Analysis of Financial Condition and Results of Operations". As a result of such risk factors and uncertainties, among others, the Company's actual results may differ materially from such forward-looking statements. The Company does not undertake and specifically disclaims any obligation to publicly release updates or revisions to any such forward-looking statements as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company has not changed its significant accounting and reporting policies from those disclosed in its 2008 Annual Report on Form 10-K. In applying these accounting policies, management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. As discussed in the Company's 2008 Annual Report on Form 10-K, the three most significant areas in which management applies critical assumptions and estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, income taxes and impairment of the investment portfolio. Management's estimates and assumptions affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from the amount derived from management's estimates and assumptions using different conditions.
EXECUTIVE LEVEL OVERVIEW
The Company recorded first quarter 2009 net income available to common shareholders of $805,000, or $0.18 per diluted share, as compared to net income of $916,000, or $0.20 per diluted share, for the first quarter of 2008. The largest factor in the quarter's results was the increase in the FDIC deposit insurance premiums from $14,000 for the first quarter of 2008 to $391,000 for the first quarter of 2009 which increase was partially offset by gains on sales of investments in the first quarter of 2009 totaling $227,000.
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 includes 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 in the cash surrender value of the Company's investment in Bank-Owned Life Insurance ("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 three months ended March 31, 2009 was $4.6 million, a 17.6% increase from $3.9 million for the comparable period in 2008, 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 $778.5 million at March 31, 2009, compared to $761.3 million at December 31, 2008. The increase in asset size at March 31, 2009, from December 31, 2008 reflected strong loan growth of $27.3 million since year-end 2008 augmented by an increase of $4.6 million in the federal funds sold and partially offset by a decrease in the investment portfolio since December 31, 2008. Investments:
The investment securities portfolio totaled $249.9 million, or 32.1% of total assets at March 31, 2009, compared to $264.6 million, or 34.8% of total assets at December 31, 2008, a decrease of $14.6 million from year-end. During the first three months of 2009, the Bank experienced cash inflows of $20.1 million of investments from principal payments and prepayments as well as $3.5 million in proceeds from sales of investments. The funds were reinvested in investment securities purchases totaling $7.2 million and funded new loan originations. 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 utilize future principal paydowns and maturities from the investment portfolio to fund future loan growth.
The net unrealized gains on securities available for sale as of March 31, 2009, totaled $6.9 million, or $4.2 million net of taxes. The unrealized gains are attributable to changes in interest rates. There are two corporate debt obligations and one preferred equity security 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 $6.5 million as of March 31, 2009, with an unrealized loss of $2.1 million, or 33.0% of amortized cost. These watch list securities recovered a significant portion of the unrealized losses during April 2009 and the unrealized losses totaled $1.4 million as of April 30, 2009. If a decline in value is determined to be other-than-temporary, a charge to earnings would be recognized at that time. Management is monitoring these securities on a monthly basis and has the intent and ability to hold these debt and preferred equity securities to maturity or for a reasonable period of time sufficient for a forecasted recovery of fair value.

The following table reflects the components and carrying values of the investment securities portfolio at March 31, 2009, and December 31, 2008:

                                              3/31/09                                                   12/31/08
                        Amortized            Unrealized              Fair         Amortized            Unrealized              Fair
                           Cost          Gains        Losses         Value           Cost          Gains        Losses         Value
                                                                        (In thousands)
U.S. Treasury
obligations             $    5,572      $   383      $      -      $   5,955      $    5,578      $   426      $      -      $   6,004
Government-sponsored
enterprise
obligations                 15,381          243             -         15,624          15,485          240            (3 )       15,722
Mortgage-backed
securities                 173,622        7,830           (13 )      181,439         181,367        5,919           (80 )      187,206
Collateralized
mortgage obligations        38,579          726          (111 )       39,194          46,725          379           (45 )       47,059
Corporate
obligations                  6,448            -          (926 )        5,522           6,433            -          (750 )        5,683
Mutual funds                 1,000            -           (32 )          968           1,000            -           (42 )          958
Equity securities            2,468            -        (1,225 )        1,243           2,469            -          (540 )        1,929

Total investment
securities available
for sale                $  243,070      $ 9,182      $ (2,307 )    $ 249,945      $  259,057      $ 6,964      $ (1,460 )    $ 264,561

Loans:
Total loans increased $27.3 million to $479.9 million and represented 61.7% of total assets at March 31, 2009, versus $452.6 million and 59.5% of total assets, respectively, at December 31, 2008. Retail loans, comprised primarily of residential mortgage loans, increased $9.9 million including $6.8 million of seasoned, 15-year fixed rate residential mortgage loans purchased during the first three months of 2009 while corporate loans, comprised mainly of construction and commercial real estate loans, increased $17.4 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. There has been increased demand from the Bank's existing borrowers and increased loan opportunities from new customers as a result of the retrenchment by the large, multi-national banks in our market area. The following table reflects the loan portfolio at March 31, 2009 and December 31, 2008:

                                              3/31/09      12/31/08
                                                 (In thousands)
                 Residential real estate     $ 119,375     $ 109,276
                 Home equity                    24,046        23,972
                 Consumer                          589           831

