and Freddie Mac impairment is $6.1 million, or $(1.37) per diluted share. Management believes that this non-cash impairment charge will not materially effect the Company's future business operations. Excluding the non-cash impairment charge of the Fannie Mae and Freddie Mac preferred stock reflected in the results above, the Company would have recorded net income of $1.1 million, or $0.25 per diluted share, for the quarter ended September 30, 2008, and net income of $3.0 million, or $0.67 per diluted share, for the nine months ended September 30, 2008. These normalized third quarter 2008 results reflect a 20.1% improvement over the second quarter of 2008 and an improvement of 9.8% over the third quarter of 2007. Despite the Company's other-than-temporary impairment, the Company and the Bank remain well-capitalized by bank regulatory standards. The Company's financial results are dependent on the following areas of the income statement: net interest income, provision for loan losses, non-interest income, non-interest expense and provision for income taxes. Net interest income is the primary earnings of the Company and the main focus of management. Net interest income is the difference between interest earned on loans and investment securities and interest paid on deposits and borrowings. Management's efforts in this area are to increase the corporate loan portfolio, which include construction, commercial real estate and commercial loans, and the residential loan portfolio. Management's efforts for funding are to increase core deposit accounts, which are lower interest-bearing accounts and include savings and money market accounts, and demand deposit accounts. Deposits and borrowings typically have short durations and the costs of these funds do not necessarily rise and fall concurrent with earnings from loans and investment securities. There are many risks involved in managing net interest income including, but not limited to, credit risk, interest rate risk and duration risk. These risks have a direct impact on the level of net interest income. The Company manages these risks through its internal credit and underwriting function and review at meetings of the Asset and Liability Management Committee ("ALCO") on a regular basis. The credit review process reviews loans for underwriting and grading of loan quality while ALCO reviews the liquidity, interest rate risk, duration risk and allocation of capital resources. Loan quality has a direct impact on the amount of provisions for loan losses the Company reports.
Non-interest income includes gains and losses on sales of investment securities, various fees and increases on cash surrender value from the Company's investment in BOLI. Customers' loan and deposit accounts generate various amounts of fee income depending on the product selected. The Company receives fee income from servicing loans that were sold in previous periods. Non-interest income is primarily impacted by the volume of customer transactions, which could change in response to changes in interest rates, pricing and competition. Non-interest expenses include salaries and employee benefits, occupancy and equipment, professional, data processing and other expenses of the Company, which generally are directly related to business volume and are controlled by a budget process.
Income tax expense is directly related to earnings of the Company. Changes in the statutory tax rates and the earnings of the Company, the Bank and its subsidiaries, as well as the mix of earnings among the different entities would affect the amount of income tax expense reported and the overall effective income tax rate recorded.
The Company believes that the most significant challenge in the current interest rate environment is to increase net interest income while also maintaining competitive deposit rates. The Company's net interest income for the nine months ended September 30, 2008 was $12.6 million, a 9.6% increase from $11.5 million for the comparable period in 2007 primarily due to the sustained loan growth. The Company's continued emphasis on increasing loan originations instead of purchasing lower-yielding investment securities favorably affected net interest income.
FINANCIAL CONDITION
SUMMARY
The Company maintains its commitment to servicing the banking needs of the local community in the Merrimack Valley area of northeastern Massachusetts and southern New Hampshire. The Company had total assets of $729.2 million at September 30, 2008, compared to $621.6 million at December 31, 2007. The increase in asset size at September 30, 2008 from December 31, 2007 reflected strong loan growth of $78.9 million since year end 2007 augmented by an increase of $11.7 million in the investment portfolio since December 31, 2007.

