During October 2008, the Company received regulatory approval to close a branch on Albany Street in Boston, Massachusetts. This branch closed in January 2009. During August 2009, the Company entered into a lease agreement to open a branch located at Coolidge Corner in Brookline, Massachusetts. The branch is scheduled to open during February 2010.
The Company's results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and interest paid on deposits and borrowings. The results of operations are also affected by the level of income and fees from loans, deposits, as well as operating expenses, the provision for loan losses, the impact of federal and state income taxes and the relative levels of interest rates and economic activity.
The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, non-profit organizations and individuals. It emphasizes service to small and medium-sized businesses and retail customers in its market area. The Company makes commercial loans, real estate and construction loans and consumer loans, and accepts savings, time, and demand deposits. In addition, the Company offers to its corporate and institutional customers automated lock box collection services, cash management services and account reconciliation services, and actively promotes the marketing of these services to the municipal market. Also, the Company provides full service securities brokerage services through its division, Investment Services at Century Bank, in conjunction with Linsco/Private Ledger Corp. ("LPL"), an unaffiliated registered securities broker-dealer and investment advisor. The Company is also a provider of financial services, including cash management, transaction processing and short term financing to municipalities in Massachusetts and Rhode Island. The Company has deposit relationships with approximately 48% of the 351 cities and towns in Massachusetts. Earnings for the third quarter ended September 30, 2009 were $3,182,000, or $0.58 per share diluted, compared to net income of $2,559,000, or $0.46 per share diluted, for the third quarter ended September 30, 2008. For the first nine months of 2009, net income totaled $7,075,000, or $1.28 per share diluted, an increase of 13.5% when compared to net income of $6,235,000, or $1.12 per share diluted, for the same period a year ago.
On May 22, 2009, the FDIC announced a special assessment on insured institutions as part of its efforts to rebuild the Deposit Insurance Fund and help maintain public confidence in the banking system. The special assessment is five basis points of each FDIC-insured depository institution's assets minus Tier 1 capital, as of June 30, 2009. The Company recorded a pre-tax charge of approximately $1.0 million in the second quarter of 2009 in connection with the special assessment. Also, the FDIC assessment increased by an additional $1.4 million for the first nine months of 2009 compared to the same period last year primarily as a result of an increase in the deposit assessment rate, an increase in deposit balances and the usage of a one-time credit during 2008. Net interest income totaled $35.4 million for the first nine months of 2009 compared to $32.8 million for 2008. The 7.9% increase in net interest income for the period is mainly due to a 21.2% increase in the average balances of earning assets, combined with a similar increase in deposits. The increased volume was somewhat offset by a decrease of twenty-six basis points in the net interest margin. The net interest margin decreased from 2.94% on a fully taxable equivalent basis in 2008 to 2.68% on the same basis for 2009.
Throughout 2007 and 2008, the Company had seen improvement in its net interest margin, however, the first quarter of 2009 reflects a decrease in the net interest margin

with a modest increase during the second quarter and third quarter of 2009 as illustrated in the graph below:

• an increase in average loans outstanding during 2008,

• the maturity of lower-yielding investment securities,

• an increase in the slope of the yield curve,

• an increase in the loan yield due to an increase in prepayment fees, particularly in the second quarter of 2007, and

• an increase in investment yields due, in part, to taking advantage of elevated yields in the municipal auction rate securities market.

The primary factor accounting for the decrease in the net interest margin for the first quarter of 2009 was a large influx of deposits, primarily from municipalities, and a corresponding increase in short-term investments. The Company is continuing to deploy these funds in higher yielding assets and the net interest margin has improved accordingly. The cost of funds has also declined from the first quarter of 2009 to the third quarter of 2009. While management will continue its efforts to improve the net interest margin, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin.
For the three months ended September 30, 2009, the loan loss provision was $1.3 million compared to a provision of $1.4 million for the same period last year for a decrease of $100,000. For the nine months ended September 30, 2009, the loan loss provision was $4.2 million compared to a provision of $3.0 million for the same period last year for an increase of $1.2 million. The increase in the provision was due to an increase in nonperforming loans as well as deterioration in the economy in Company's market area. Nonperforming loans increased to $17.0 million at September 30, 2009 from $3.7 million on December 31, 2008.
For the third quarter of 2009, the Company's effective income tax was 11.5% compared to 18.4% for last year's corresponding quarter. For the first nine months of 2009, the Company's effective income tax was 10.7% compared to 23.7% for last year's corresponding period. The effective income tax rate decreased for both periods primarily as a result of increased levels of tax-exempt income.

