LSBX Lsb Corp (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20529

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the quarterly period ended June 30, 2009

o		Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File Number 000-32955

 

LSB Corporation

(Exact name of registrant as specified in its charter)

Massachusetts		04-3557612
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
30 Massachusetts Avenue, North Andover, MA		01845
(Address of principal executive offices)		(Zip Code)

(978) 725-7500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ            No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o            No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).

Large Accelerated Filer o		Accelerated Filer o		Non-Accelerated Filer o (Do not check if smaller reporting company)		Smaller Reporting Company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o            No þ

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class		Outstanding as of August 10, 2009
Common Stock, par value $.10 per share		4,499,936 shares

 

 

LSB CORPORATION AND SUBSIDIARY

INDEX

PART I – FINANCIAL INFORMATION

						Page:
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets							3
Consolidated Statements of Income							4
Consolidated Statements of Changes in Stockholders’ Equity							5
Consolidated Statements of Cash Flows							6
Notes to Consolidated Financial Statements							7-12
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS							12-23
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK							23
ITEM 4. CONTROLS AND PROCEDURES							24
PART II – OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS							24
ITEM 1A RISK FACTORS							24
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS							24
ITEM 3 DEFAULTS UPON SENIOR SECURITIES							24
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS							24
ITEM 5 OTHER INFORMATION							24
ITEM 6 EXHIBITS							25
SIGNATURES							26
EXHIBIT INDEX							27
EX-31.1 Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
EX-31.2 Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
EX-32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002
EX-32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002

PART 1 – FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

LSB CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

		June 30,				December 31,
		2009				2008
		(In thousands, except share data)
ASSETS
Assets:
Cash and due from banks		$	8,555			$	6,859
Federal funds sold			17,916				6,469
Total cash and cash equivalents			26,471				13,328
Investment securities available for sale (amortized cost of $222,103 in 2009 and $259,057 in 2008)			228,920				264,561
Federal Home Loan Bank stock, at cost			11,825				11,825
Loans, net of allowance for loan losses			495,347				446,736
Premises and equipment			6,331				5,528
Accrued interest receivable			2,686				2,720
Deferred income tax asset, net			4,094				4,447
Bank-owned life insurance			10,890				10,641
Other real estate owned			120				120
Other assets			1,470				1,418
Total assets		$	788,154			$	761,324
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Core deposits		$	202,029			$	177,639
Term deposits			246,702				231,024
Total deposits			448,731				408,663
Long-term borrowed funds			254,150				259,228
Short-term borrowed funds			7,044				17,262
Advance payments by borrowers for taxes and insurance			632				619
Other liabilities			3,753				3,410
Total liabilities			714,310				689,182
Stockholders’ equity:
Preferred stock, Series A, $.10 par value per share: 5,000,000 shares authorized, none issued			—				—
Cumulative perpetual preferred stock, Series B, (liquidation preference $1,000 per share) 15,000 shares authorized and issued			14,510				14,455
Common stock, $.10 par value per share; 20,000,000 shares authorized; 4,474,286 and 4,470,941 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively			447				447
Additional paid-in capital			60,223				60,179
Accumulated deficit			(5,493	)			(6,250	)
Accumulated other comprehensive income, net of tax			4,157				3,311
Total stockholders’ equity			73,844				72,142
Total liabilities and stockholders’ equity		$	788,154			$	761,324

The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.

LSB CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
		(In thousands, except share data)
Interest and dividend income:
Loans		$	7,077			$	6,049			$	13,754			$	12,067
Investment securities available for sale			3,003				3,356				6,367				6,408
Federal Home Loan Bank stock			—				102				—				256
Short term interest income			7				53				11				112
Total interest and dividend income			10,087				9,560				20,132				18,843
Interest expense:
Deposits			2,585				2,433				5,245				5,046
Long-term borrowed funds			2,770				2,861				5,544				5,606
Short-term borrowed funds			4				41				43				78
Total interest expense			5,359				5,335				10,832				10,730
Net interest income			4,728				4,225				9,300				8,113
Provision for loan losses			460				400				700				505
Net interest income after provision for loan losses			4,268				3,825				8,600				7,608
Non-interest income:
Deposit account fees			234				267				457				512
Loan servicing fees, net			65				35				116				73
Gains on sales of investments			232				—				458				—
Income on bank-owned life insurance			124				96				249				192
Other income			119				112				225				227
Total non-interest income			774				510				1,505				1,004
Non-interest expense:
Salaries and employee benefits			1,627				1,631				3,370				3,270
Occupancy and equipment			346				321				720				673
Data processing			233				243				473				477
Professional			152				132				337				262
Marketing			117				194				259				246
Other real estate owned			—				44				2				55
Deposit insurance			369				14				760				28
Other			613				403				1,158				792
Total non-interest expense			3,457				2,982				7,079				5,803
Income before income tax expense			1,585				1,353				3,026				2,809
Income tax expense			524				410				1,001				950
Net income			1,061				943				2,025				1,859
Preferred stock dividends and accretion			(215	)			—				(374	)			—
Net income available to common shareholders		$	846			$	943			$	1,651			$	1,859
Average common shares outstanding			4,471,382				4,459,710				4,471,163				4,476,523
Common stock equivalents			1,683				22,093				882				23,551
Average diluted common shares outstanding			4,473,065				4,481,803				4,472,045				4,500,074
Basic earnings per share		$	0.19			$	0.21			$	0.36			$	0.41
Diluted earnings per share		$	0.19			$	0.21			$	0.36			$	0.41

The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.