Investments:
The investment securities portfolio totaled $242.3 million, or 33.2% of total assets at September 30, 2008, compared to $230.6 million, or 37.1% of total assets at December 31, 2007, an increase of $11.7 million from year-end. As a result of the Company's valuation review of the investment portfolio, the Company recorded a non-cash impairment charge of $9.4 million for certain investments available for sale. The term "other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not favorable. Once a decline in value is determined to be other-than-temporary, a charge to earnings is recognized. The loss on the investments taken in the third quarter of 2008 results from preferred stock issued by the Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") at a total cost of $10.1 million. The fair value of these holdings was $9.4 million less than their amortized cost as of September 30, 2008. Despite the Company's other-than-temporary non-cash impairment write-down of $9.4 million in the third quarter of 2008 which reduced the Company's and the Bank's capital, the Company and the Bank remain well-capitalized by bank regulatory standards. The Company will recognize in the fourth quarter of 2008 a tax benefit of $3.3 million, or $0.73 per diluted share, on the Fannie Mae and Freddie Mac preferred stock impairment charges due to the October 3, 2008, enactment of the Emergency Economic Stabilization Act of 2008 which permits the Company to treat losses incurred on the Fannie Mae and Freddie Mac preferred stock as ordinary losses for federal income tax purposes. The Company's total investment in the Fannie Mae and Freddie Mac preferred stock totaled $726,000 at September 30, 2008, net of the impairment loss of $9.4 million. Future reviews for other-than-temporary impairment will consider the particular facts and circumstances during the reporting period under review.
During the first nine months of 2008, the Bank experienced cash inflows of $42.2 million of investments from maturities, payments and prepayments and the funds were reinvested along with other investment securities purchases for a total of $62.8 million. These purchases were primarily purchased for use as collateral for wholesale repurchase agreements, FHLBB short-term and long-term advances and customer repurchase agreements. The Company intends to reinvest future principal paydowns and maturities from the investment portfolio and, to a lesser degree, to fund future loan growth.
The net unrealized gains on securities available for sale as of September 30, 2008 totaled $757,000, or $459,000 net of taxes. The unrealized gains are attributable to changes in interest rates. There are three corporate debt obligations on the Bank's securities watch list due to their current credit ratings by external, independent rating agencies. Management believes that the Company will collect all amounts due on these investments in accordance with their contractual terms. The amortized cost of these investments totaled $6.4 million as of September 30, 2008 with an unrealized loss of $1.2 million, or 18.6% of amortized cost. Management is monitoring these securities on a monthly basis and has the intent and ability to hold these debt securities to maturity.

The following table reflects the components and carrying values of the investment securities portfolio at September 30, 2008, after taking the non-cash impairment charge, and December 31, 2007:

                                              9/30/08                                                   12/31/07
                        Amortized            Unrealized              Fair         Amortized            Unrealized              Fair
                           Cost          Gains        Losses         Value           Cost          Gains        Losses         Value
                                                                        (In thousands)
Investment
securities available
for sale:
U.S. Treasury
obligations             $    5,583      $    82      $      -      $   5,665      $    5,589      $     4      $    (52 )    $   5,541
Government-sponsored
enterprise
obligations                 17,045           31           (11 )       17,065          15,748           95           (33 )       15,810

U.S. Treasury and
government sponsored
enterprise
obligations                 22,628          113           (11 )       22,730          21,337           99           (85 )       21,351

Mortgage-backed
securities                 162,905        2,635          (378 )      165,162         134,969        2,208          (474 )      136,703
Collateralized
mortgage obligations        45,358          207          (220 )       45,345          60,660          169          (682 )       60,147

Collateralized
mortgage obligations
and mortgage-backed
securities                 208,263        2,842          (598 )      210,507         195,629        2,377        (1,156 )      196,850

Corporate
obligations                  6,417            -        (1,195 )        5,222           6,373           30          (583 )        5,820
Mutual funds                 1,000            -           (54 )          946           1,000            -           (41 )          959
Equity securities            3,191            -          (340 )        2,851           5,546           70             -          5,616

Corporate
obligations and
other investment
securities                  10,608            -        (1,589 )        9,019          12,919          100          (624 )       12,395

Total investment
securities available
for sale                $  241,499      $ 2,955      $ (2,198 )    $ 242,256      $  229,885      $ 2,576      $ (1,865 )    $ 230,596

Loans:
Total loans increased $78.9 million to $437.0 million and represented 59.9% of total assets at September 30, 2008, versus $358.1 million and 57.6% of total assets, respectively, at December 31, 2007. Retail loans, comprised primarily of residential mortgage loans, increased $26.4 million during the first nine months of 2008 while corporate loans, comprised mainly of construction and commercial real estate loans, increased $52.5 million during the same period. The increase is due to loan growth experienced in the commercial real estate and residential loan categories and reflects the continued strategic preference toward loan originations rather than investment security purchases as well as increased demand from the Bank's borrowers.
The following table reflects the loan portfolio at September 30, 2008 and December 31, 2007:

                                                9/30/08      12/31/07
                                                   (In thousands)
                Residential mortgage loans     $ 105,706     $  79,743
                Home equity lines and loans       23,530        23,046
                Consumer loans                       911         1,007

