Business" and Note 1 to the Consolidated Financial Statements for a detailed description of management's estimation process and methodology related to the allowance for loan losses.
Income Taxes. As set forth by Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes", deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the accounting basis and the tax basis of the Bank's assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The Bank's deferred tax asset is reviewed periodically and adjustments to such asset are recognized as deferred income tax expense or benefit based on management's judgments relating to the realizability of such asset. Refer to Note 9 to the Consolidated Financial Statements for details concerning the Company's tax position.
Other Real Estate Owned. Other real estate owned ("OREO") is recorded at the lower of book value, or fair market value less estimated selling costs. Property and liability insurance are obtained for each parcel, and each property is properly maintained and secured during the holding period. Property management vendors may be utilized in those instances when a direct sale does not seem probable during a reasonable period of time, or if the property requires additional oversight. It is the Company's policy and strategy to sell all OREO as soon as possible consistent with maximizing value and return to the Company.
Fair Value of Investments. The Bank adheres to guidance set forth by Statement of Financial Accounting Standard No. 115, "Accounting for Certain Debt and Equity Securities" in accounting for its investment activities. Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at cost, adjusted for amortization of premiums and accretion of discounts, both computed by a method that approximates the effective yield method. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity and comprehensive income. At both March 31, 2009, and March 31, 2008, all of the Bank's investment securities were classified as available for sale.
Gains and losses on sales of securities are recognized when realized with the cost basis of investments sold determined on a specific-identification basis. Premiums and discounts on investment and mortgage-backed securities are amortized or accreted to interest income over the actual or expected lives of the securities using the level-yield method.
If a decline in fair value below the amortized cost basis of an investment is judged to be other-than-temporary, the cost basis of the investment is written down to fair value as a new cost basis and the amount of the write-down is included in the results of operations.
The Company's investments in the Federal Home Loan Bank of Boston and the Co-operative Central Bank Reserve Fund are accounted for at cost.
Accounting for Goodwill and Impairment. The bank accounts for goodwill and impairment in accordance to the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses the method of identifying and measuring goodwill and other intangible assets having indefinite lives acquired in a business combination, eliminates further amortization of goodwill and requires periodic impairment evaluations of goodwill using a fair value methodology prescribed in the statement. As a result of adopting SFAS 142, the Company no longer amortizes the goodwill balance of $2.2 million. Impairment testing is required at least annually or more frequently as a result of an event or change in circumstances (e.g., recurring operating losses by the acquired entity) that would indicate an impairment adjustment may be necessary. The Company adopted December 31 as its assessment date. Annual impairment testing was performed during each year and in each analysis, it was determined that an impairment charge was not required. The most recent testing was performed as of December 31, 2008 utilizing 2008 average earnings and average book multiples of bank sale transactions, and management determined that no impairment existed. See Note 1 to the Consolidated Financial Statements.

