
the event market interest rates rise. Higher payments may increase the risk of
default.




5


Commercial Real
Estate Loans.  The Company originated $19.4 million and $12.3
million of commercial real estate loans in 2008 and 2007, respectively, and had
$117.6 million of commercial real estate loans, with an average yield of 6.6%,
in its portfolio as of June 30, 2008. The Company intends to further grow this
segment of its loan portfolio, both in absolute terms and as a percentage of its
total loan portfolio.




The
Company originates commercial real estate loans for terms of up to 10 years.
Interest rates on commercial real estate loans adjust over periods of three,
five, or seven years based primarily on Federal Home Loan Bank rates. In
general, rates on commercial real estate loans are priced at a spread over
Federal Home Loan Bank advance rates.  Commercial real estate loans
are generally secured by commercial properties such as, industrial properties,
hotels, small office buildings, retail facilities, warehouses multi-family
income properties and owner-occupied properties used for business. Generally,
commercial real estate loans are approved with a maximum 80% loan to appraised
value ratio.




In its
evaluation of a commercial real estate loan application, the Company considers
the net operating income of the property, the borrower’s expertise, credit
history, and the profitability and value of the underlying property. For loans
secured by rental properties, the Company will also consider the terms of the
leases and the quality of the tenant. The Company generally requires that the
properties securing these loans have minimum debt service coverage sufficient to
support the loan. The Company generally requires the borrowers seeking
commercial real estate loans to personally guarantee those loans.




Commercial
real estate loans generally have larger balances and involve a greater degree of
risk than residential mortgage loans. Loan repayment is often dependent on the
successful operation and management of the properties, as well as on the
collateral value of the commercial real estate securing the loan. Economic
events and changes in government regulations could have an adverse impact on the
cash flows generated by properties securing the Company’s commercial real estate
loans and on the value of such properties.




Home
EquityLoans.  The
Company offers home equity lines-of-credit and home equity term loans. The
Company originated $15.4 million and $11.8 million of home equity
lines-of-credit and loans during 2008 and 2007, respectively, and at June 30,
2008 had $57.8 million of home equity lines-of-credit and loans outstanding,
representing 16.0% of the loan portfolio, with an average yield of 5.6% at that
date.




Home
equity lines-of-credit and loans are secured by second mortgages on one-to-four
family owner occupied properties, and are made 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. The undrawn portion
of home equity lines-of-credit totaled $27.9 million at June 30,
2008.





ConstructionLoans.  The
Company offers residential and commercial construction loans. The majority of
non-residential construction loans are written to become permanent financing.
The Company originated $22.3 million and $24.5 million of construction loans
during fiscal 2008 and fiscal 2007, respectively, and at June 30, 2008 had $11.3
million of construction loans outstanding, representing 3.1% of the loan
portfolio.





Commercial
Loans.  The
Company originates secured and unsecured commercial loans to business customers
in its market area for the purpose of financing equipment purchases, working
capital, expansion and other general business purposes. The Company originated
$15.0 million and $12.4 million in commercial loans during fiscal 2008 and
fiscal 2007, respectively, and as of June 30, 2008 had $32.5 million in
commercial loans in its portfolio, representing 9.0% of such portfolio, with an
average yield of 5.5%. The Company intends to grow this segment of its lending
business in the future.




The
Company’s commercial loans are generally collateralized by equipment, accounts
receivable and inventory, and are usually supported by personal guarantees. The
Company offers both term and revolving commercial loans. The former have either
fixed or adjustable-rates of interest and generally fully amortize over a term
of between three and seven years. Revolving loans are written on demand with
annual reviews, with floating interest rates that are indexed to the Company’s
base rate of interest.




6


When
making commercial loans, the Company considers the financial statements of the
borrower, the borrower’s payment history with respect to both corporate and
personal debt, the debt service capabilities of the borrower, the projected cash
flows of the business, the viability of the industry in which the borrower
operates and the value of the collateral. The Company has established limits on
the amount of commercial loans in any single industry.




Commercial
loans generally bear higher interest rates than residential mortgage loans of
like duration because they involve a higher risk of default since their
repayment is generally dependent on the successful operation of the borrower’s
business and the sufficiency of collateral, if any. Because commercial loans
often depend on the successful operation or management of the business,
repayment of such loans may be affected by adverse changes in the economy.
Further, collateral securing such loans may depreciate in value over time, may
be difficult to appraise and to liquidate, and may fluctuate in
value.





Consumer
and Other Loans.The Company offers a variety of
consumer and other loans, including manufactured homes, auto loans and loans
secured by passbook savings or certificate accounts. The Company originated $8.6
million and $11.0 million of consumer and other loans, including purchases of
manufactured home loans, during 2008 and 2007, respectively, and at June 30,
2008 had $20.0 million of consumer and other loans outstanding, which included
$1.4 million of industrial revenue bonds. Of the $8.6 million of originations in
2008, approximately $5.7 million consists of manufactured housing loans. The
majority of the manufactured housing loans are purchased from a third party who
has over 30 years of specialized market experience in originating manufactured
home loans. Consumer and other loans outstanding represented 5.5% of the loan
portfolio at that date, with an average yield of 7.9%.





Loan
Origination.  Loan
originations come from a variety of sources. The primary source of originations
are our salaried and commissioned loan personnel, and to a lesser extent, local
mortgage brokers, advertising and referrals from customers. The Company
occasionally purchases participation interests in commercial real estate loans
and commercial loans from banks located in Massachusetts and Connecticut. The
Company underwrites these loans using its own underwriting
criteria.




The
Company makes commitments to loan applicants based on specific terms and
conditions.  As of June 30, 2008, the Company had commitments to grant
loans of $14.9 million, unadvanced funds on home equity lines of credit totaling
$27.9, unadvanced funds on overdraft lines-of-credit totaling $2.0 million,
unadvanced funds on commercial lines-of-credit totaling $17.4 million,
unadvanced funds due mortgagors and on construction loans totaling $9.0 million
and standby letters of credit totaling $775,000.




Generally,
the Company charges origination fees, or points, and collects fees to cover the
costs of appraisals and credit reports. For information regarding the Company’s
recognition of loan fees and costs, please refer to Note 1 to the Consolidated
Financial Statements of Hampden Bancorp, Inc. and its subsidiaries, beginning on
page F-8.






7


The
following table sets forth certain information concerning the Company’s
portfolio loan originations:





For
      the Years Ended June 30,2008
            
            2007
            
            2006
            
            2005
            
            2004(In
      Thousands)Loans
      at beginning of year
            $329,982
            
            $320,704
            
            $272,702
            
            $251,675
            
            $217,825OriginationsMortage
      loans on real estate:Residential
            37,975
            
            23,833
            
            36,133
            
            26,185
            
            36,720Commercial
            19,435
            
            12,309
            
            33,350
            
            23,199
            
            34,752Construction
            22,291
            
            24,456
            
            16,047
            
            15,689
            
            14,947Home
      Equity
            15,383
            
            11,794
            
            31,913
            
            22,169
            
            29,477Total
      mortgage loans on real estate originations
            95,084
            
            72,392
            
            117,443
            
            87,242
            
            115,896Other
      loans:Commercial
      business
            14,960
            
            12,351
            
            7,214
            
            9,673
            
            9,434Consumer
      and other
            2,842
            
            4,477
            
            2,928
            
            3,022
            
            2,388Total
      other loan originations
            17,802
            
            16,828
            
            10,142
            
            12,695
            
            11,822Total
      loans originated
            112,886
            
            89,220
            
            127,585
            
            99,937
            
            127,718Purchase
      of manufactured home loans
            5,726
            
            6,497
            
            3,156
            
            -
            
            -Deduct:Principal
      loan repayments and prepayments
            71,073
            
            73,194
            
            75,011
            
            72,294
            
            80,602Loan
      sales
            16,408
            
            12,219
            
            7,610
            
            6,570
            
            13,251Charge-offs
            39
            
            1,026
            
            118
            
            46
            
            15Total
      deductions
            87,520
            
            86,439
            
            82,739
            
            78,910
            
            93,868Net
      increase in loans
            31,092
            
            9,278
            
            48,002
            
            21,027
            
            33,850Loans
      at end of year
            $361,074
            
            $329,982
            
            $320,704
            
            $272,702
            
            $251,675





Residential
mortgage loans are underwritten by the Company. Residential mortgage loans less
than the corresponding Fannie Mae (FNMA) limit to be held in portfolio require
the approval of a residential loan underwriter. Residential mortgage loans
greater than the FNMA limit require the approval of a Senior Retail Loan Officer
and in some instances, depending on the amount of the loan, the approval of the
Board of Investment of the Board of Directors of Hampden Bank (the “Board of
Investment”).





Loan
Underwriting. The Company believes that credit risk is best approved in a
bottom up manner.  The officer most directly responsible for credit
risk, the Account Manager, should approve exposures within delegated authority
or recommend approval to the next level of authority as
necessary.  All exposures require at least one signature by an officer
with the appropriate authority.  No exposure will be approved without
the recommendation of the Account Manager.  All new commercial loan
approval actions must be documented in the individual credit file with a Credit
Approval Memorandum, prior to any funds being advanced by the
Company.





The
Company’s loan policy has established specific loan approval
limits.  Loan officers may approve loans up to their individual
lending limit.  The loan committee reviews all loan applications and
approves relationships greater than the loan officer’s limit.  Certain
loan relationships require Board of Investment approval.  The
Company’s loan committee membership includes the Company’s President, Executive
Vice President, Chief Financial Officer, two Senior Vice Presidents, Vice
President of the credit department and commercial loan originators.





Consumer
loans are underwritten by consumer loan underwriters, including loan officers
and branch managers who have approval authorities based on experience for these
loans. Unsecured personal loans are generally written for not more than
$5,000.




8


The
Company generally will not make loans aggregating more than $10.0 million to one
borrower (or related entity). Exceptions to this limit require the approval of
the Board of Investment prior to loan origination. The Company’s internal
lending limit is lower than the Massachusetts legal lending limit, which is
20.0% of a bank’s retained earnings and equity, or $13.6 million for the Company
as of June 30, 2008.




The
Company has established a risk rating system for its commercial real estate and
commercial loans. This system evaluates a number of factors useful in indicating
the risk of default and risk of loss associated with a loan. These ratings are
reviewed by commercial credit analysts who do not have responsibility for loan
originations. The Company also uses a third party loan review firm to test and
review these ratings, and then report their results to the Audit Committee of
the Board of Directors of Hampden Bancorp, Inc (the “Audit
Committee”).




The
Company occasionally participates in loans originated by third parties to
supplement our origination efforts. The Company underwrites these loans using
its own underwriting criteria.




Loan
Maturity.  The
following table summarizes the final maturities of the Company’s loan portfolio
at June 30, 2008. The Company’s largest loan is $6.6 million. The average
balance of the Company’s ten largest loans is $3.8 million. This table does not
reflect scheduled principal payments, unscheduled prepayments, or the ability of
certain loans to reprice prior to maturity dates. Demand loans, and loans having
no stated repayment schedule, are reported as being due in one year or
less:


Residential
      Mortgage
            
            Commercial
      Mortgage
            
            Commercial
            
            ConstructionAmount
            
            Weighted
      Average Rate
            
            Amount
            
            Weighted
      Average Rate
            
            Amount
            
            Weighted
      Average Rate
            
            Amount
      *
            
            Weighted
      Average Rate(Dollars
      In Thousands)Due
      less than one year
            
            $12
            
            6.86
            %
            $5,443
            
            6.46
            %
            $1,157
            
            6.14
            %
            $3,163
            
            5.81
            %Due
      after one year to five years
            1,560
            
            5.60
            
            32,445
            
            6.52
            
            20,193
            
            5.30
            
            1,370
            
            4.72Due
      after five years
            
            120,292
            
            5.70
            
            79,748
            
            6.59
            
            11,159
            
            5.84
            
            6,775
            
            6.45Total
            
            $121,864
            
            5.70
            %
            $117,636
            
            6.56
            %
            $32,509
            
            5.51
            %
            $11,308
            
            6.06
            %Home
      Equity
            
            Consumer
      and Other
            
            TotalAmount
            
            Weighted
      Average Rate
            
            Amount
            
            Weighted
      Average Rate
            
            Amount
            
            Weighted
      Average Rate(Dollars
      In Thousands)Due
      less than one year
            
            $12
            
            5.53
            %
            $572
            
            4.49
            %
            $10,359
            
            6.12
            %Due
      after one year to five years
            3,246
            
            5.76
            
            4,859
            
            5.82
            
            63,673
            
            5.98Due
      after five years
            
            54,532
            
            5.58
            
            14,536
            
            8.80
            
            287,042
            
            6.10Total
            
            $57,790
            
            5.59
            %
            $19,967
            
            7.95
            %
            $361,074
            
            6.08
            %*
      The amount of Construction loans that are due after five years are written
      to be permanent loans after the construction period is
    over.





9
  The following
table sets forth, at June 30, 2008, the dollar amount of total loans, net of
unadvanced funds on loans, contractually due after June 30, 2009 and whether
such loans have fixed interest rates or adjustable interest
rates.








Due
      After June 30, 2009Fixed
            
            Adjustable
            
            Total(In
      Thousands)Residential
      Mortgage
            
            
            $25,255
            
            $96,597
            
            $121,852Construction
            
            
            5,406
            
            2,739
            
            8,145Commercial
      mortgage
            
            43,000
            
            69,193
            
            112,193Commercial
      business
            
            
            9,270
            
            22,082
            
            31,352Home
      equity, consumer and other
            
            55,355
            
            21,818
            
            77,173Total
      loans
            
            
            $138,286
            
            $212,429
            
            $350,715





Asset
Quality




General.  One
of the Company’s most important operating objectives is to maintain a high level
of asset quality. Management uses a number of strategies in furtherance of this
goal including maintaining sound credit standards in loan originations,
monitoring the loan portfolio through internal and third-party loan reviews, and
employing active collection and workout processes for delinquent or problem
loans.




Delinquent
Loans.  Management
performs a monthly review of all delinquent loans. The actions taken with
respect to delinquencies vary depending upon the nature of the delinquent loans
and the period of delinquency. A late charge is normally assessed on loans where
the scheduled payment remains unpaid after a 15 day grace period for residential
mortgages and a 10 day grace period for commercial loans. After mailing
delinquency notices, the Company’s loan collection personnel call the borrower
to ascertain the reasons for delinquency and the prospects for repayment. On
loans secured by one- to four-family owner-occupied property, the Company
initially attempts to work out a payment schedule with the borrower in order to
avoid foreclosure. Any such loan restructurings must be approved by the level of
officer authority required for a new loan of that amount. If these actions do
not result in a satisfactory resolution, the Company refers the loan to legal
counsel and counsel initiates foreclosure proceedings. For commercial real
estate, construction and commercial loans, collection procedures may vary
depending on individual circumstances.





Other Real Estate
Owned.  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
lower of the carrying value or 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 inspects all OREO property
periodically. Holding costs and declines in fair value result in charges to
expense after the property is acquired. At June 30, 2008, the Company had no
property classified as OREO.





Classification of
Assets and Loan Review.  Risk
ratings are assigned to all credit relationships to differentiate and manage
levels of risk in individual exposures and throughout the
portfolio.  Ratings are called Customer Risk Ratings
(CRR).  Customer Risk Ratings are designed to reflect the risk to the
Company in any Total Customer Relationship Exposure.  Risk ratings are
used to profile the risk inherent in portfolio outstandings and exposures to
identify developing trends and relative levels of risk and to provide guidance
for the promulgation of policies, which control the amount of risk in an
individual credit and in the entire portfolio, identify deteriorating credits
and predict the probability of default.  Timeliness of this process
allows early intervention in the recovery process so as to maximize the
likelihood of full recovery, and establish a basis for maintaining prudent
reserves against loan losses.




The
Account Manager has the primary responsibility for the timely and accurate
maintenance of Customer Risk Ratings.  The risk rating responsibility
for the aggregate portfolio rests with the Division Executive.  If a
disagreement surfaces regarding a risk rating, the loan review committee makes
the final determination. All others in a supervisory or review function
regarding a certain credit have a responsibility for reviewing the
appropriateness of the rating and bringing to senior management’s attention any
dispute so it may be resolved.  Generally, changes to risk ratings are
made immediately upon receipt of material information, which suggests that the
current rating is not appropriate.




10


The
Company engages an independent third party to conduct a semi-annual review of
its commercial mortgage and commercial loan portfolios. These loan reviews
provide a credit evaluation of individual loans to determine whether the risk
ratings assigned are appropriate. Independent loan review findings are presented
directly to the Audit Committee.




Watchlist
loans, including non-accrual loans, are classified as either special mention,
substandard, doubtful, or loss. At June 30, 2008, loans classified as special
mention totaled $10.9 million, consisting of $7.3 million commercial real
estate, $1.7 million commercial loans, $1.3 million residential mortgage loans,
and $645,000 consumer loans. Substandard loans totaled $2.3 million, consisting
of $1.3 million commercial, $908,000 in commercial real estate, $116,000
residential mortgage and $25,000 consumer loans. Loans classified as doubtful
totaled $2.9 million, consisting of $2.4 million commercial, $367,000 commercial
real estate, and $156,000 consumer loans. Loans classified as loss totaled
$14,000, consisting of consumer loans. Specific reserves for these loans totaled
$1.1 million, $1.0 related to doubtful loans, and $58,000 related to substandard
loans.




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




At
      June 30,2008
            
            2007
            
            2006
            
            2005
            
            2004(Dollars
      In Thousands)Non-accrual
      loans:Residential
      mortgage
            $684
            
            $217
            
            $78
            
            $150
            
            $165Commercial
      mortgage
            703
            
            235
            
            588
            
            358
            
            -Commercial
            3,212
            
            3,083
            
            3,168
            
            2,710
            
            1,459Home
      equity, consumer and other
            226
            
            26
            
            118
            
            36
            
            11Total
      non-accrual loans
            4,825
            
            3,561
            
            3,952
            
            3,254
            
            1,635Loans
      greater than 90 days delinquent and still accruing:Residential
      mortgage
            -
            
            -
            
            190
            
            -
            
            -Commercial
      mortgage
            -
            
            -
            
            267
            
            -
            
            -Commercial
            -
            
            -
            
            778
            
            -
            
            -Home
      equity, consumer and other
            -
            
            -
            
            -
            
            -
            
            -Total
      loans 90 days delinquent and still accruing
            -
            
            -
            
            1,235
            
            -
            
            -Total
      non-performing loans
            4,825
            
            3,561
            
            5,187
            
            3,254
            
            1,635Other
      Real Estate Owned
            -
            
            -
            
            -
            
            -
            
            -Total
      non-performing assets
            $4,825
            
            $3,561
            
            $5,187
            
            $3,254
            
            $1,635Ratios:Non-performing
      loans to total loans
            1.34%
            
            1.08%
            
            1.62%
            
            1.19%
            
            0.65%Non-performing
      assets to total assets
            0.89%
            
            0.68%
            
            1.11%
            
            0.78%
            
            0.40%








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. Loans are reclassified to accrual status no sooner
than regulatory requirements allow.




Allowance for
LoanLosses.  In originating
loans, the Company recognizes that losses will be experienced on loans and that
the risk of loss will vary with many factors, including the type of loan being
made, the creditworthiness of the borrower over the term of the loan, general
economic conditions and, in the case of a secured loan, the quality of the
security for the loan over the term of the loan. The Company maintains an
allowance for loan losses that is intended to absorb losses inherent in the loan
portfolio, and as such, this allowance represents management’s best estimate of
the probable known and inherent credit losses in the loan portfolio as of the
date of the financial statements. 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.




11




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
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 (or 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.




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 does not separately identify individual consumer and
residential mortgages for impairment. At June 30, 2008, impaired loans totaled
$4.0 million with an established valuation allowance of $1.1
million.




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.







12


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







At
      or For the Years Ended June 30,2008
            
            2007
            
            2006
            
            2005
            
            2004(Dollars
      In Thousands)Balance
      at beginning of year
            $2,810
            
            $3,695
            
            $3,644
            
            $3,471
            
            $3,096Charge-offs:Mortgage
      loans on real estate
            (28)
            
            -
            
            -
            
            (7)
            
            (4)Other
      loans:Commercial
      business
            -
            
            (991)
            
            (92)
            
            -
            
            -Consumer
      and other
            (11)
            
            (35)
            
            (26)
            
            (39)
            
            (11)Total
      other loans
            (11)
            
            (1,026)
            
            (118)
            
            (39)
            
            (11)Total
      charge-offs
            (39)
            
            (1,026)
            
            (118)
            
            (46)
            
            (15)Recoveries:Mortgage
      loans on real estate
            26
            
            -
            
            -
            
            -
            
            89Other
      loans:Commercial
      business
            -
            
            7
            
            -
            
            -
            
            -Consumer
      and other
            5
            
            12
            
            19
            
            19
            
            1Total
      other loans
            5
            
            19
            
            19
            
            19
            
            1Total
      recoveries
            31
            
            19
            
            19
            
            19
            
            90Net
      (charge-offs) recoveries
            (8)
            
            (1,007)
            
            (99)
            
            (27)
            
            75Provision
      for loan losses
            651
            
            122
            
            150
            
            200
            
            300Balance
      at end of year
            $3,453
            
            $2,810
            
            $3,695
            
            $3,644
            
            $3,471Ratios:Net
      charge-offs to average loans outstanding
            (0.00%)
            
            (0.32%)
            
            (0.03%)
            
            (0.01%)
            
            0.03%Allowance
      for loan losses to non-performing loans at end of year
            71.56%
            
            78.91%
            
            71.24%
            
            111.99%
            
            212.29%Allowance
      for loan losses to total loans at end of year
            0.96%
            
            0.85%
            
            1.15%
            
            1.34%
            
            1.38%








As shown in
the table above, the provision for loan losses has increased over the past year.
This is due to increases in loan delinquencies, increases in non-accrual loans,
general economic conditions, and growth in the loan portfolio. The Company
completes its loan loss review using a calculation that uses specific reserves
on impaired credits. During this review process, the Company has implemented a
qualitative review of the impaired loans, using historical charge-offs as the
starting point and then adding additional basis points for specific qualitative
factors. Adjustments to the provision are made when quarterly reviews indicate
that revisions are necessary.





13


The
following table sets forth the Company’s percent of allowance by loan category
and the percent of the loans to total loans in each of the categories listed at
the dates indicated. The allowance for loan losses allocated to each category is
not necessarily indicative of future losses in any particular category and does
not restrict the use of the allowance to absorb losses in other
categories:








At
      June 30,2008
            
            2007
            
            2006Allowance
      for Loan Losses
            
            Loan
      Balance by Category
            
            Percent
      of Loans in Each Category to Total Loans
            
            Allowance
      for Loan Losses
            
            Loan
      Balance by Category
            
            Percent
      of Loans in Each Category to Total Loans
            
            Allowance
      for Loan Losses
            
            Loan
      Balance by Category
            
            Percent
      of Loans in Each Category to Total Loans(Dollars
      In Thousands)Mortage
      loans on real estate:Residential
            
            $464
            
            $121,864
            
            33.75
            %
            $287
            
            $116,178
            
            35.21
            %
            $287
            
            $111,849
            
            34.88
            %Construction
            
            91
            
            11,308
            
            3.13
            
            141
            
            21,251
            
            6.44
            
            141
            
            22,314
            
            6.95Commercial
            
            850
            
            117,636
            
            32.59
            
            539
            
            90,538
            
            27.45
            
            744
            
            91,226
            
            28.45Home
      equity
            
            304
            
            57,790
            
            16.01
            
            217
            
            59,899
            
            18.15
            
            217
            
            64,132
            
            20.00Total
      mortgage loans on real estate
            1,709
            
            308,598
            
            85.48
            
            1,184
            
            287,866
            
            87.25
            
            1,389
            
            289,521
            
            90.28Other
      loans:Commercial
            
            1,681
            
            32,509
            
            8.99
            
            1,469
            
            25,472
            
            7.71
            
            2,123
            
            22,609
            
            7.05Consumer
      and other
            63
            
            19,967
            
            5.53
            
            157
            
            16,644
            
            5.04
            
            183
            
            8,574
            
            2.67Total
      other loans
            1,744
            
            52,476
            
            14.52
            
            1,626
            
            42,116
            
            12.75
            
            2,306
            
            31,183
            
            9.72Total
      loans
            
            $3,453
            
            $361,074
            
            100.00
            %
            $2,810
            
            $329,982
            
            100.00
            %
            $3,695
            
            $320,704
            
            100.00
            %At
      June 30,2005
            
            2004Allowance
      for Loan Losses
            
            Loan
      Balance by Category
            
            Percent
      of Loans in Each Category to Total Loans
            
            Allowance
      for Loan Losses
            
            Loan
      Balance by Category
            
            Percent
      of Loans in Each Category to Total Loans(Dollars
      In Thousands)Mortage
      loans on real estate:Residential
            
            $180
            
            $91,542
            
            33.57
            %
            $500
            
            $86,531
            
            34.38
            %Construction
            
            -
            
            11,996
            
            4.40
            
            -
            
            4,850
            
            1.93Commercial
            
            3,146
            
            88,766
            
            32.54
            
            2,810
            
            90,551
            
            35.98Home
      equity
            
            313
            
            53,711
            
            19.70
            
            -
            
            50,080
            
            19.90Total
      mortgage loans on real estate
            3,639
            
            246,015
            
            90.21
            
            3,310
            
            232,012
            
            92.19Other
      loans:Commercial
            
            -
            
            21,485
            
            7.88
            
            27
            
            14,989
            
            5.96Consumer
      and other
            5
            
            5,202
            
            1.91
            
            134
            
            4,674
            
            1.85Total
      other loans
            5
            
            26,687
            
            9.79
            
            161
            
            19,663
            
            7.81Total
      loans
            
            $3,644
            
            $272,702
            
            100.00
            %
            $3,471
            
            $251,675
            
            100.00
            %





14


Investment
Activities




General.  The
Company’s investment policy is approved and adopted by the Board of Directors.
The Chief Executive Officer, and the Chief Financial Officer, as authorized by
the Board of Directors, implement this policy based on the established
guidelines within the written policy.





The basic
objectives of the investment function are to enhance the profitability of the
Company by keeping its investable funds fully employed at the maximum after-tax
return, to provide adequate regulatory and operational liquidity, to minimize
and/or adjust the interest rate risk position of the Company, to assist in
reducing the Company’s corporate tax liability, to minimize the Company’s
exposure to credit risk, to provide collateral for pledging requirements, to
serve as a countercyclical balance to earnings by absorbing funds when the
Company’s loan demand is low and infusing funds when loan demand is high and to
provide a diversity of earning assets to mortgage/loan investments.





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.





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
securities 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.  Gains and losses on disposition of securities are recorded on
the trade date and determined using the specific identification
method.





Government-Sponsored
Enterprises.  At June 30,
2008, the Company’s government-sponsored enterprises portfolio totaled $37.2
million, or 30.0% of the total portfolio on that date.




Mortgage-Backed
Securities.At
June 30, 2008, the Company’s portfolio of mortgage-backed securities totaled
$85.4 million, or 69.0% of the portfolio on that date, and consisted of
pass-through securities totaling $78.7 million and collateralized mortgage
obligations totaling $6.7 million directly insured or guaranteed by Freddie Mac,
Fannie Mae or the Government National Mortgage Association (“Ginnie Mae”).
Privately-issued mortgage-backed securities totaled $13.6 million at June 30,
2008. At June 30, 2008, all privately-issued mortgage-backed securities were
rated ‘AAA’.




Marketable Equity
Securities.  At June 30,
2008, the Company’s portfolio of marketable equity securities totaled $1.3
million, or 1.0% of the portfolio at that date, and consisted of common and
preferred stock of various corporations. The Company’s investment policy
requires no more than 5% of Tier I capital in any one issuer and no more than
20% of Tier I capital in any one industry.  The total of all
investments in common and preferred stocks may not exceed 100% of Tier I
capital.  Issues must be listed on the NYSE, or AMEX or traded on
NASDAQ.