LSB CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2008 AND THE

SIX MONTHS ENDED JUNE 30, 2009

(UNAUDITED)

																		Accumulated
										Additional								Other				Total
		Preferred				Common				Paid-In				Accumulated				Comprehensive				Stockholders’
		Stock				Stock				Capital				Deficit				Income				Equity
		(In thousands, except share data)
Balance at December 31, 2007		$	—			$	452			$	60,382			$	(934	)		$	398			$	60,298
Net loss			—				—				—				(2,723	)			—				(2,723	)
Other comprehensive income - Unrealized gain on securities available for sale, (tax effect $1,935)			—				—				—				—				2,913				2,913
Total comprehensive income			—				—				—				—				—				190
Stock-based compensation			—				—				156				—				—				156
Issuance of preferred stock, net of discount $549			14,451				—				—				—				—				14,451
Accretion of discount on preferred stock			4				—				—				(4	)			—				—
Fair value of warrants issued with preferred stock			—				—				549				—				—				549
Exercise of stock options and tax benefits (9,500 shares)			—				1				120				—				—				121
Common stock repurchased (64,620 shares)			—				(6	)			(1,028	)											(1,034	)
Dividends declared and paid ($0.58 per share)			—				—				—				(2,589	)			—				(2,589	)
Balance at December 31, 2008			14,455				447				60,179				(6,250	)			3,311				72,142
Net income			—				—				—				2,025				—				2,025
Other comprehensive income -
Unrealized gain on securities available for sale, (tax effect $467)			—				—				—				—				846				846
Total comprehensive income															—				—				2,871
Stock-based compensation			—				—				14				—				—				14
Accretion of discount on preferred stock			55				—				—				(55	)			—				—
Exercise of stock options (3,345 shares)			—				—				30				—				—				30
Dividends paid on Series B preferred stock 5%			—				—				—				(319	)			—				(319	)
Dividends declared and paid ($0.20 per common share)			—				—				—				(894	)			—				(894	)
Balance at June 30, 2009		$	14,510			$	447			$	60,223			$	(5,493	)		$	4,157			$	73,844

The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.

LSB CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		Six months ended June 30,
		2009				2008
		(In thousands)
Cash flows from operating activities:
Net income before preferred stock dividends and accretion		$	2,025			$	1,859
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			700				505
Gains on sales of investments			(458	)			—
Net accretion of investment securities			(393	)			(283	)
Depreciation and amortization of premises and equipment			290				312
Decrease (increase) in accrued interest receivable			34				(37	)
Deferred income tax benefit			(115	)			(312	)
Stock-based compensation			14				32
Increase in cash surrender value of Bank-owned life insurance			(249	)			(192	)
(Increase) decrease in other assets			(52	)			5
Increase in other liabilities			343				93
Net cash provided by operating activities			2,139				1,982
Cash flows from investing activities:
Proceeds from maturities of investment securities available for sale			7,987				750
Proceeds from sales of investment securities available for sale			8,291				—
Purchases of investment securities available for sale			(24,288	)			(51,210	)
Purchases of FHLBB stock			—				(1,498	)
Principal payments of investment securities available for sale			45,816				24,441
Loan originations, net of principal payments			(42,474	)			(52,275	)
Loans purchased			(6,837	)			—
Purchases of premises and equipment			(1,093	)			(1,004	)
Net cash used in investing activities			(12,598	)			(80,796	)
Cash flows from financing activities:
Net increase in deposits			40,068				50,197
Additions to long-term borrowed funds			—				58,000
Payments on long-term borrowed funds			(5,078	)			(19,075	)
Net (decrease) increase in short-term borrowed funds			(10,218	)			3,187
Increase (decrease) in advance payments by borrowers			13				(17	)
Dividends paid to preferred shareholders			(319	)			—
Dividends paid to common shareholders			(894	)			(1,251	)
Proceeds from exercise of stock options			30				27
Common stock repurchased			—				(1,035	)
Net cash provided by financing activities			23,602				90,033
Net increase in cash and cash equivalents			13,143				11,219
Cash and cash equivalents, beginning of period			13,328				7,550
Cash and cash equivalents, end of period		$	26,471			$	18,769
Cash paid during the period for:
Interest on deposits		$	5,257			$	5,037
Interest on borrowed funds			5,654				5,617
Income taxes			1,235				1,494
Supplemental noncash investing and financing activities:
Transfers to other real estate owned			—				692

The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.

LSB CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(UNAUDITED)

1.		BASIS OF PRESENTATION

LSB Corporation (the “Corporation” or the “Company”) is a Massachusetts corporation and the holding company of its wholly-owned subsidiary River Bank (the “Bank”), a state-chartered Massachusetts savings bank organized in 1868. The Corporation was organized by the Bank on July 1, 2001 to be a bank holding company and to acquire all of the capital stock of the Bank.

