FORWARD-LOOKING STATEMENTS
In this report, the Company has made forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 as amended) that are subject to risks and uncertainties. Such forward-looking statements are expressions of management's expectations as of the date of this report regarding future events or trends and which do not relate to historical matters. Such expectations may or may not be realized, depending on a number of variable factors, including, but not limited to, changes in interest rates, general economic conditions, including real estate conditions in the Bank's lending areas, regulatory considerations and competition. For more information about these factors, please see our 2008 Annual Report on Form 10-K on file with the SEC, including the sections entitled "Risk Factors" and "Management's Discussion and 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 second quarter 2009 net income available to common shareholders of $846,000, or $0.19 per diluted common share, as compared to net income of $943,000, or $0.21 per diluted common share, for the second quarter of 2008. The largest factor in the quarter's results as compared to 2008 was the increase in the FDIC deposit insurance premiums from $14,000 for the second quarter of 2008 to $369,000 for the second quarter of 2009 which was partially offset by gains on sales of investments in the second quarter of 2009 totaling $232,000.

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 also 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 June 30, 2009 was $4.7 million, a 11.9% increase from $4.2 million for the comparable period in 2008, primarily due to sustained loan growth. The Company's continued emphasis on increasing loan originations instead of purchasing lower-yielding investment securities favorably affected net interest income during the quarter and six months ended June 30, 2009.
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 $788.2 million at June 30, 2009, compared to $761.3 million at December 31, 2008. The increase in asset size at June 30, 2009 from December 31, 2008 reflected strong loan growth of $49.1 million since year-end 2008 augmented by an increase of $11.4 million in federal funds sold and partially offset by a decrease in the investment portfolio since December 31, 2008.
Investments:
The investment securities portfolio totaled $228.9 million, or 29.0% of total assets at June 30, 2009, a decrease of $35.6 million, compared to $264.6 million, or 34.8% of total assets at December 31, 2008. During the first six months of 2009, the Bank experienced cash inflows of $45.8 million of investments from principal payments and prepayments as well as $8.3 million in proceeds from sales of investments. The funds were

reinvested in investment securities purchases totaling $24.3 million and funded new loan originations. These purchases were primarily 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.
Loans:
Total loans increased $49.1 million to $501.7 million and represented 63.7% of total assets at June 30, 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 $16.1 million including $6.8 million of seasoned, 15-year fixed rate residential mortgage loans purchased during the first six months of 2009 while corporate loans, comprised mainly of construction and commercial real estate loans, increased $33.0 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 June 30, 2009 and December 31, 2008:

                                                     6/30/09      12/31/08
                                                        (In thousands)
           Residential real estate                  $ 124,456     $ 109,276
           Home equity lines and second mortgages      25,123        23,972
           Consumer                                       615           831

           Retail loans                               150,194       134,079

           Construction and land development           80,442        78,169
           Commercial real estate                     241,484       206,577
           Commercial business                         29,626        33,796

           Corporate loans                            351,552       318,542

           Total loans                                501,746       452,621
           Allowance for loan losses                   (6,399 )      (5,885 )

           Net loans                                $ 495,347     $ 446,736

Allowance For Loan Losses:
The following table summarizes changes in the allowance for loan losses for the
three and six months ended June 30, 2009 and 2008:

                                                    Three months ended                   Six months ended
                                               6/30/09             6/30/08            6/30/09         6/30/08
                                                                    (Dollars in thousands)
Beginning balance                             $    6,089         $     4,874         $   5,885        $  4,810
Provision for loan losses                            460                 400               700             505
Recoveries on loans previously
charged-off                                            1                   1                 2               2
Loans charged-off                                   (151 )               (37 )            (188 )           (79 )

Ending balance                                $    6,399         $     5,238         $   6,399        $  5,238


Ratios:
Annualized net charge-offs to average
loans outstanding                                   0.12 %              0.02 %            0.08 %          0.04 %
Allowance for loan losses to total loans
at end of period                                    1.28 %              1.28 %            1.28 %          1.28 %

The allowance for loan losses increased to $6.4 million at June 30, 2009 compared to $5.9 million and $5.2 million, respectively, at December 31, 2008 and June 30, 2008. The coverage of the allowance for loan losses remained

stable at 1.28% at June 30, 2009 and June 30, 2008, respectively, due to the loan growth of $49.1 million experienced during the first six months of 2009 as compared to $51.5 million in the first six months of 2008. Included in the loan growth of $49.1 million in the first six months of 2009 was the loan purchase of $6.8 million of seasoned, 15-year fixed rate residential mortgages discussed above. The Company believes that asset quality remains high, as evidenced by the relatively low levels of non-performing and delinquent loans as a percentage of total loans and OREO or total assets as defined below. See "Risk Assets" below. 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 stability in the allowance for loan loss coverage as a percentage of total loans from December 31, 2008 to June 30, 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 Company considers the current level of the allowance for loan losses to be appropriate and adequate. 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 $4.3 million at June 30, 2009, compared to $2.7 million at 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 $4.0 million and $3.1 million at June 30, 2009 and December 31, 2008, respectively. All of the impaired loans at June 30, 2009, had been measured using the fair value of the collateral method with $1.8 million requiring a valuation allowance of $200,000 and the remainder not requiring a related allowance. The Company had impaired loans totaling $1.3 million at June 30, 2008.
The following table summarizes the Company's risk assets at June 30, 2009, December 31, 2008 and June 30, 2008:

                                                    6/30/09       12/31/08      6/30/08
                                                           (Dollars in thousands)
 Non-performing loans                               $  4,139     $    2,606     $  1,455
 Other real estate owned                                 120            120          692

 Total risk assets                                  $  4,259     $    2,726     $  2,147


 Risk assets as a percent of total loans and OREO       0.85 %         0.60 %       0.52 %

 Risk assets as a percent of total assets               0.54 %         0.36 %       0.30 %

Deposits:
Deposits increased $40.1 million during the first six months of 2009 to $448.7 million at June 30, 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 $24.4 million, or 13.7%, amounting to $202.0 million at June 30, 2009, compared to $177.6 million at December 31, 2008. Savings accounts experienced an increase of $16.6 million from December 31, 2008, to $72.9 million at June 30, 2009, primarily due to the higher-rate promotional accounts. NOW and demand deposit accounts increased $1.0 million and $3.6 million, respectively, from December

31, 2008, to $18.2 million and $31.1 million, respectively, at June 30, 2009, while money market accounts increased $3.2 million to $79.8 million at June 30, 2009. Term deposits comprised of brokered certificates of deposit and certificates of deposit increased $15.7 million, or 6.8%, totaling $246.7 million at June 30, 2009, versus $231.0 million at December 31, 2008. Certificates of deposit increased $19.1 million to $217.3 million at June 30, 2009, while brokered certificates of deposit decreased $3.4 million from December 31, 2008, to $29.4 million at June 30, 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 9.8% growth in total deposits during the first six 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 June 30, 2009 and December 31, 2008:

                                                  6/30/09      12/31/08
                                                     (In thousands)
              NOW accounts                       $  18,199     $  17,239
              Demand deposit accounts               31,133        27,546
              Savings accounts                      72,899        56,251
              Money market accounts                 79,798        76,603

              Core deposits                        202,029       177,639

              Brokered certificates of deposit      29,391        32,819
              Certificates of deposit              217,311       198,205

              Term deposits                        246,702       231,024

              Total deposits                     $ 448,731     $ 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 $261.2 million at June 30, 2009, compared to $276.5 million at December 31, 2008, a decrease of $15.3 million or 5.5%. Short-term borrowed funds decreased $10.2 million from December 31, 2008, due primarily to payments of maturing short-term FHLBB advances of $11.0 million, while long-term FHLBB borrowed funds decreased $5.1 million due maturing advances. Wholesale repurchase agreements remained stable at $40 million at June 30, 2009 and December 31, 2008, respectively. The Company reduced its borrowing position with a view toward lessening the Company's exposure to rate fluctuations that may occur in the coming year.
The following table reflects the components of borrowings at June 30, 2009 and December 31, 2008:

                                                 6/30/09      12/31/08
                                                    (In thousands)
              Long-term borrowed funds:
              FHLBB long-term advances          $ 214,150     $ 219,228
              Wholesale repurchase agreements      40,000        40,000

                                                  254,150       259,228

              Short-term borrowed funds:
              FHLBB short-term borrowings               -        11,000
              Customer repurchase agreements        7,044         6,262