Restricted Equity
Securities.  At June 30,
2008, the Company held $5.2 million of FHLB stock. This stock is restricted and
must be held as a condition of membership in the FHLB and as a condition for
Hampden Bank to borrow from the FHLB.




15


The
following table sets forth certain information regarding the amortized cost and
market values of the Company’s investment securities at the dates
indicated:


At
      June 30,2008
            
            2007
            
            2006Amortized
      Cost
            
            Fair
      Value
            
            Amortized
      Cost
            
            Fair
      Value
            
            Amortized
      Cost
            
            Fair
      Value(In
      Thousands)Securities
      available for sale:Government-sponsored
      enterprises
            $36,962
            
            $37,196
            
            $56,677
            
            $56,483
            
            $24,283
            
            $23,793Corporate
      bonds and other obligations
            -
            
            -
            
            1,689
            
            1,684
            
            2,094
            
            2,056Mortgage-backed
      securities
            85,892
            
            85,433
            
            69,786
            
            68,328
            
            83,590
            
            80,442Total
      debt securities
            122,854
            
            122,629
            
            128,152
            
            126,495
            
            109,967
            
            106,291Marketable
      equity securitiesCommon
      stock
            1,661
            
            1,263
            
            1,814
            
            1,852
            
            2,584
            
            2,470Money
      market preferred stock
            -
            
            -
            
            20,800
            
            20,800
            
            1,996
            
            2,000Total
      marketable equity securities
            1,661
            
            1,263
            
            22,614
            
            22,652
            
            4,580
            
            4,470Total
      securities available for sale
            124,515
            
            123,892
            
            150,766
            
            149,147
            
            114,547
            
            110,761Restricted
      equity securities:Federal
      Home Loan Bank of Boston stock
            5,233
            
            5,233
            
            4,607
            
            4,607
            
            5,273
            
            5,273Total
      securities
            $129,748
            
            $129,125
            
            $155,373
            
            $153,754
            
            $119,820
            
            $116,034


The table
below sets forth certain information regarding the amortized cost, weighted
average yields by contractual maturity of the Company’s debt securities
portfolio at June 30, 2008. In the case of mortgage-backed securities, this
table does not reflect scheduled principal payments, unscheduled prepayments, or
the ability of certain of these securities to reprice prior to their contractual
maturity:






One
      Year or Less
            
            More
      Than One Year Through Five Years
            
            More
      Than Five Years Through Ten Years
            
            More
      Than Ten Years
            
            Total
      SecuritiesAmortized
      Cost
            
            Weighted
      Average Yield
            
            Amortized
      Cost
            
            Weighted
      Average Yield
            
            Amortized
      Cost
            
            Weighted
      Average Yield
            
            Amortized
      Cost
            
            Weighted
      Average Yield
            
            Amortized
      Cost
            
            Weighted
      Average Yield(Dollars
      In Thousands)Securities
      available for sale:Government-sponsored
      enterprises
            $2,999
            
            3.37
            %
            $33,963
            
            4.70
            %
            $-
            
            -
            %
            $-
            
            -
            %
            $36,962
            
            4.59
            %Mortgage-backed
      securities
            -
            
            -
            
            4,412
            
            3.63
            
            15,421
            
            5.10
            
            66,059
            
            4.71
            
            85,892
            
            4.73Total
      debt securities
            $2,999
            
            
            
            $38,375
            
            
            
            $15,421
            
            
            
            $66,059
            
            
            
            $122,854


16


Sources
of Funds




General.  Deposits are the
primary source of the Company’s funds for lending and other investment purposes.
In addition to deposits, the Company obtains funds from the amortization and
prepayment of loans and mortgage-backed securities, the sale or maturity of
investment securities, advances from the FHLB, and cash flows generated by
operations.





Deposits.  Consumer and
commercial deposits are gathered primarily from the Company’s primary market
area through the offering of a broad selection of deposit products including
checking, regular savings, money market deposits and time deposits, including
certificate of deposit accounts and individual retirement accounts. The FDIC
insures deposits up to certain limits (generally, $100,000 per depositor except
self-directed retirement accounts, which are insured up to $250,000 per
depositor) and the DIF fully insures amounts in excess of such
limits.




Competition
and general market conditions affect the Company’s ability to attract and retain
deposits.  We offer Remote Deposit Capture to our customers, which
allows us to expand our deposit gathering outside of our normal deposit area.
The Company offers rates on various deposit products based on local competitive
pricing and the Company’s need for new funds.  Occasionally, the
Company does offer “special” rate pricing in an effort to attract new
customers.  The Company does not have any brokered
deposits.





The
following table sets forth certain information relative to the composition of
the Company’s average deposit accounts and the weighted average interest rate on
each category of deposits:







Years
      Ended June 30,2008
            
            2007
            
            2006Average
      Balance
            
            Percent
            
            Weighted
      Average Rate
            
            Average
      Balance
            
            Percent
            
            Weighted
      Average Rate
            
            Average
      Balance
            
            Percent
            
            Weighted
      Average Rate(Dollars
      In Thousands)Deposit
      type:Demand
            $34,335
            
            11.09
            %
            -
            %
            $32,851
            
            10.09
            %
            -
            %
            $26,980
            
            8.72
            %
            -
            %Savings
            68,065
            
            21.97
            
            1.79
            
            59,575
            
            18.29
            
            2.79
            
            33,429
            
            10.80
            
            0.51Money
      market
            19,958
            
            6.44
            
            1.70
            
            27,239
            
            8.36
            
            2.55
            
            27,792
            
            8.98
            
            1.60NOW
      accounts
            16,571
            
            5.35
            
            0.94
            
            20,615
            
            6.33
            
            1.03
            
            30,593
            
            9.89
            
            0.96Total
      transaction accounts
            138,929
            
            44.85
            
            1.23
            
            140,280
            
            43.07
            
            1.83
            
            118,794
            
            38.39
            
            0.77Certificates
      of deposit
            170,849
            
            55.15
            
            3.99
            
            185,393
            
            56.93
            
            4.55
            
            190,615
            
            61.61
            
            4.20Total
      deposits
            $309,778
            
            100.00
            %
            2.75
            %
            $325,673
            
            100.00
            %
            3.38
            %
            $309,409
            
            100.00
            %
            2.88
            %










17


The following
table sets forth the time deposits of the Company classified by interest rate as
of the dates indicated:





At
      June 30,Interest
      Rate
            2008
            
            2007
            
            2006(In
      Thousands)Less
      than 2%
            $6,326
            
            $8,057
            
            $15,1962.00%
      - 2.99%
            26,722
            
            13,812
            
            10,8643.00%
      - 3.99%
            57,520
            
            6,384
            
            40,5044.00%
      - 4.99%
            58,970
            
            64,345
            
            42,1485%
      or Greater
            39,857
            
            89,008
            
            83,182Total
            $189,395
            
            $181,606
            
            $191,894








The following
table sets forth the amount and maturities of time deposits at June 30,
2008:





Year
      Ending June 30,Interest
      Rate
            2009
            
            2010
            
            2011
            
            2012
            
            After
              June
      30, 2012
            
            Total(In
      Thousands)Less
      than 2%
            $6,326
            
            $-
            
            $-
            
            $-
            
            $-
            
            $6,3262.00%
      - 2.99%
            23,232
            
            3,013
            
            477
            
            -
            
            -
            
            26,7223.00%
      - 3.99%
            33,836
            
            5,223
            
            14,208
            
            1,833
            
            2,420
            
            57,5204.00%
      - 4.99%
            55,642
            
            551
            
            493
            
            344
            
            1,940
            
            58,9705%
      or Greater
            16,718
            
            5,220
            
            7,436
            
            9,613
            
            870
            
            39,857Total
            $135,754
            
            $14,007
            
            $22,614
            
            $11,790
            
            $5,230
            
            $189,395


As of June
30, 2008, the aggregate amount of outstanding certificates of deposit in amounts
greater than or equal to $100,000 was approximately $106.0 million. The
following table sets forth the maturity of those certificates as of June 30,
2008:







At
      June 30, 2008(In
      Thousands)Three
      months or less
            $21,822Over
      three months through six months
            23,331Over
      six months through one year
            30,898Over
      one year through three years
            19,327Over
      three years
            10,636Total
            $106,014








18





Borrowings.  The Company
utilizes advances from the FHLB primarily in connection with funding growth in
the balance sheet and to assist in the management of its interest rate risk by
match funding longer term fixed rate loans. FHLB advances are secured primarily
by certain of the Company’s mortgage loans, investment securities and by it’s
holding of FHLB stock. As of June 30, 2008, the Company had outstanding $95.5
million in FHLB advances, and had the ability to borrow an additional $88.1
million based on available collateral.




The
following table sets forth certain information concerning balances and interest
rates on the Company’s FHLB advances at the dates and for the years
indicated:




At
      or For the Years Ended June 30,2008
            
            2007
            
            2006(Dollars
      In Thousands)Balance
      at end of year
            $95,477
            
            $76,334
            
            $99,824Average
      balance during year
            92,770
            
            84,782
            
            88,094Maximum
      outstanding at any month end
            98,394
            
            104,628
            
            99,824Weighted
      average interest rate at end of year
            4.16%
            
            4.45%
            
            4.35%Weighted
      average interest rate during year
            4.36%
            
            4.41%
            
            4.10%








Of the
$95.5 million in advances outstanding at June 30, 2008, $39.0 million bearing a
weighted-average interest rate of 4.16% are callable by the FHLB at its option
and in its sole discretion only if the level of a specific index were to exceed
a pre-determined maximum rate. In the event the FHLB calls these advances, the
Company will evaluate its liquidity and interest rate sensitivity position at
that time and determine whether to replace the called advances with new
borrowings.





The
Company recognizes the need to assist the communities it serves with economic
development initiatives. These initiatives focus on creating or retaining jobs
for lower income workers, benefits for lower income families, supporting small
business and funding affordable housing programs. To assist in funding these
initiatives, the Company has participated in FHLB’s Community Development
Advance program. The Company continues to originate loans that qualify under
this program.





In
addition to FHLB borrowings as of June 30, 2008, the Company had $13.2 million
of overnight repurchase agreements with business customers.  These
repurchases agreements are collateralized by government-sponsored enterprise
investments.





Personnel




As of
June 30, 2008, the Company had 96 full-time and 9 part-time employees, none of
whom is represented by a collective bargaining unit. The Company considers its
relationship with its employees to be good.




Subsidiary
Activities and Portfolio Management Services


Hampden
Bancorp, Inc. conducts its principal business activities through its
wholly-owned subsidiary, Hampden Bank. Hampden Bank has two operating
subsidiaries, Hampden Investment Corporation and Hampden Insurance
Agency.




Hampden
Investment Corporation. Hampden Investment Corporation (“HIC”) is a
Massachusetts securities corporation and a wholly owned subsidiary of Hampden
Bank. HIC is an investment company that engages in buying, selling and holding
securities on its own behalf. At June 30, 2008, HIC had total assets of $62.3
million consisting primarily of government-sponsored enterprise bonds and
mortgage backed securities. HIC’s net income for the years ending June 30, 2008
and June 30, 2007 was $2.0 million and $1.7 million respectively. As a
Massachusetts securities corporation, HIC has a lower state income tax rate
compared to other corporations.





Hampden Insurance
Agency. Hampden Insurance Agency (“HIA”) is an inactive insurance
agency.  As of June 30, 2008 HIA had no assets.




Hampden
Bancorp, Inc.’s subsidiary, in addition to Hampden Bank, is described
below.




Hampden LS,
Inc. Hampden Bancorp, Inc. contributed funds to a subsidiary, Hampden LS,
Inc. to enable it to make a 15-year loan to the employee stock ownership plan to
allow it to purchase shares of the Company common stock as part of the
completion of the initial public offering. On January 16, 2007, at the
completion of the initial public offering the ESOP purchased 635,990 shares, or
8% of the 7,949,879 shares outstanding from the initial public
offering.




19





REGULATION
AND SUPERVISION





General




Hampden
Bancorp, Inc. is a Delaware corporation and registered bank holding company.
Hampden Bancorp, Inc. is regulated as a bank holding company by the Federal
Reserve Board. Hampden Bank is a Massachusetts-charted stock savings bank.
Hampden Bank is the wholly-owned subsidiary of Hampden Bancorp,
Inc.  Hampden Bank’s deposits are insured up to applicable limits by
the FDIC and by DIF of Massachusetts for amounts in excess of the FDIC insurance
limits. Hampden Bank is subject to extensive regulation by the Massachusetts
Commissioner of Banks, as its chartering agency, and by the FDIC, as its deposit
insurer. Hampden Bank is required to file reports with, and is periodically
examined by, the FDIC and the Massachusetts Commissioner of Banks concerning its
activities and financial condition and must obtain regulatory approvals prior to
entering into certain transactions, including, but not limited to, mergers with
or acquisitions of other financial institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of depositors and, for
purposes of the FDIC, the protection of the insurance fund. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the
Massachusetts legislature, the FDIC or Congress, could have a material adverse
impact on Hampden Bancorp, Hampden Bank and their operations. Hampden Bank is a
member of the FHLB, and regulated as a bank holding company by the Federal
Reserve Board.




Certain
regulatory requirements applicable to Hampden Bank and to Hampden Bancorp, Inc.
are referred to below. The description of statutory provisions and regulations
applicable to savings institutions and their holding companies set forth below
does not purport to be a complete description of such statutes and regulations
and their effects on Hampden Bank and Hampden Bancorp, Inc. and is qualified in
its entirety by reference to the actual laws and regulations.




Massachusetts
Bank Regulation




General.    As
a Massachusetts-chartered savings bank, Hampden Bank is subject to supervision,
regulation and examination by the Massachusetts Commissioner of Banks and to
various Massachusetts statutes and regulations which govern, among other things,
investment powers, lending and deposit-taking activities, borrowings,
maintenance of retained earnings and reserve accounts, distribution of earnings
and payment of dividends. In addition, Hampden Bank is subject to Massachusetts
consumer protection and civil rights laws and regulations. The approval of the
Massachusetts Commissioner of Banks or the Board of Bank Incorporation is
required for a Massachusetts-chartered bank to establish or close branches,
merge with other financial institutions, organize a holding company, issue stock
and undertake certain other activities.




In
response to Massachusetts laws enacted in the last few years, the Massachusetts
Commissioner of Banks adopted rules that generally allow Massachusetts banks to
engage in activities permissible for federally chartered banks or banks
chartered by another state. The Commissioner also has adopted procedures
reducing regulatory burdens and expense and expediting branching by
well-capitalized and well-managed banks.




Investment
Activities.    In general, Massachusetts-chartered
savings banks may invest in preferred and common stock of any corporation
organized under the laws of the United States or any state provided such
investments do not involve control of any corporation and do not, in the
aggregate, exceed 4.0% of the bank’s deposits. Massachusetts-chartered savings
banks may in addition invest an amount equal to 1.0% of their deposits in stocks
of Massachusetts corporations or companies with substantial employment in
Massachusetts which have pledged to the Massachusetts Commissioner of Banks that
such monies will be used for further development within the Commonwealth of
Massachusetts. However, these powers are constrained by federal law. See “—Federal Bank Regulation—Investment
Activities” for federal restrictions on equity investments.




Loans-to-One-Borrower
Limitations.    Massachusetts banking law grants
broad lending authority. However, with certain limited exceptions, total
obligations of one borrower to a bank may not exceed 20.0% of the total of the
bank’s capital.




Loans
to a Bank’s Insiders.    The Massachusetts banking
laws prohibit any executive officer, director or trustee from borrowing,
otherwise becoming indebted, or becoming liable for a loan or other extension of
credit by such bank to any other person, except for any of the following loans
or extensions of credit: (i) loans or extension of credit, secured or
unsecured, to an officer of the bank in an amount not exceeding $100,000;
(ii) loans or extensions of credit intended or secured for educational
purposes to an officer of the bank in an amount not exceeding $200,000;
(iii) loans or extensions of credit secured by a mortgage on residential
real estate to be occupied in whole or in part by the officer to whom the loan
or extension of credit is made, in an amount not exceeding $750,000; and
(iv) loans or extensions of credit to a director or trustee of the bank who
is not also an officer of the bank in an amount permissible under the bank’s
loan to one borrower limit.




20


The
loans listed above require approval of the majority of the members of the
Company’s Board of Directors, excluding any member involved in the loan or
extension of credit. No such loan or extension of credit may be granted with an
interest rate or other terms that are preferential in comparison to loans
granted to persons not affiliated with the savings bank.




Dividends.    A
Massachusetts stock bank may declare from net profits cash dividends not more
frequently than quarterly and non-cash dividends at any time. No dividends may
be declared, credited or paid if the bank’s capital stock is impaired. The
approval of the Massachusetts Commissioner of Banks is required if the total of
all dividends declared in any calendar year exceeds the total of its net profits
for that year combined with its retained net profits of the preceding two years.
Net profits for this purpose means the remainder of all earnings from current
operations plus actual recoveries on loans and investments and other assets
after deducting from the total thereof all current operating expenses, actual
losses, accrued dividends on preferred stock, if any, and all federal and state
taxes.




Regulatory
Enforcement Authority.    Any Massachusetts bank that
does not operate in accordance with the regulations, policies and directives of
the Massachusetts Commissioner of Banks may be subject to sanctions for
non-compliance, including seizure of the property and business of the bank and
suspension or revocation of its charter. The Massachusetts Commissioner of Banks
may under certain circumstances suspend or remove officers or directors who have
violated the law, conducted the bank’s business in a manner which is unsafe,
unsound or contrary to the depositors interests or been negligent in the
performance of their duties. In addition, upon finding that a bank has engaged
in an unfair or deceptive act or practice, the Massachusetts Commissioner of
Banks may issue an order to cease and desist and impose a fine on the bank
concerned. Finally, Massachusetts consumer protection and civil rights statutes
applicable to Hampden Bank permit private individual and class action law suits
and provide for the rescission of consumer transactions, including loans, and
the recovery of statutory and punitive damage and attorney’s fees in the case of
certain violations of those statutes.




Depositors
Insurance Fund.    All Massachusetts-chartered
savings banks are required to be members of the DIF, a corporation that insures
savings bank deposits in excess of federal deposit insurance coverage. The DIF
is authorized to charge savings banks an annual assessment of up to 1/50th of 1.0%
of a savings bank’s deposit balances in excess of amounts insured by the
FDIC.




Federal
Bank Regulation




Capital
Requirements.    Under FDIC regulations, federally
insured state-chartered banks that are not members of the Federal Reserve System
(“state non-member banks”), such as Hampden Bank, are required to comply with
minimum leverage capital requirements. For an institution determined by the FDIC
to not be anticipating or experiencing significant growth and to be, in general,
a strong banking organization rated composite 1 under Uniform Financial
Institutions Ranking System established by the Federal Financial Institutions
Examination Council, the minimum capital leverage requirement is a ratio of Tier
1 capital to total assets of 3.0%. For all other institutions, the minimum
leverage capital ratio is not less than 4.0%. Tier 1 capital is the sum of
common stockholder’s equity, noncumulative perpetual preferred stock (including
any related retained earnings) and minority investments in certain subsidiaries,
less intangible assets (except for certain servicing rights and credit card
relationships) and certain other specified items.




The
FDIC regulations require state non-member banks to maintain certain levels of
regulatory capital in relation to regulatory risk-weighted assets. The ratio of
regulatory capital to regulatory risk-weighted assets is referred to as a bank’s
“risk-based capital ratio.” Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet items (including recourse
obligations, direct credit substitutes and residual interests) to four
risk-weighted categories ranging from 0.0% to 100.0%, with higher levels of
capital being required for the categories perceived as representing greater
risk. For example, under the Federal Deposit Insurance Corporation’s
risk-weighting system, cash and securities backed by the full faith and credit
of the U.S. government are given a 0.0% risk weight, loans secured by one- to
four-family residential properties generally have a 50.0% risk weight, and
commercial loans have a risk weighting of 100.0%.




State
non-member banks must maintain a minimum ratio of total capital to risk-weighted
assets of at least 8.0%, of which at least one-half must be Tier 1 capital.
Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital
items, which include allowances for loan losses in an amount of up to 1.25% of
risk-weighted assets, cumulative preferred stock and certain other capital
instruments, and a portion of the net unrealized gain on equity securities. The
includable amount of Tier 2 capital cannot exceed the amount of the
institution’s Tier 1 capital. Banks that engage in specified levels of trading
activities are subject to adjustments in their risk based capital calculation to
ensure the maintenance of sufficient capital to support market
risk.




21




The
FDIC Improvement Act required each federal banking agency to revise its
risk-based capital standards for insured institutions to ensure that those
standards take adequate account of interest-rate risk, concentration of credit
risk, and the risk of nontraditional activities, as well as to reflect the
actual performance and expected risk of loss on multi- family residential loans.
The Federal Deposit Insurance Corporation, along with the other federal banking
agencies, has adopted a regulation providing that the agencies will take into
account the exposure of a bank’s capital and economic value to changes in
interest rate risk in assessing a bank’s capital adequacy. The FDIC also has
authority to establish individual minimum capital requirements in appropriate
cases upon determination that an institution’s capital level is, or is likely to
become, inadequate in light of the particular circumstances.




Standards for
Safety and Soundness.    As required by statute, the
federal banking agencies adopted final regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness to implement safety and
soundness standards. The guidelines set forth the safety and soundness standards
that the federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired. The guidelines
address internal controls and information systems, internal audit system, credit
underwriting, loan documentation, interest rate exposure, asset growth, asset
quality, earnings and compensation, fees and benefits. Most recently, the
agencies have established standards for safeguarding customer information. If
the appropriate federal banking agency determines that an institution fails to
meet any standard prescribed by the guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard.




Investment
Activities.    Since the enactment of the FDIC
Improvement Act, all state-chartered Federal Deposit Insurance
Corporation-insured banks, including savings banks, have generally been limited
in their investment activities to principal and equity investments of the type
and in the amount authorized for national banks, notwithstanding state law. FDIC
Improvement Act and the FDIC regulations permit exceptions to these limitations.
For example, state chartered banks may, with FDIC approval, continue to exercise
state authority to invest in common or preferred stocks listed on a national
securities exchange or the NASDAQ Global Market and in the shares of an
investment company registered under the Investment Company Act of 1940, as
amended. The maximum permissible investment is 100.0% of Tier 1 Capital, as
specified by the Federal Deposit Insurance Corporation’s regulations, or the
maximum amount permitted by Massachusetts law, whichever is less. Hampden Bank
received approval from the FDIC to retain and acquire such equity instruments
equal to the lesser of 100% of Hampden Banks’ Tier 1 capital or the maximum
permissible amount specified by Massachusetts law. Any such grandfathered
authority may be terminated upon the Federal Deposit Insurance Corporation’s
determination that such investments pose a safety and soundness risk or upon the
occurrence of certain events such as the savings bank’s conversion to a
different charter. In addition, the FDIC is authorized to permit such
institutions to engage in state authorized activities or investments not
permissible for national banks (other than non-subsidiary equity investments) if
they meet all applicable capital requirements and it is determined that such
activities or investments do not pose a significant risk to Hampden Bank
Insurance Fund. The FDIC has adopted regulations governing the procedures for
institutions seeking approval to engage in such activities or investments. The
Gramm-Leach-Bliley Act of 1999 specifies that a non-member bank may control a
subsidiary that engages in activities as principal that would only be permitted
for a national bank to conduct in a “financial subsidiary” if a bank meets
specified conditions and deducts its investment in the subsidiary for regulatory
capital purposes.




Interstate
Banking and Branching.    The Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994, or the Interstate Banking Act,
permits adequately capitalized bank holding companies to acquire banks in any
state subject to specified concentration limits and other conditions. The
Interstate Banking Act also authorizes the interstate merger of banks. In
addition, among other things, the Interstate Banking Act permits banks to
establish new branches on an interstate basis provided that such action is
specifically authorized by the law of the host state.




Prompt
Corrective Regulatory Action.    Federal law
requires, among other things, that federal bank regulatory authorities take
“prompt corrective action” with respect to banks that do not meet minimum
capital requirements. For these purposes, the law establishes five capital
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. As of
June 30, 2008, the most recent notification from the FDIC categorized
Hampden Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes have changed Hampden Bank’s category.




The
FDIC has adopted regulations to implement the prompt corrective action
legislation. An institution is deemed to be “well capitalized” if it has a total
risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio
of 6.0% or greater and a leverage ratio of 5.0% or greater. An institution is
“adequately capitalized” if it has a total risk-based capital ratio of 8.0% or
greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and generally a
leverage ratio of 4.0% or greater. An institution is “undercapitalized” if it
has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based
capital ratio of less than 4.0%, or generally a leverage ratio of less than
4.0%. An institution is deemed to be “significantly undercapitalized” if it has
a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital
ratio of less than 3.0%, or a leverage ratio of less than 3.0%. An institution
is considered to be “critically undercapitalized” if it has a ratio of tangible
equity (as defined in the regulations) to total assets that is equal to or less
than 2.0%.




22


“Undercapitalized”
banks must adhere to growth, capital distribution (including dividend) and other
limitations and are required to submit a capital restoration plan. A bank’s
compliance with such a plan is required to be guaranteed by any company that
controls the undercapitalized institution in an amount equal to the lesser of
5.0% of the institution’s total assets when deemed undercapitalized or the
amount necessary to achieve the status of adequately capitalized. If an
“undercapitalized” bank fails to submit an acceptable plan, it is treated as if
it is ”significantly undercapitalized.” “Significantly undercapitalized” banks
must comply with one or more of a number of additional restrictions, including
but not limited to an order by the FDIC to sell sufficient voting stock to
become adequately capitalized, requirements to reduce total assets, cease
receipt of deposits from correspondent banks or dismiss directors or officers,
and restrictions on interest rates paid on deposits, compensation of executive
officers and capital distributions by the parent holding company. “Critically
undercapitalized” institutions are subject to additional measures including,
subject to a narrow exception, the appointment of a receiver or conservator
within 270 days after it obtains such status.




Transaction
with Affiliates and Regulation W of the Federal Reserve
Regulations.    Transactions between banks and their
affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An
affiliate of a bank is any company or entity that controls, is controlled by or
is under common control with the bank. In a holding company context, the parent
bank holding company and any companies which are controlled by such parent
holding company are affiliates of the bank. Generally, Sections 23A and 23B of
the Federal Reserve Act and Regulation W (i) limit the extent to which
the bank or its subsidiaries may engage in “covered transactions” with any one
affiliate to an amount equal to 10.0% of such institution’s capital stock and
retained earnings, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20.0% of such institution’s capital stock
and retained earnings and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term “covered transaction”
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar transactions. In addition, loans or other extensions of credit by
the financial institution to the affiliate are required to be collateralized in
accordance with the requirements set forth in Section 23A of the Federal
Reserve Act.




The
Gramm-Leach-Bliley Act amended several provisions of Sections 23A and 23B of the
Federal Reserve Act. The amendments provide that so-called “financial
subsidiaries” of banks are treated as affiliates for purposes of Sections 23A
and 23B of the Federal Reserve Act, but the amendment provides that (i) the
10.0% capital limit on transactions between the bank and such financial
subsidiary as an affiliate is not applicable, and (ii) the investment by
the bank in the financial subsidiary does not include retained earnings in the
financial subsidiary. Certain anti-evasion provisions have been included that
relate to the relationship between any financial subsidiary of a bank and sister
companies of the bank: (1) any purchase of, or investment in, the
securities of a financial subsidiary by any affiliate of the parent bank is
considered a purchase or investment by the bank; or (2) if the Federal
Reserve Board determines that such treatment is necessary, any loan made by an
affiliate of the parent bank to the financial subsidiary is to be considered a
loan made by the parent bank.