Financial Condition
Loans
On September 30, 2009, total loans outstanding, net, were $875.0 million, an increase of 4.7% from the total on December 31, 2008. At September 30, 2009, commercial real estate loans accounted for 41.4% and residential real estate loans, including home equity loans, accounted for 35.4% of total loans. Commercial and industrial loans decreased to $133.5 million at September 30, 2009 from $141.4 million on December 31, 2008. Construction loans increased to $62.4 million at September 30, 2009 from $59.5 million on December 31, 2008. Allowance for Loan Losses
The allowance for loan loss at September 30, 2009 was $14.2 million as compared to $11.1 million at December 31, 2008. This increase was due to the provision for loan losses exceeding net loan charge offs for the nine months ended September 30, 2009 as
shown in the table below. The provision for loan losses increased by $1.2 million from $3.0 million to $4.2 million; this increase in the provision was due to an increase in nonperforming loans as well as deterioration in the economy in Company's market area. Also, the level of the allowance for loan losses to total loans increased from 1.33% at December 31, 2008 to 1.62% at September 30, 2009. This increase in the ratio is primarily a result of an increase in non-performing loans to $17.0 million from $3.7 million on December 31, 2008. The increase in nonperforming loans was primarily as a result of three loan relationships totaling $11.0 million with specific reserves of $2.0 million, one primarily commercial real estate and two construction. In evaluating the allowance for loan losses the Company considered the following categories to be higher risk:
• Small business loans: The outstanding loan balances of small business loans is $30.8 million at September 30, 2009. These are considered higher risk loans because small businesses have been negatively impacted by the current economic conditions. In a liquidation scenario, the collateral, if any, is often not sufficient to fully recover the outstanding balance of the loan. As a result, the Company often seeks additional collateral prior to renewing maturing small business loans. In addition, the payment status of the loans is monitored closely in order to initiate collection efforts in a timely fashion.

• Construction loans: The outstanding loan balance of construction loans at September 30, 2009 is $62.4 million. As noted above, a major factor in nonaccrual loans is two large construction loans. Based on this fact, and the general local construction conditions facing construction, the management closely monitors all construction loans and considers this type of loans to be higher risk.

• Higher balance loans: Loans greater than $1.0 million are considered "high balance loans". The balance of these loans is $413.6 million at September 30, 2009. These loans are considered higher risk due to the concentration in individual loans. Additional allowance allocations are made based upon the level of high balance loans.

The following table summarizes the changes in the Company's allowance for loan losses for the periods indicated:

                                                  Three months ended                Nine months ended
                                                    September 30,                     September 30,
                                                                    (In thousands)
                                                 2009             2008            2009             2008
Allowance for loan losses, beginning of
period                                        $   13,364        $  9,469        $  11,119        $  9,633
Loans charged off                                   (496 )          (659 )         (1,511 )        (2,593 )
Recoveries on loans previously
charged-off                                           98              94              458             239

Net charge-offs                                     (398 )          (565 )         (1,053 )        (2,354 )
Provision charged to expense                       1,250           1,350            4,150           2,975

Allowance for loan losses, end of period      $   14,216        $ 10,254        $  14,216        $ 10,254

During 2009, the Company has experienced increased levels of nonaccruing loans. Due to current economic conditions, this trend may continue if borrowers are negatively impacted by future economic conditions. Management continually monitors trends in the loan portfolio to determine the appropriate level of allowance for loan losses. At the current time, management believes that the allowance for loan losses is adequate.
Nonperforming Assets
The following table sets forth information regarding nonperforming assets held by the Bank at the dates indicated:

                                                                   September 30, 2009         December 31, 2008
                                                                              (Dollars in thousands)
Nonaccruing loans                                                   $         17,001           $         3,661
Loans past due 90 days or more and still accruing                   $              -           $            89
Other real estate owned                                             $              -           $             -
Nonaccruing loans as a percentage of total loans                                1.94 %                     .44 %
Accruing troubled debt restructures                                 $            511           $             -

Cash and Cash Equivalents
Cash and cash equivalents remained relatively stable during the third quarter of 2009.
Short-term Investments
Short-term investments increased mainly as a result of increases in interest bearing deposits. Interest bearing deposits increased mainly because of increases in savings and NOW deposits and money market accounts. The increase was primarily from deposits from municipalities. Investments
Management continually evaluates its investment alternatives in order to properly manage the overall balance sheet mix. The timing of purchases, sales and reinvestments, if any, will be based on various factors including expectation of

movements in market interest rates, deposit flows and loan demand.
Notwithstanding these events, it is the intent of management to grow the earning asset base mainly through loan originations while funding this growth through a mix of retail deposits, FHLB advances, and retail repurchase agreements.

Securities Available-for-Sale (at Fair Value)

                                                                   September 30, 2009          December 31, 2008
                                                                                  (In thousands)
U.S Treasury                                                      $              2,006        $             2,028
U.S. Government Sponsored Enterprises                                          135,396                    161,292
U.S. Government Agency and Sponsored Enterprise
Mortgage-backed Securities                                                     456,008                    260,132
Privately Issued Residential Mortgage-backed Securities                          5,348                      5,659
Privately Issued Commercial Mortgage-backed Securities                             718                      3,367
Obligations issued by States and Political Subdivisions                         44,044                     60,259
Other Debt Securities                                                            2,518                      2,100
Equity Securities                                                                  868                        748


Total Securities Available-for-Sale                               $            646,906        $           495,585

During the first nine months of 2009 the Company capitalized on favorable market conditions and realized $1.1 million of gains on sales of investments. The sales of investments represented seven U.S. Government Sponsored Enterprise bonds totaling $36.0 million.
Debt securities of Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac. Control of these enterprises was directly taken over by the U.S. Government in the 3rd quarter of 2008.

Securities Held-to-Maturity (at Amortized Cost)

                                                                   September 30, 2009          December 31, 2008
                                                                                  (In thousands)
U.S. Government Sponsored Enterprises                             $             17,600        $            44,000
U.S. Government Agency and Sponsored Enterprise
Mortgage-backed Securities                                                     159,406                    140,047


Total Securities Held-to-Maturity                                 $            177,006        $           184,047

At September 30, 2009 and December 31, 2008, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises.
Debt securities of Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac. Control of these enterprises was directly taken over by the U.S. Government in the 3rd quarter of 2008.