                                                    7,044        17,262

              Total borrowed funds              $ 261,194     $ 276,490

RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2009 AND 2008
SUMMARY
The Company reported net income available to common shareholders of $846,000, or $0.19 per diluted common share, as compared to net income of $943,000, or $0.21 per diluted common share, for the three months ended June 30, 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 $369,000 for the three months ended June 30, 2009 versus $14,000 in the comparable quarter of 2008. This includes the special deposit assessment by the FDIC in May 2009. Other significant factors were the elimination of Fannie Mae and Freddie Mac preferred stock dividends and the suspension of FHLBB dividends that together resulted in a decrease of $310,000 for 2009 from the results for the comparable three-month period in 2008. Partially offsetting these impacts were gains on sales of investments of $232,000 in the quarter ended June 30, 2009 compared to none in the comparable three month period in 2008. Net Interest Income:
Net interest income for the three months ended June 30, 2009 increased by $503,000, or 11.9%, to $4.7 million from $4.2 million for the same period of 2008. The net interest rate spread increased slightly to 2.17% for the three months ended June 30, 2009 versus 2.16% for the same period of 2008. Interest income for the three months ended June 30, 2009 increased $527,000 or 5.5% primarily due to higher average loan balances compared to the same period of 2008. Partially offsetting the increase in total interest income was an increase of $24,000 in total interest expense primarily due to an increase in average deposit balances. Net interest margin decreased to 2.52% versus 2.54% for the quarters ended June 30, 2009 and 2008, respectively. Interest Income:
Interest income increased $527,000, or 5.5%, during the second quarter of 2009 versus the same quarter in 2008, primarily due to a rise in average loan balances.
Average loan interest rates decreased 47 basis points from 6.29% to 5.82% during the second quarter of 2009 as compared to the same quarter of 2008, resulting in a decrease of $485,000 to interest income. Average loan balances rose $100.5 million, or 26.0%, from $387.1 million in 2008 to $487.5 million in 2009, contributing $1.5 million to interest income.
Average investment security interest rates decreased 46 basis points during the second quarter of 2009, from 5.00% in 2008 to 4.54% in 2009, resulting in a decrease of $268,000 to interest income. Average investment security balances declined $16.3 million, from $282.2 million in 2008 to $265.9 million in 2009, resulting in a decrease of $233,000 to interest income. In connection with the conservatorship of Fannie Mae and Freddie Mac, in the third quarter of 2008 future dividend payments by those entities ceased. During the second quarter of 2009, the Company recognized no dividend income from FNMA and FHLMC preferred stock compared to dividend income from its preferred stock investments of $208,000 that was recognized in the second quarter of 2008. FHLB stock dividends have also been suspended indefinitely. These dividends amounted to $102,000 in the three months ended June 30, 2008 compared to zero in 2009. Interest Expense:
Interest expense increased $24,000 during the second quarter of 2009, from $5.3 million in the second quarter of 2008 to $5.4 million in the second quarter of 2009, primarily due to the rise in average deposit volumes.
Average deposit interest rates decreased 52 basis points, from 3.06% to 2.54% in the second quarter of 2009 as compared to the same quarter of 2008, decreasing interest expense by $485,000. Average interest-bearing deposit balances increased by $89.5 million, from $319.4 million in 2008 to $408.8 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 $637,000.

Average borrowed funds interest rates rose 5 basis points from 4.19% in the second quarter of 2008 to 4.24% in the same quarter of 2009 resulting in an increase of $20,000 to interest expense. Average borrowed funds balances decreased $16.3 million, or 5.8%, from $278.9 million in 2008 to $262.6 million in 2009. This increase resulted in a decline to interest expense of $148,000 due primarily to maturities of longer term borrowed funds with lower yields. Provision for Loan Losses:
The provision for loan losses totaled $460,000 and $400,000 for the three months ended June 30, 2009 and 2008, respectively. The provisions in 2009 and 2008 reflect management's analysis of loan growth and changes in risk during the second 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 allowance for loan losses has grown to $6.4 million at June 30, 2009, from $5.2 million at June 30, 2008.
Non-Interest Income:
Non-interest income increased $264,000 for the three months ended June 30, 2009, compared to the same period in 2008, to $774,000 in 2009 while amounting to $510,000 in 2008. The largest factor in the increase in 2009 was due to the gains on sales of investments of $232,000 as compared to $0 in the second quarter of 2008. Deposit account fees decreased $33,000, or 12.4%, to $234,000 from $267,000 for the three months ended June 30, 2009 and 2008, respectively, due mainly to a decrease of $29,000 in NOW account fees. Loan servicing fees increased by $30,000, or 85.7%, to $65,000 from $35,000 for the three months ended June 30, 2009 and 2008, respectively, due to the increase in the number of loans processed. Income on bank-owned life insurance increased $28,000 to $124,000 for the three months ended June 30, 2009 from $96,000 for the same period in 2008 based on higher investment income earned by the underlying insurance company. Other income increased to $119,000 from $112,000 for the three months ended June 30, 2009 and 2008, respectively. Non-Interest Expense:
Non-interest expenses increased $475,000, or 15.9%, during the second quarter of 2009 to $3.5 million versus $3.0 million for the same period of 2008 primarily resulting from the increase of $355,000 in FDIC deposit insurance premiums which totaled $369,000 for the three months ended June 30, 2009 compared to $14,000 for the comparable quarter of 2008. Salary and employee benefits remained stable at $1.6 million in the second quarter of 2009 and 2008, respectively. Occupancy and equipment expense increased $25,000, or 7.8%, to $346,000 in the second quarter of 2009 from $321,000 in the same period of 2008 due mainly to an increase in building repairs and maintenance as well as depreciation due to the opening of the new branch in Derry, New Hampshires. Data processing expense decreased to $233,000 versus $243,000 in the second quarters of 2009 and 2008, respectively, due to a decrease in computer software and license fees. Professional fees increased $20,000, or 15.2%, to $152,000 in the second quarter of 2009 from $132,000 in the second quarter of 2008 due primarily to an increase in legal fees and regulatory assessments. Marketing expense decreased $77,000, or 36.7%, due to decreased newspaper advertising. OREO expense totaled zero in the three months ended June 30, 2009 compared to $44,000 in 2008. Other expenses increased $210,000, or 52.1%, to $613,000 in the second quarter of 2009 from $403,000 in the same period of 2008 due primarily to an increase in loan workout expenses associated with one nonaccrual loan and expenses associated with a . . .