Troubled Asset Relief Program Capital Purchase Program On December 5, 2008, the Company sold $10.0 million in preferred shares to the U.S. Department of Treasury as a participant in the federal government's Troubled Asset Relief Program ("TARP") Capital Purchase Program. This represented approximately 2.6% of the Company's risk-weighted assets as of September 30, 2008. The TARP Capital Purchase Program is a voluntary program for healthy U.S. financial institutions designed to encourage these institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the weakened U.S. economy. In connection with the investment, the Company entered into a Letter Agreement and related Securities Purchase Agreement with the U.S. Treasury pursuant to which the Company issued (i) 10,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference $1,000 per share (the "Series A Preferred Stock") and (ii) a warrant (the "Warrant") to purchase 234,742 shares of the Company's common stock for an aggregate purchase price of $10.0 million in cash. The warrant term is 10 years and it is immediately exercisable, in whole or in part, at an exercise price of $6.39 per share. With the U.S. Treasury's $10.0 million investment in the Company, the Company and the Bank met all regulatory requirements to be considered well-capitalized under the federal prompt corrective action regulations as of March 31, 2009. For more information on the Series A Preferred Stock and Warrant issued to the U.S. Treasury in connection with the TARP Capital Purchase Program, see Note 14 to the Company's Consolidated Financial Statements included in this Form 10-K.
Results of Operations
Overview. The Company's net loss for fiscal 2009 totaled $6.2 million, compared to net income of $1.4 million for fiscal 2008. Earnings for fiscal 2009 were significantly impacted by the September 2008 conservatorship of the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") that resulted in a $9.4 million impairment of the Company's investment in the preferred stock of these companies during the quarter ended September 30, 2008. During the quarter ended December 31, 2008, the Company recorded a $3.5 million tax benefit on the Fannie Mae and Freddie Mac impairment charges due to the October 3, 2008 enactment of the Emergency Economic Stabilization Act of 2008, which permitted the Company to treat losses incurred on the Fannie Mae and Freddie Mac preferred stock as ordinary losses for federal income tax purposes. As a result, the after-tax net loss on the impairment of the Company's Fannie Mae and Freddie Mac preferred stock investments during fiscal 2009 totaled $5.9 million.
Net interest and dividend income increased by $2.3 million during fiscal 2009 as compared to fiscal 2008 primarily due to a $4.1 million decline in interest expense, partially offset by a $1.8 million decline in interest income.
The provision for loan losses increased by $2.2 million during fiscal 2009 as compared to fiscal 2008 mainly due to losses associated with one customer relationship.
In addition to the fiscal 2009 FNMA and FHLMC impairment write-downs of $9.4 million, non-interest income (loss) decreased by $883 thousand during fiscal 2009 as compared to fiscal 2008 primarily due to a reduction in gains on the sales of securities, and increases in impairment write-downs on investments other than Fannie Mae and Freddie Mac preferred stock. The aforementioned reductions in non-interest income were partially offset by an increase in bank-owned life insurance income.
Noninterest expenses increased by $1.3 million during fiscal 2009 when compared to fiscal 2008 primarily due to increases in the foreclosure and collection, advertising and marketing, professional fees, and the occupancy and equipment categories.
The Company recognized an income tax benefit of $3.3 million during fiscal 2009, which included the aforementioned $3.5 million tax benefit related to the Fannie Mae and Freddie Mac impairment write-downs, compared to income tax expense of $592 thousand during fiscal 2008.

Net Interest Rate Spread and Net Interest Margin. The Company's and the Bank's operating results are significantly affected by the net interest rate spread, which is the difference between the yield on loans and investments and the interest cost of deposits and borrowings. The net interest rate spread is affected by economic conditions and market factors that influence interest rates, loan demand and deposit flows. The net interest margin reflects the relationship of net interest income to interest earning assets and it is calculated by dividing net interest income before the provision for loan losses by average interest earning assets. The net interest spread and net interest margin improved from 2.06% and 2.51%, respectively, for the fiscal year ended March 31, 2008 to 2.63% and 2.96%, respectively, for the fiscal year ended March 31, 2009 due to the following factors. The cost of funds decreased by 84 basis points during fiscal 2009 mainly due to decreases in the average rates paid on deposits resulting from aggressive liability management as some maturing certificates of deposit were either not renewed or were replaced with low-cost deposits or FHLB borrowings. During the fiscal year ended March 31, 2009, the yield on interest-earning assets declined by 27 basis points primarily due to a 396 basis point reduction in interest income on short-term investments offset by a 32 basis point increase in interest income on investments. The reduced yield on investments during the fiscal year ended March 31, 2009 was primarily due to the combined effect of: (1) a $125 thousand decrease in dividend income as The Co-operative Central Bank, which insures in-full deposits in excess of FDIC limits, paid a special dividend of $125 thousand during the quarter ended December 31, 2007 compared to $0 during the same period of 2008; and (2) a reduction of $280 thousand in FHLB stock dividends as the FHLB of Boston gradually reduced its dividend rate during both fiscal years and then announced the elimination of its dividend entirely in February 2009. Although the average balance of short-term investments increased from $9.3 million during the fiscal year ended March 31, 2008 to $25.8 million during the fiscal year ended March 31, 2009, interest income on these investments declined by $273 thousand. This decline was primarily due to recessionary economic conditions which resulted in the Federal Reserve's lowering of the fed funds target rate from a range of 5.25% to 2.25% during the fiscal year ended March 31, 2008, to a target range of 2.25% to 25 to 0 basis points during the fiscal year ended March 31, 2009. This decrease in the fed funds target rate had a corresponding effect on the interest earned on the Company's short-term investments which is closely tied to the target fed funds rate.