The
Sarbanes-Oxley Act of 2002 generally prohibits loans by a company to its
executive officers and directors. However, the law contains a specific exception
for loans by a depository institution to its executive officers and directors in
compliance with federal banking laws. Under such laws, Hampden Bank’s authority
to extend credit to executive officers, directors and 10% shareholders
(“Insiders”) of Hampden Bancorp, Inc. and Hampden Bank, as well as entities such
persons control, is limited. The law limits both the individual and aggregate
amount of loans Hampden Bank may make to Insiders based, in part, on Hampden
Bank’s capital position and requires certain board approval procedures to be
followed. Such loans are required to be made on terms substantially the same as
those offered to unaffiliated individuals and not involve more than the normal
risk of repayment. There is an exception for loans made pursuant to a benefit or
compensation program that is widely available to all employees of the
institution and does not give preference to Insiders over other employees. Loans
to executive officers are further limited by specific categories.




Enforcement.    The
FDIC has extensive enforcement authority over insured state savings banks,
including Hampden Bank. This enforcement authority includes, among other things,
the ability to assess civil money penalties, issue cease and desist orders and
remove directors and officers. In general, these enforcement actions may be
initiated in response to violations of laws and regulations and unsafe or
unsound practices. The FDIC has authority under federal law to appoint a
conservator or receiver for an insured bank under limited circumstances. The
FDIC is required, with certain exceptions, to appoint a receiver or conservator
for an insured state non-member bank if that bank was “critically
undercapitalized” on average during the calendar quarter beginning 270 days
after the date on which the institution became “critically undercapitalized.”
The FDIC may also appoint itself as conservator or receiver for an insured state
non-member institution under specific circumstances on the basis of the
institution’s financial condition or upon the occurrence of other events,
including: (1) insolvency; (2) substantial dissipation of assets or
earnings through violations of law or unsafe or unsound practices;
(3) existence of an unsafe or unsound condition to transact business; and
(4) insufficient capital, or the incurring of losses that will deplete
substantially all of the institution’s capital with no reasonable prospect of
replenishment without federal assistance.




Insurance
of Deposit Accounts.    The FDIC has adopted a
risk-based insurance assessment system. The FDIC assigns an institution to one
of three capital categories based on the institution’s financial condition
consisting of (1) well capitalized, (2) adequately capitalized or
(3) undercapitalized, and one of three supervisory subcategories within
each capital group.




23


The
supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution’s primary federal
regulator and information which the FDIC determines to be relevant to the
institution’s financial condition and the risk posed to the deposit insurance
funds. An institution’s assessment rate depends on the capital category and
supervisory category to which it is assigned. Assessment rates for insurance
fund deposits currently range from 5 basis points for the strongest institution
to 43 basis points for the weakest. Insured institutions are also required to
assist in the repayment of bonds issued by the Financing Corporation in the late
1980’s to recapitalize the Federal Savings and Loan Insurance Corporation. For
fiscal 2008, the total FDIC assessment was $36,000, after the FDIC deposit
insurance credit, for Hampden Bank. The FDIC is authorized to raise the
assessment rates. The FDIC has exercised this authority several times in the
past and may raise insurance premiums in the future. If such action is taken by
the FDIC, it could have an adverse effect on the earnings of Hampden
Bank.




The
FDIC may terminate insurance of deposits if it finds that the institution is in
an unsafe or unsound condition to continue operations, has engaged in unsafe or
unsound practices, or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC. The management of Hampden Bank does not know
of any practice, condition or violation that might lead to termination of
deposit insurance.




Federal
Deposit Insurance Reform Act of 2005.    The Federal
Deposit Insurance Reform Act of 2005, or the Act, signed by the President on
February 8, 2006, revised the laws governing the federal deposit insurance
system. The Act provides for the consolidation of the Bank and Savings
Association Insurance Funds into a combined “Deposit Insurance
Fund.”




Under
the Act, insurance premiums are to be determined by the FDIC based on a number
of factors, primarily the risk of loss that insured institutions pose to the
Deposit Insurance Fund. The legislation eliminates the current minimum 1.25%
reserve ratio for the insurance funds, the mandatory assessments when the ratio
falls below 1.25% and the prohibition on assessing the highest quality banks
when the ratio is above 1.25%. The Act provides the FDIC with flexibility to
adjust the new insurance fund’s reserve ratio between 1.15% and 1.5%, depending
on projected losses, economic changes and assessment rates at the end of a
calendar year.




The
Act increased deposit insurance coverage limits from $100,000 to $250,000 for
certain types of Individual Retirement Accounts, 401(k) plans and other
retirement savings accounts. While it preserved the $100,000 coverage limit for
individual accounts and municipal deposits, the FDIC was furnished with the
discretion to adjust all coverage levels to keep pace with inflation beginning
in 2010. Also, institutions that become undercapitalized will be prohibited from
accepting certain employee benefit plan deposits.




Privacy
Regulations.    Pursuant to the Gramm-Leach-Bliley
Act, the FDIC has published final regulations implementing the privacy
protection provisions of the Gramm-Leach-Bliley Act. The regulations generally
require that Hampden Bank disclose its privacy policy, including identifying
with whom it shares a customer’s “non-public personal information,” to customers
at the time of establishing the customer relationship and annually thereafter.
In addition, Hampden Bank is required to provide its customers with the ability
to “opt-out” of having their personal information shared with unaffiliated third
parties and not to disclose account numbers or access codes to non-affiliated
third parties for marketing purposes. Hampden Bank currently has a privacy
protection policy in place and believes that such policy is in compliance with
the regulations.




Customer
Information Security.    The FDIC and other bank
regulatory agencies have adopted guidelines for establishing standards for
safeguarding nonpublic personal information about customers that implement
provisions of the Gramm-Leach Bliley Act (“Information Security Guidelines”).
Among other things, the Information Security Guidelines require each financial
institution, under the supervision and ongoing oversight of its Board of
Directors or an appropriate committee thereof, to develop, implement and
maintain a comprehensive written information security program designed to ensure
the security and confidentiality of customer information, to protect against any
anticipated threats or hazards to the security or integrity of such information
and to protect against unauthorized access to or use of such information that
could result in substantial harm or inconvenience to any customer. In
April 2005, the FDIC and other bank regulatory agencies issued further
guidance for the establishment of these Information Security Guidelines,
requiring financial institutions to develop and implement response programs
designed to address incidents of unauthorized access to sensitive customer
information maintained by the financial institution or its service provider,
including customer notification procedures. Hampden Bank currently has
Information Security Guidelines in place and believes that such guidelines are
in compliance with the regulations.




Community
Reinvestment Act.    Under the Community Reinvestment
Act (the “CRA”) as amended and as implemented by FDIC regulations, a bank has a
continuing and affirmative obligation, consistent with its safe and sound
operation, to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution’s discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.




24


The CRA
does require the FDIC, in connection with its examination of a bank, to assess
the institution’s record of meeting the credit needs of its community and to
take such record into account in its evaluation of certain applications by such
institution, including applications to acquire branches and other financial
institutions. The CRA requires the FDIC to provide a written evaluation of an
institution’s CRA performance utilizing a four-tiered descriptive rating system.
Hampden Bank’s latest FDIC CRA rating was “Outstanding.”




Massachusetts
has its own statutory counterpart to the CRA which is also applicable to Hampden
Bank. The Massachusetts version is generally similar to the CRA but utilizes a
five-tiered descriptive rating system. Massachusetts law requires the
Massachusetts Commissioner of Banks to consider, but not be limited to, a bank’s
record of performance under Massachusetts law in considering any application by
the bank to establish a branch or other deposit- taking facility, to relocate an
office or to merge or consolidate with or acquire the assets and assume the
liabilities of any other banking institution. Hampden Bank’s most recent rating
under Massachusetts law was “Outstanding.”




Consumer
Protection and Fair Lending
Regulations.    Massachusetts savings banks are
subject to a variety of federal and Massachusetts statutes and regulations that
are intended to protect consumers and prohibit discrimination in the granting of
credit. These statutes and regulations provide for a range of sanctions for
non-compliance with their terms, including imposition of administrative fines
and remedial orders, and referral to the Attorney General for prosecution of a
civil action for actual and punitive damages and injunctive relief. Certain of
these statutes authorize private individual and class action lawsuits and the
award of actual, statutory and punitive damages and attorneys’ fees for certain
types of violations.




Anti-Money
Laundering




The
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT
Act”) significantly expands the responsibilities of financial institutions,
including savings and banks, in preventing the use of the U.S. financial system
to fund terrorist activities. Title III of the USA PATRIOT Act provides for a
significant overhaul of the U.S. anti-money laundering regime. Among other
provisions, Title III of the USA PATRIOT Act requires financial institutions
operating in the United States to develop new anti-money laundering compliance
programs, due diligence policies and controls to ensure the detection and
reporting of money laundering. Such required compliance programs are intended to
supplement existing compliance requirements, also applicable to financial
institutions, under the Bank Secrecy Act and the Office of Foreign Assets
Control Regulations.




Other
Regulations




Interest
and other charges collected or contracted for by Hampden Bank are subject to
state usury laws and federal laws concerning interest rates. Hampden Bank’s loan
operations are also subject to state and federal laws applicable to credit
transactions, such as the:




•Home Mortgage Disclosure
Act of 1975, requiring financial institutions to provide information to enable
the public and public officials to determine whether a financial institution is
fulfilling its obligation to help meet the housing needs of the community it
serves;





•Equal Credit Opportunity
Act, prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit;





•Fair Credit Reporting Act
of 1978, governing the use and provision of information to credit reporting
agencies;





•
Massachusetts Debt Collection Regulations, establishing standards, by defining
unfair or deceptive acts or practices, for the collection of debts from persons
within the Commonwealth of Massachusetts;





• General
Laws of Massachusetts, Chapter 167E, which governs Hampden Bank’s lending
powers; and





•Rules and regulations of
the various federal and state agencies charged with the responsibility of
implementing such federal and state laws.




The
deposit operations of Hampden Bank also are subject to, among others,
the:




• Right
to Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records;


25


•Electronic Funds Transfer
Act and Regulation E promulgated thereunder, as well as Chapter 167B of the
General Laws of Massachusetts, which govern automatic deposits to and
withdrawals from deposit accounts and customers’ rights and liabilities arising
from the use of automated teller machines and other electronic banking
services;





• Check
Clearing for the 21st Century
Act (also known as “Check 21”), which gives “substitute checks,” such as digital
check images and copies made from that image, the same legal standing as the
original paper check; and





• General Laws of Massachusetts, Chapter
167D, which governs the Hampden Bank’s deposit powers.




In
many cases, Massachusetts has similar statutes to those under federal law that
will be applicable to Hampden Bank.




Federal Reserve
System




The Federal
Reserve Board regulations require depository institutions to maintain
non-interest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The Federal Reserve Board regulations generally
require that reserves be maintained against aggregate transaction accounts as
follows: for that portion of transaction accounts aggregating $43.9 million
or less (which may be adjusted by the Federal Reserve Board) the reserve
requirement is 3.0%; and for amounts greater than $43.9 million, the
reserve requirement is $1,038,000 plus 10.0% (which may be adjusted by the
Federal Reserve Board between 8.0% and 14.0%), of the amount in excess of
$43.9 million. The first $9.3 million of otherwise reservable balances
(which may be adjusted by the Federal Reserve Board) are exempted from the
reserve requirements. Hampden Bank is in compliance with these
requirements.




Federal Home Loan Bank
System


Hampden Bank is a member
of the Federal Home Loan Bank System, which consists of 12 regional Federal Home
Loan Banks. The Federal Home Loan Bank provides a central credit facility
primarily for member institutions. Members of the Federal Home Loan Bank are
required to acquire and hold shares of capital stock in the Federal Home Loan
Bank. Hampden Bank was in compliance with this requirement with an investment in
stock of the FHLB at June 30, 2008 of $5.2 million.




The Federal
Home Loan Banks are required to provide funds for certain purposes including the
resolution of insolvent thrifts in the late 1980s and to contributing funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and result in
the Federal Home Loan Banks imposing a higher rate of interest on advances to
their members. If dividends were reduced, or interest on future Federal Home
Loan Bank advances increased, a member bank affected by such reduction or
increase would likely experience a reduction in its net interest income. Recent
legislation has changed the structure of the Federal Home Loan Banks’ funding
obligations for insolvent thrifts, revised the capital structure of the Federal
Home Loan Banks and implemented entirely voluntary membership for Federal Home
Loan Banks. There can be no assurance that such dividends will continue in the
future. Further, there can be no assurance that the impact of recent or future
legislation on the Federal Home Loan Banks also will not cause a decrease in the
value of the FHLB stock held by Hampden Bank.




Holding Company
Regulation




Hampden
Bancorp, Inc. is subject to examination, regulation, and periodic reporting
under the Bank Holding Company Act of 1956, as amended, as administered by the
Federal Reserve Board. Hampden Bancorp, Inc. is required to obtain prior
approval of the Federal Reserve Board to acquire all, or substantially all, of
the assets of any bank or holding company. Prior Federal Reserve Board approval
would be required for Hampden Bancorp, Inc. to acquire direct or indirect
ownership or control of any voting securities of any bank or holding company if,
after such acquisition, it would, directly or indirectly, own or control more
than 5% of any class of voting shares of the bank or bank holding company. In
addition to the approval of the Federal Reserve Board, before any bank
acquisition can be completed, prior approval must also be required to be
obtained from other agencies having supervisory jurisdiction over the bank to be
acquired.




A bank
holding company is generally prohibited from engaging in, or acquiring, direct
or indirect control of more than 5% of the voting securities of any company
engaged in non-banking activities. One of the principal exceptions to this
prohibition is for activities found by the Federal Reserve Board to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the principal activities that the Federal Reserve
Board has determined by regulation to be so closely related to banking are:
(i) making or servicing loans; (ii) performing certain data processing
services; (iii) providing discount brokerage services; (iv) acting as
fiduciary, investment or financial advisor; (v) leasing personal or real
property; (vi) making investments in corporations or projects designed
primarily to promote community welfare; and (vii) acquiring a savings and
loan association.




26




The
Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets
specified conditions, including being “well capitalized” and “well managed,” to
opt to become a “financial holding company” and thereby engage in a broader
array of financial activities than previously permitted. Such activities can
include insurance underwriting and investment banking.




Hampden
Bancorp, Inc. is subject to the Federal Reserve Board’s capital adequacy
guidelines for bank holding companies (on a consolidated basis) substantially
similar to those of the FDIC for Hampden Bank.




A
bank holding company is generally required to give the Federal Reserve Board
prior written notice of any purchase or redemption of then outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of the company’s
consolidated net worth. The Federal Reserve Board may disapprove such a purchase
or redemption if it determines that the proposal would constitute an unsafe and
unsound practice, or would violate any law, regulation, Federal Reserve Board
order or directive, or any condition imposed by, or written agreement with, the
Federal Reserve Board. The Federal Reserve Board has adopted an exception to
this approval requirement for well-capitalized bank holding companies that meet
certain other conditions.




The
Federal Reserve Board has issued a policy statement regarding the payment of
dividends by bank holding companies. In general, the Federal Reserve Board’s
policies provide that dividends should be paid only out of current earnings and
only if the prospective rate of earnings retention by the bank holding company
appears consistent with the organization’s capital needs, asset quality and
overall financial condition. The Federal Reserve Board’s policies also require
that a bank holding company serve as a source of financial strength to its
subsidiary banks by standing ready to use available resources to provide
adequate capital funds to those banks during periods of financial stress or
adversity and by maintaining the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks where
necessary. Under the prompt corrective action laws, the ability of a bank
holding company to pay dividends may be restricted if a subsidiary bank becomes
undercapitalized. These regulatory policies could affect the ability of Hampden
Bancorp, Inc. to pay dividends or otherwise engage in capital
distributions.




Under
the Federal Deposit Insurance Act, depository institutions are liable to the
FDIC for losses suffered or anticipated by the FDIC in connection with the
default of a commonly controlled depository institution or any assistance
provided by the FDIC to such an institution in danger of default. This law would
have potential applicability if Hampden Bancorp, Inc. ever held as a separate
subsidiary a depository institution in addition to Hampden Bank.




Hampden
Bancorp, Inc. and Hampden Bank will be affected by the monetary and fiscal
policies of various agencies of the United States Government, including the
Federal Reserve System. In view of changing conditions in the national economy
and in the money markets, it is impossible for management to accurately predict
future changes in monetary policy or the effect of such changes on the business
or financial condition of Hampden Bancorp, Inc. or Hampden Bank.




The
status of Hampden Bancorp, Inc. as a registered bank holding company under the
Bank Holding Company Act will not exempt it from certain federal and state laws
and regulations applicable to corporations generally, including, without
limitation, certain provisions of the federal securities
laws.




Massachusetts
Holding Company Regulation.    Under the
Massachusetts banking laws, a company owning or controlling two or more banking
institutions, including a savings bank, is regulated as a bank holding company.
The term “company” is defined by the Massachusetts banking laws similarly to the
definition of “company” under the Bank Holding Company Act. Each Massachusetts
bank holding company: (i) must obtain the approval of the Massachusetts
Board of Bank Incorporation before engaging in certain transactions, such as the
acquisition of more than 5% of the voting stock of another banking institution;
(ii) must register, and file reports, with the Division; and (iii) is
subject to examination by the Division. Hampden Bancorp, Inc. would become a
Massachusetts bank holding company if it acquires a second banking institution
and holds and operates it separately from Hampden Bank.




Federal
Securities Laws.    Our common stock is registered
with the SEC under Section 12(b) of the Exchange Act. We are subject to
information, proxy solicitation, insider trading restrictions, and other
requirements under the Exchange Act.




The
Sarbanes-Oxley Act.    The Sarbanes-Oxley Act of 2002
addresses, among other issues, corporate governance, auditing and accounting,
executive compensation, and enhanced and timely disclosure of corporate
information. As directed by the Sarbanes-Oxley Act of 2002, Hampden Bancorp,
Inc.’s principal executive officer and principal financial officer each are
required to certify that Hampden Bancorp, Inc.’s quarterly and annual reports do
not contain any untrue statement of a material fact. The rules adopted by the
SEC under the Sarbanes-Oxley Act of 2002 have several requirements, including
having these officers certify that: they are responsible for establishing,
maintaining and regularly evaluating the effectiveness of our internal controls;
they have made certain disclosures to our auditors and the Audit Committee about
our internal controls; and they have included
information in our quarterly and annual reports about their evaluation and
whether there have been significant changes in our internal controls or in other
factors that could significantly affect internal controls.




27


FEDERAL
AND STATE TAXATION




Federal IncomeTaxation


General.    The
Company reports its income using the accrual method of accounting. The federal
income tax laws apply to the Company in the same manner as to other corporations
with some exceptions, including the reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Company. Hampden Bank currently files a consolidated federal income tax return
with Hampden Bancorp, Inc. Hampden Bank's federal income tax returns have been
either audited or closed under the statute of limitations through
October 31, 2004. For its 2006 tax year, Hampden Bank's maximum federal
income tax rate was 34%.




Bad
Debt Reserves.    For taxable years beginning before
January 1, 1996, thrift institutions that qualified under certain
definitional tests and other conditions of the Internal Revenue Code were
permitted to use certain favorable provisions to calculate their deductions from
taxable income for annual additions to their bad debt reserve. A reserve could
be established for bad debts on qualifying real property loans, generally
secured by interests in real property improved or to be improved, under the
percentage of taxable income method or the experience method. The reserve for
nonqualifying loans was computed using the experience method. Federal
legislation enacted in 1996 repealed the reserve method of accounting for bad
debts and the percentage of taxable income method for tax years beginning after
1995 and required savings institutions to recapture or take into income certain
portions of their accumulated bad debt reserves. However, those bad debt
reserves accumulated prior to 1988 ("Base Year Reserves") were not required to
be recaptured unless the savings institution failed certain tests. Approximately
$2.2 million of Hampden Bank's accumulated bad debt reserves would not be
recaptured into taxable income unless Hampden Bank makes a "non-dividend
distribution" to Hampden Bancorp, Inc. as described below.




Distributions.    If
Hampden Bank makes "non-dividend distributions" to Hampden Bancorp, Inc., the
distributions will be considered to have been made from Hampden Bank's
unrecaptured tax bad debt reserves, including the balance of its Base Year
Reserves as of October 31, 1987, to the extent of the "non-dividend
distributions," and then from Hampden Bank's supplemental reserve for losses on
loans, to the extent of those reserves, and an amount based on the amount
distributed, but not more than the amount of those reserves, will be included in
Hampden Bank's taxable income. Non-dividend distributions include distributions
in excess of Hampden Bank's current and accumulated earnings and profits, as
calculated for federal income tax purposes, distributions in redemption of stock
and distributions in partial or complete liquidation. Dividends paid out of
Hampden Bank's current or accumulated earnings and profits will not be so
included in Hampden Bancorp, Inc.'s taxable income.




The
amount of additional taxable income triggered by a non-dividend is an amount
that, when reduced by the tax attributable to the income, is equal to the amount
of the distribution. Therefore, if Hampden Bank makes a non-dividend
distribution to Hampden Bancorp, Inc. approximately one and one-half times the
amount of the distribution not in excess of the amount of the reserves would be
includable in income for federal income tax purposes, assuming a 34% federal
corporate income tax rate. Hampden Bank does not intend to pay dividends that
would result in a recapture of any portion of its bad debt
reserves.




State
Taxation




Prior to tax
years beginning on or after January 1, 2009, financial institutions in
Massachusetts were not allowed to file consolidated income tax returns. Instead,
each entity in the consolidated group files a separate annual income tax return.
The Massachusetts excise tax rate for savings banks is currently 10.5% of
federal taxable income, adjusted for certain items. Taxable income includes
gross income as defined under the Internal Revenue Code, plus interest from
bonds, notes and evidences of indebtedness of any state, including
Massachusetts, less deductions, but not the credits, allowable under the
provisions of the Internal Revenue Code, except for those deductions relating to
dividends received and income or franchise taxes imposed by a state or political
subdivision. Carryforwards and carrybacks of net operating losses and capital
losses are not allowed.




On July 3, 2008, the state of
Massachusetts enacted a law that included reducing the tax rate on net income
applicable to financial institutions. The rate drops from the current rate of
10.5% to 10.0% for tax years beginning on or after January 1, 2010, 9.5% for tax
years beginning on or after January 1, 2011, and to 9.0% for tax years beginning
on or after January 1, 2012 and thereafter. Also, for the years beginning on or
after January 1, 2009, the new law requires all unitary members of a
consolidated group, except those with Massachusetts Security Corporation status,
to file a combined corporation excise tax return. The Company continues to
analyze the impact of this law change, however, it is not expected to have a
material effect on the financial statements.




28




Hampden
Bank's state tax returns, as well as those of its subsidiaries, are not
currently under audit.




A
financial institution or business corporation is generally entitled to special
tax treatment as a "security corporation" under Massachusetts law provided that:
(a) its activities are limited to buying, selling, dealing in or holding
securities on its own behalf and not as a broker; and (b) it has applied
for, and received, classification as a "security corporation" by the
Commissioner of the Massachusetts Department of Revenue. A security corporation
that is also a bank holding company under the Internal Revenue Code must pay a
tax equal to 0.33% of its gross income. A security corporation that is not a
bank holding company under the Internal Revenue Code must pay a tax equal to
1.32% of its gross income. Hampden Bancorp, Inc. requested to be classified as a
security corporation and was approved for the taxable year ended October 31,
2007. The classification is in effect until revoked by the Commissioner of the
Massachusetts Department of Revenue in writing or revoked by conducting any
activities deemed impermissible under the governing statutes and the various
regulations, directives, letter rulings and administrative pronouncements issued
by the Massachusetts Department of Revenue. In order to qualify as a security
corporation, the Company established a subsidiary for the purpose of making the
loan to the employee stock ownership plan, since making such a loan directly
would disqualify it from classification as a security corporation.




Delaware
Taxation. As a Delaware holding company not earning income in Delaware,
the Company is exempt from Delaware corporate income tax but is required to file
an annual report with and pay an annual franchise tax to the State of
Delaware.




Item 1A.
            Risk
      Factors




The following
risk factors are relevant to our future results and financial success, and
should be read with care.




Our
continued emphasis on commercial lending may expose us to increased lending
risks.




At
June 30, 2008, our loan portfolio consisted of $117.6 million, or
32.6%, of commercial real estate loans, $32.5 million, or 9.0%, of
commercial business loans and $11.3 million, or 3.1%, of construction
loans. We have grown these loan portfolios in recent years and intend to
continue to grow commercial real estate and commercial loans. Commercial real
estate loans generally expose a lender to greater risk of non-payment and loss
than one- to four-family residential mortgage loans because repayment of the
loans often depends on the successful operation of the property. Commercial
business loans expose us to additional risks since they typically are made on
the basis of the borrower's ability to make repayments from the cash flow of the
borrower's business and are secured by non-real estate collateral that may
depreciate over time. In addition, since commercial business loans generally
entail greater risk than one- to four-family residential mortgage loans, we may
need to increase our allowance for loan losses in the future to account for the
likely increase in probable incurred credit losses associated with the growth of
such loans. Also, many of our commercial borrowers have more than one loan
outstanding with us. Consequently, an adverse development with respect to one
loan or one credit relationship can expose us to a significantly greater risk of
loss compared to an adverse development with respect to a one- to four-family
residential mortgage loan. We expect to increase substantially our internal
loans-to-one-borrower limit. Although we do not expect to increase our internal
loans-to-one-borrower limit up to the regulatory maximum, the increased internal
limit may expose us to greater risk of loss.




The
building of market share through our branching strategy could cause our expenses
to increase faster than revenues.




We intend to
continue to build market share in Hampden County, Massachusetts and surrounding
areas through our branching strategy. Hampden Bank expects to open its
second branch in Longmeadow, which will be its ninth branch, in November
2008.Our business
plan currently contemplates that we will establish additional branches, if
market conditions are favorable. There are considerable expenses involved in
opening branches and new branches generally require a period of time to generate
the necessary revenues to offset their expenses, especially in areas in which we
do not have an established presence. Accordingly, any new branch can be expected
to negatively impact our earnings for some period of time until the branch
reaches certain economies of scale. Our expenses could be further increased if
we encounter delays in the opening of any of our new branches. Finally, we have
no assurance our new branches will be successful even after they have been
established.




Certain
interest rate movements may hurt our earnings and asset value.




Our
profitability, like that of most financial institutions, depends on primarily
upon our net interest income, which is the difference between our gross interest
income and interest-earning assets, such as loans and securities, and our
interest expense on interest-bearing liabilities, such as deposits and borrowed
funds. Accordingly, our results of operations and financial condition depend
largely on movements in market interest rates and our ability to manage our
interest-rate-sensitive assets and liabilities in response to these movements,
including our adjustable-rate mortgage loans, which represent a large portion of
our residential loan portfolio. Changes in interest rates could have a material
adverse effect on our business, financial condition, results
of operations and cash flows.  For further discussion of how changes
in interest rates could impact us, see “Management's Discussion and Analysis
of Financial Condition and Results of Operations - Risk
Management."




29




We
are also subject to reinvestment risk relating to interest rate movements.
Decreases in interest rates can result in increased prepayments of loans and
mortgage-related securities, as borrowers refinance to reduce their borrowing
costs. Under these circumstances, we are subject to reinvestment risk to the
extent that we are not able to reinvest funds from such prepayments at rates
that are comparable to the rates on the prepaid loans or securities. On the
other hand, increases in interest rates on adjustable-rate mortgage loans result
in larger mortgage payments due from borrowers, which could potentially increase
our level of loan delinquencies and defaults.




Strong
competition within our market area could hurt our profits and slow
growth.




We
face intense competition both in making loans and attracting and retaining
deposits. Price competition for loans and deposits might result in us earning
less on our loans and paying more on our deposits, which reduces net interest
income. There are 21 credit unions in Hampden County, which, as tax-exempt
organizations, are able to offer higher rates on retail deposits than banks.
Some of the institutions with which we compete have substantially greater
resources and lending limits than we have and may offer services that we do not
provide. We expect competition to increase in the future as a result of
legislative, regulatory and technological changes and the continuing trend of
consolidation in the financial services industry. Our profitability depends upon
our continued ability to compete successfully in our market area. For more
information about our market area and the competition we face, see "Business—Market Area" and
"
Business—Competition."