                 Retail loans                  144,010       134,079

                 Construction                   55,931        61,769
                 Commercial real estate        247,007       222,977
                 Commercial business            32,998        33,796

                 Corporate loans               335,936       318,542

                 Total loans                   479,946       452,621
                 Allowance for loan losses      (6,089 )      (5,885 )

                 Net loans                   $ 473,857     $ 446,736

Allowance For Loan Losses:
The following table summarizes changes in the allowance for loan losses for the
three months ended March 31, 2009 and 2008:

                                                                        Three months ended
                                                                     3/31/09            3/31/08
                                                                      (Dollars in thousands)
Beginning balance                                                 $       5,885         $  4,810
Provision for loan losses                                                   240              105
Recoveries on loans previously charged-off                                    1                1
Loans charged-off                                                           (37 )            (42 )

Ending balance                                                    $       6,089         $  4,874


Ratios:

Annualized net charge-offs to average loans outstanding                    0.03 %           0.05 %
Allowance for loan losses to total loans at end of period                  1.27 %           1.31 %

The allowance for loan losses increased to $6.1 million at March 31, 2009 as compared to $5.9 million and $4.8 million, respectively, at December 31, 2008 and March 31, 2008. The coverage of the allowance for loan losses decreased to 1.27% at March 31, 2009 from 1.31% at March 31, 2008 due to the loan growth of $27.3 million experienced during the first quarter of 2009 as compared to $14.5 million in the first quarter of 2008. Included in the $27.3 million growth in the first quarter of 2009 was a loan purchase of $6.8 million of seasoned, 15-year fixed rate residential mortgages. In addition, the mix of loans has increased towards retail loans, thereby allowing the coverage ratio to decline slightly as they represent less risky loans. The Company believes that asset quality remains high, as evidenced by the low levels of non-performing and delinquent loans. 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 and resulted in the aforementioned modest decline in the allowance for loan loss coverage as a percentage of total loans from December 31, 2008 to March 31, 2009. The Company has not engaged in any subprime lending, which it views 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. 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 $2.7 million at both March 31, 2009 and December 31, 2008. Impaired loans are commercial and commercial real estate loans and individually significant residential mortgage loans for which management believes 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 $3.2 million at both March 31, 2009 and December 31, 2008. All of the impaired loans at March 31, 2009, had been measured using the fair value of the collateral method with

$2.0 million requiring a valuation allowance of $200,000 and the remainder not requiring a related allowance. The Company had impaired loans totaling $607,000 at March 31, 2008.
The following table summarizes the Company's risk assets at March 31, 2009, December 31, 2008 and March 31, 2008:

                                                    3/31/09       12/31/08      3/31/08
                                                           (Dollars in thousands)
 Non-performing loans                               $  2,576     $    2,606     $  1,000
 Other real estate owned                                 120            120          612

 Total risk assets                                  $  2,696     $    2,726     $  1,612

 Risk assets as a percent of total loans and OREO       0.56 %         0.60 %       0.43 %

 Risk assets as a percent of total assets               0.35 %         0.36 %       0.24 %

Deposits:
Deposits increased $25.0 million during the first three months of 2009 to $433.7 million at March 31, 2009 from $408.7 million at December 31, 2008. Core deposits, consisting of NOW accounts, demand deposit accounts, savings accounts and money market accounts, increased $11.4 million, or 6.4%, amounting to $189.0 million at March 31, 2009, compared to $177.6 million at December 31, 2008. Savings accounts experienced an increase of $8.0 million from December 31, 2008, to $64.2 million at March 31, 2009, primarily due to the higher-rate promotional accounts. NOW and demand deposit accounts increased $2.3 million and $1.3 million, respectively, from December 31, 2008, to $19.6 million and $28.9 million, respectively, at March 31, 2009, while money market accounts experienced a slight decline to $76.4 million at March 31, 2009. Term deposits comprised of brokered certificates of deposit and certificates of deposit increased $13.6 million, or 5.9%, totaling $244.7 million at March 31, 2009, versus $231.0 million at December 31, 2008. Brokered certificates of deposit decreased $3.4 million from December 31, 2008, to $29.4 million at March 31, 2009, while certificates of deposit increased $17.1 million to $215.3 million at March 31, 2009. The decrease in brokered deposits reflects a maturity of $3.4 million.
Due to the recent turmoil in the financial markets, the Bank has seen an inflow of deposits as evidenced by the 6.1% growth in total deposits during the first three months of 2009. 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 March 31, 2009 and December 31, 2008:

                                                  3/31/09      12/31/08
                                                     (In thousands)
              NOW accounts                       $  19,559     $  17,239
              Demand deposit accounts               28,857        27,546
              Savings accounts                      64,218        56,251
              Money market accounts                 76,399        76,603

              Core deposits                        189,033       177,639

              Brokered certificates of deposit      29,391        32,819
              Certificates of deposit              215,263       198,205

              Term deposits                        244,654       231,024

              Total deposits                     $ 433,687     $ 408,663

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 $267.1 million at March 31, 2009, compared to $276.5 million at December 31, 2008, a decrease of $9.4 million. Short-term borrowed funds decreased $7.4 million from December 31, 2008, due primarily to payments of maturing short-term FHLBB advances of $6.0 million, while long-term FHLBB borrowed funds decreased $2.0 million due to payments of maturing advances. Wholesale repurchase agreements remained stable at $40 million at March 31, 2009 and December 31, 2008, respectively. The Company believes its borrowing position leaves the Company less vulnerable to rate fluctuations in the coming year.