                Total retail loans               130,147       103,796

                Construction loans                60,968        47,885
                Commercial real estate loans     219,079       177,968
                Commercial loans                  26,798        28,464

                Total corporate loans            306,845       254,317

                Total loans                      436,992       358,113
                Allowance for loan losses         (5,535 )      (4,810 )

                Total loans, net               $ 431,457     $ 353,303

Allowance For Loan Losses:
The following table summarizes changes in the allowance for loan losses for the
three months ended and the nine months ended September 30, 2008 and 2007:

                                                  Three months ended                 Nine months ended
                                               9/30/08           9/30/07          9/30/08          9/30/07
                                                                     (In thousands)
Beginning balance                             $    5,238         $  4,517        $    4,810        $  4,309
Provision for loan losses                            330              250               835             465
Recoveries on loans previously
charged-off                                            1                3                 3              10
Loans charged-off                                    (34 )             (7 )            (113 )           (21 )

Ending balance                                $    5,535         $  4,763        $    5,535        $  4,763


Ratios:
Annualized net charge-offs to average
loans outstanding                                   0.03 %           0.00 %            0.04 %          0.00 %
Allowance for loan losses to total loans
at end of period                                    1.27 %           1.36 %            1.27 %          1.36 %

The allowance for loan losses increased to $5.5 million at September 30, 2008 as compared to $4.8 million at December 31, 2007. However, the allowance for loan losses as a percent of total loans has decreased to 1.27% at September 30, 2008 down from 1.34% at December 31, 2007, due to an increase in total loans outstanding at September 30, 2008, compared to December 31, 2007, with the highest level of growth coming from the commercial real estate and the residential loan portfolios. The Company considers the current level of the allowance for loan losses to be appropriate and adequate. The low levels of delinquent loans and sustained asset quality of the loan portfolio combined with minimal levels of loan charge-offs contributed to the assessment of the allowance for loan losses. The Company has not engaged in any subprime lending, which we view as one- to four-family residential loans to a borrower with a credit score below 620 on a scale that ranges from 300 to 850.
The amount of the allowance for loan losses reflects management's assessment of estimated credit quality and is based on a review of the risk characteristics of the loan portfolio. The Company considers many factors in determining the adequacy of the allowance for loan losses. Collateral values on a loan by loan basis, trends of loan delinquencies on a portfolio segment level, risk classification identified in the Company's regular review of individual loans, and economic conditions are primary factors in establishing allowance levels. Management believes the allowance level is adequate to absorb the estimated credit losses inherent in the loan portfolio. The allowance for loan losses reflects information available to management at the end of each period. Risk Assets:
Risk assets consist of non-performing loans and other real estate owned ("OREO"). Non-performing loans consist of both loans 90 days or more past due and loans placed on non-accrual because full collection of the principal balance and interest is in doubt. OREO is comprised of foreclosed properties where the Company has formally received title or has possession of the collateral and is carried at the lower of the carrying amount of the loan plus capital improvements or the estimated fair value of the property, less selling costs. Total risk assets were $1.6 million and $1.5 million, respectively, at September 30, 2008 and December 31, 2007. Impaired loans are commercial and commercial real estate loans and individually significant residential mortgage loans for which it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans totaled $490,000 and $1.5 million, respectively, at September 30, 2008 and December 31, 2007. All of the $490,000 and $1.5 million in impaired loans at September 30, 2008 and December 31, 2007, respectively, had been measured using the fair value of the collateral and did not require a related allowance. The decrease in non-performing loans since December 31, 2007 was primarily due to the reclassification into OREO of three loans to one borrower that were collateral dependent during the first quarter of 2008. The Company had impaired loans totaling $934,000 at September 30, 2007.

The following table summarizes the Company's risk assets at September 30, 2008, December 31, 2007 and September 30, 2007:

                                                    9/30/08       12/31/07       9/30/07
                                                           (Dollars in thousands)
 Non-performing loans                               $    618     $    1,523     $     343
 Other real estate owned                                 939              -             -

 Total risk assets                                  $  1,557     $    1,523     $     343

 Risk assets as a percent of total loans and OREO       0.36 %         0.43 %        0.10 %

 Risk assets as a percent of total assets               0.21 %         0.24 %        0.06 %