A
downturn in the local economy or a decline in real estate values could hurt our
profits.




Nearly
all of our real estate loans are secured by real estate in Hampden and Hampshire
Counties. As a result of this concentration, a downturn in the local economy
could cause significant increases in non-performing loans, which would hurt our
profits. Additionally, a decrease in asset quality could require additions to
our allowance for loan losses through increased provisions for loan losses,
which would hurt our profits. A decline in real estate values could cause some
of our mortgage loans to become inadequately collateralized, which would expose
us to a greater risk of loss. In addition, because we have a significant amount
of commercial real estate loans, decreases in tenant occupancy may also have a
negative effect on the ability of many of our borrowers to make timely
repayments on their loans, which would have an adverse impact on our earnings.
For a discussion of our market area, see "Business—Market
Area."




If
our allowance for loan losses is not sufficient to cover actual loan losses, our
earnings could decrease.




In
the event that our loan customers do not repay their loans according to the
terms of the loans, and the collateral securing the repayment of these loans is
insufficient to cover any remaining loan balance, we could experience
significant loan losses, which could have a material adverse effect on our
operating results. We make various assumptions and judgments about the
collectibility of our loan portfolio, including the creditworthiness of our
borrowers and the value of the real estate and other assets, if any, serving as
collateral for the repayment of our loans. As of June 30, 2008, our
allowance for loan losses was $3.5 million, representing 1.0% of total
loans and 71.6% of nonperforming loans as of that date. In determining the
amount of our allowance for loan losses, we rely on our loan quality reviews,
our experience and our evaluation of economic conditions, among other factors.
If our assumptions are incorrect, our allowance for loan losses may not be
sufficient to cover probable losses inherent in our loan portfolio, which may
require additions to our allowance. Our allowance may need to be increased
further in the future due to our emphasis on loan growth and on increasing our
portfolio of commercial business and commercial real estate loans. Any material
additions to our allowance for loan losses would materially decrease our net
income.




We operate in a highly regulated environment and may be adversely
affected by changes in law and regulations.




We
are subject to extensive regulation, supervision and examination. See "Business—Regulation and Supervision".
Any change in the laws or regulations applicable to us, or in banking
regulators' supervisory policies or examination procedures, whether by the
Massachusetts Commissioner of Banks, the FDIC, the Federal Reserve Board, other
state or federal regulators, the United States Congress or the Massachusetts
legislature could have a material adverse effect on our business, financial
condition, results of operations and cash flows.




We are subject to regulations promulgated by the Massachusetts Division of
Banks, as our chartering authority, and by the FDIC as the insurer of our
deposits up to certain limits. We also belong to the Federal Home Loan Bank
System and, as a member of such system, we are subject to certain limited
regulations promulgated by the FHLB. In addition, currently the Federal Reserve
Board regulates and oversees Hampden Bancorp, Inc., as a bank holding
company.




30


This
regulation and supervision limits the activities in which we may engage. The
purpose of regulation and supervision is primarily to protect our depositors and
borrowers and, in the case of FDIC regulation, the FDIC's insurance fund.
Regulatory authorities have extensive discretion in the exercise of their
supervisory and enforcement powers. They may, among other things, impose
restrictions on the operation of a banking institution, the classification of
assets by such institution and such institution's allowance for loan losses.
Regulatory and law enforcement authorities also have wide discretion and
extensive enforcement powers under various consumer protection and civil rights
laws, including the Truth-in-Lending Act, the Equal Credit Opportunity Act, the
Fair Housing Act, the Real Estate Settlement Procedures Act and Massachusetts's
deceptive acts and practices law. These laws also permit private individual and
class action law suits and provide for the recovery of attorneys fees in certain
instances. No assurance can be given that the foregoing regulations and
supervision will not change so as to affect us adversely. Any change in such
regulation and oversight, whether in the form of regulatory policy, regulations,
or legislation, may have a material impact on our operations.




Our
low return on equity may negatively affect our stock price




Net income
divided by average equity, known as “return on equity,” is a ratio many
investors use to compare the performance of a financial institution to its
peers. Our return on equity is reduced due to the large amount of capital that
we raised in our 2007 stock offering and to expenses we will incur in pursuing
our growth strategies, the costs associated with being a public company and
added expenses in connection with the administration of our employee stock
ownership plan and our 2008 Equity Incentive Plan. Until we can increase our net
interest income and non-interest income, we expect our return on equity to be
below that of our peers, which may negatively affect the value of our common
stock. For the twelve months ended June 30, 2008, our return on equity was
1.13%.




Expenses
from operating as a public company and from new stock-based benefit plans will
continue to adversely affect our profitability




Our
non-interest expenses are impacted as a result of the financial, accounting,
legal and other additional expenses usually associated with operating as a
public company. We will also recognize additional annual employee compensation
and benefit expenses stemming from the shares that are purchased or granted to
employees and executives under our new benefit plans. These additional expenses
adversely affect our profitability. We recognize expenses for our employee stock
ownership plan when shares are committed to be released to participants’
accounts and recognize expenses for restricted stock awards and stock options
over the vesting period of awards made to recipients pursuant to our 2008 Equity
Incentive Plan.




Our
contribution to Hampden Bank Charitable Foundation may not be fully tax
deductible, which could hurt our profits




We made a contribution to the Hampden
Bank Charitable Foundation, valued at $3.8 million, pre-tax, at the time of our
initial public offering. The Internal Revenue Service has granted tax-exempt
status to the foundation. The amount of the tax deduction related to the
foundation is limited to 10% of taxable income each year but can only be carried
forward until 2011. We may not have sufficient profits to be able to use the
deduction fully. As a result of our evaluation of whether it is “more likely
than not” that we will be unable to use the entire deduction, we have
established a valuation allowance of $810,000 related to the deferred tax asset
that has been recorded for this contribution.




Item 1B.
            Unresolved
      Staff Comments




Not
applicable.





31





Item 2.
            Properties





The Company conducts
its business through its main office located in Springfield, Massachusetts and
seven other offices located in Hampden County, Massachusetts. The following
table sets forth ownership and lease information for the Company’s offices as of
June 30, 2008:





Location
            Year Opened
            Lease ExpiresOwnedMain
      Office:19
      Harrison Avenue
            1951Springfield,
      MA 01103Branch
      Offices:220
      Westfield Street
            1975West
      Springfield, MA 01085475
      Longmeadow Street
            1976Longmeadow,
      MA 011061363
      Allen Street
            1979Springfield,
      MA 01118Leased820
      Suffield Street
            2001
            2010
      (1)Agawam,
      MA 010012006
      Boston Road
            2003
            2022
      (2)Wilbraham,
      MA 010951500
      Main Street
            2005
            2010
      (3)Tower
      SquareSpringfield,
      MA 01115187
      Main Street
            2007
            2013
      (4)Indian
      OrchardSpringfield,
      MA 01151916
      Shaker Road
            Expected
      Fiscal
            2014
      (5)Longmeadow,
      MA 01106
            2009(1)
      Hampden Bank has an option to renew for ten years.(2)
      Hampden Bank has an option to renew for two additional ten year
      terms.(3)
      Hampden Bank has an option to renew for five years.(4)
      Hampden Bank has an option to renew for two additional five year
      terms.(5)
      Hampden Bank has an option to renew for three additional five year
      terms.








Item 3.
            Legal
      Proceedings




The
Company is not involved in any legal proceedings other than routine legal
proceedings occurring in the ordinary course of business. The Company’s
management believes that those routine legal proceedings involve, in the
aggregate, amounts that are immaterial to our financial condition and results of
operations.




Item 4.
            Submission
      Of Matters To A Vote Of Security
Holders




None


32


Part II




Item 5.
            Market For
      Registrant’s Common Equity, Related Stockholder Matters And Issuer
      Purchases Of Equity
Securities







Market
Information





The
Company’s common stock is listed on The NASDAQ Global Market under the trading
symbol “HBNK”. The Company’s initial public offering closed on January 16, 2007
and the common stock began commercial trading on January 17, 2007. The initial
offering price was $10.00 per share. The following table sets forth, for the
quarters indicated, the daily high and low sales price for the common stock and
the dividends declared. The closing price of the Company’s common stock on
September 5, 2008 was $10.38. The Company is subject to the
requirements of Delaware law, which generally limits dividends to an amount
equal to the excess of the net assets of the Company (the amount by which total
assets exceed total liabilities) over its statutory capital or, if there is no
excess, to its net profits for the current and/or immediately preceding two
fiscal years.








Common
      Stock (per share)Market
      PriceHigh
            
            Low
            
            Dividends
      Declared2008:First
      Quarter
            $11.31
            
            $9.00
            
            $0.03Second
      Quarter
            11.29
            
            9.72
            
            0.03Third
      Quarter
            10.95
            
            9.72
            
            0.03Fourth
      Quarter
            11.30
            
            9.11
            
            0.03Common
      Stock (per share)Market
      PriceHigh
            
            Low
            
            Dividends
      Declared2007:First
      Quarter
            $-
            
            $-
            
            $-Second
      Quarter
            -
            
            -
            
            -Third
      Quarter (commencing January 17, 2007)
            13.00
            
            11.50
            
            -Fourth
      Quarter
            12.19
            
            11.19
            
            0.03





33
  Shareholders
and Issuer Purchases of Equity Securities





As of
June 30, 2008, there were 7,949,879 shares of common stock outstanding. The
Company had approximately 2,100 holders of record as of June 30,
2008.





On
January 30, 2008 the Company announced that its Board of Directors authorized
the establishment and funding of a trust to repurchase up to 317,996, or 4% of
the common stock outstanding, in open market purchases to fund awards of
restricted stock under the Company’s 2008 Equity Incentive Plan as approved by
shareholders as a Special Meeting on January 29, 2008. Purchases were made from
time to time at the discretion of the independent trustee of the trust. The
trust purchased 62,614 shares in the quarter ended March 31, 2008 at an average
price of $10.58 per share. The trust purchased the remaining 255,382 shares in
the quarter ended June 30, 2008 as follows:








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 or Appropriate Dollar Value of Shares that May Yet Be Purchased
      Under the Plans or ProgramsApril
      1, 2008 - April 30, 2008
            
            78,406
            
            $10.77
            
            78,406
            
            176,976May
      1, 2008 - May 31, 2008
            
            176,976
            
            $11.15
            
            176,976
            
            -June
      1, 2008 - June 30, 2008
            
            -
            
            $-
            
            -
            
            -255,382
            
            $11.03
            
            255,382





Securities
Authorized for Issuance Under Equity Correspondence Plans





Information
regarding securities authorized for issuance under equity compensation plans
appears in Part III, Item 12(c) of this report.







34
  Stock
Performance Graph





The
following graph shows a comparison of cumulative total shareholder return
(including reinvested dividends) on the Company’s common stock, with the
cumulative total returns of both a broad-market index and a peer group index for
the period January 17, 2007 (the date of the Company’s initial public offering)
through June 30, 2008. The broad-market index chosen was the NASDAQ Composite
Index, and the peer group index chosen was the NASDAQ Bank Index. The
shareholder returns are measured based on an assumed investment of $100 on
January 17, 2007. The stock price performance on the graph below does not
necessarily indicate future price performance.


Hampden Bancorp,Inc.








Period Ending


Index 01/17/07 03/31/07 06/30/07 09/30/07 12/31/07 03/31/08 06/30/08


Hampden
Bancorp,
Inc. 100.00 93.60 87.98 88.16 87.58 83.22 79.25


NASDAQ
Bank
Index 100.00 97.52 94.15 90.21 79.58 76.16 61.29


NASDAQ
Composite 100.00 97.67 104.99 108.96 106.97 91.92 92.48







The information in this section shall
not be deemed “soliciting material” or to be “filed” with the SEC, and is not to
be incorporated by reference in any filing of Hampden Bancorp, Inc. under the
Securities Act of 1933, as amended, or Exchange Act, whether made before or
after the date of this Annual Report on Form 10-K and irrespective of any
general incorporation language in those filings.





Recent
Sales of Unregistered Securities





Not
applicable.





Use
of Proceeds





Not applicable.


35





Item 6.
            Selected
      Financial Data




The
following summary data is based in part on the consolidated financial statements
and accompanying notes, and other schedules appearing elsewhere in this Annual
Form 10-K. The information below should be read in conjunction with the
consolidated financial statements and notes therein, and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included in item 7.





At
      June 30,2008
            
            2007
            
            2006
            
            2005
            
            2004(In
      Thousands)Selected
      Financial Condition Data:Total
      assets
            $543,832
            
            $523,937
            
            $468,786
            
            $419,628
            
            $410,549Loans,
      net (1)
            360,773
            
            329,538
            
            318,202
            
            269,269
            
            248,110Securities
            123,892
            
            153,754
            
            116,034
            
            124,006
            
            124,199Deposits
            331,441
            
            327,341
            
            322,714
            
            311,208
            
            317,053Short-term
      borrowings, including repurchase agreements
            13,223
            
            13,937
            
            30,235
            
            18,211
            
            19,852Long-term
      debt
            95,477
            
            75,334
            
            80,824
            
            53,284
            
            41,706Other
      secured borrowings
            -
            
            -
            
            -
            
            2,383
            
            -Stockholders'
      equity
            100,448
            
            102,018
            
            31,274
            
            32,029
            
            30,083(1)
      Includes loans held for sale.








For
      The Years Ended June 30,2008
            
            2007
            
            2006
            
            2005
            
            2004(In
      Thousands, except per share data)Selected
      Operating Results:Interest
      and dividend income, including fees
            $28,824
            
            $27,534
            
            $23,428
            
            $20,427
            
            $20,074Interest
      expense
            14,340
            
            15,481
            
            12,340
            
            9,110
            
            9,712Net
      interest income
            14,484
            
            12,053
            
            11,088
            
            11,317
            
            10,362Provision
      for loan losses
            651
            
            122
            
            150
            
            200
            
            300Net
      interest income after provision for loan losses
            13,833
            
            11,931
            
            10,938
            
            11,117
            
            10,062Non-interest
      income
            2,291
            
            1,755
            
            1,403
            
            1,294
            
            1,318Gain
      on sales of securities and loans, net
            143
            
            208
            
            23
            
            146
            
            507Non-interest
      expense (1)
            14,082
            
            15,616
            
            11,067
            
            9,971
            
            9,935Income
      (loss) before income tax expense
            2,185
            
            (1,722)
            
            1,297
            
            2,586
            
            1,952Income
      tax expense (benefit) (2)
            1,015
            
            (267)
            
            277
            
            768
            
            585Net
      income (loss)
            $1,170
            
            $(1,455)
            
            $1,020
            
            $1,818
            
            $1,367Basic
      earnings per share
            $0.16
            
            N/A
      (3)
            
            N/A
      (3)
            
            N/A
      (3)
            
            N/A
      (3)Basic
      weighted average shares outstanding
            7,273,069
            
            N/A
      (3)
            
            N/A
      (3)
            
            N/A
      (3)
            
            N/A
      (3)Diluted
      earnings per share
            $0.16
            
            N/A
      (3)
            
            N/A
      (3)
            
            N/A
      (3)
            
            N/A
      (3)Diluted
      weighted average shares outstanding
            7,283,701
            
            N/A
      (3)
            
            N/A
      (3)
            
            N/A
      (3)
            
            N/A
      (3)Dividends
      per share
            $0.12
            
            $0.03
            
            N/A
            
            N/A
            
            N/A(1)
      Includes the contribution to the Hampden Bank Charitable Foundation in the
      amount of $3.8 million for the twelve months ended June 30,
      2007.(2)
      Includes a tax benefit of approximately $827,000 due to the donation to
      the Hampden Bank Charitable Foundation for the twelve months ended June
      30, 2007. Also includes a $350,000 increase to the Company's valuation
      reserve  against the deferred tax asset set up for the
      utilization of the charitable contribution deduction carry-forward for the
      twelve months ended June 30, 2008.(3)
      Earnings per common share are not presented as Hampden Bancorp Inc.'s
      initial public offering was completed on January 16, 2007; therefore per
      share results would not be
meaningful.





36





At
      or For The Years Ended June 30,2008
            
            2007
            
            2006
            
            2005
            
            2004Selected
      Ratios and Other Data:Performance
      Ratios:Return
      on assets (ratio of net income to average total assets)
            0.22
            %
            (0.29)
            %
            0.23
            %
            0.44
            %
            0.33
            %Return
      on equity (ratio of net income to average equity)
            1.13
            %
            (3.04)
            %
            3.06
            %
            5.77
            %
            4.57
            %Average
      interest rate spread (1)
            2.41
            %
            2.24
            %
            2.57
            %
            2.84
            %
            2.63
            %Net
      interest margin (2)
            2.95
            %
            2.58
            %
            2.66
            %
            2.91
            %
            2.69
            %Efficiency
      ratio (3)
            83.95
            %
            113.09
            %
            88.60
            %
            79.07
            %
            85.06
            %Non-interest
      expense to average total assets
            2.70
            %
            3.13
            %
            2.50
            %
            2.41
            %
            2.44
            %Dividend
      pay-out ratio (4)
            81.54
            %
            (16.39)
            %
            n/a
            
            n/a
            
            n/aAverage
      interest-earning assets to average interest bearing
      liabilities
            118.48
            %
            110.38
            %
            102.91
            %
            102.85
            %
            102.38
            %Asset
      Quality Ratios:Non-performing
      assets to total assets
            0.89
            %
            0.68
            %
            1.11
            %
            0.78
            %
            0.40
            %Non-performing
      loans to total loans
            1.34
            %
            1.08
            %
            1.62
            %
            1.19
            %
            0.65
            %Allowance
      for loan losses to non-performing loans
            71.56
            %
            78.91
            %
            71.24
            %
            111.99
            %
            212.29
            %Allowance
      for loan losses to total loans
            0.96
            %
            0.85
            %
            1.15
            %
            1.34
            %
            1.38
            %Capital
      Ratios:Equity
      to total assets at end of year
            18.47
            %
            19.47
            %
            6.67
            %
            7.63
            %
            7.33
            %Average
      equity to average assets
            19.79
            %
            9.61
            %
            7.52
            %
            7.63
            %
            7.31
            %Risk
      based capital ratio (bank only) at end of year
            18.50
            %
            19.30
            %
            11.30
            %
            12.65
            %
            11.87
            %Other
      Data:Number
      of full service offices
            8
            
            7
            
            7
            
            6
            
            5(1)
      The average interest rate spread represents the difference between the
      weighted-average yield on interest-earningassets
      and the weighted average cost of interest-bearing liabilities for the
      year.(2)
      The net interest margin represents net interest income as a percent of
      average interest-earning assets for the year.(3)
      The efficiency ratio represents non-interest expense for the period
      divided by the sum of net interest income(before
      the loan loss provision) plus non-interest income.(4)
      Dividends declared per share divided by basic net income per common share.
      Comparable figures for 2006,2005,
      and 2004 are not available since no dividends were paid during these
      periods.





37


Item 7.
            Management’s
      Discussion And Analysis Of Financial Condition And Results Of
      Operation




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 the Company’s financial condition at June 30, 2008 and
June 30, 2007 and the Company’s consolidated results of operations for the
years ended June 30, 2008, 2007and 2006. This section should be read in
conjunction with the consolidated financial statements and related notes to the
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K.





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 of 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, 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 Annual
Report on Form 10-K. The Company disclaims any obligation to update any
forward-looking statements, whether in response to new information, future
events or otherwise.




Overview




Income.    The
Company’s results of operations are primarily dependent on net interest income,
which is the difference between the income earned on its loan and investment
portfolios and interest expense incurred on its deposits and borrowed funds.
Results of operations are also affected by fee income from banking and
non-banking operations, provisions for loan losses, gains (losses) on sales of
loans and securities available for sale, loan servicing income and other
miscellaneous income.




Expenses.    The
Company's expenses consist primarily of compensation and employee benefits,
office occupancy, technology, marketing, general administrative expenses and
income tax expense. In 2007, the Company made a charitable contribution to the
Hampden Bank Charitable Foundation in the amount of $3.8 million.




Results
of operations are also significantly affected by general economic and
competitive conditions, particularly with respect to changes in interest rates,
government policies and actions of regulatory authorities. Future changes in
applicable law, regulations or government policies may materially impact the
Company's financial condition and results of operations. See "Risk Factors."




Dividend. On July 30, 2008 the Company
announced that its Board of Directors had declared a cash dividend of $0.03 per
common share. The dividend will be paid on August 28, 2008 to shareholders of
record as of August 13, 2008.




Stock-based
Compensation. In
accordance with the Company’s 2008 Equity Incentive Plan (the “2008 Plan”),
which was approved by shareholders on January 29, 2008, the Company’s Board of
Directors awarded 317,996 shares of restricted stock with a grant date fair
value of $10.18 per share to directors and certain employees on January 29, 2008
and 595,000 stock options with an exercise price of $10.90 per share on April
29, 2008. The 2008 Plan provides for total awards of 794,987 stock options and
317,996 shares of restricted stock, leaving 199,987 stock options available for
future awards as of June 30, 2008.The shares of common stock underlying any
awards that are forfeited, cancelled, reacquired by Hampden Bancorp or otherwise
terminated (other than by exercise), shares that are tendered or withheld in
payment of the exercise price of any award, and shares that are tendered or
withheld for tax withholding obligations will be added back to the available
shares of common stock with respect to which new awards may be granted under the
plan.




38




All stock
options awarded as of June 30, 2008 are for a term of ten years and will vest
over a period of five years, except the Company’s options granted to its chief
executive officer vest over a period of four years at 25% per year. Upon a
change in control (as defined in the plan) or the death or disability of the
individual to whom options or shares were awarded, all options and restricted
shares awarded immediately vest. Of the options awarded, 400,000 were incentive
stock options and 195,000 were non-qualified options. Of the 595,000 options
granted to date, all remain outstanding at June 30, 2008, and no options have
vested as of June 30, 2008. The following table presents the fair value and
related assumptions using the Black-Scholes Option Pricing Model for stock
options granted:






Options
      Granted in April 2008Fair
      Value
            
            $2.86Risk-free
      interest rate
            
            4.25
            %Expected
      dividend yield
            
            1.16
            %Expected
      volatility
            
            19.40
            %Expected
      life
            
            6.5
      years




All of
the restricted stock awards granted vest over a five year period, except the
Company’s awards to its chief executive officer vest over a four year period at
25% per year. All of the 317,996 shares awarded to date remain outstanding and
no awards have vested as of June 30, 2008.




For the
year ended June 30, 2008, the Company recognized compensation cost on stock
options of $85,000. For restricted stock awards, the cost recognized during the
year ended June 30, 2008 amounted to approximately $335,000.




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:





Securities. 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.





Purchase
premiums and discounts are amortized to earnings by the interest method over the
terms of the securities.  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.  Gains and losses on disposition of securities are recorded on
the trade date and determined using the specific identification
method.





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
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.


39


Income taxes.
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.  As changes in the
tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
accordingly through the provision for income taxes.  The Company’s
base amount of its federal income tax reserve for loan losses is a permanent
difference for which there is no recognition of a deferred tax
liability.  However, the loan loss allowance maintained for financial
reporting purposes is a temporary difference with allowable recognition of a
related deferred tax asset, if it is deemed realizable. Quarterly management
reviews the deferred tax asset to identify any uncertainties to the
collectability of the components of the deferred tax asset.





Comparison of Financial Condition atJune 30,
2008andJune 30,
2007




Total
Assets.    Total assets increased by
$19.9 million, or 3.8%, from $523.9 million at June 30, 2007 to
$543.8 million at June 30, 2008. This increase was primarily
attributable to the increase in net loans of $30.8 million, or 9.4%, to $359.9
million at June 30, 2008, and an increase in short-term investments of $15.0
million, or 111.7%, to $28.5 million at June 30, 2008. These increases were
partially offset by a decrease in securities available for sale of $25.3
million, or 16.9%, to $123.9 million at June 30, 2008. All of these changes are
discussed below.




Cash and
Short-term Investments.    Cash and correspondent
bank balances, and short-term investments primarily consisting of money market
mutual funds increased by $13.0 million, or 63.5%, from $20.5 million
at June 30, 2007 to $33.5 million at June 30, 2008. Cash and
short-term investments were increased to ensure that Hampden Bank had sufficient
liquidity to fund loan growth.




Securities.    The
investment portfolio aggregated $123.9 million at June 30, 2008, a
decrease of $25.2 million, or 16.9%, from $149.1 million at
June 30, 2007. Within the securities portfolio, money market preferred
stock decreased by $20.8 million, or 100%, and government-sponsored enterprises
decreased by $19.3 million, or 34.1%. A partial offset to these decreases
was an increase in mortgage-backed securities of $17.1 million, or 25.0%, from
$68.3 million at June 30, 2007 to $85.4 million at June 30,
2008. In anticipation of a potential cash out-flow due to $50.6 million of
certificates of deposit that matured starting August 15, 2007 and ending on
September 30, 2007, the Company had approximately $20.0 million of
government-sponsored enterprise obligations maturing during this
time.




Net
Loans.    Including loans held for sale, net loans
increased $31.3 million, or 9.5%, from $329.5 million at June 30,
2007 to $360.8 million at June 30, 2008. Commercial real estate loans
increased $27.1 million, or 29.9%, Commercial loans increased $7.0 million,
or 27.6%, Residential mortgage loans increased $5.7 million, or 4.9%,
Consumer loans increased $3.4 million, or 22.5%, Home Equity loans
decreased $2.1 million, or 3.5%, Construction loans decreased
$9.9 million, or 46.8%, and Industrial Revenue Bonds decreased $93,000, or
6.4%.




Deposits and
Borrowed Funds.    Deposits increased from
$327.3 million at June 30, 2007 to $331.4 million at
June 30, 2008. Certificates of deposits increased $7.8 million, or 4.3%,
NOW accounts decreased $2.4 million, or 12.7%, regular and other savings
accounts decreased $404,000, or 0.6%, business and consumer checking accounts
decreased $444,000, or 1.2%, and money market accounts decreased $408,000, or
1.8%. In addition, there were $50.6 million of certificates of deposit that
matured starting August 15, 2007 and ending on September 30, 2007. These
maturing certificates of deposit were five year certificates of deposit that the
Company offered as a special promotion from August 15, 2002 to September 30,
2002.




Total
borrowings, including borrowings from the FHLB as well as securities sold under
agreements to repurchase, increased from $89.2 million as of June 30,
2007 to $108.7 million as of June 30, 2008. As of June 30, 2008,
total borrowings included $13.2 million of securities sold under agreement
to repurchase and $95.5 million of FHLB borrowings.




Total
Stockholders’ Equity.Stock
repurchases resulted in an overall decrease in stockholders’ equity of $1.6
million, to $100.4 million at June 30, 2008, compared to $102.0 million at June
30, 2007.  The Company purchased 317,996 shares of Company stock at an
average price of $10.95 per share in the third and forth quarters of fiscal 2008
as part of the Equity Incentive Program announced in January 2008. The Company
adopted FAS 156, and as a result recorded a cumulative effect adjustment for a
change in accounting principles as an addition to retained earnings of $133,000
net of tax effect. Net income increased retained earnings by $1.2 million.These
increases in equity were offset by quarterly dividends of $0.03 per share in
each quarter of fiscal 2008. Our ratio of capital to total assets decreased to
18.5% as of June 30, 2008, from 19.5% as of June 30, 2007.






40


Comparison
of Operating Results For the Years Ended June 30, 2008 and June 30,
2007




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 tables set 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.




