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 September 30, 2009 was $5.0 million, a 13.5% increase from $4.4 million for the comparable period in 2008, primarily due to sustained loan growth. The results from 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 nine months ended September 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 $807.0 million at September 30, 2009, compared to $761.3 million at December 31, 2008. The increase in asset size at September 30, 2009 from December 31, 2008 reflected strong loan growth of $65.8 million since year-end 2008 augmented by an increase of $3.7 million in federal funds sold and partially offset by a decrease of $24.2 million in the investment portfolio since December 31, 2008. Investments:
The investment securities portfolio totaled $240.3 million, or 29.8% of total assets at September 30, 2009, a decrease of $24.2 million, compared to $264.6 million, or 34.8% of total assets at December 31, 2008. During the first nine months of 2009, the Bank experienced cash inflows of $64.2 million of investments from principal payments and prepayments as well as $19.3 million in proceeds from sales of investments. The funds were reinvested in investment securities purchases totaling $74.9 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 $65.8 million to $518.4 million and represented 64.2% of total assets at September 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 $22.8 million including $6.8 million of seasoned, 15-year fixed rate residential mortgage loans purchased during the first nine months of 2009 while corporate loans, comprised mainly of construction and commercial real estate loans, increased $43.0 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 September 30, 2009 and December 31, 2008:

                                                     9/30/09      12/31/08
                                                        (In thousands)
           Residential real estate                  $ 129,832     $ 109,276
           Home equity lines and second mortgages      26,191        23,972
           Consumer                                       832           831

           Retail loans                               156,855       134,079

           Construction and land development           81,461        78,169
           Commercial real estate                     250,267       206,577
           Commercial business                         29,859        33,796

           Corporate loans                            361,587       318,542

           Total loans                                518,442       452,621
           Allowance for loan losses                   (6,636 )      (5,885 )

           Net loans                                $ 511,806     $ 446,736

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

                                                  Three months ended                 Nine months ended
                                               9/30/09           9/30/08          9/30/09          9/30/08
                                                                 (Dollars in thousands)

Beginning balance                             $    6,399         $  5,238        $    5,885        $  4,810
Provision for loan losses                            400              330             1,100             835
Recoveries on loans previously
charged-off                                            1                1                 3               3
Loans charged-off                                   (164 )            (34 )            (352 )          (113 )

Ending balance                                $    6,636         $  5,535        $    6,636        $  5,535


Ratios:
Annualized net charge-offs to average
loans outstanding                                   0.13 %           0.03 %            0.10 %          0.04 %
Allowance for loan losses to total loans
at end of period                                    1.28 %           1.27 %            1.28 %          1.27 %

The allowance for loan losses increased to $6.6 million at September 30, 2009 compared to $5.9 million and $5.5 million, respectively, at December 31, 2008 and September 30, 2008. The coverage of the allowance for loan losses increased slightly to 1.28% at September 30, 2009 from 1.27% at September 30, 2008, due to the loan growth of $65.8 million experienced during the first nine months of 2009 as compared to $78.9 million in the first nine months of 2008. Included in the loan growth of $65.8 million in the first nine months of 2009 was the 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 September 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 $3.7 million at September 30, 2009, compared to $2.7 million at December 31, 2008 and $4.3 million as of June 30, 2009. As evidenced by the table below, the economy has had an impact on the level of non-performing loans and in residential non-performing loans in particular. Offsetting the commercial business, non-performing loans of $668,000 are SBA guarantees in the amount of $415,000.
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 $4.6 million and $3.1 million at September 30, 2009 and December 31, 2008, respectively. Of the $4.6 million in impaired loans, $2.1 million represent modifications on residential, owner-occupied properties at September 30, 2009. All of the impaired loans at September 30, 2009, had been measured using either the fair value of the collateral method or the estimated cash flow method with one loan requiring a related allowance of $50,000. The Company had impaired loans totaling $490,000 at September 30, 2008.
The following table summarizes the Company's risk assets at September 30, 2009, December 31, 2008 and September 30, 2008:

                                                    9/30/09       12/31/08      9/30/08
                                                           (Dollars in thousands)

 Non-performing loans:
 Residential                                        $  1,052     $      305     $    128
 Construction and land development                       350            350          490
 Commercial real estate                                1,478          1,951            -
 Commercial business                                     668              -            -


 Total non-performing loans                            3,548          2,606          618
 Other real estate owned                                 120            120          939

 Total risk assets                                  $  3,668     $    2,726     $  1,557


 Risk assets as a percent of total loans and OREO       0.71 %         0.60 %       0.36 %

 Risk assets as a percent of total assets               0.45 %         0.36 %       0.21 %

Deposits:
Deposits increased $62.7 million during the first nine months of 2009 to $471.4 million at September 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 $54.6 million, or 30.7%, amounting to $232.3 million at September 30, 2009, compared to $177.6 million at December 31, 2008. Savings accounts experienced an increase of $29.5 million from December 31, 2008, to $85.7 million at September 30, 2009, primarily due to the higher-rate promotional accounts. NOW and demand deposit accounts increased $2.1 million and $10.2 million, respectively, from December 31, 2008, to $19.3 million and $37.7 million, respectively, at September 30, 2009, while money market accounts increased $12.8 million to $89.4 million at September 30, 2009. Term deposits comprised of brokered certificates of deposit and certificates of deposit increased $8.0 million, or 3.5%, totaling $239.1 million at September 30, 2009, versus $231.0 million at December 31, 2008. Certificates of deposit increased $11.5 million to

$209.8 million at September 30, 2009, while brokered certificates of deposit decreased $3.4 million from December 31, 2008, to $29.3 million at September 30, 2009. The decrease in brokered deposits reflects a maturity of $3.5 million. Due to the recent turmoil in the financial markets, the Bank has seen an inflow of deposits as evidenced by the 15.3% growth in total deposits during the first nine 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 September 30, 2009 and December 31, 2008:

                                                  9/30/09      12/31/08
                                                     (In thousands)
              NOW accounts                       $  19,345     $  17,239
              Demand deposit accounts               37,747        27,546
              Savings accounts                      85,736        56,251
              Money market accounts                 89,427        76,603

              Core deposits                        232,255       177,639

              Brokered certificates of deposit      29,344        32,819
              Certificates of deposit              209,752       198,205

              Term deposits                        239,096       231,024

              Total deposits                     $ 471,351     $ 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 $254.8 million at September 30, 2009, compared to $276.5 million at December 31, 2008, a decrease of $21.7 million or 7.8%. Short-term borrowed funds decreased $11.6 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 $10.1 million due to maturing advances. Wholesale repurchase agreements remained stable at $40 million at September 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 September 30, 2009 and December 31, 2008:

                                                 9/30/09      12/31/08
                                                    (In thousands)
              Long-term borrowed funds:
              FHLBB long-term advances          $ 209,111     $ 219,228
              Wholesale repurchase agreements      40,000        40,000

                                                  249,111       259,228

              Short-term borrowed funds:
              FHLBB short-term borrowings               -        11,000
              Customer repurchase agreements        5,704         6,262

                                                    5,704        17,262

              Total borrowed funds              $ 254,815     $ 276,490

RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
SUMMARY
The Company reported net income available to common shareholders of $1.3 million, or $0.30 per diluted common share, as compared to a net loss of $(8.3) million, or $(1.85) per diluted common share, for the three months ended September 30, 2009 and 2008, respectively. The largest factor in 2008's quarterly results was the other-than-