Securities Available-for-Sale
The securities available-for-sale portfolio totaled $646.9 million at September 30, 2009, an increase of 30.5% from December 31, 2008. Purchases of securities available-for-sale totaled $425.4 million for the nine months ended September 30, 2009. The portfolio is concentrated in United States Government Sponsored Enterprises, Mortgage-backed Securities and Obligations issued by States and Political Subdivisions and had an estimated weighted average remaining life of 4.2 years. Excluding auction rate municipal obligations ("ARS") and variable rate demand notes ("VRDN"), which have maturities of up to 30 years, but reprice frequently, the estimated average remaining life is 3.3 years.
Included in Obligations Issued by States and Political Subdivisions as of September 30, 2009, are $22.1 million of ARS's and $14.7 million of VRDN's with unrealized losses of $2.9 million for ARS's. VRDN's fair value is estimated to equal the cost. These debt securities were issued by governmental entities, but are not necessarily debt obligations of the issuing entity. Of the total of $36.8 million of ARS's and VRDN's, $15.0 million are obligations of governmental entities and the remainder are obligations of large non-profit entities. These obligations are variable rate securities with long-term maturities whose interest rates are set periodically through an auction process for ARS's and by prevailing market rates for VRDN's. Should the auction not attract sufficient bidders, the interest rate adjusts to the default rate defined in each obligation's underlying documents. The Company increased its holdings in these types of securities during the second and third quarters of 2008 to take advantage of yields available at that time due to market disruption. Although many of these issuers have bond insurance, the Company purchased the securities based on the creditworthiness of the underlying obligors. Based on the creditworthiness of the underlying obligors, management does not believe that any of these securities are other-than-temporarily impaired. As of September 30, 2009 the weighted average taxable equivalent yield on these securities was 0.77%. At the time of purchase, these securities generally had higher yields. The overall yield has declined due to an overall decline in prevailing short-term interest rates as well as declining spreads to market rates. In the case of a failed auction, the Company may not have access to funds as only a limited market exists for failed ARS's. As of September 30, 2009, three of the Company's ARS's were purchased subsequent to their failure with a fair value of $10.7 million and an amortized cost of $13.3 million. These securities were issued by governmental entities, and are the debt of non-profit organizations which the Company believes to be creditworthy. Securities issued by governmental entities were purchased prior to their failure with a fair value of $4.8 million and amortized cost of $5.0 million. The securities purchased prior to their failure are not considered to have other than temporary impairment.
The majority of the Company's securities AFS are classified as Level 2. The fair values of these securities are obtained from a pricing service, which provides the Company with a description of the inputs generally utilized for each type of security. These inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Market indicators and industry and economic events are also monitored.
Securities available-for-sale totaling $21.3 million, or 1.04% of assets are classified as Level 3. These securities are generally failed auction rate securities, equity investments or obligations of states and political subdivisions with no readily determinable fair value. Failed auction rate securities were reclassified to level 3 during the first quarter of 2009 due to the lack of an active market. Fair values for Level 3 securities are generally arrived at based upon a review of market trades, if any, as well as an analysis of the security based upon market liquidity and prevailing market interest rates.

Securities Held-to-Maturity
The securities held-to-maturity portfolio totaled $177.0 million on September 30, 2009, a decrease of 3.8% from the total on December 31, 2008. These purchases were made to take advantage of rising rates and the somewhat steeper yield curve. The portfolio is concentrated in United States Government Sponsored Enterprises and Mortgage-backed Securities and had an estimated weighted average remaining life of 2.6 years. Federal Home Loan Bank of Boston Stock
The Company owns Federal Home Loan Bank of Boston ("FHLBB") stock which is considered a restricted equity security. As a voluntary member of the FHLBB, the Company is required to invest in stock of the FHLBB in an amount equal to 4.5% of its outstanding advances from the FHLBB. Stock is purchased at par value. As and when such stock is redeemed, the Company would receive from the FHLBB an amount equal to the par value of the stock. At its discretion, the FHLBB may declare dividends on the stock. On April 10, 2009, the FHLBB reiterated to its members that, while it currently meets all its regulatory capital requirements, it is focusing on preserving capital in response to ongoing market volatility, and accordingly, has suspended its quarterly dividend and has extended the moratorium on excess stock repurchases. It also announced that it had taken a write-down of $381.7 million in other-than-temporary impairment charges on its private-label mortgage-backed securities for the year ended December 31, 2008. This resulted in a net loss of $115.8 million. For the six months ended June 30, 2009, the FHLBB reported a net loss of $87.6 million resulting from the recognition of $197.4 million of impairment losses which were recognized through income. In the future, if additional unrealized losses are deemed to be other-than-temporary, the associated impairment charges could exceed the FHLBB's current level of retained earnings and possibly put into question whether the fair value of the FHLBB stock owned by the Company is less than par value. The FHLBB has stated that it expects and intends to hold its private-label mortgage-backed securities to maturity. Despite these negative trends, the FHLBB exceeded the regulatory capital requirements promulgated by the Federal Home Loan Banks Act and the Federal Housing Financing Agency. The FHLBB has the capacity to issue additional debt if necessary to raise cash. If needed, the FHLBB also has the ability to secure funding available to U.S. Government Sponsored Enterprises through the U.S. Treasury. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no other-than-temporary impairment related to the carrying amount of the Company's FHLBB stock as of September 30, 2009. The Company will continue to monitor its investment in FHLBB stock.
Deposits and Borrowed Funds
On September 30, 2009, deposits totaled $1.53 billion, representing a 21.1% increase in total deposits from December 31, 2008. Total deposits increased primarily as a result of increases in money market accounts and savings and NOW . . .