Years
      Ended June 30,2008
            
            2007
            
            2006Average Outstanding Balance
            
            Interest
            
            Yield
              /Rate
            
            Average Outstanding Balance
            
            Interest
            
            Yield
              /Rate
            
            Average Outstanding Balance
            
            Interest
            
            Yield
              /Rate(Dollars
      in Thousands)Interest-earning
      assets:Loans,
      net (1)
            $344,563
            
            $22,072
            
            6.41
            %
            $316,971
            
            $20,561
            
            6.49
            %
            $287,231
            
            $18,065
            
            6.29
            %Investment
      securities
            132,608
            
            6,259
            
            4.72
            %
            131,392
            
            6,025
            
            4.59
            %
            129,160
            
            5,335
            
            4.13
            %Federal
      funds sold and other
            14,136
            
            493
            
            3.49
            %
            17,951
            
            948
            
            5.28
            %
            1,401
            
            53
            
            3.78
            %Total
      interest earning assets
            491,307
            
            28,824
            
            5.87
            %
            466,314
            
            27,534
            
            5.90
            %
            417,792
            
            23,453
            
            5.61
            %Non-interest
      earning assets
            30,696
            
            
            
            
            
            32,240
            
            
            
            
            
            25,219Total
      assets
            $522,003
            
            
            
            
            
            $498,554
            
            
            
            
            
            $443,011Interest-bearing
      liabilities:Savings
      deposits
            $68,065
            
            1,584
            
            2.33
            %
            $59,575
            
            1,580
            
            2.65
            %
            $33,429
            
            334
            
            1.00
            %Money
      market
            19,958
            
            433
            
            2.17
            %
            27,239
            
            714
            
            2.62
            %
            27,792
            
            421
            
            1.51
            %NOW
      and other checking accounts
            50,906
            
            149
            
            0.29
            %
            51,427
            
            251
            
            0.49
            %
            57,573
            
            226
            
            0.39
            %Certificates
      of deposit
            170,849
            
            7,743
            
            4.53
            %
            185,393
            
            8,585
            
            4.63
            %
            190,615
            
            7,454
            
            3.91
            %Total
      deposits
            309,778
            
            9,909
            
            3.20
            %
            323,634
            
            11,130
            
            3.44
            %
            309,409
            
            8,435
            
            2.73
            %Borrowed
      funds
            104,901
            
            4,431
            
            4.22
            %
            98,843
            
            4,351
            
            4.40
            %
            96,574
            
            3,905
            
            4.04
            %Total
      interest-bearing liabilities
            414,679
            
            14,340
            
            3.46
            %
            422,477
            
            15,481
            
            3.66
            %
            405,983
            
            12,340
            
            3.04
            %Non-interest
      bearing liabilities
            3,996
            
            
            
            
            
            28,166
            
            
            
            
            
            3,718Total
      liabilities
            418,675
            
            
            
            
            
            450,643
            
            
            
            
            
            409,701Equity
            103,328
            
            
            
            
            
            47,911
            
            
            
            
            
            33,310Total
      Liabilities and equity
            $522,003
            
            
            
            
            
            $498,554
            
            
            
            
            
            $443,011Net
      interest income
            
            
            $14,484
            
            
            
            
            
            $12,053
            
            
            
            
            
            $11,113Net
      interest rate spread (2)
            
            
            
            
            2.41
            %
            
            
            
            2.24
            %
            
            
            
            2.57
            %Net
      interest-earning assets (3)
            $76,628
            
            
            
            
            
            $43,837
            
            
            
            
            
            $11,809Net
      interest margin (4)
            
            
            
            
            2.95
            %
            
            
            
            2.58
            %
            
            
            
            2.66
            %Average
      interest-earning assets to interest-bearing liabilities
            
            
            
            
            118.48
            %
            
            
            
            110.38
            %
            
            
            
            102.91
            %(1)
      Includes loans held for sale.(2)
      Net interest rate spread represents the difference between the yield on
      interest-earning assets and the cost of interest-earning
      liabilitiesfor
      the period inicated.(3)
      Net interest-earning assets represents total interest-earning assets less
      total interest-earning liabilities.(4)
      Net interest margin represents net interest income divided by average
      total interest-earning assets.






41




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).




Years
      Ended June 30
            
            Years
      Ended June 302008 vs. 2007
            
            2007 vs. 2006Increase
              (Decrease) Due to
            
            Total Increase (Decrease)
            
            Increase
              (Decrease) Due to
            
            Total Increase
(Decrease)Volume
            
            Rate
            
            
            Volume
            
            Rate(Dollars
      in Thousands)Interest
      income:Loans,
      net (1)
            $1,770
            
            $(259)
            
            $1,511
            
            $1,915
            
            $581
            
            $2,496Investment
      securities
            56
            
            178
            
            234
            
            94
            
            596
            
            690Federal
      funds sold and other
            (175)
            
            (280)
            
            (455)
            
            866
            
            29
            
            895Total
      interest income
            1,651
            
            (361)
            
            1,290
            
            2,875
            
            1,206
            
            4,081Interest
      expense:Savings
      deposits
            210
            
            (206)
            
            4
            
            400
            
            846
            
            1,246Money
      market
            (171)
            
            (110)
            
            (281)
            
            (9)
            
            302
            
            293NOW
      and other checking accounts
            (3)
            
            (99)
            
            (102)
            
            (26)
            
            51
            
            25Certificates
      of deposits
            (662)
            
            (180)
            
            (842)
            
            (209)
            
            1,340
            
            1,131Total
      deposits
            (626)
            
            (595)
            
            (1,221)
            
            156
            
            2,539
            
            2,695Borrowed
      funds
            260
            
            (180)
            
            80
            
            93
            
            353
            
            446Total
      interest expense
            (366)
            
            (775)
            
            (1,141)
            
            250
            
            2,891
            
            3,141Change
      in net interest income
            $2,017
            
            $414
            
            $2,431
            
            $2,625
            
            $(1,685)
            
            $940(1)
      Includes loans held for sale.







Net
Income.    Net income was $1.2 million, or $0.16 per
fully diluted share, for the twelve month period ended June 30, 2008 as compared
to a net loss of $1.5 million for the twelve month period ended June 30, 2007.
The reason for the net loss for the twelve month period in 2007 was the funding
of the Hampden Bank Charitable Foundation. For the twelve months ended June 30,
2008 the provision for loan losses increased $529,000 compared to the twelve
months ending June 30, 2007 due to increases in loan delinquencies, increases in
non-accrual loans, general economic conditions, and growth in the loan
portfolio.





Net Interest
Income.The
tables on pages 41 and 42 set forth the components of the Company's net interest
income, yields on interest-earning assets and interest-bearing liabilities, and
the effect on net interest income arising from changes in volume and rate. There
was an increase in net interest income for the twelve months ended June 30, 2008
of $2.4 million, or 20.2%, to $14.5 million from $12.1 million for the same
period in 2007.The
positive effects of the decrease in interest expense due to both a decrease in
volume of interest-bearing liabilities and decreases in rates on
interest-bearing liabilities more than offset the lower yields on
interest-earning assets. The increase in volume of interest-earning assets
increased interest income by $1.7 million, while the decrease in the volume
of interest-bearing liabilities decreased interest expense by $366,000. The
changes in volume had the effect of increasing net interest income by $2.0
million. The increase in net interest income associated with changes in rate had
the effect of increasing net interest income by $414,000. The decrease in net
interest income attributable to lower yields on interest-earning assets totaled
$361,000 compared to a $775,000 increase in net interest income attributable to
lower rates on interest-bearing liabilities. Net interest margin increased to
2.95% for the year ended June 30, 2008 compared to 2.58% for the year ended
June 30, 2007.




Interest
Income.    Interest income increased from
$27.5 million for the year ended June 30, 2007 to $28.8 for the year
ended June 30, 2008. This increase of $1.3 million, or 4.7%, was due
to increases in average balances of interest-earning assets. Interest income on
loans increased by $1.5 million, or 7.3%, and interest income on securities
increased by $234,000, or 3.9%.




42




Interest
Expense.    Interest expense decreased by
$1.1 million, or 7.4%, from the year ended June 30, 2007 to the year
ended June 30, 2008. Decreased interest costs on borrowings and deposits
were the reason for this decrease. Average deposit balances decreased by $13.8
million, or 4.3%, while average rates decreased from 3.44% to 3.20%. Average
borrowings balances increased from $98.8 million to $104.9 million,
and the average rate on borrowings decreased from 4.40% to 4.22%.




Provision
for Loan Losses.    For the twelve months ended June
30, 2008 the provision for loan losses increased $529,000 compared to the twelve
months ending June 30, 2007 due to increases in loan delinquencies, increases in
non-accrual loans, growth in the loan portfolio, and general economic
conditions. Net loan charge-offs for 2008 and 2007 were $8,000 and $1.0 million,
respectively. The allowance for loan losses of $3.5 million at
June 30, 2008 represented 1.0% of total loans, as compared to an allowance
of $2.8 million, representing 0.9% of total loans at June 30, 2007.
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 the Company's current methodology, please
refer to "Business."




Non-interest
Income.    Total non-interest income increased by
$471,000, or 24.0%, for the year ended 2008 compared to the year ended June 30,
2007. The primary reason for this increase was an increase in customer service
fees of $486,000 from $1.1 million for the year ended June 30, 2007 to $1.6
million for the year ended June 30, 2008.There was a
$63,000 increase in the cash surrender value of life insurance, and a $63,000
increase in other non-interest income. These increases were partially offset by
a $69,000 decrease in gains on the sale of securities, as well as a $76,000
decrease in the curtailment of the defined benefit plan.  The Company
froze its defined benefit pension plan effective October 31, 2006 and recorded a
gain of $184,000 as a result of the curtailment. In the third quarter of fiscal
2007, the Company voted to terminate the plan with final settlement, including
the distribution of all plan assets, which was completed in the fourth quarter
of fiscal 2008. The Company recorded a gain of $108,000 as a result of the
settlement of the plan.




Non-interest
Expense.    Non-interest expense decreased
$1.5 million, or 9.8%, to $14.1 million in 2008 as compared to
$15.6 million in 2007. There were increases in salaries and benefits of
$1.0 million, general expenses of $766,000, advertising expense of $234,000,
occupancy expense of $178,000, and data processing services of $55,000. The
Company experienced increases in salaries and benefit categories and expenses
associated with being a public company, including audit and legal fees and fees
related to complying with the provisions of the Sarbanes-Oxley Act of 2002.
These increases were more than offset by a decrease in charitable contributions
of $3.8 million for the year ended June 30, 2008.




Additionally, during the
third and fourth quarters of 2008, the Company’s Board of Directors awarded
595,000 stock options with an exercise price of $10.90 per share and 317,996
shares of restricted stock with a grant date fair value of $10.18 per share to
directors and certain officers. These options and stock awards were granted in
accordance with the Company’s 2008 Plan approved by shareholders on January 29,
2008. The stock option expense and the stock awards expense are both recognized
in salary expense. For more information regarding the 2008 Plan please see
“Stock Based Compensation”.




Income
Taxes.There was an
income tax expense of $1.0 million for the year ended June 30, 2008. This
was an increase of $1.3 million compared to an income tax benefit of $267,000
for the year ended June 30, 2007. The tax benefit in fiscal 2007 was due to
a tax benefit of $827,000 from the charitable foundation contribution, after a
related valuation reserve of $460,000 for the charitable foundation
contribution. A
$350,000 adjustment was
made in fiscal 2008 to increase the Company’s valuation reserve against the
deferred tax asset set up for the utilization of the charitable deduction
carry-forward generated by the establishment of the Hampden Bank Charitable
Foundation. The combined federal and state effective tax rate was 46.4% in 2008,
compared to 15.5% in 2007.




Comparison
of Operating Results For the Years Ended June 30, 2007 and June 30,
2006




Net
Income.    Net income decreased by $2.5 million from
$1.0 million for the year ended June 30, 2006, to a net loss of $1.5 million for
the year ended June 30, 2007. The decrease was the result of the planned
contribution Hampden Bancorp, Inc. made to the Hampden Bank Charitable
Foundation of $3.8 million. An offset to the charitable foundation contribution
was an increase in net interest income, after provision for loan losses, for the
year ended June 30, 2007 of $1.0 million, or 9.1%, to $11.9 million over the
same period in 2006.




Net
Interest Income.    The tables on pages 41 and 42 set
forth the components of the Company's net interest income, yields on
interest-earning assets and interest-bearing liabilities, and the effect on net
interest income arising from changes in volume and rate. Net interest income
increased $1.0 million, or 8.7%, from $11.1 million in the year ended
June 30, 2006 to $12.1 million in the year ended June 30, 2007.
The positive effects of an increase in volume of interest-earning assets and
higher yields on interest-earning assets more than offset the increase in
interest expense due to both an increase in volume of interest-bearing
liabilities and increases in rates on interest-bearing liabilities. The increase
in volume of interest-earning assets increased interest income by
$2.9 million, while the increase in the volume of interest-bearing
liabilities increased interest expense by $250,000. The changes in volume had
the effect of increasing net interest income by $2.6 million. The increase in
net interest income associated with volume was partially offset, however, by
changes in rate, which had the effect of decreasing net interest income
by $1.7 million.




43




The
increase in net interest income attributable to higher yields on
interest-earning assets totaled $1.2 million compared to a
$2.9 million decrease in net interest income attributable to higher rates
on interest-bearing liabilities. Net interest margin remained relatively
unchanged at 2.6% for the years ended June 30, 2007 and June 30, 2006.
During fiscal 2007, while short-term market interest rates increased,
longer-term market interest rates did not. As a consequence, changes in market
rates disproportionately affected interest expense, as certain liability costs
have risen faster than yields on earning assets.




Interest
Income.    Interest income increased from
$23.4 million for the year ended June 30, 2006 to $27.5 for the year
ended June 30, 2007. This increase of $4.1 million, or 17.5%, was due
to increases in average balances and increases in rates. Interest income on
loans increased by $2.5 million, or 14.0%, and interest income on
securities increased by $690,000, or 12.9%.




Interest
Expense.    Interest expense increased by
$3.1 million, or 25.5%, from the year ended June 30, 2006 to the year
ended June 30, 2007. Increases in average borrowing balances combined with
increased interest costs on borrowings and deposits were the reason for this
increase. Average deposit balances increased by $14.2 million, or 4.6%, while
average rates increased from 2.73% to 3.44%. Average borrowings balances
increased from $96.6 million to $98.8 million, and the average rate on
borrowings increased from 4.04% to 4.40%.




Provision for
Loan Losses.    The Company's provision for loan
losses decreased from $150,000 in 2006 to $122,000 in 2007. Net loan charge-offs
for 2007 and 2006 were $1.0 million and $99,000, respectively. The allowance for
loan losses of $2.8 million at June 30, 2007 represented 0.9% of total
loans, as compared to an allowance of $3.7 million, representing 1.2% of
total loans at June 30, 2006. 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 the Company's
current methodology, please refer to "Business."




Non-interest
Income.    Total non-interest income increased by
$537,000, or 37.7%, for the year ended 2007 compared to the year ended June 30,
2006. The primary reason for this increase was the curtailment gain of $184,000
from the termination of Hampden Bank's defined benefit plan in the third
quarter of 2007. There was a $128,000 increase in gains on the sale of
securities, as well as a $57,000 increase in gains realized on the sale of fixed
rate residential mortgage loans sold into the secondary market in 2007. There
was also an increase of $203,000 in customer service fees. These increases were
partially offset by a decrease in other non-interest income of
$47,000.




Non-interest
Expense.    Non-interest expense increased
$4.5 million, or 41.1%, to $15.6 million in 2007 as compared to
$11.1 million in 2006. The increase was primarily attributable to the
contribution to the Hampden Bank Charitable Foundation of $3.8 million. There
were also increases in salaries and benefits of $513,000, general expenses of
$172,000, advertising expense of $53,000, occupancy expense of $28,000, and data
processing services of $25,000.




Income
Taxes.    There was an income tax benefit of $267,000
for the year ended June 30, 2007, a decrease of $544,000, or 196.4%,
compared to an income tax expense of $277,000 for the year ended June 30,
2006. This was due to a tax benefit of $827,000 from the charitable foundation
contribution, after a related valuation reserve of $460,000 for the charitable
foundation contribution. The combined federal and state effective tax rate was
15.5% in 2007, compared to 21.4% in 2006.




Risk
Management




Management
recognizes that taking and managing risk is fundamental to the business of
banking. Through the development, implementation and monitoring of its policies
with respect to risk management, the Company strives to measure, evaluate and
mitigate the risks it faces. Management understands that an effective risk
management system is critical to the safety and soundness of the Company. Chief
among the risks faced by the Company are credit risk, market risk including
interest rate risk, liquidity risk, operational (transaction) risk and
compliance risk.





Within
management, the responsibility for risk management rests with the General
Counsel and the senior officers responsible for finance, lending, retail
banking, marketing and human resources. The General Counsel and senior officers
continually review the status of our risk management efforts, including reviews
of internal and external audit findings, loan review findings, and the
activities of the Asset/Liability Committee with respect to monitoring interest
rate and liquidity risk. The General Counsel tracks any open items requiring
corrective action with the goal of ensuring that each is addressed on a timely
basis. The General Counsel reports all findings directly to the Audit
Committee.




Management of
Credit Risk.    The Company considers credit risk to
be the most significant risk it faces, in that it has the greatest potential to
affect the financial condition and operating results of the Company. Credit risk
is managed through a combination of policies established by the Board of
Directors of the Company, the monitoring of compliance with these policies,and the periodic
evaluation of loans in the portfolio, including those with problem
characteristics.


44


In
general, the Company's policies establish maximums on the amount of credit that
may be granted to a single borrower (including affiliates), the aggregate amount
of loans outstanding by type in relation to total assets and capital, and loan
concentrations. Collateral and debt service coverage ratios, approval limits and
other underwriting criteria are also specified. Policies also exist with respect
to performing periodic credit reviews, the rating of loans, when loans should be
placed on non-performing status and factors that should be considered in
establishing the Company's allowance for loan losses. For additional
information, see "Business—Lending
Activities."




Management of
Market Risk.    Market risk is the risk of loss due
to adverse changes in market prices and rates, and typically encompasses
exposures such as sensitivity to changes in market interest rates, foreign
currency exchange rates, and commodity prices. The Company has no exposure to
foreign currency exchange or commodity price movements. Because net interest
income is the Company's primary source of revenue, the Company's exposure to
interest rate risk is significant.




Interest
rate risk is the exposure of the Company's net interest income to adverse
movements in interest rates. Net interest income is affected by changes in
interest rates as well as by fluctuations in the level and duration of the
Company's assets and liabilities. Over and above the influence that interest
rates have on net interest income, changes in rates may also affect the volume
of lending activity, the ability of borrowers to repay variable rate loans, the
volume of loan prepayments and refinancing, the flow and mix of deposits, and
the market value of the Company's assets and liabilities.




Exposure
to interest rate risk is managed by the Company through periodic evaluations of
the current interest rate risk inherent in its rate-sensitive assets and
liabilities, coupled with determinations of the level of risk considered
appropriate given the Company's capital and liquidity requirements, business
strategy and performance objectives. Through such management, the Company seeks
to manage the vulnerability of its net interest income to changes in interest
rates.




Strategies
used by the Company to manage the potential volatility of its earnings may
include:




•Emphasizing the
origination and retention of adjustable-rate mortgage loans, variable rate
commercial loans and variable rate home equity lines of credit;





•Investing in securities
with relatively short maturities and/or expected average lives;





•Classifying all
of the investment portfolio as "available for sale" in order to provide for
flexibility in liquidity management; and





•Lengthening or
shortening liabilities such as certificates of deposits and FHLB borrowings when
appropriate.




The
Company's Asset/Liability Committee, comprised of senior management and two
members of the Board of Directors, is responsible for managing interest rate
risk. On a quarterly basis, the Committee reviews with the Board of Directors
its analysis of the Company's exposure to interest rate risk, the effect that
subsequent changes in interest rates could have on the Company's future net
interest income, its strategies and other activities, and the effect of those
strategies on the Company's operating results.




The
Committee's primary method for measuring and evaluating interest rate risk is
income simulation analysis. This analysis considers the maturity and repricing
characteristics of assets and liabilities, as well as the relative sensitivities
of these balance sheet components over a range of interest rate scenarios.
Interest rate scenarios tested generally include instantaneous and sustained
parallel and flattening/steepening rate ramps over a one year period, and static
(or flat) rates. The simulation analysis is used to measure the exposure of net
interest income to changes in interest rates over a specified time horizon,
usually a two-year period.




The
following table sets forth, as of June 30, 2008, the estimated changes in
the Company's net interest income that would result from the designated
instantaneous and sustained changes in the U.S. Treasury yield curve.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results.






45





Percentage
      Change in Estimated Net Interest Income over 12 months as Compared to Flat
      Rates200
      basis point increase in rates
            2.56%100
      basis point increase in rates
            1.95%Flat
      interest rates
            0.00%100
      basis point decrease in rates
            1.03%200
      basis point decrease in rates
            -0.26%




As
      indicated in the table above the result of a 100 basis point increase in
      interest rates is estimated to increase net interest income by 1.95% and
      2.56% for a 200 basis point increase over a 12-month horizon, when
      compared to the flat rate scenario. The estimated change in net interest
      income from the flat rate scenario for a 200 basis point decline in the
      level of interest rates is a decrease of 0.26%, and an increase of 1.03%
      for a 100 basis point decline. Inherent in these estimates is the
      assumption that interest rates on interest bearing liabilities would
      change in direct proportion to changes in the U.S. Treasury yield curve.
      In all simulations, the lowest possible interest rate would be
      zero.




There
are inherent shortcomings in income simulation, given the number and variety of
assumptions that must be made in performing the analysis. The assumptions relied
upon in making these calculations of interest rate sensitivity include the level
of market interest rates, the shape of the yield curve, the degree to which
certain assets and liabilities with similar maturities or periods to repricing
react to changes in market interest rates, the degree to which non-maturity
deposits react to changes in market rates, the expected prepayment rates on
loans and mortgage-backed securities, and the degree to which early withdrawals
occur on certificates of deposit and the volume of other deposit flows. As such,
although the analysis shown above provides an indication of the Company's
sensitivity to interest rate changes at a point in time, these estimates are not
intended to and do not provide a precise forecast of the effect of changes in
market interest rates on the Company's net interest income and will differ from
actual results.




In its
management of interest rate risk, the Company also relies on the analysis of its
interest rate "gap," which is the measure of the mismatch between the amount of
the Company's interest-earning assets and interest-bearing liabilities that
mature or reprice within specified timeframes. An asset-sensitive position
(positive gap) exists when there are more rate-sensitive assets than
rate-sensitive liabilities maturing or repricing within a particular time
horizon, and generally signifies a favorable effect on net interest income
during periods of rising interest rates and a negative effect during periods of
falling interest rates. Conversely, a liability-sensitive position (negative
gap) would generally indicate a negative effect on net interest income during
periods of rising rates and a positive effect during periods of falling rates.
Certain factors may serve to limit the usefulness of the measurement of the
interest rate gap. For example, interest rates on certain assets and liabilities
are discretionary and may change in advance of, or may lag behind, changes in
market rates. The gap analysis does not give effect to changes the Company may
undertake to mitigate interest rate risk. Certain assets, such as
adjustable-rate loans, have features that may restrict the magnitude of changes
in interest rates both on a short-term basis and over the life of the assets.
Further, in the event of changes in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in the
gap analysis. Lastly, should interest rates increase, the ability of borrowers
to service their debt may decrease.




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, repurchase agreements,
amortization of loans, loan prepayments and the maturity of loans,
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 June 30, 2008, cash and due
from banks, federal funds sold and short-term investments totaled
$33.6 million, or 6.2%, of total assets, which is an increase of $13.1
million, or 63.5%, from June 30, 2007.






46


The Company
also relies on outside borrowings from the FHLB as an additional funding source.
Over the past several years, the Company has expanded its use of 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. Since
June 30, 2007, the Company has increased FHLB borrowings by
$19.1 million to a total of $95.5 million outstanding as of
June 30, 2008. On that date, the Company had the ability to borrow an
additional $84.0 million from the FHLB.




The
Company uses its 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.




Contractual
      Obligations.    The following tables present
      information indicating various contractual obligations and commitments of
      the Company as of June 30, 2008 and the respective maturity
      dates:






June
      30, 2008Total
            
            One
      Year or Less
            
            More
      Than One Year Through Three Years
            
            More
      Than Three Years Through Five Years
            
            Over
      Five Years(In
      Thousands)Federal
      Home Loan Bank of Boston advances
            $95,477
            
            $25,664
            
            $26,392
            
            $31,409
            
            $12,012Lease
      commitments
            2,991
            
            269
            
            539
            
            428
            
            1,755Securities
      sold under agreements to repurchase
            13,223
            
            13,223
            
            -
            
            -
            
            -Total
      contractual obligations
            $111,691
            
            $39,156
            
            $26,931
            
            $31,837
            
            $13,767




Off-Balance Sheet
Arrangements.    None.




Loan
commitments.    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 outstanding as of June 30,
2008:




June
      30, 2008 Total(In
      Thousands)Commitments
      to grant loans (1)
            $14,876Commercial
      lines of credit
            17,384Unused
      portions of home equity lines of credit (2)
            27,887Unused
      portion of construction loans (3)
            8,636Unused
      portion of mortgage loans
            323Unused
      portion of personal lines-of-credit (4)
            2,006Standby
      letters of credit (5)
            775Total
      loan commitments
            $71,887(1)
      Commitments for loans are generally extended to customers for up to 60
      days after which they expire.(2)
      Unused portions of home equity lines of credit are available to the
      borrower for up to 10 years.(3)
      Unused portions of construction loans are available to the borrower for up
      to twelve to eighteenmonths
      for development loans and up to one year for other construction
      loans.(4)
      Unused portions of personal lines-of-credit are available to customers in
      "good standing" indefinitely.(5)
      Standby letters of credit are generally available for one year or
      less.





Management of Other
Risks.    Two additional risk areas that receive
significant attention by management and the Board are operational risk and
compliance risk. Operational risk is the risk to earnings and capital arising
from control deficiencies, problems with information systems, fraud, error or
unforeseen catastrophes. Compliance risk is the risk arising from violations of,
or nonconformance with, laws, rules, regulations, prescribed practices, internal
policies and procedures or ethical standards. Compliance risk can expose us to
fines, civil money penalties, payment of damages and the voiding of
contracts.


47


The Company addresses such risks
through the establishment of comprehensive policies and procedures with respect
to internal control, the management and operation of its information and
communication systems, disaster recovery, and compliance with laws, regulations
and banking "best practice." Monitoring of the efficacy of such policies and
procedures is performed through a combination of the Company's internal audit
program, through periodic internal and third-party compliance reviews, and
through the ongoing attention of its managers charged with supervising
compliance and operational control. Oversight of these activities is provided by
the Company's General Counsel and the Board of Directors.





Impact of Inflation and Changing
Prices




The
financial statements, accompanying notes, and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollar amounts without considering the changes in
the relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of our operations. Most of our
assets and liabilities are monetary in nature, and, therefore, the impact of
interest rates has a greater impact on its performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and
services.





Impact of Recent Accounting
Pronouncements




Please
refer to the note on Recent Accounting Pronouncements in Note 1 to the
consolidated financial statements in Item 8 for a detailed discussion of
new accounting pronouncements.





Item 7A.
            Quantitative
      and Qualitative Disclosures About Market
  Risk





The
information required by this item is incorporated be reference to Part II, Item
7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Risk
Management.”





Item 8:
            Financial
      Statements And SupplementaryData




The
information required by this Item 8 is included at the end of this Annual Report
on Form 10-K beginning on page F-1.





Item 9.
            Changes In
      And Disagreements With Accountants On Accounting And Financial
      Disclosure




Not
applicable.








48


Item 9A(T).
            Controls
      And Procedures





The Company’s
management, including the Company’s principal executive officer and principal
financial officer, have evaluated the effectiveness of the Company’s “disclosure
controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Exchange Act. Based upon their evaluation, the principal
executive officer and principal financial officer concluded that, as of the end
of the period covered by this Annual Report on Form 10-K, the Company’s
disclosure controls and procedures were effective for the purpose of ensuring
that the information required to be disclosed in the reports that the Company
files or submits under the Exchange Act with the SEC (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and (2) is accumulated and communicated to the
Company’s management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required
disclosure.