Deposits:
Deposits increased $78.3 million during the first nine months of 2008 to $400.4 million at September 30, 2008 from $322.1 million at December 31, 2007. Core deposits, consisting of NOW accounts, demand deposit accounts, savings accounts and money market accounts, increased $35.7 million, or 23.8%, amounting to $185.5 million at September 30, 2008, compared to $149.8 million at December 31, 2007. Savings and money market accounts experienced increases of $24.0 million and $12.7 million, respectively, from December 31, 2007, primarily due to the higher-rate promotional accounts, while NOW and demand deposit accounts experienced slight declines. Term deposits comprised of brokered certificates of deposit and certificates of deposit increased $42.6 million, or 24.7%, totaling $214.9 million at September 30, 2008, versus $172.3 million at December 31, 2007. Brokered certificates of deposit increased $27.4 million from December 31, 2007, while certificates of deposit increased $15.2 million. The increase in brokered deposits reflects attractive rates for these maturity durations.
Due to the recent turmoil in the financial markets, the Bank has seen an inflow of deposits as evidenced by the 24.3% growth in total deposits during the first nine months of 2008. However, the Company continues to face strong competition for deposits which will impact the rate of growth of deposits for the foreseeable future.
The following table reflects the components of the deposit portfolio at September 30, 2008 and December 31, 2007:

                                                  9/30/08      12/31/07
                                                     (In thousands)
              NOW accounts                       $  17,337     $  17,877
              Demand deposit accounts               28,374        28,851
              Savings accounts                      52,411        28,452
              Money market accounts                 87,360        74,621

              Core deposits                        185,482       149,801

              Brokered certificates of deposit      32,889         5,461
              Certificates of deposit              181,990       166,821

              Term deposits                        214,879       172,282

              Total deposits                     $ 400,361     $ 322,083

Borrowed Funds:
Borrowed funds consist of long-term and short-term Federal Home Loan Bank of Boston (FHLBB) advances and securities sold under agreements to repurchase. Total borrowed funds amounted to $272.8 million at September 30, 2008, compared to $235.4 million at December 31, 2007, an increase of $37.5 million. Short-term borrowed funds increased $1.6 million from December 31, 2007, while long-term borrowed funds increased $35.9 million due to the availability of more favorable, longer term rates. Wholesale repurchase agreements increased $15.0 million in the first nine months of 2008 and included an embedded cap intended to provide rate relief to the Company should rates rise abruptly. The Company believes its borrowing position leaves the Company less vulnerable to rate fluctuations in the coming year. This was achieved by lowering the average long-term borrowed cost of funds from 4.62% at December 31, 2007, to 4.24% at September 30, 2008.

The following table reflects the components of borrowings at September 30, 2008 and December 31, 2007:

                                                 9/30/08      12/31/07
                                                    (In thousands)
              Long-term borrowed funds:
              FHLBB long-term advances          $ 223,267     $ 202,378
              Wholesale repurchase agreements      40,000        25,000

                                                  263,267       227,378

              Short-term borrowed funds:
              FHLBB Ideal Way advances                  -           800
              FHLBB short-term advances             6,000             -
              Customer repurchase agreements        3,536         7,173

                                                    9,536         7,973

              Total borrowed funds              $ 272,803     $ 235,351

RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
SUMMARY
The Company reported a net loss of $8.3 million, or $(1.85) per diluted share, as compared to a net income of $1.0 million, or $0.22 per diluted share, for the three months ended September 30, 2008 and 2007, respectively. The largest factor in the quarterly results was the other-than-temporary impairment write-down of investments in Fannie Mae and Freddie Mac preferred stock resulting in a non-cash charge of $9.4 million pre-tax, or $(2.10) per diluted share. Excluding the non-cash impairment charge mentioned above, the Company would have recorded net income of $1.1 million, or $0.25 per diluted share for the quarter ended September 30, 2008. These normalized results reflect an improvement of 9.8% compared to the third quarter of 2007. The third quarter of 2008 experienced growth in total assets of 17.3%, a corresponding increase of $605,000 in net interest income and an improvement in the Company's efficiency ratio. Partially offsetting these increases, the Company recorded a provision for loan losses of $330,000 in the third quarter of 2008 resulting from continued and sustained corporate and residential loan growth of $26.5 million in the third quarter of 2008.
Net Interest Income:
Net interest income for the three months ended September 30, 2008 increased by $605,000, or 15.8%, to $4.4 million from $3.8 million for the same period of 2007. The net interest rate spread increased to 2.21% for the three months ended . . .