The following table presents average balances, interest income and expense and yields earned or rates paid on interest-earning assets and interest-bearing liabilities for the years indicated. Note that average loans include non-performing loans.

                                                               Years Ended March 31,
                                              2009                                               2008
                                                              Average                                            Average
                            Average                           Yield/           Average                           Yield/
                            Balance         Interest           Cost            Balance         Interest           Cost
                                                               (Dollars in Thousands)
Assets:
Interest-earning
assets:
Mortgage loans             $ 455,782        $  27,141             5.95 %      $ 450,047        $  27,212             6.05 %
Other loans                    8,507              533             6.28           12,117              879             7.25

Total loans                  464,289           27,674             5.96          462,164           28,091             6.08

Short-term
investments                   25,812              150             0.58            9,324              423             4.54
Investment securities         45,374            2,467             5.44           69,670            3,569             5.12

Total investments             71,186            2,617             3.68           78,994            3,992             5.05

Total
interest-earnings
assets                       535,475           30,291             5.66          541,158           32,083             5.93

Allowance for loan
losses                        (4,066 )                                           (3,614 )
Noninterest-earning
assets                        23,331                                             19,504

Total assets               $ 554,740                                          $ 557,048


Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Deposits                   $ 316,683            6,984             2.21        $ 326,767           10,733             3.28
Other borrowings              12,126              689             5.68           11,857              838             7.07
Advances from FHLB of
Boston                       147,108            6,756             4.59          139,110            6,916             4.97

Total
interest-bearing
liabilities                  475,917           14,429             3.03          477,734           18,487             3.87

Noninterest-bearing
deposits                      38,807                                             37,863
Other liabilities              2,818                                              2,968

Total liabilities            517,542                                            518,565
Stockholders' equity          37,198                                             38,483

Total liabilities and
stockholders' equity       $ 554,740                                          $ 557,048

Net interest and
dividend income                             $  15,862                                          $  13,596

Interest rate spread                                              2.63 %                                             2.06 %

Net yield on
interest-earning
assets                                                            2.96 %                                             2.51 %

Rate/Volume Analysis. The effect on net interest income of changes in interest rates and changes in the amounts of interest-earning assets and interest-bearing liabilities is shown in the following table. Information is provided on changes for the fiscal years indicated attributable to changes in interest rates and changes in volume. Changes due to combined changes in interest rates and volume are allocated between changes in rate and changes in volume proportionally to the change due to volume and the change due to rate.

                                        2009 vs. 2008                                  2008 vs. 2007
                                        Changes due to                                 Changes due to
                                   Increase (decrease) in:                        Increase (decrease) in:
                            Volume           Rate           Total           Volume          Rate          Total
                                                                (In Thousands)
Interest income:
Mortgage loans             $    361        $   (432 )      $    (71 )      $  1,413        $ (791 )      $    622
Other loans                    (238 )          (108 )          (346 )           356           (58 )           298

Total income from
loans                           123            (540 )          (417 )         1,769          (849 )           920
Short-term
investments                     312            (585 )          (273 )           120           (25 )            95
Investment securities        (1,313 )           211          (1,102 )        (1,472 )         253          (1,219 )

Total income from
investments                  (1,001 )          (374 )        (1,375 )        (1,352 )         228          (1,124 )

Total interest and
dividend income                (878 )          (914 )        (1,792 )           417          (621 )          (204 )


Interest expense:
Deposits                       (324 )        (3,425 )        (3,749 )          (785 )         382            (403 )
Other borrowings -
including short-term
advances from FHLB               19            (168 )          (149 )           134            (5 )           129
Long-term advance -
FHLB of Boston                  386            (546 )          (160 )         1,451          (528 )           923