CHANGES IN INTERNAL CONTROL OVER
FINANCIAL REPORTING





There
were no changes in the Company’s internal control over financial reporting that
occurred during the fourth quarter of our last fiscal year that have materially
affected, or are reasonably likely to affect, the Company’s internal control
over financial reporting.





MANAGEMENT’SREPORTONINTERNAL CONTROL OVER FINANCIAL
REPORTING





The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. The internal control process has been
designed under management’s supervision to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Company’s financial statements for external reporting purposes in accordance
with accounting principles generally accepted in the United States of
America.





This
annual report does not include an attestation report of the Company’s
Independent Registered Public Accounting Firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s Independent Registered Public Accounting Firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management’s report in this annual report.





Management
conducted an assessment of the effectiveness of the Company’s internal control
over financial reporting as of June 30, 2008, utilizing the framework
established in Internal
Control — Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this assessment,
management has determined that the Company’s internal control over financial
reporting as of June 30, 2008 is effective.





The
Company’s internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that accurately and fairly
reflect, in reasonable detail, transactions and dispositions of assets; and
provide reasonable assurances that: (1) transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America;
(2) receipts and expenditures are being made only in accordance with
authorizations of management and the directors of the Company; and
(3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the Company’s financial
statements.





All internal
control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.





Item 9B.
            Other
      Information




Not
applicable.





49


PART III




Item 10.
            Directors,
      Executive Officers and Corporate
  Governance




Directors


For
information relating to the directors of the Company, the information contained
under the sections captioned “Proposal 1 — Election of Directors” in
the Hampden Bancorp, Inc. Proxy Statement for the 2008 Annual Meeting of
Shareholders (the “Proxy Statement”) is incorporated herein by
reference.





Executive
Officers




For information
relating to the executive officers of the Company, the information contained
under the section captioned “Executive Compensation —Executive Officers of
Hampden Bancorp, Inc.” is incorporated by reference.




Compliance
With Section 16(a) of the Exchange Act




For
information regarding compliance with Section 16(a) of the Exchange Act, the
section captioned “Section 16(a) Beneficial Ownership Compliance” in the
Company’s Proxy Statement is incorporated herein by reference.




Disclosure
of Code of Ethics




For
information concerning the Company’s code of conduct and ethics, the information
contained under the section captioned “Code of Conduct and Ethics” in the
Company’s Proxy Statement is incorporated herein by reference.




Corporate
Governance




There have
been no material changes to the procedures by which security holders may
recommend nominees to the Company’s Board of Directors.




For
information regarding the Audit Committee and its composition and the audit
committee financial expert, the section captioned “Corporate Governance —Audit
Committee” in the Company’s Proxy Statement is incorporated herein by
reference.




Item 11.
            Executive
      Compensation




For
information relating to executive compensation, the information contained under
the sections captioned “Executive Compensation” and “Directors’ Compensation” in
the Proxy Statement is incorporated herein by reference.





Item 12.
            Security
      Ownership Of Certain Beneficial Owners And Management And Related
      Stockholder Matters




(a) Security
Ownership of Certain Beneficial Owners




The
information required by this item is incorporated herein by reference to the
section captioned “Security Ownership of Certain Beneficial Owners and
Management” in the Proxy Statement.





(b) Security
Ownership of Management




The
information
required by this item is incorporated herein by reference to the section
captioned “Security
Ownership of Certain Beneficial Owners and Management”in the Proxy
Statement.





50





(c) Equity
Incentive Plan Information





The
following table sets forth information, as of June 30, 2008, the Company common
stock that may be issued upon exercise of options under stock-based benefit
plans maintained by the Company.








Plan
      Category
            
            Number
      of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
      and Rights
            
            Weighted-Average
      Exercise Price of Outstanding Options, Warrants and Rights
            
            Number
      of Securities Remaining Available for Future Issuance Under Equity
      Compensation Plans (Excluding Securities Reflected in the First
      Column)Equity
      compensation plans
              approved
      by security holders
            
            595,000
            
            $10.90
            
            199,987Equity
      compensation plans not
              approved
      by security holders
            
            -
            
            -
            
            -Total
            
            595,000
            
            $10.90
            
            199,987








Item 13.
            Certain
      Relationships And Related Transactions, and DirectorIndependence




The
information required by this item is incorporated herein by reference to the
sections captioned “Certain Relationships and Related Transactions” and
“Corporate Governance — Independent Directors” in the Proxy
Statement.







Item 14.
            Principal
      AccountingFees And
      Services




The
information required by this item is incorporated herein by reference to the
section captioned “Proposal 2 — Ratification of Independent Registered
Public Accounting Firm” in the Proxy Statement.







51
  PART IV




Item 15.
            Exhibits,Financial
      Statement Schedules





1.
            Financial
      Statements


The
consolidated financial statements, including notes thereto, and financial
schedules required in response to this item are set forth in Part II, Item 8 of
this Annual Report on Form 10-K.





2.
            Financial
      Statement Schedules


Schedules
to the consolidated financial statements required by Article 9 of Regulation S-X
and all other schedules to the consolidated financial statements have been
omitted because they are either not required, are not applicable or are included
in the consolidated financial statements or notes thereto, which can be found in
Part II, Item 8 of this Annual Report on Form 10-K.





3.
            Exhibits:







3.1
            
            Certificate
      of Incorporation of Hampden Bancorp, Inc.(1)3.2
            
            Bylaws
      of Hampden Bancorp, Inc.(2)4.1
            
            Stock
      Certificate of Hampden Bancorp, Inc.(1)10.1
            
            Hampden
      Bank Employee Stock Ownership Plan and Trust
  Agreement(3)10.2.1
            
            Hampden
      Bank Employee Stock Ownership Plan Loan Agreement(4)10.2.2
            
            Pledge
      Agreement(4)10.2.3
            
            Promissory
      Note(4)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(4)10.5.2
            
            Employment
      Agreement between Hampden Bank and Glenn S. Welch(4)10.6
            
            Form
      of Hampden Bank Change in Control Agreement(4)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)




52


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
            
            Amendment
      to Supplemental Retirement Agreement between Hampden Bank and Thomas R.
      Burton (5)10.12
            
            2008
      Equity Incentive Plan (6)10.13
            
            Form
      of Restricted Stock Agreement (7)10.14
            
            Form
      of Stock Option Grant Notice and Stock Option Agreement
  (7)21.0
            
            List
      of Subsidiaries23.0
            
            Consent
      of Wolf & Company, P.C.31.1
            
            Certification
      pursuant to Rule 13a-14(a)/15d-14(a) of Thomas R.
Burton31.2
            
            Certification
      pursuant to Rule 13a-14(a)/15d-14(a) of Robert A.
Massey32.0
            
            Section 1350
      Certification of Chief Executive Officer and Chief Financial
      Officer





(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.
      000-33144) as filed with the SEC on August 3,
  2007.





(3)
            Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q (File No.
      001-33144) for the quarter ended September 30,
  2006.





(4)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K (File No.
      000-33144) as filed with the SEC on January 19,
  2007.





(5)
            Incorporated
      by reference to the Company’s Annual Report on Form 10-K (File No.
      001-33144) for the year ended June 30,
2007.





(6)
            Incorporated
      by reference to the Company’s Proxy Statement on Form DEF 14A, as filed
      with the SEC on December 27, 2007.





(7)
            Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q (File No.
      001-33144) for quarter ended March 31,
2008.







53





SIGNATURES




Pursuant to the
requirements of the Securities Act of 1933, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Springfield, Commonwealth of Massachusetts on
September 9, 2008.




HAMPDEN
      BANCORP, INC.By:
            /s/  THOMAS R.
      BURTON
              Thomas
      R. Burton
              President
      and Chief Executive Officer




Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated.






Name
            
            Title
            
            Date/s/  THOMAS R.
      BURTON
              Thomas
      R. Burton
            
            President,
      Chief Executive Officer (principal executive officer)
            
            September
      9, 2008/s/  ROBERT
      A. MASSEY
              Robert
      A. Massey
            
            Senior
      Vice President and Treasurer (principal accounting and financial
      officer)
            
            September
      9, 2008/s/  STUART F. YOUNG
      JR.
              Stuart
      F. Young, Jr.
            
            Chairman
      of the Board of Directors
              Director
            
            September
      9, 2008/s/  DONALD R.
      DUPRE
              Donald
      R. Dupré
            
            Director
            
            September
      9, 2008/s/  THOMAS V.
      FOLEY
              Thomas
      V. Foley
            
            Director
            
            September
      9, 2008/s/  JUDITH E.
      KENNEDY
              Judith
      E. Kennedy
            
            Director
            
            September
      9, 2008/s/  RICHARD J.
      KOS
              Richard
      J. Kos
            
            Director
            
            September
      9, 2008/s/  STANLEY KOWALSKI,
      JR.
              Stanley
      Kowalski, Jr.
            
            Director
            
            September
      9, 2008/s/  KATHLEEN O’BRIEN
      MOORE
              Kathleen
      O'Brien Moore
            
            Director
            
            September
      9, 2008




54


/s/  MARY ELLEN
      SCOTT
              Mary
      Ellen Scott
            
            Director
            
            September
      9, 2008/s/  ARLENE
      PUTNAM
              Arlene
      Putnam
            
            Director
            
            September
      9, 2008/s/  LINDA SILVA
      THOMPSON
              Linda
      Silva Thompson
            
            Director
            
            September
      9, 2008/s/  RICHARD D
      SUSKI
              Richard
      D. Suski
            
            Director
            
            September
      9, 2008










55


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS




PageReport of Independent Registered Public Accounting
      Firm
            
            F-2Consolidated Balance Sheets
            
            F-3Consolidated Statements of Operations
            
            F-4Consolidated Statements of Changes in Stockholders’ Equity
            
            F-5Consolidated Statements of Cash Flows
            
            F-6
      – F-7Notes to Consolidated Financial Statements
            
            F-8







F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM





To the
Board of Directors and Shareholders of


Hampden
Bancorp, Inc.







We have
audited the consolidated balance sheets of Hampden Bancorp, Inc. and
subsidiaries (the “Company”) as of June 30, 2008 and 2007, and the related
consolidated statements of operations, changes in stockholders’ equity and cash
flows for each of the years in the three-year period ended June 30, 2008. These
consolidated financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Hampden Bancorp, Inc. and
subsidiaries as of June 30, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2008 in conformity with accounting principles generally accepted
in the United States of America.







/s/ Wolf
& Company, P.C.





Boston,
Massachusetts


September
9, 2008







F-2


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS







ASSETSJune
      30,2008
            
            2007(In
      Thousands)Cash
      and due from banks
            $5,090
            
            $7,084Federal
      funds sold and other short-term investments
            28,460
            
            13,441Cash
      and cash equivalents
            33,550
            
            20,525Securities
      available for sale, at fair value
            123,892
            
            149,147Federal
      Home Loan Bank of Boston stock, at cost
            5,233
            
            4,607Loans
      held for sale
            895
            
            464Loans,
      net of allowance for loan losses of $3,453at
      June 30, 2008 and $2,810 at June 30, 2007
            359,878
            
            329,074Premises
      and equipment, net
            4,330
            
            4,387Accrued
      interest receivable
            2,093
            
            2,386Deferred
      tax asset
            2,853
            
            3,226Bank-owned
      life insurance
            9,475
            
            8,811Other
      assets
            1,633
            
            1,310$543,832
            
            $523,937LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits
            $331,441
            
            $327,341Securities
      sold under agreements to repurchase
            13,223
            
            12,937Short-term
      borrowings
            -
            
            1,000Long-term
      debt
            95,477
            
            75,334Mortgagors'
      escrow accounts
            741
            
            713Accrued
      expenses and other liabilities
            2,502
            
            4,594Total
      liabilities
            443,384
            
            421,919Commitments
      and contingencies (Notes 12 and 15)Preferred
      stock ($.01 par value, 5,000,000 shares authorized, none issued or
      outstanding)
            -
            
            -Common
      stock ($.01 par value, 25,000,000 shares authorized,
    7,949,879issued
      and outstanding at June 30, 2008 and June 30, 2007)
            79
            
            79Additional
      paid-in-capital
            77,276
            
            77,156Unearned
      compensation - ESOP (572,391 shares unallocated at June 30, 2008
      and614,790
      shares unallocated at June 30, 2007)
            (5,759)
            
            (6,148)Unearned
      compensation - equity incentive plan
            (2,902)
            
            -Retained
      earnings
            32,131
            
            31,933Accumulated
      other comprehensive loss
            (377)
            
            (1,002)Total
      stockholders' equity
            100,448
            
            102,018$543,832
            
            $523,937











See
accompanying notes to consolidated financial statements.


F-3


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS








Years
      Ended June 30,2008
            
            2007
            
            2006(In
      Thousands)Interest
      and dividend income:Loans,
      including fees
            $22,072
            
            $20,561
            
            $18,065Debt
      securities
            5,683
            
            5,130
            
            4,961Dividends
            576
            
            895
            
            374Federal
      funds sold and other short-term investments
            493
            
            948
            
            53Total
      interest and dividend income
            28,824
            
            27,534
            
            23,453Interest
      expense:Deposits
            9,909
            
            11,130
            
            8,435Borrowings
            4,431
            
            4,351
            
            3,905Total
      interest expense
            14,340
            
            15,481
            
            12,340Net
      interest income
            14,484
            
            12,053
            
            11,113Provision
      for loan losses
            651
            
            122
            
            150Net
      interest income, after provision for loan losses
            13,833
            
            11,931
            
            10,963Non-interest
      income:Customer
      service fees
            1,569
            
            1,083
            
            880Gain
      (loss) on sales of securities, net
            57
            
            126
            
            (2)Gain
      on sales of loans, net
            86
            
            82
            
            25Curtailment
      and settlement of defined benefit plan
            108
            
            184
            
            -Increase
      in cash surrender value of life insurance
            377
            
            314
            
            302Other
            237
            
            174
            
            196Total
      non-interest income
            2,434
            
            1,963
            
            1,401Non-interest
      expense:Salaries
      and employee benefits
            8,209
            
            7,182
            
            6,669Occupancy
      and equipment
            1,481
            
            1,303
            
            1,275Data
      processing services
            760
            
            705
            
            680Advertising
            909
            
            675
            
            622Charitable
      contributions
            -
            
            3,785
            
            -Other
      general and administrative
            2,723
            
            1,966
            
            1,821Total
      non-interest expense
            14,082
            
            15,616
            
            11,067Income
      (loss) before income taxes
            2,185
            
            (1,722)
            
            1,297Income
      tax expense (benefit)
            1,015
            
            (267)
            
            277Net
      income (loss)
            $1,170
            
            $(1,455)
            
            $1,020Earnings
      per shareBasic
            $0.16
            
            N/A
            
            N/ADiluted
            $0.16
            
            N/A
            
            N/AWeighted
      average shares outstandingBasic
            7,273,069
            
            N/A
            
            N/ADiluted
            7,283,701
            
            N/A
            
            N/A








See
accompanying notes to consolidated financial statements.


F-4


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


YEARS
ENDED JUNE 30, 2008, 2007 and 2006








Unearned
            
            
            
            AccumulatedAdditional
            
            Unearned
            
            Compensation
            
            
            
            OtherCommon
      Stock
            
            Paid-in
            
            Compensation
            
            Equity
            
            Retained
            
            ComprehensiveShares
            
            Amount
            
            Capital
            
            ESOP
            
            Incentive
      Plan
            
            Earnings
            
            Loss
            
            Total(In
      Thousands)Balance
      at June 30, 2005
            -
            
            $-
            
            $-
            
            $-
            
            $-
            
            $32,607
            
            $(578)
            
            $32,029Comprehensive
      loss:Net
      income
            -
            
            -
            
            -
            
            -
            
            -
            
            1,020
            
            -
            
            1,020Change
      in net unrealized loss on securities available for sale, net of
      reclassification adjustment and tax effects
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            (1,775)
            
            (1,775)Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (755)Balance  at
      June 30, 2006
            -
            
            $-
            
            $-
            
            $-
            
            $-
            
            $33,627
            
            $(2,353)
            
            $31,274Comprehensive
      loss:Net
      loss
            -
            
            -
            
            -
            
            -
            
            -
            
            (1,455)
            
            -
            
            (1,455)Change
      in net unrealized loss on securities available for sale, net of
      reclassification adjustment and tax effects
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            1,351
            
            1,351Total comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (104)Issuance
      of common stock for initial public offering, net of expenses
      of $2.3 million
            7,571,313
            
            75
            
            73,323
            
            -
            
            -
            
            -
            
            -
            
            73,398Issuance
      of common stock to Hampden Bank Charitable
    Foundation
            378,566
            
            4
            
            3,782
            
            -
            
            -
            
            -
            
            -
            
            3,786Cash
      dividends paid ($0.03 per share)
            -
            
            -
            
            -
            
            -
            
            -
            
            (239)
            
            -
            
            (239)Shares
      purchased for ESOP (635,990 shares)
            -
            
            -
            
            -
            
            (6,360)
            
            -
            
            -
            
            -
            
            (6,360)ESOP
      shares committed to be allocated (21,200 shares)
            -
            
            -
            
            51
            
            212
            
            -
            
            -
            
            -
            
            263Balance  at
      June 30, 2007
            7,949,879
            
            $79
            
            $77,156
            
            $(6,148)
            
            $-
            
            $31,933
            
            $(1,002)
            
            $102,018Comprehensive
      income:Net
      income
            -
            
            -
            
            -
            
            -
            
            -
            
            1,170
            
            -
            
            1,170Change
      in net unrealized loss on securities available for sale, net of
      reclassification adjustment and tax effects
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            625
            
            625Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,795Culmulative
      effect of change to initially
              apply
      FASB Statement No. 156, net of
              tax
      effect
            -
            
            -
            
            -
            
            -
            
            -
            
            133
            
            -
            
            133Cash
      dividends paid ($0.12 per share)
            -
            
            -
            
            -
            
            -
            
            -
            
            (862)
            
            -
            
            (862)Establishment
      of stock incentive plan -
              restricted
      stock
            -
            
            -
            
            3,237
            
            -
            
            (3,237)
            
            -
            
            -
            
            -Common
      stock repurchased for stock
              incentive
      plan - restricted stock   (317,996shares)
            -
            
            -
            
            (3,237)
            
            -
            
            -
            
            (243)
            
            -
            
            (3,480)Stock-based
      compensation
            -
            
            -
            
            85
            
            -
            
            335
            
            -
            
            -
            
            420ESOP
      shares allocated or committed to beallocated
      (42,399 shares)
            -
            
            -
            
            35
            
            389
            
            -
            
            -
            
            -
            
            424Balance
      at June 30, 2008
            7,949,879
            
            $79
            
            $77,276
            
            $(5,759)
            
            $(2,902)
            
            $32,131
            
            $(377)
            
            $100,448














See
accompanying notes to consolidated financial statements.





F-5





HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS








Years
      Ended June 30,2008
            
            2007
            
            2006(In
      Thousands)Cash
      flows from operating activities:Net
      income (loss)
            $1,170
            
            $(1,455)
            
            $1,020Adjustments
      to reconcile net income (loss)  to net cashprovided
      by operating activities:Provision
      for loan losses
            651
            
            122
            
            150Net
      amortization (accretion) of securities
            (63)
            
            (144)
            
            209Depreciation
      and amortization
            662
            
            591
            
            589Loss
      (gain) on sales of securities, net
            (57)
            
            (126)
            
            2Loans
      originated for sale
            (16,753)
            
            (12,362)
            
            (7,931)Proceeds
      from loan sales
            16,408
            
            12,301
            
            7,635Gain
      on sales of loans, net
            (86)
            
            (82)
            
            (25)Increase
      in cash surrender value oflife
      insurance
            (377)
            
            (314)
            
            (302)Deferred
      tax provision (benefit)
            2
            
            (594)
            
            (191)Contribution
      of common stock to Hampden Bank
              Charitable
      Foundation
            -
            
            3,786
            
            -Employee
      Stock Ownership Plan expense
            424
            
            263
            
            -Stock-based
      compensation
            420
            
            -
            
            -Net
      change in:Accrued
      interest receivable
            293
            
            (579)
            
            (255)Other
      assets
            (190)
            
            13
            
            (228)Accrued
      expenses and other liabilities
            (2,092)
            
            1,428
            
            1,162Net
      cash provided by operating activities
            412
            
            2,848
            
            1,835Cash
      flows from investing activities:Activity
      in available-for-sale securities:Sales
            21,226
            
            9,072
            
            9,183Maturities
      and calls
            43,001
            
            6,000
            
            3,098Principal
      payments
            17,718
            
            17,454
            
            23,038Purchases
            (55,574)
            
            (68,475)
            
            (29,200)Redemption
      (purchase) of Federal Home Loan Bank stock
            (626)
            
            666
            
            (1,201)Loan
      originations, net
            (31,455)
            
            (11,315)
            
            (48,762)Premiums
      paid on bank-owned life insurance
            (287)
            
            -
            
            -Purchase
      of premises and equipment
            (605)
            
            (364)
            
            (650)Net
      cash used by investing activities
            (6,602)
            
            (46,962)
            
            (44,494)














(continued)








See
accompanying notes to consolidated financial statements.




















F-6





HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS (Concluded)








Years
      Ended June 30,2008
            
            2007
            
            2006(In
      Thousands)Cash
      flows from financing activities:Net
      change in deposits
            4,100
            
            4,627
            
            11,506Net
      change in repurchase agreements
            286
            
            1,702
            
            3,524Net
      change in short-term borrowings
            (1,000)
            
            (18,000)
            
            8,500Net
      change in other secured borrowings
            -
            
            -
            
            (2,383)Proceeds
      from long-term debt
            36,143
            
            43,061
            
            86,042Repayment
      of long-term debt
            (16,000)
            
            (48,551)
            
            (58,502)Net
      change in mortgagors' escrow accounts
            28
            
            140
            
            64Net
      proceeds from initial public stock offering
            -
            
            73,398
            
            -Stock
      purchased for ESOP
            -
            
            (6,360)
            
            -Stock
      purchased for restricted stock awards
            (3,480)
            
            -
            
            -Payment
      of dividends on common stock
            (862)
            
            (239)
            
            -Net
      cash provided by financing activities
            19,215
            
            49,778
            
            48,751Net
      change in cash and cash equivalents
            13,025
            
            5,664
            
            6,092Cash
      and cash equivalents at beginning of year
            20,525
            
            14,861
            
            8,769Cash
      and cash equivalents at end of year
            $33,550
            
            $20,525
            
            $14,861Supplemental
      cash flow information:Interest
      paid on deposits
            $9,909
            
            $11,130
            
            $8,435Interest
      paid on borrowings
            4,027
            
            4,074
            
            3,760Income
      taxes paid
            683
            
            425
            
            677




















See
accompanying notes to consolidated financial statements.







F-7


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED JUNE 30, 2008, 2007 and 2006







1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES






Basis
of presentation and consolidation






Hampden
Bancorp, Inc., a Delaware corporation, was formed by Hampden Bank to become the
stock holding company for Hampden Bank upon completion of Hampden Bancorp, MHC's
conversion from a mutual bank holding company to a stock bank holding company
(the “Conversion”). Hampden Bancorp, Inc. and Hampden Bank completed the
conversion of the holding company structure of Hampden Bank and the related
stock offering on January 16, 2007 with the issuance of 7,949,879 shares
(including 378,566 shares issued to the Hampden Bank Charitable Foundation)
raising net proceeds of $73.4 million (the "Conversion"). 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. Hampden Bancorp, Inc. contributed funds to Hampden LS, Inc. to
enable it to make a 15-year loan to the employee stock ownership plan (“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.During any
period prior to January 16, 2007, the Company was newly organized and owned no
assets. Therefore, the financial information for any period prior to January 16,
2007 presented in this report is that of Hampden Bancorp, MHC and its
subsidiary.




Use
of estimates




In
preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the consolidated balance sheet and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The determination of the allowance
for loan losses, other-than-temporary impairment losses and deferred taxes are
material estimates that are particularly susceptible to significant change in
the near term.




Business
and Operating Segments




The
Company provides a variety of financial services to individuals and small
businesses through its Internet operations and seven offices in Hampden County,
Massachusetts and surrounding communities. Its primary deposit products are
checking, savings and term certificate accounts and its primary lending products
are residential mortgage and commercial loans.




Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information," establishes standards for the way that public
business enterprises report information about operating segments in annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographical areas, and major
customers. Generally, financial information is to be reported on the basis that
it is used internally for evaluating segment performance and deciding how to
allocate resources to segments. Management evaluates the Company's performance
and allocates resources based on a single segment concept. Accordingly, there
are no separately identified material operating segments for which discrete
financial information is available. The Company does not derive revenues from,
or have assets located in foreign countries, nor does it derive revenues from
any single customer that represents 10% or more of the Company's total
revenues.




Reclassification




Certain
amounts in the 2007 and 2006 consolidated financial statements have been
reclassified to conform to the 2008 presentation.




Cash
equivalents




Cash
equivalents include amounts due from banks and federal funds sold and other
short-term investments.




F-8


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)




Securities




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.




Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Declines in fair value of securities
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. Gains and
losses on disposition of securities are recorded on the trade date and
determined using the specific identification method.




Federal
Home Loan Bank of Boston stock




Federal
Home Loan Bank of Boston ("FHLB") stock is a restricted equity security and is
carried at cost.




Loans
held for sale




Loans
originated and intended for sale in the secondary market are carried at the
lower of cost or estimated fair value in the aggregate. Fair value is based on
commitments on hand from investors or prevailing market prices. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to
income. Gains or losses on sales of mortgage loans are recognized based on
differences between the selling price and the carrying value of related mortgage
loans sold on the trade date.




Loans




The
Company grants mortgage, commercial, and consumer loans to customers. A
substantial portion of the loan portfolio consists of mortgage loans in Hampden
County, Massachusetts and surrounding communities. The ability of the Company's
debtors to honor their contracts is dependent upon the local real estate market
and economy.




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 as an adjustment of the related
loan yield using the interest method.




The
accrual of interest on mortgage and commercial loans is discontinued when
reasonable doubt exists as to the final timely collection of interest and
principal or at the time the loan is 90 days delinquent unless the credit
is well-secured and in process of collection. Other personal loans are typically
charged off no later than 180 days past due. Past due status is based on
the contractual term of the loans. In all cases, loans are placed on non-accrual
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 non-accrual or
charged off is reversed against interest income. The interest on these loans is
accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual status. Loans are reclassified to accrual status no sooner
than regulatory requirements allow.




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.




F-9


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)








SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)




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
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 (or 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.




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 or interest when due according to the contractual terms of the loan
agreement. Impaired loans are generally maintained on a non-accrual basis.
Impairment is measured on a loan by loan basis for commercial and construction
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, the Company does not separately identify individual
consumer and residential mortgage loans for impairment disclosures.




Mortgage
Banking




Mortgage
loans originated and held for sale in the secondary market are reported at the
lower of cost or fair value in the aggregate, with net unrealized losses (if
any) reported in a valuation allowance by charges to income. Realized gains and
losses on sales of loans held for sale are recognized at the settlement date and
are determined based on the cost of the specific loans sold.




Servicing
assets are recognized as separate assets when rights are acquired through
purchase or through sale of financial assets. For sales of mortgage loans, a
portion of the cost of originating the loan is allocated to the servicing right
based on relative fair value. Fair value is based on market prices for
comparable mortgage servicing contracts, when available, or alternatively, is
based on a valuation model that calculates the present value of estimated future
net servicing income.