The following table reflects the components of borrowings at March 31, 2009 and December 31, 2008:

                                                 3/31/09      12/31/08
                                                    (In thousands)
              Long-term borrowed funds:
              FHLBB long-term advances          $ 217,189     $ 219,228
              Wholesale repurchase agreements      40,000        40,000

                                                  257,189       259,228


              Short-term borrowed funds:
              FHLBB short-term borrowings           5,000        11,000
              Customer repurchase agreements        4,896         6,262

                                                    9,896        17,262

              Total borrowed funds              $ 267,085     $ 276,490

RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
SUMMARY
The Company reported net income available to common shareholders of $805,000, or $0.18 per diluted common share, as compared to net income of $916,000, or $0.20 per diluted common share, for the three months ended March 31, 2009 and 2008, respectively. The largest factor in the decline of quarterly net income was the increase in the FDIC deposit insurance premiums that totaled $391,000 for the first three months of 2009 versus $14,000 in the comparable quarter of 2008. This reflects an estimate for the increased assessment announced by the FDIC in March 2009. FHLB dividends were suspended for 2009 resulting in a decrease of $154,000 from the results for the comparable three-month period in 2008. Partially offsetting these impacts were gains on sales of investments of $227,000 in the first quarter of 2009 compared to none in the first three months of 2008.
Net Interest Income:
Net interest income for the three months ended March 31, 2009 increased by $683,000, or 17.6%, to $4.6 million from $3.9 million for the same period of 2008. The net interest rate spread increased to 2.14% for the three months ended March 31, 2009 versus 2.06% for the same period of 2008. Interest income for the three months ended March 31, 2009 increased $763,000 primarily due to higher average loan and investment security balances compared to the same period of 2008. Partially offsetting the increase in total interest income was an increase of $80,000 in total interest expense primarily due to an increase in average deposit and borrowed funds balances. Net interest margin decreased to 2.48% versus 2.52% for the quarters ended March 31, 2009 and 2008, respectively. Interest Income:
Interest income increased $763,000, or 8.2%, during the first quarter of 2009 versus the same quarter in 2008, primarily due to a rise in average loan and investment security balances.
Average loan interest rates decreased 85 basis points from 6.68% to 5.83% during the first quarter of 2009 as compared to the same quarter of 2008, resulting in a decrease of $906,000 to interest income. Average loan balances rose $102.3 million, or 28.2%, from $362.4 million in 2008 to $464.7 million in 2009, contributing $1.6 million to interest income.
Average investment security interest rates decreased 22 basis points during the first quarter of 2009, from 5.07% in 2008 to 4.85% in 2009, resulting in a decrease of $188,000 to interest income. Average investment security balances rose $22.9 million, from $258.9 million in 2008 to $281.8 million in 2009, contributing $292,000 to interest income. In connection with the conservatorship of Fannie Mae and Freddie Mac, in the third quarter of 2008 future dividend payments ceased. During the first quarter of 2009, the Company recognized no dividend income from FNMA and FHLMC preferred stock while dividend income from its preferred stock investments of

$125,000 was recognized in the first quarter of 2008. FHLB stock dividends have also been suspended indefinitely. These dividends amounted to $154,000 in the first three months of 2008 compared to zero in 2009. Interest Expense:
Interest expense increased $80,000, or 1.5%, during the first quarter of 2009, from $5.4 million in the first quarter of 2008 to $5.5 million in the first quarter of 2009, primarily due to the rise in average deposit and average borrowed funds volumes.
Average deposit interest rates decreased 80 basis points, from 3.54% to 2.74% in the first quarter of 2009 as compared to the same quarter of 2008, decreasing interest expense by $672,000. Average interest-bearing deposit balances increased by $97.0 million, from $296.7 million in 2008 to $393.7 million in 2009, accompanied by a change in the mix resulting in a preference for higher costing certificates of deposit, which increased interest expense by $719,000. Average borrowed funds interest rates decreased 28 basis points from 4.44% in the first quarter of 2008 to 4.16% in the same quarter of 2009 resulting in a decrease of $146,000 to interest expense. Average borrowed funds balances rose $22.3 million, or 8.8%, from $252.1 million in 2008 to $274.3 million in 2009. This increase resulted in additional interest expense of $179,000 due primarily to an increase in longer term borrowed funds. Provision for Loan Losses:
The provision for loan losses totaled $240,000 and $105,000 for the three months ended March 31, 2009 and 2008, respectively. The provisions in 2009 and 2008 reflect management's analysis of loan growth and changes in risk during the first quarters of 2009 and 2008 with the highest levels of growth coming from the commercial real estate and residential loan portfolio. The balance of the . . .