Total interest
expense                          81          (4,139 )        (4,058 )           800          (151 )           649


Net interest and
dividend income            $   (959 )      $  3,225        $  2,266        $   (383 )      $ (470 )      $   (853 )

Interest and Dividend Income. Interest and dividend income decreased by $1.8 million, or 5.6%, to $30.3 million for the year ended March 31, 2009 compared to $32.1 million for fiscal 2008 primarily due to a decrease in the average balances of investment securities, and a decrease in the average yield on short-term investments, partially offset by increased average loan balances. The average balance of loans increased primarily due to increases in the average balances of commercial real estate and residential loans as the Bank continued to focus on originating these types of loans. The average balance on investment securities declined as proceeds from maturities and principal repayments were used to fund loan growth, an increase in short-term investments, and a net decrease in the average balance of interest-bearing liabilities. Additionally, the average balance of investment securities during the year ended March 31, 2009 was negatively impacted by the $9.4 million impairment write-down of Fannie Mae and Freddie Mac preferred stock which occurred during the quarter ended September 30, 2008. The yield on short-term investments was 0.58% during the year ended March 31, 2009 as compared to 4.54% during the year ended March 31, 2008. Although the average balance of short-term investments increased from $9.3 million during the year ended March 31, 2008 to $25.8 million during the year ended March 31, 2009, interest income on these investments declined by $273 thousand. This decline was primarily due to recessionary economic conditions which resulted in the Federal Reserve's lowering of the fed funds target rate from a range of 5.25% to 2.25% during the year ended March 31, 2008, to a target range of 2.25% to 25 to 0 basis points during the year ended March 31, 2009. This decrease in the fed funds target rate had a corresponding effect on the interest earned on the Company's short-term investments, which is closely tied to the target fed funds rate.
Interest Expense. Interest expense decreased by $4.1 million, or 22.0%, to $14.4 million for the year ended March 31, 2009 compared to $18.5 million for fiscal 2008. The cost of deposits decreased by 107 basis points from 3.28% during the year ended March 31, 2008 to 2.21% during the year ended March 31, 2009, due to aggressive liability management as some high-cost certificates of deposit were replaced by more cost-effective FHLB of Boston borrowings and lower-costing deposits. The average balance of certificates of deposit totaled $173.3 million during the year ended March 31, 2009, compared to $188.1 million for fiscal 2008, a decline of $14.8

million. The average balance of lower-costing non-maturity deposits increased by $5.7 million to $182.2 million for the year ended March 31, 2009, as compared to an average balance of $176.5 million during the year ended March 31, 2008. The average balance of FHLB of Boston borrowings increased by $8.0 million, from $139.1 million during the year ended March 31, 2008 to $147.1 million for the year ended March 31, 2009. The decrease in the average cost of these funds was the result of a decrease in market interest rates. The average cost of other borrowings decreased as a portion of these borrowings is adjustable and is three month LIBOR based. Three month LIBOR ranged from 2.78% to 5.49% during the fiscal year ended March 31, 2008 compared to a range of 1.21 % to 4.06 % during the fiscal year ended March 31, 2009.
Provision for Loan Losses. The provision for losses for the fiscal year ended March 31, 2009 totaled $2.1 million, of which $1.6 million was related to a single borrowing relationship, compared to a negative provision for loan losses of $70 thousand during the fiscal year ended March 31, 2008. The Company provides for loan losses in order to maintain the allowance for loan losses at a level that management estimates is adequate to absorb probable losses based on an evaluation of known and inherent risks in the portfolio. In determining the appropriate level of the allowance for loan losses, management considers, among other things, past and anticipated loss experience, evaluations of underlying collateral including loan to value ratios, financial condition of the borrower, prevailing economic conditions, changes in staff depth and experience, the nature and volume of the loan portfolio, loan review/oversight, quality of underwriting standards, effects of concentrations, the impact of competition and legal issues, and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and ultimate losses may vary from such estimates. Management assesses the allowance for loan losses on a quarterly basis and provides for loan losses monthly when appropriate to maintain the adequacy of the allowance. The Company uses a process of portfolio segmentation . . .