In March 2006, the Financial Accounting
Standards Board (“FASB”) issued Statement of Financial Accounting Standards No.
156, "Accounting for Servicing
of Financial Assets" ("SFAS 156"). The Statement amends SFAS No. 140,
"Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS 156 requires companies to recognize a servicing
asset or servicing liability at fair value each time it undertakes an obligation
to service a financial asset by entering into a service contract. However, the
Statement permits the Company to choose either the amortized cost method or fair
value measurement method for each class of separately recognized servicing
assets. The Company adopted the fair value measurement method under SFAS 156
effective July 1, 2007. Previous to that date servicing assets were amortized
into non-interest income in proportion to, and over the period of the estimated
future net servicing income of the underlying financial assets. As a result of
the adoption of SFAS 156, the Company recorded a cumulative effect adjustment
for a change in accounting principle as an addition to retained earnings of
$133,000, net of tax effects.




Derivative
financial instruments




SFAS
No. 133, "Accounting for
Derivative Instruments and Hedging Activities," requires that all
derivatives be recognized as assets or liabilities in the balance sheet and
measured at fair value.








F-10


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)




Derivative
Loan Commitments




Mortgage loan commitments are referred to as derivative loan commitments
if the loan that will result from exercise of the commitment will be held for
sale upon funding. Loan commitments that are derivatives are recognized at fair
value on the consolidated balance sheet in other assets and other liabilities
with changes in their fair values recorded in other non-interest income, if
material.




The
Company records a zero value for the loan commitment at inception (at the time
the commitment is issued to a borrower ("the time of rate lock")) and recognizes
the value of the expected normal servicing rights until the underlying loan is
sold. Subsequent to inception, changes in the fair value of the loan commitment
are recognized based on changes in the fair value of the underlying mortgage
loan due to interest rate changes, changes in the probability the derivative
loan commitment will be exercised, and the passage of time. In estimating fair
value, the Company assigns a probability to a loan commitment based on an
expectation that it will be exercised and the loan will be funded.




Forward Loan
Sale Commitments




To
protect against the price risk inherent in derivative loan commitments, the
Company utilizes both "mandatory delivery" and "best efforts" forward loan sale
commitments to mitigate the risk of potential decreases in the values of loans
that would result from the exercise of the derivative loan commitments.
Mandatory delivery contracts are accounted for as derivative instruments.
Generally, the Company's best efforts contracts meet the definition of
derivative instruments when the loans to the underlying borrowers close, and are
accounted for as derivative instruments at that time. Accordingly, forward loan
sale commitments are recognized at fair value on the consolidated balance sheet
in other assets and other liabilities with changes in their fair values recorded
in other noninterest income, if material.




The
Company estimates the fair value of its forward loan sales commitments using a
methodology similar to that used for derivative loan commitments.




Transfers
of financial assets




Transfers
of financial assets are accounted for as sales, when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and
(3) the Company does not maintain effective control over the transferred
assets through an agreement to repurchase them before their
maturity.




Bank-Owned
Life Insurance




Bank-owned
life insurance policies are reflected on the consolidated balance sheet at cash
surrender value. Changes in cash surrender value are reflected in non-interest
income on the consolidated statement of income.




Premises
and equipment




Land
is carried at cost. Buildings, leasehold improvements and equipment are stated
at cost, less accumulated depreciation and amortization, computed on the
straight-line method over the estimated useful lives of the assets or the
expected term of the lease, if shorter. Expected terms include lease option
periods to the extent that the exercise of such options is reasonably assured.
The cost of maintenance and repairs is expensed as incurred.




Advertising
costs




All
advertising costs are expensed as incurred.




F-11


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)




Income
taxes




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. As changes in the tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted accordingly through
the provision for income taxes. The Company's base amount of its federal income
tax reserve for loan losses is a permanent difference for which there is no
recognition of a deferred tax liability. However, the loan loss allowance
maintained for financial reporting purposes is a temporary difference with
allowable recognition of a related deferred tax asset, if it is deemed
realizable.




Pension
Plan




In prior years, the Company had a
non-contributory defined benefit plan providing pension benefits through
membership in the Savings Banks Employees Retirement Association covering
substantially all employees who met certain age and service requirements. The
compensation cost was recognized on the net periodic cost method over the
employees’ approximate service period. The aggregate cost method was utilized
for funding purposes. As of October 31, 2006, the Company elected to freeze
the non-contributory defined benefit plan. The final distribution of assets was
completed in the fourth quarter of fiscal year 2008. See Note 15, Employee
Benefit Plans.




Stock-based
compensation





The
Company expenses compensation cost associated with share-based payment
transactions, such as options and restricted stock awards, in the financial
statements over the requisite service (vesting) period as required by SFAS 123R,
Share-Based
Payment.




Employee
Stock Ownership Plan




Compensation expense is recognized based on the fair value of shares at the time
they are committed to be released to the Employee Stock Ownership Plan (“ESOP”).
All shares held by the ESOP that are released and committed to be released are
deemed outstanding for purposes of earnings per share calculations. The value of
unearned shares to be allocated to ESOP participants for future services not yet
performed is reflected as a reduction of stockholders’ equity. As ESOP shares
are earned by the participants, the Company recognizes compensation expense
equal to the fair value of the earned ESOP shares.




Comprehensive
income/loss




Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on available-for-sale securities, are
reported as a separate component of the retained earnings section of the
consolidated balance sheet, such items, along with net income, are components of
comprehensive income/loss.




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





Years
      Ended June 30,2008
            
            2007
            
            2006(In
      Thousands)Unrealized
      holding gains (losses) on available-for-sale securities
            $1,053
            
            $2,293
            
            $(2,845)Reclassification
      adjustment for losses (gains) realized in income
            (57)
            
            (126)
            
            2Net
      unrealized gains (losses)
            996
            
            2,167
            
            (2,843)Tax
      effect
            371
            
            816
            
            1,068Net-of-tax
      amount
            $625
            
            $1,351
            
            $(1,775)


F-12


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)




Earnings
Per Common 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 earnings per share calculations as they are committed to be
released.




Earnings per common share have
been computed based upon the following:




Year
      Ended June 30,2008Net
      income applicable to common stock (in thousands)
            $1,170Average
      number of shares issued
            7,949,879Less:
      average unallocated ESOP shares
            (595,252)Less:
      average unvested restricted stock awards
            (81,558)Average
      number of basic shares outstanding
            7,273,069Plus:
      dilutive unvested restricted stock awards
            10,632Plus:
      dilutive stock option shares
            -Average
      number of diluted shares outstanding
            7,283,701Basic
      earnings per share
            $0.16Diluted
      earnings per share
            $0.16








The
earnings per share calculation excludes 595,000 options whose effect would have
been antidilutive. Because shares were not issued until January 16, 2007,
earnings per share have not been reported for the years ended June 30, 2007
and 2006.




Recent
Accounting Pronouncements




In June
2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes,"which is an interpretation of FASB Statement No. 109,
"Accounting for Income Taxes."This Interpretation clarifies the accounting for uncertainty in income
taxes recognized in a Company's financial statements, prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position in the tax return and provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transition. The Company adopted this Interpretation on
July 1, 2007, and it did not have a material impact on the Company's
consolidated financial statements. The Company accounts for interest and
penalties related to uncertain tax positions as part of its federal and state
income taxes. The Company has no penalties or interest recorded for the year
ended June 30, 2008.





In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurement" which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands the disclosures about fair
value measurement. This Statement was developed to provide guidance for
consistency and comparability in fair value measurements and disclosures and
applies under other accounting pronouncements that require or permit fair value
measurements. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. This Statement is not expected to have a material impact on the
Company's consolidated financial statements.


F-13


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Concluded)





In March
2007, the Emerging Task Force ("EITF") reached a consensus on Issue No. 06-10,
"Accounting forCollateral AssignmentSplit-Dollar Life Insurance
Arrangements"("EITF 06-10"). Under this EITF, effective for the
Company’s 2009 fiscal year, the Company is required to recognize a liability for
postretirement benefits related to collateral assignment split-dollar life
insurance arrangements. As a result of the adoption of EITF 06-10, the
Company recorded a cumulative effect adjustment for a change in accounting
principle as a reduction to retained earnings of $457,000 as of July 1,
2008.





In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities". This Statement provides companies with
an option to report selected financial assets and liabilities at fair value. The
Standard's objective is to reduce both the complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. This Statement is effective as of the beginning of an entity's
first fiscal year beginning after November 15, 2007. The Company does not expect
SFAS 159 to have a material impact on its consolidated financial
statements.





In June
2007, the FASB ratified the consensus reached in EITF 06-11, “Accounting for Income Tax Benefits
of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11
applies to entities that have share-based payment arrangements that entitle
employees to receive dividends or dividend equivalents on equity-classified
unvested shares when those dividends or dividend equivalents are charged to
retained earnings and result in an income tax deduction. Entities that have
share-based payment arrangements that fall within scope of EITF 06-11 will be
required to increase capital surplus for any realized income tax benefit
associated with dividends or dividend equivalents paid to employees for equity
classified unvested equity awards. EITF 06-11 is effective for fiscal years
beginning after December 15, 2007. The Company does not expect EITF 06-11 to
have a material impact on its consolidated financial statements.





On
December 4, 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements — An Amendment of ARB No. 51
(“SFAS 160”) establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
This statement is not applicable to the Company and will, therefore, not have an
impact on it’s consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),“Business Combinations”(“SFAS 141R”), which requires an acquiring entity to recognize all assets
acquired and liabilities assumed in a transaction at their fair value as of the
acquisition date, with limited exception, changes the accounting treatment for
certain specific items and expands disclosure requirements. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, with early adoption prohibited.







F-14


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)








2.
      RESTRICTIONS ON CASH AND AMOUNTS DUE FROM
BANKS





The
Company is required to maintain average balances on hand or with the Federal
Reserve Bank. At June 30, 2008 and 2007, these reserve balances amounted to
$250,000 and $800,000 respectively.





3.
      SECURITIES AVAILABLE FOR SALE





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








June
      30, 2008Amortized
      Cost
            
            Gross
      Unrealized Gains
            
            Gross
      Unrealized Losses
            
            Fair
      Value(In
      Thousands)Debt
      securities:Government-sponsored
      enterprises
            $36,962
            
            $294
            
            $(60)
            
            $37,196Mortgage-backed
      securities
            85,892
            
            497
            
            (956)
            
            85,433Total
      debt securities
            122,854
            
            791
            
            (1,016)
            
            122,629Marketable
      equity securities
            1,661
            
            19
            
            (417)
            
            1,263Total
      securities available for sale
            $124,515
            
            $810
            
            $(1,433)
            
            $123,892

















June
      30, 2007Amortized
      Cost
            
            Gross
      Unrealized Gains
            
            Gross
      Unrealized Losses
            
            Fair
      Value(In
      Thousands)Debt
      securities:Government-sponsored
      enterprises
            $56,677
            
            $15
            
            $(209)
            
            $56,483Corporate
      bonds
            1,689
            
            -
            
            (5)
            
            1,684Mortgage-backed
      securities
            69,786
            
            100
            
            (1,558)
            
            68,328Total
      debt securities
            128,152
            
            115
            
            (1,772)
            
            126,495Marketable
      equity securities
            22,614
            
            113
            
            (75)
            
            22,652Total
      securities available for sale
            $150,766
            
            $228
            
            $(1,847)
            
            $149,147










F-15


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




SECURITIES
      AVAILABLE FOR SALE (Continued)




The
amortized cost and estimated fair value of debt securities by contractual
maturity at June 30, 2008 follows. 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.





June
      30, 2008Amortized
      Cost
            
            Fair
      Value(In
      Thousands)Within
      1 year
            $2,999
            
            $3,006Over
      1 year through 5 years
            33,963
            
            34,190Total
      bonds and obligations
            36,962
            
            37,196Mortgage-backed
      securities
            85,892
            
            85,433Total
      debt securities
            $122,854
            
            $122,629







At
June 30, 2008 and 2007, the fair value of securities pledged to secure
repurchase agreements was $14,210,000 and $14,745,000, respectively (see
Note 8).




For
the years ended June 30, 2008, 2007 and 2006, proceeds from sales of
securities available for sale amounted to $21,226,000, $9,072,000 and
$9,183,000, respectively. Gross realized gains amounted to $137,000, $185,000
and $121,000, respectively. Gross realized losses amounted to $80,000, $59,000
and $123,000, respectively.




Information
pertaining to securities with gross unrealized losses at June 30, 2008 and
2007, aggregated by investment category and length of time that individual
securities have been in a continuous loss position, follows:






Less
      Than Twelve Months
            
            Over
      Twelve MonthsGross
      Unrealized Losses
            
            Fair
      Value
            
            Gross
      Unrealized Losses
            
            Fair
      Value(In
      Thousands)June 30, 2008:Government-sponsored
      enterprises
            $60
            
            $5,439
            
            $-
            
            $-Mortgage-backed
      securities
            179
            
            17,549
            
            777
            
            30,401Marketable
      equity securities
            261
            
            662
            
            156
            
            325$500
            
            $23,650
            
            $933
            
            $30,726June 30, 2007:Government-sponsored
      enterprises
            $84
            
            $30,305
            
            $125
            
            $23,173Corporate
      bonds
            -
            
            -
            
            5
            
            1,684Mortgage-backed
      securities
            -
            
            -
            
            1,558
            
            54,912Marketable
      equity securities
            5
            
            119
            
            70
            
            462$89
            
            $30,424
            
            $1,758
            
            $80,231


F-16


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




SECURITIES
      AVAILABLE FOR SALE (Concluded)




At
June 30, 2008, sixty-three debt securities have unrealized losses with
aggregate depreciation of 1.9% 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 the intent and ability
to hold debt securities for the foreseeable future, no declines are deemed to be
other than temporary.




At
June 30, 2008, twenty-six marketable equity securities have unrealized
losses with aggregate depreciation of 29.8% from the Company's cost basis. The
majority of these unrealized losses have existed for less than a year and relate
principally to the banking, retail, electric utilities, insurance and defense
industries. Although the issuers have shown declines in earnings as a result of
the weakened economy, no credit issues have been identified that would cause
management to believe the declines in market value are other than temporary. In
analyzing the issuer's financial condition, management considers industry
analysts’ reports and financial performance. Because management has the intent
and ability to hold equity securities for the foreseeable future, no declines
are deemed to be other than temporary.




4.
LOAN SERVICING




In the
ordinary course of business, the Company sells real estate loans to the
secondary market. The Company retains servicing on loans sold and earns
servicing fees of .25% per annum based on the monthly outstanding balances of
the loans serviced. The Company recognizes servicing assets each time it
undertakes an obligation to service loans sold.





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




Year
      EndedJune
      30, 2008(In
      Thousands)Fair
      value at the beginning of year
            $152Capitalized
      servicing assets
            68Changes
      in fair value
            224Fair
      value at end of year
            $444




The changes in servicing assets
measured using the amortization method are as follows:







Years
      Ended June 30,2007
            
            2006(In
      Thousands)Carrying
      amount at the beginning of year
            $116
            
            $91Capitalized
      servicing assets
            12
            
            (21)Amortization
            24
            
            46Carrying
      amount at end of year
            $152
            
            $116







F-17


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





LOAN
SERVICING (Concluded)





The
unpaid principal balance of mortgage serviced for others was $31.9 million and
$25.3 million at June 30, 2008 and June 30, 2007, respectively. 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 years ended June 30,
2008, 2007, and 2006, amounts recognized for loan servicing fees amounted to
$187,000, $88,000, and $72,000, respectively.




5.
LOANS




A
summary of the balances of loans follows:




June
      30,2008
            
            2007(In
      Thousands)Mortgage
      loans on real estate:Residential
            $121,864
            
            $116,178Commercial
            117,636
            
            90,538Home
      equity
            57,790
            
            59,899Construction
            11,308
            
            21,251308,598
            
            287,866Commercial
      loans
            32,509
            
            25,472Consumer
      loans
            19,967
            
            16,64452,476
            
            42,116Total
      loans
            361,074
            
            329,982Deferred
      costs
            2,257
            
            1,902Allowance
      for loan losses
            (3,453)
            
            (2,810)$359,878
            
            $329,074







An analysis
of the allowance for loan losses follows:




Years
      Ended June 30,2008
            
            2007
            
            2006(In
      Thousands)Balance
      at beginning of year
            $2,810
            
            $3,695
            
            $3,644Provision
      for loan losses
            651
            
            122
            
            150Recoveries
            31
            
            19
            
            19Loans
      charged-off
            (39)
            
            (1,026)
            
            (118)Balance
      at end of year
            $3,453
            
            $2,810
            
            $3,695









F-18


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


LOANS
(Concluded)




The
following is a summary of information pertaining to impaired and non-accrual
loans:




June
      30,2008
            
            2007(In
      Thousands)Impaired
      loans without a valuation allowance
            $1,057
            
            $1,845Impaired
      loans with a valuation allowance
            2,963
            
            1,716Total
      impaired loans
            $4,020
            
            $3,561Valuation
      allowance related to impaired loans
            $1,146
            
            $1,104Total
      non-accrual loans
            $4,825
            
            $3,561





As
of June 30, 2008 and June 30, 2007, there were no loans past-due ninety
days or more and still accruing.




There
was no interest income recognized on an accrual basis on impaired loans for the
years ended June 30, 2008, 2007 and 2006.




Years
      Ended June 30,2008
            
            2007
            
            2006(In
      Thousands)Average
      investment in impaired loans
            $4,242
            
            $3,647
            
            $3,882Interest
      income recognized on a cash basis on impaired loans
            $102
            
            $80
            
            $196




No
additional funds are committed to be advanced in connection with impaired
loans.




6.
PREMISES AND EQUIPMENT




A summary of
the cost and accumulated depreciation and amortization is as
follows:




June
      30,2008
            
            2007
            
            Estimated
      Useful Lives(In
      Thousands)Premises:Land
            $763
            
            $763Buildings
      and improvements
            4,459
            
            4,417
            
            5 -
      39 YearsLeasehold
      improvements
            1,180
            
            1,000
            
            5 -
      10 YearsEquipment
            4,122
            
            3,739
            
            3 -
      10 Years10,524
            
            9,919Accumulated
      depreciation and amortization
            (6,194)
            
            (5,532)$4,330
            
            $4,387




Depreciation and amortization expense
for the years ended June 30, 2008, 2007 and 2006 amounted to $662,000, $591,000
and $589,000, respectively.




F-19


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




7.
DEPOSITS




A summary of
deposit balances by type is as follows:




June
      30,2008
            
            2007(In
      Thousands)Demand
            $36,619
            
            $37,063NOW
            16,797
            
            19,230Regular
      and other savings
            66,492
            
            66,896Money
      market deposits
            22,138
            
            22,546Total
      non-certificate accounts
            142,046
            
            145,735Term
      certificates less than $100,000
            83,381
            
            80,885Term
      certificates of $100,000 and greater
            106,014
            
            100,721Total
      certificate accounts
            189,395
            
            181,606Total
      deposits
            $331,441
            
            $327,341







At June 30,
2008 the scheduled maturities of time deposits (in thousands) are as
follows:






Year Ending June 30,2009
            $135,7542010
            14,0072011
            22,6142012
            11,7902013
            5,230$189,395






8.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE




Securities
sold under agreements to repurchase ("repurchase agreements") are funds borrowed
from customers on an overnight basis that are secured by securities. At
June 30, 2008 and 2007, repurchase agreements outstanding amounted to
$13,223,000 and $12,937,000, respectively, with a weighted average interest rate
of 1.75% and 3.00%, respectively. At June 30, 2008 and 2007, securities with an
amortized cost of $14,372,000 and $15,424,000, respectively, and a fair value of
$14,210,000 and $14,745,000, respectively, were pledged to secure repurchase
agreements.




9.
SHORT-TERM BORROWINGS




Short-term
borrowings consist of FHLB advances with an original maturity within one year at
a weighted average rate of 5.41% at June 30, 2007. There were no short-term
borrowings at June 30, 2008.




In
addition, at June 30, 2008 and 2007, the Company had an Ideal Way Line of
Credit available with the FHLB of $1,952,000, of which there were no amounts
outstanding at June 30, 2008 and 2007.






F-20


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




10.    LONG-TERM
DEBT




A
summary of outstanding advances from the FHLB at June 30, 2008 and 2007
follows:






Amount
            
            Weighted
      Average Rate2008
            
            2007
            
            2008
            
            2007(In
      Thousands)FHLB
      advances maturing
              in
      the years ending June 30,2008
            $-
            
            $15,000
            
            -
            %
            4.17
            %*2009
            25,664
            
            22,734
            
            4.65
            
            4.60*2010
            13,202
            
            9,070
            
            4.41
            
            4.27*2011
            13,190
            
            4,716
            
            3.69
            
            4.56*2012
            23,159
            
            18,757
            
            4.36
            
            4.412013
            8,250
            
            3,057
            
            4.25
            
            5.28*2014
            3,012
            
            -
            
            4.62
            
            -2015
            3,000
            
            -
            
            3.25
            
            -2017
            2,000
            
            2,000
            
            4.19
            
            4.192018
            4,000
            
            -
            
            3.19
            
            -Total
      FHLB advances
            $95,477
            
            $75,334
            
            4.26
            %
            4.44
            %







*
At June 30, 2008, includes amortizing advances aggregating $6,427,000
requiring combined monthly principal and interest payments of
$372,000.




Certain
FHLB advances are callable in the amount of $28,000,000 in fiscal 2009,
$8,000,000 in fiscal 2010, and $3,000,000 in fiscal 2012. These advances have
maturity dates in fiscal years 2009, 2011, 2012, 2013, 2014, 2015, 2017, and
2018.




All
borrowings from the FHLB are secured by a blanket lien on qualified collateral,
defined principally as 75% of the carrying value of first mortgage loans on
owner-occupied residential property and 90% of the market value of obligations
of Government-sponsored enterprises.




As
a member of the FHLB, the Company is required to invest in shares of $100 par
value stock of the FHLB in the amount of 1% of its outstanding residential loans
or 5% of its outstanding advances from the FHLB, whichever is
higher.








F-21


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




11.    INCOME
TAXES




Allocation
of the federal and state income taxes between current and deferred portions is
as follows:




Years
      Ended June 30,2008
            
            2007
            
            2006(In
      Thousands)Current
      tax provision:Federal
            $905
            
            $267
            
            $437State
            108
            
            60
            
            311,013
            
            327
            
            468Deferred
      tax provision (benefit):Federal
            (235)
            
            (1,111)
            
            (142)State
            (113)
            
            57
            
            (49)(348)
            
            (1,054)
            
            (191)Change
      in valuation reserve
            350
            
            460
            
            -2
            
            (594)
            
            (191)Total
      tax provision (benefit)
            $1,015
            
            $(267)
            
            $277




The
reasons for the differences between the statutory federal income tax rate and
the effective tax rates are summarized as follows:




Years
      Ended June 30,2008
            
            2007
            
            2006Statutory
      tax rate
            34.0
            %
            34.0
            %
            34.0
            %Increase
      (decrease) resulting from:State
      taxes, net of federal tax benefit
            (0.2)
            
            (4.5)
            
            (0.9)Dividends
      received deduction
            (2.8)
            
            6.3
            
            (3.4)Bank-owned
      life insurance
            (5.2)
            
            5.4
            
            (6.8)Change
      in valuation reserve
            16.0
            
            (26.7)
            
            0.0Other,
      net
            4.6
            
            1.0
            
            (1.5)Effective
      income tax rate
            46.4
            %
            15.5
            %
            21.4
            %




The
components of the net deferred tax asset are as follows:




June
      30,2008
            
            2007(In
      Thousands)Deferred
      tax asset:Federal
            $3,297
            
            $3,319State
            751
            
            6354,048
            
            3,954Valuation
      reserve
            (810)
            
            (460)3,238
            
            3,494Deferred
      tax liability:Federal
            (286)
            
            (199)State
            (99)
            
            (69)(385)
            
            (268)Net
      deferred tax asset
            $2,853
            
            $3,226


F-22


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




INCOME
      TAXES (Concluded)




The tax
effects of each item that give rise to deferred taxes are as
follows:




June
      30,2008
            
            2007(In
      Thousands)Non-accrual
      interest income
            $92
            
            $9Net
      unrealized loss on securities available for sale
            246
            
            617Depreciation
      and amortization
            64
            
            -Allowance
      for loan losses
            1,428
            
            1,165Employee
      benefit plans
            1,033
            
            887Charitable
      contribution carryover
            1,171
            
            1,264Other
            (371)
            
            (256)Valuation
      reserve for charitable contribution carryover
            (810)
            
            (460)Net
      deferred tax asset
            $2,853
            
            $3,226







An adjustment
of $350,000 was made to increase the Company's valuation reserve againstthe
deferred tax asset set up for the utilization of the charitable contribution
deduction carryforward in fiscal 2008. A valuation reserve of $460,000 was
established against the federal deferred tax asset in fiscal 2007. The valuation
allowance was established to reflect the uncertainty of fully utilizing a
five-year charitable contribution carryforward of approximately $3.5 million.
The carryforward was created primarily by the contribution of 378,566 shares of
the Company’s common stock to the Hampden Bank Charitable Foundation as part of
the mutual to stock conversion. There was no valuation allowance for the year
ended June 30, 2006.




The federal
income tax reserve for loan losses at the Company's base year amounted to
$2,222,000. If any portion of the reserve is used for purposes other than to
absorb loan losses, approximately 150% of the amount actually used, limited to
the amount of the reserve, would be subject to taxation, in the fiscal year in
which used. As the Company intends to use the reserves solely to absorb loan
losses, a deferred income tax liability of $911,000 has not been
provided.




12.    COMMITMENTS
AND CONTINGENCIES




In the
normal course of business, there are outstanding commitments which are not
reflected in the accompanying consolidated balance sheets.




Loan
commitments




The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the accompanying consolidated balance
sheets.




F-23


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




COMMITMENTS
AND CONTINGENCIES (Continued)




The Company's
exposure to credit loss is represented by the contractual amount of these
commitments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. A summary
of financial instruments outstanding whose contract amounts represent credit
risk is as follows:




June
      30,2008
            
            2007(In
      Thousands)Commitments
      to grant loans
            $14,876
            
            $28,891Unadvanced
      funds on home equity lines-of-credit
            27,887
            
            29,882Unadvanced
      funds on personal lines-of-credit
            2,006
            
            531Unadvanced
      funds on commercial lines-of-credit
            17,384
            
            19,312Unadvanced
      funds on construction loans
            8,636
            
            15,777Unadvanced
      funds due mortgagors
            323
            
            641Standby
      letters of credit
            775
            
            580




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. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Commitments to grant loans are generally secured by real estate.
Unadvanced lines-of-credit do not necessarily represent future cash requirements
as these commitments may expire without being drawn upon. The Company evaluates
each customer's creditworthiness on a case-by-case basis. Funds disbursed on
construction loans and home equity lines-of-credit are collateralized by real
estate. Overdraft lines-of-credit are unsecured.




Unadvanced
funds on commercial lines of credit are generally secured by the business assets
of the borrower. Unadvanced funds due mortgagers are funds committed for
construction loans collateralized by residential real estate.




Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance by a customer to a third party. Standby letters of
credit are generally secured by cash, business assets, or real estate. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.




FASB
Interpretation ("FIN") No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, requires a guarantor to recognize, at the
inception of a guarantee, a liability in an amount equal to the fair value of
the obligation undertaken in issuing the guarantee. The Company considers
standby letters of credit to be guarantees under FIN No. 45. The amount of
the liability related to guarantees at June 30, 2008, and 2007 was not
material.




Operating
Leases




Pursuant
to the terms of noncancelable lease agreements in effect at June 30, 2008,
pertaining to premises and equipment, future minimum rent commitments under
various operating leases are as follows:




Years Ending June 30,
            
            Amount(In
      Thousands)2009
            
            $2692010
            
            2882011
            
            2512012
            
            2382013
            
            190Thereafter
            
            1,755$2,991




The
leases contain options to extend for periods of five and ten year terms. The
cost of such rentals is not included above. Rent expense amounted to $231,000,
$191,000 and $163,000 for the years ended June 30, 2008, 2007 and 2006,
respectively.