temporary impairment write-down of investments in Fannie Mae and Freddie Mac preferred stock resulting in a non-cash charge of $(9.4) million, or $(2.10) per diluted common share. The largest factor in the decline of the normalized quarterly net income in 2009 was the increase in the FDIC deposit insurance premiums which totaled $262,000 for the three months ended September 30, 2009 versus $18,000 in the comparable quarter of 2008. Other significant factors in 2009 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 $191,000 for 2009 from the results for the comparable three-month period in 2008. Partially offsetting these impacts were gains on sales of investments of $572,000 in the quarter ended September 30, 2009 compared to none in the comparable three-month period in 2008. Net Interest Income:
Net interest income for the three months ended September 30, 2009 increased by $599,000, or 13.5%, to $5.0 million from $4.4 million for the same period of 2008. The net interest rate spread increased slightly to 2.26% for the three months ended September 30, 2009 versus 2.21% for the same period of 2008. Interest income for the three months ended September 30, 2009 increased $343,000, or 3.5%, primarily due to higher average loan balances compared to the same period of 2008. Coupled with the increase in total interest income was a decrease of $256,000 in total interest expense, primarily due to a decrease in average deposit rates. Net interest margin increased to 2.59% versus 2.54% for the quarters ended September 30, 2009 and 2008, respectively. Interest and Dividend Income:
Interest and dividend income increased $343,000, or 3.5%, during the third quarter of 2009 versus the same quarter in 2008, primarily due to a rise in average loan balances.
Average loan interest rates decreased 38 basis points from 6.21% to 5.83% during the third quarter of 2009 as compared to the same quarter of 2008, resulting in a decrease of $417,000 to interest income. Average loan balances rose $86.8 million, or 20.6%, from $421.0 million in 2008 to $507.8 million in 2009, contributing $1.3 million to interest income.
Average investment security interest rates decreased 66 basis points during the third quarter of 2009, from 4.88% in 2008 to 4.22% in 2009, resulting in a decrease of $380,000 to interest income. Average investment security balances declined $10.0 million or 3.7%, from $273.6 million in 2008 to $263.6 million in 2009, resulting in a decrease of $169,000 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 third 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 $103,000 that was recognized in the third quarter of 2008. FHLB stock dividends have also been suspended indefinitely. These dividends amounted to $88,000 in the three months ended September 30, 2008 compared to zero in the comparable period of 2009.
Interest Expense:
Interest expense decreased $256,000 during the third quarter of 2009, from $5.5 million in the third quarter of 2008 to $5.2 million in the third quarter of 2009, primarily due to the decline in average deposit rates.
Average deposit interest rates decreased 53 basis points, from 2.84% to 2.31% in the third quarter of 2009 as compared to the same quarter of 2008, decreasing interest expense by $489,000. Average interest-bearing deposit balances increased by $75.9 million or 21.5%, from $353.6 million in 2008 to $429.5 million in 2009, accompanied by a change in the mix resulting in a preference for higher costing certificates of deposit, and higher rate promotional savings accounts which increased interest expense by $469,000. Average borrowed funds interest rates declined 6 basis points from 4.28% in the third quarter of 2008 to 4.22% in the same quarter of 2009 resulting in an decrease of $57,000 to interest expense. Average borrowed funds balances decreased $19.4 million, or 7.0%, from $275.5 million in 2008 to $256.1 million in 2009. This decrease resulted in a decline in interest expense of $179,000 due primarily to maturities of longer term borrowed funds.

Provision for Loan Losses:
The provision for loan losses totaled $400,000 and $330,000 for the three months ended September 30, 2009 and 2008, respectively. The provisions in 2009 and 2008 reflect management's analysis of loan growth and changes in risk during the third 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 grew to $6.6 million at September 30, 2009, from $5.5 million at September 30, 2008.
Non-Interest Income (Loss):
Non-interest income increased $9.9 million for the three months ended September 30, 2009, compared to the same period in 2008, to $1.1 million in 2009 compared to a loss of $(8.8) million in 2008. The largest factor in the increase in 2009 was due to the non-cash impairment write-down of $(9.4) million incurred in 2008. The normalized non-interest income for the three months ended September 30, 2008, excluding the non-cash impairment write-down, would have been $535,000 as compared to $524,000 in 2009, excluding the gains on sales of investments. Deposit account fees decreased $16,000, or 5.9%, to $253,000 from $269,000 for the three months ended September 30, 2009 and 2008, respectively, due mainly to a decrease of $11,000 in NOW account fees. Loan servicing fees increased by $7,000, or 25.9%, to $34,000 from $27,000 for the three months ended . . .