F-24


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




COMMITMENTS
AND CONTINGENCIES (Concluded)




Contingencies




Various
legal claims arise from time to time in the ordinary course of business. In the
opinion of management, these claims will have no material effect on the
Company's consolidated financial position or results of operations.




Employment
and change of control agreements




In
connection with the Conversion, the Company entered into employment agreements
and change of control agreements with certain officers. The employment
agreements provide for an annual base salary, subject to increase, and certain
other benefits. They also guarantee customary corporate indemnification and
insurance coverage under a standard directors’ and officers’ insurance policy
throughout the employment term. The initial terms of the agreements are three
years. Depending on the officer, the change in control agreements provide for a
severance payment equal to either one (1) or two (2) times the individual’s
average annual compensation for the five most recent taxable
years.  The initial terms of the agreements are two
years.




Commencing
on the first anniversary date of the agreement, and continuing on each
anniversary date thereafter, the term automatically renews for a successive term
of three years for the employment agreements, unless either party gives notice
not to renew. The terms of each change in control agreement may be extended by
the Board of Directors of Hampden Bank for an additional
year.  Following termination of the executive’s employment, the
executive must adhere to non-competition and non-disclosure restrictions for one
year, or for a period of time equal to the officer’s severance benefit,
whichever is longer.




13.
DERIVATIVE INSTRUMENTS




Derivative
financial instruments




The
Company utilizes various derivative instruments primarily for asset/liability
management. These transactions involve both credit and market risk. The notional
amounts are amounts on which calculations and payments are based. Notional
amounts do not represent direct credit exposures. Direct credit exposure is
limited to the net difference between the calculated amounts to be received and
paid, if any.




Interest
rate swap agreements




The
Company used interest rate swap agreements to hedge a portfolio of certificates
of deposit. These agreements expired in September 2007. These agreements were
designated as fair value hedges since they were used to convert the cost of the
certificates of deposit from a fixed to a variable rate. The application of SFAS
No. 133 resulted in a fair value adjustment to the carrying amount of the
swap and the certificates of deposit. There was no hedge ineffectiveness for the
years ended June 30, 2007 and 2006.




These
agreements provided for the Company to make payments of a variable-rate
determined by a specified index (one-month LIBOR) in exchange for receiving
payments at a fixed-rate.




June
      30,2007(Dollars
      in thousands)Notional
      amount
            $20,000Weighted
      average pay rate
            7.21
            %Weighted
      average receive rate
            5.00
            %Weighted
      average maturity in years
            0.2Unrealized
      loss relating to interest rate swaps
            $(101)




At June
30, 2007, the unrealized loss relating to use of interest rate swaps was
recorded in other liabilities.




F-25


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




14.
MINIMUM REGULATORY CAPITAL REQUIREMENTS






The
Company (on a consolidated basis) and the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's and the Bank's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to the
Company.




Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of June 30, 2008 and 2007,
that the Company and the Bank meets all capital adequacy requirements to which
it is subject.




As
of June 30, 2008, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.






F-26


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




MINIMUM
REGULATORY CAPITAL REQUIREMENTS (Continued)






The
Company's and the Bank's actual and minimum required capital amounts and ratios
are as follows:




MinimumTo
      Be WellMinimum
            
            Capitalized
      UnderFor
      Capital
            
            Prompt
      CorrectiveActual
            
            Adequacy
      Purposes
            
            Action
      ProvisionsAmount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            Ratio(Dollars
      in Thousands)As of June 30, 2008:Total
      capital (to risk weighted assets):Consolidated
            $103,836
            
            27.6
            %
            $30,065
            
            8.0
            %
            N/A
            
            N/ABank
            71,476
            
            19.4
            
            29,496
            
            8.0
            
            $36,870
            
            10.0%Tier
      1 capital (to risk weighted assets):Consolidated
            100,383
            
            26.7
            
            15,032
            
            4.0
            
            N/A
            
            N/ABank
            68,023
            
            18.5
            
            14,748
            
            4.0
            
            22,122
            
            6.0Tier
      1 capital (to average assets):Consolidated
            100,383
            
            19.1
            
            21,019
            
            4.0
            
            N/A
            
            N/ABank
            68,023
            
            13.7
            
            19,868
            
            4.0
            
            24,835
            
            5.0As of June 30, 2007:Total
      capital (to risk weighted assets):Consolidated
            $105,832
            
            30.5
            %
            $28,038
            
            8.0
            %
            N/A
            
            N/ABank
            66,673
            
            20.1
            
            27,582
            
            8.0
            
            $34,478
            
            10.0%Tier
      1 capital (to risk weighted assets):Consolidated
            103,005
            
            29.7
            
            14,019
            
            4.0
            
            N/A
            
            N/ABank
            63,846
            
            19.3
            
            13,791
            
            4.0
            
            20,687
            
            6.0Tier
      1 capital (to average assets):Consolidated
            103,005
            
            20.2
            
            20,636
            
            4.0
            
            N/A
            
            N/ABank
            63,846
            
            13.7
            
            19,431
            
            4.0
            
            24,289
            
            5.0






F-27


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




MINIMUM
REGULATORY CAPITAL REQUIREMENTS (Concluded)




A
reconciliation of the Company’s year-end total stockholders’ equity to the
Bank’s regulatory capital is as follows:






June
      30, 2008Consolidated
            
            Bank(In
      Thousands)Total
      stockholders' equity per consolidated financial statements
            $100,448
            
            $100,448Adjustments
      for Tier 1 capital:Holding
      company equity adjustment
            -
            
            (32,369)Accumulated
      losses on securities available for sale, net of tax
            377
            
            386Net
      unrealized loss on equity securities available for sale
            (398)
            
            (398)Mortgage
      servicing rights
            (44)
            
            (44)Total
      Tier 1 capital
            100,383
            
            68,023Adjustments
      for total capital:Allowance
      for loan losses
            3,453
            
            3,453Other
      adjustments
            -
            
            -Total
      capital per regulatory reporting
            $103,836
            
            $71,476June
      30, 2007Consolidated
            
            Bank(In
      Thousands)Total
      stockholders' equity per consolidated financial statements
            $102,018
            
            $102,018Adjustments
      for Tier 1 capital:Holding
      company equity adjustment
            -
            
            (39,142)Accumulated
      losses on securities available for sale, net of tax
            1,002
            
            985Other
      adjustments
            (15)
            
            (15)Total
      Tier 1 capital
            103,005
            
            63,846Adjustments
      for total capital:Allowance
      for loan losses
            2,810
            
            2,810Other
      adjustments
            17
            
            17Total
      capital per regulatory reporting
            $105,832
            
            $66,673











F-28


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




15.
EMPLOYEE BENEFIT PLANS




Pension
Plan




The
Company froze its defined benefit pension plan effective October 31, 2006 and
recorded a gain of $184,000 in fiscal 2008 as a result of the curtailment. In
the third quarter of fiscal 2007, the Company voted to terminate the plan with
final settlement, including the distribution of all plan assets, which was
completed in the fourth quarter of fiscal 2008. The Company recorded a gain of
$108,000 as a result of the settlement of the plan. Prior to this curtailment
and settlement, the Company provided pension benefits for eligible employees
through a defined benefit pension plan. Substantially all employees participated
in the retirement plan on a non-contributing basis, and were fully vested after
three years of service. Information pertaining to the activity in the plan is as
follows:




Year
      Ended June 30,2008
            
            2007
            
            2006(In
      Thousands)Change
      in plan assets:Fair
      value of plan assets at beginning of year
            $4,456
            
            $4,025
            
            $3,419Actual
      return on plan assets
            166
            
            311
            
            425Contribution
            137
            
            363
            
            318Benefits
      paid
            (4,722)
            
            (243)
            
            (137)Plan
      expenses paid
            (37)
            
            -
            
            -Fair
      value of plan assets at end of year
            $-
            
            $4,456
            
            $4,025Change
      in benefit obligation:Benefit
      obligation at beginning of year
            4,701
            
            4,410
            
            4,291Service
      cost
            129
            
            129
            
            411Interest
      cost
            -
            
            250
            
            225Plan
      amendment
            (108)
            
            (280)
            
            -Actuarial
      loss (gain)
            -
            
            435
            
            (380)Benefits
      paid
            (4,722)
            
            (243)
            
            (137)Benefit
      obligation at end of year
            $-
            
            $4,701
            
            $4,410Funded
      status
            -
            
            (245)
            
            (385)Unrecognized
      net actuarial gain
            -
            
            -
            
            (295)Unrecognized
      prior service cost
            -
            
            -
            
            12Accrued
      pension cost
            $-
            
            $(245)
            
            $(668)Accumulated
      benefit obligation
            $-
            
            $4,701
            
            $2,621







At June 30,
the assumptions used to determine the benefit obligation are as
follows:




2007Discount
      rate
            5.00%Rate
      of compensation increase
            N/A






F-29


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




EMPLOYEE
BENEFIT PLANS (Continued)




The
components of net periodic pension cost for the plan year ended June 30, 2007
and 2006 were as follows:




Year
      Ended June 30,2007
            
            2006(In
      Thousands)Service
      cost
            $129
            
            $411Interest
      cost
            250
            
            225Expected
      return on plan assets
            (252)
            
            (239)Amortization
      of prior service cost
            2
            
            5Recognized
      net actuarial loss (gain)
            (4)
            
            11$125
            
            $413




For
the plan years ended June 30, actuarial assumptions used in accounting
were:




Year
      Ended June 30,2007
            
            2006Discount
      rate on benefit obligations
            5.46
            %
            5.25
            %Expected
      long-term rate of return on plan assets
            6.22
            
            7.00Annual
      salary increases
            4.50
            
            4.50




The basis
used to determine the overall long-term rate of return on asset assumptions are
the prevailing yields on high quality fixed income investments increased by a
premium for equity investments.




The Company’s pension plan weighted
average asset allocations at June 30, were as follows:




Percentage
      of Plan AssetsAsset Category
            2007Fixed
      income securities
            100.0
            %Equity
      securities
            0.0Total
            100.0
            %




401(k)
plan




The
Company also provides a 401(k) retirement savings plan for eligible employees.
Each employee reaching the age of 21 and having completed at least
1,000 hours of service in a twelve-month period, automatically becomes a
participant in the plan. For participating employees, the Company contributes an
amount equal to 3% of each employee’s compensation for the plan year to their
participation account and makes matching contributions equal to 50% of the first
2% of each participant’s deferred compensation for the plan year. Prior to
January 16, 2007, the Company made matching contributions to the 401(k) plan
equal to 25% of the first 6% of each participant’s deferred compensation for the
plan year. Contributions for the years ended June 30, 2008, 2007 and 2006
amounted to $184,000, $56,000 and $39,000, respectively.






F-30


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




EMPLOYEE
BENEFIT PLANS (Concluded)




Supplemental
retirement benefits




In
2004, the Company entered into supplemental retirement benefit agreements with
certain officers and directors which provide for annual retirement benefits
above the amounts provided by SBERA. The present value of future payments is
being accrued monthly over the required service periods. Supplemental retirement
benefit expense for the year ended June 30, 2008, 2007 and 2006 amounted to
$525,000, $414,000 and $277,000, respectively. In connection with the
supplemental retirement agreements, the Company maintains a liability account
with balances of $1.6 million at June 30, 2008 and $1.1 million at June 30,
2007.




In
addition, the Company has entered into collateral assignment split dollar life
insurance agreements with certain officers in connection with supplemental
retirement benefits whereby the Company has agreed to pay the insurance premiums
currently and post-retirement on policies purchased for and owned by certain
officers. The Company holds collateral assignments equal to the amount of
premiums paid by the Company. Refer to Note 1 – Recent Accounting Pronouncements
for more information on EITF 06-10.




Employee
Stock Ownership Plan




Hampden
Bancorp, Inc. contributed funds to a subsidiary, Hampden LS, Inc., to enable it
to make a 15-year loan to the ESOP to allow it to purchase shares of the Company
common stock as part of the completion of the initial public offering. On
January 16, 2007, at the completion of the initial public offering the ESOP
purchased 635,990 shares, or 8% of the 7,949,879 shares outstanding from the
initial public offering. This plan is a tax-qualified retirement plan for the
benefit of eligible Company employees.  The plan is created for the
purpose of providing retirement benefits to participants and their beneficiaries
in a manner consistent with the requirements of the Code and Title I of ERISA.
Eligible employees who have attained age 21 and have been employed by the
Company for three months as of January 16, 2007 will be eligible to participate
in the plan. Thereafter, employees who have attained the age of 21 and have
completed 1,000 hours of service during a continuous 12-month period will be
eligible to participate as of the first entry date following completion of the
plan’s eligibility requirements.




At June 30, 2008, the
principal balance on the ESOP debt is payable as follows:





Year ending June 30,
            
            Amount(In
      Thousands)2009
            
            $2682010
            
            2912011
            
            3152013
            
            3392014
            
            369Thereafter
            
            4,281$5,863





The
Company has committed to make contributions to the ESOP sufficient to support
the debt service of the loan. The loan is secured by the shares purchased, which
are held in a suspense account allocated among the participants as the loan is
repaid. Cash dividends paid on allocated shares are distributed to participants
and cash dividends paid on unallocated shares are used to repay the outstanding
debt of the ESOP.





Shares
held by the ESOP include the following:





June
      30,2008
            
            2007Allocated
            
            42,399
            
            -Committed
      to be allocated
            
            21,200
            
            21,200Unallocated
            
            572,391
            
            614,790635,990
            
            635,990




Total
compensation expense for the years ended June 30, 2008, and 2007 was $424,000,
and $263,000, respectively. The total fair value of the unallocated shares as of
June 30, 2008, and 2007 was $5.9 million and $7.2 million,
respectively.


F-31


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





16.
EQUITY INCENTIVE PLAN




Stock
Options




Under the
Company’s 2008 Equity Incentive Plan, approved by the Company’s stockholders at
a special stockholder meeting on January 29, 2008, the Company may grant stock
options to its directors, employees, and consultants for up to 794,987 shares of
common stock. Both incentive stock options and non-qualified stock options may
be granted under the Plan. On April 29, 2008, the Board of Directors of the
Company granted stock options to purchase 595,000 shares of common stock to its
directors and employees. The exercise price of each option equals the market
price of the Company’s stock on the date of grant and the maximum term of each
option is 10 years. The vesting period is five years from date of grant, with
vesting at 20% per year, except that the Company’s options granted to its chief
executive officer vest over four years from date of grant at 25% per year. The
fair value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:





For
      Options Granted in Year Ended June 30, 2008Fair
      Value
            $2.86Expected
      dividends
            1.16%Expected
      term (years)
            6.50Expected
      volatility
            19.40%Risk-free
      interest rate
            4.25%








The expected
volatility is based on historical volatility through the date of grant. The
risk-free interest rate for periods within the contractual life of the awards is
based on the U.S. Treasury yield curve in effect at the time of the grant. The
expected life of 6.5 years is based on the simplified method calculation allowed
for “plain vanilla” share options. The dividend yield assumption is based on the
Company’s history and expectation of dividend payouts.




A summary of
options under the Plan as of June 30, 2008, and changes during the year then
ended, is presented below:






Shares
            
            Weighted
      Average Exercise Price per Share
            
            Weighted
      Average Remaining Contractual Term (in Years)
            
            Aggregate
      Intrinsic ValueOutstanding
      at July 1, 2007
            -
            
            $-
            
            -Granted
            595,000
            
            10.90
            
            9.8Forfeited
      or expired
            -
            
            -
            
            -Outstanding
      at June 30, 2008
            595,000
            
            $10.90
            
            9.8
            
            $-Exercisable
      at June 30, 2008
            -
            
            -
            
            -
            
            -




Share-based
compensation expense applicable to stock options was $85,000 for the year ended
June 30, 2008. As of June 30, 2008, unrecognized stock-based compensation
expense related to nonvested options amounted to $1.6 million. This amount is
expected to be recognized over a weighted average period of 4.75
years.







F-32





HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




EQUITY
INCENTIVE PLAN (Concluded)




Stock
Awards




Under the
Company’s 2008 Equity Incentive Plan, approved by the Company’s stockholders at
a special stockholder meeting on January 29, 2008, the Company may grant stock
awards to its directors, employees and consultants for up to 317,996 shares of
common stock. The stock awards vest at 20% per year, except that the Company’s
awards to its chief executive officer vest at 25% per year. The fair market
value of the stock awards, based on the market price at grant date, is recorded
as unearned compensation. Unearned compensation is amortized over the applicable
vesting period. The Company recognized compensation cost related to restricted
stock awards of $335,000 for the year ended June 30, 2008. No stock awards were
granted prior to January 29, 2008. As of June 30, 2008, there was $2.9 million
of total unrecognized compensation cost related to nonvested stock awards
granted under the Plan, which is expected to be recognized over a period of 4.50
years.





A summary
of the status of the Company’s stock awards is presented below:








Nonvested
      Shares
            
            Shares
            
            Weighted-Average
      Grant-Date Fair ValueBalance
      at July 1, 2007
            
            -
            
            $-Granted
            
            317,996
            
            10.18Vested
            
            -
            
            -Cancelled
            
            -
            
            -Forfeited
            
            -
            
            -Balance
      at June 30, 2008
            
            317,996
            
            $10.18











17.
RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES





Federal
and state banking regulations place certain restrictions on dividends paid and
loans or advances made by the Bank to the Company. The total amount of dividends
which may be paid at any date is generally limited to the retained earnings of
the Bank, and loans or advances are limited to 10 percent of the Bank’s capital
stock and surplus on a secured basis.





At
June 30, 2008, the Bank’s retained earnings available for the payment of
dividends was $34.0 million. Accordingly, $34.1 million of the Company’s equity
in the net assets of the Bank was restricted at June 30, 2008. Funds available
for loans or advances by the Bank to the Company amounted to $6.8
million.





In
addition, dividends paid by the Bank to the Company would be prohibited if the
effect thereof would cause the Bank’s capital to be reduced below applicable
minimum capital requirements.




As
part of the Conversion, the Company established a liquidation account in an
amount equal to the net worth of the Company as of the date of the last
consolidated balance sheet appearing in the final prospectus distributed in
connection with the Conversion. The amount of the liquidation account as of June
30, 2008 is $13.3 million, however, this amount will decline over time. The
liquidation account is maintained for the benefit of eligible account holders
and supplemental eligible account holders who maintain their accounts at the
Company after the Conversion. The liquidation account will be reduced annually
to the extent that such account holders have reduced their qualifying deposits
as of each anniversary date. Subsequent increases will not restore an account
holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible account holder will be entitled to receive balances
for accounts then held.








F-33


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




18.
      FAIR VALUE OF FINANCIAL INSTRUMENTS






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. SFAS No. 107 excludes certain
      financial instruments and all nonfinancial instruments from its disclosure
      requirements. Accordingly, the aggregate fair value amounts presented may
      not necessarily represent the underlying fair value of the
      Company.






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 short-term investments
approximate fair values.






Securities: Fair
values for securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments. The carrying amount of FHLB stock approximates
fair value based upon the redemption provisions of the Federal Home Loan
Bank.






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 other types of loans are estimated using discounted cash flow analyses,
using 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.






Deposits: The fair
values for non-certificate accounts are, by definition, equal to the amount
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 interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on time
deposits.






Securities sold under
agreements to repurchase: The carrying amount of repurchase agreements
approximates fair value.






Short-term
borrowings: The carrying amount of short-term borrowings approximates
their fair values.






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.






Other secured
      borrowings: The carrying value of these instruments approximate
      fair value.






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






Derivative financial
instruments: Fair values for the interest rate swap agreements are based
on pricing models.






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
June 30, 2008 and 2007 was not material.




F-34


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




FAIR
VALUE OF FINANCIAL INSTRUMENTS (Concluded)






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




June
      30,2008
            
            2007Carrying
      Amount
            
            Fair
      Value
            
            Carrying
      Amount
            
            Fair
      Value(In
      Thousands)Financial
      assets:Cash
      and cash equivalents
            $33,550
            
            $33,550
            
            $20,525
            
            $20,525Securities
      available for sale
            123,892
            
            123,892
            
            149,147
            
            149,147Federal
      Home Loan Bank stock
            5,233
            
            5,233
            
            4,607
            
            4,607Loans
      held for sale
            895
            
            895
            
            464
            
            464Loans,
      net
            359,878
            
            360,622
            
            329,074
            
            327,734Accrued
      interest receivable
            2,093
            
            2,093
            
            2,386
            
            2,386Financial
      liabilities:Deposits
            331,441
            
            334,343
            
            327,341
            
            329,759Securities
      sold under agreements to repurchase
            13,223
            
            13,223
            
            12,937
            
            12,937Short-term
      borrowings
            -
            
            -
            
            1,000
            
            1,000Long-term
      debt
            95,477
            
            95,796
            
            75,334
            
            73,156Derivative
      liabilities
            -
            
            -
            
            (101)
            
            (101)









F-35





HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




19.
PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS






On
January 16, 2007, Hampden Bancorp, Inc. became the holding company of Hampden
Bank in connection with the conversion of the holding company structure of the
Bank from mutual to stock form. As part of this conversion, the predecessor
mutual holding company, Hampden Bancorp, MHC, was combined into the Bank. The
condensed financial information pertaining only to the parent, Hampden Bancorp,
Inc., is as follows:






BALANCE SHEETS




June
      30,2008
            
            2007(In
      Thousands)AssetsCash
            $5
            
            $112Federal
      funds sold and other short-term investments
            7,565
            
            1,826Cash
      and cash equivalents
            7,570
            
            1,938Securities
      available for sale, at  fair value
            18,106
            
            27,267Investment
      in common stock of Hampden Bank
            68,079
            
            65,470Investment
      in common stock of Hampden LS, Inc.
            448
            
            75Accrued
      interest receivable
            207
            
            293Deferred
      tax asset
            457
            
            837Other
      assets
            5,642
            
            6,360$100,509
            
            $102,240Liabilities
      and Stockholders' EquityAccrued
      expenses
            $61
            
            $222Stockholders'
      equity
            100,448
            
            102,018$100,509
            
            $102,240




STATEMENTS OF
OPERATIONS




Year
      Ended June 30, 2008
            
            From
      Date of Inception January 16, 2007 to June 30, 2007(In
      Thousands)Income:Dividend
      income
            $235
            
            $438Interest
      on securities
            889
            
            169Interest
      on cash and short term investments
            176
            
            75Non-interest
      income
            1
            
            5Total
      income
            1,301
            
            687Operating
      expenses
            1,569
            
            3,930Loss
      before income taxes and equity in undistributed net income of
      subsidiaries
            (268)
            
            (3,243)Income
      tax provision (benefit)
            261
            
            (646)Loss
      before equity in undistributed net income of subsidiaries
            (529)
            
            (2,597)Equity
      in undistributed net income of Hampden Bank
            1,326
            
            643Equity
      in undistributed net income of Hampden LS, Inc.
            373
            
            75Net
      income (loss)
            $1,170
            
            $(1,879)


F-36


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




PARENT
COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (Concluded)






STATEMENTS OF CASH
FLOWS




Year
      Ended June 30, 2008
            
            From
      Date of Inception January 16, 2007 to June 30, 2007(In
      Thousands)Cash
      flows from operating activities:Net
      income (loss)
            $1,170
            
            $(1,879)Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Equity
      in undistributed net income of Hampden Bank
            (1,326)
            
            (643)Equity
      in undistributed net income of Hampden LS, Inc.
            (373)
            
            (75)Stock-based
      compensation
            420
            
            -Deferred
      tax provision (benefit)
            380
            
            (827)Contribution
      of common stock to Hampden Bank Charitable Foundation
            -
            
            3,786Net
      change in:Accrued
      interest receivable
            86
            
            (293)Other
      assets
            718
            
            (6,360)Accrued
      expenses and other liabilities
            (160)
            
            222Net
      cash provided (used) by operating activities:
            915
            
            (6,069)Cash
      flows from investing activities:Initial
      investment in Hampden Bank
            -
            
            (31,497)Initial
      investment in Hampden LS, Inc.
            -
            
            (1)Activities
      in available-for-sale securities:Maturities
            10,800
            
            4,507Purchases
            (1,583)
            
            (31,801)Net
      cash provided (used) by investing activities:
            9,217
            
            (58,792)Cash
      flows from financing activities:Net
      proceeds from initial public offering (IPO)
            -
            
            73,398Stock
      purchased for ESOP
            -
            
            (6,360)Payment
      of loan from Hampden LS, Inc.
            752
            
            -Stock
      repurchased for restricted stock awards
            (3,480)
            
            -Payment
      of dividends on common stock
            (862)
            
            (239)Other,
      net
            (910)
            
            -Net
      cash (used) provided by financing activities:
            (4,500)
            
            66,799Net
      increase in cash and cash equivalents
            5,632
            
            1,938Cash
      and cash equivalents at beginning of period
            1,938
            
            -Cash
      and cash equivalents at end of period
            $7,570
            
            $1,938









F-37


HAMPDEN
BANCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)







20.
QUARTERLY DATA (UNAUDITED)






Quarterly
results of operations for the years ended June 30, 2008 and 2007 were as
follows:




2008
            
            2007Fourth
      Quarter
            
            Third
      Quarter
            
            Second
      Quarter
            
            First
      Quarter
            
            Fourth
      Quarter
            
            Third
      Quarter
            
            Second
      Quarter
            
            First
      Quarter(In
      thousands, except per share amounts)Interest
      and dividend income
            $6,904
            
            $7,156
            
            $7,416
            
            $7,351
            
            $7,097
            
            $7,118
            
            $6,722
            
            $6,596Interest
      expense
            3,305
            
            3,543
            
            3,652
            
            3,840
            
            3,743
            
            3,681
            
            4,107
            
            3,949Net
      interest income
            3,599
            
            3,613
            
            3,764
            
            3,511
            
            3,354
            
            3,437
            
            2,615
            
            2,647Provision
      for loan losses
            377
            
            108
            
            84
            
            82
            
            30
            
            37
            
            30
            
            25Non-interest
      income
            703
            
            561
            
            613
            
            553
            
            827
            
            362
            
            378
            
            397Non-interest
      expense
            3,656
            
            3,622
            
            3,527
            
            3,276
            
            3,352
            
            6,903
            
            2,625
            
            2,736Provision
      (benefit) for income taxes
            78
            
            139
            
            613
            
            185
            
            141
            
            (605)
            
            109
            
            88Net
      income (loss)
            $191
            
            $305
            
            $153
            
            $521
            
            $658
            
            $(2,536)
            
            $229
            
            $195Basic
            $0.03
            
            $0.04
            
            $0.02
            
            $0.07
            
            $0.09
            
            N/A
            
            N/A
            
            N/ADiluted
            $0.03
            
            $0.04
            
            $0.02
            
            $0.07
            
            $0.09
            
            N/A
            
            N/A
            
            N/AWeighted
      average shares outstanding:Basic
            7,152,802
            
            7,351,698
            
            7,349,337
            
            7,338,699
            
            7,313,889
            
            N/A
            
            N/A
            
            N/ADiluted
            7,187,651
            
            7,359,379
            
            7,349,337
            
            7,338,699
            
            7,313,889
            
            N/A
            
            N/A
            
            N/A




Results
for the third quarter of 2007 were significantly impacted by the conversion of
the holding company structure of Hampden Bank from mutual to stock formwith
the issuance of 7,949,879 shares (including 378,566 shares issued to the Hampden
Bank Charitable Foundation). Non-interest expenses were increased as a result of
a $3.8 million expense relating to the Company’s donation of
378,566 shares of its outstanding common stock to the Hampden Bank
Charitable Foundation.




Earnings
per common share are not presented for the first three quarters of 2007 as
Hampden Bancorp Inc.'s initial public offering was completed on January 16,
2007; therefore per share results would not be meaningful for quarters prior to
fourth quarter 2007.





Quarterly
data may not sum to annual data due to rounding.













F-38