The Corporation is supervised by the Board of Governors of the Federal Reserve System (“FRB”), and it is also subject to the jurisdiction of the Massachusetts Division of Banks, while the Bank is subject to the regulations of, and periodic examination by, the Federal Deposit Insurance Corporation (“FDIC”) and the Massachusetts Division of Banks. The Bank’s deposits are currently insured by the Deposit Insurance Fund of the FDIC up to $250,000 per depositor, as defined by the FDIC (which level is permanent for certain retirement accounts, including IRAs, but temporary for all other deposit accounts through December 31, 2013), and the Depositors Insurance Fund (“DIF”) of Massachusetts, a private industry-sponsored insurer, for customer deposit amounts in excess of FDIC insurance limits. The Consolidated Financial Statements include the accounts of LSB Corporation and its wholly-owned consolidated subsidiary, River Bank, and the Bank’s wholly-owned subsidiaries, Shawsheen Security Corporation, Shawsheen Security Corporation II, and Spruce Wood Realty Trust. All inter-company balances and transactions have been eliminated in consolidation. The Company has one reportable operating segment. In the opinion of management, the accompanying Consolidated Financial Statements reflect all necessary adjustments consisting of normal recurring adjustments for fair presentation. Certain amounts in prior periods may be re-classified to conform to the current presentation.

The Corporation’s Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, management is required to make estimates and assumptions that affect amounts reported in the balance sheets and statements of income. Actual results could differ significantly from those estimates and judgments. Material estimates that are particularly susceptible to change relate to the allowance for loan losses, income taxes and impairment of investment securities.

The interim results of consolidated income are not necessarily indicative of the results for any future interim period or for the entire year. These interim Consolidated Financial Statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the annual Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2008 filed with the Securities and Exchange Commission.

2.		INVESTMENTS

The following table reflects the components and carrying values of the investment securities portfolio at June 30, 2009, and December 31, 2008:

		6/30/09																12/31/08
		Amortized				Unrealized								Fair				Amortized				Unrealized								Fair
		Cost				Gains				Losses				Value				Cost				Gains				Losses				Value
														(In thousands)
U.S. Treasury obligations		$	5,567			$	227			$	—			$	5,794			$	5,578			$	426			$	—			$	6,004
Government-sponsored enterprise obligations			14,215				140				(12	)			14,343				15,485				240				(3	)			15,722
Mortgage-backed securities			167,192				6,712				(37	)			173,867				181,367				5,919				(80	)			187,206
Collateralized mortgage obligations			27,192				489				(69	)			27,612				46,725				379				(45	)			47,059
Corporate obligations			4,469				6				(236	)			4,239				6,433				—				(750	)			5,683
Mutual funds			1,000				—				(35	)			965				1,000				—				(42	)			958
Equity securities			2,468				—				(368	)			2,100				2,469				—				(540	)			1,929
Total investment securities available for sale		$	222,103			$	7,574			$	(757	)		$	228,920			$	259,057			$	6,964			$	(1,460	)		$	264,561

The net unrealized gains on securities available for sale as of June 30, 2009 totaled $6.8 million, or $4.2 million net of taxes. The unrealized gains are attributable to changes in interest rates. There are two corporate debt obligations and one preferred equity security on the Bank’s securities watch list due to their current credit ratings by external, independent rating agencies. Management believes that the Company will collect all amounts due on these investments in accordance with their contractual terms. The amortized cost of these investments totaled $6.5 million as of June 30, 2009, with an unrealized loss of $604,000, or 9.2% of amortized cost. These watch list securities recovered a significant portion of the unrealized losses during the second quarter of 2009 due to the improved outlook of the three underlying entities. If a decline in value is determined to be other-than-temporary, a charge to earnings would be recognized at that time. Management is monitoring these securities on a monthly basis, does not intend to sell the securities, and it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost. Therefore, management does not consider these investments to be other-than-temporarily impaired at June 30, 2009. The remainder of the unrealized losses resulted from changes in interest rates and are not material as of June 30, 2009.

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2009.

		Less Than 12 Months								12 Months or Longer								Total
						Unrealized								Unrealized								Unrealized
			Fair Value			Losses					Fair Value			Losses					Fair Value			Losses
(In thousands)
Government-sponsored enterprise obligations		$	6,002			$	(12	)		$	—			$	—			$	6,002			$	(12	)
Mortgage-backed securities			2,053				(4	)			1,926				(33	)			3,979				(37	)
Collateralized mortgage Obligations			2,592				(60	)			1,003				(9	)			3,595				(69	)
Corporate obligations			—				—				2,246				(236	)			2,246				(236	)
Mutual funds			—				—				965				(35	)			965				(35	)
Equity securities			—				—				1,672				(368	)			1,672				(368	)
Total temporarily impaired securities		$	10,647			$	(76	)		$	7,812			$	(681	)		$	18,459			$	(757	)

The Company realized gains of $458,000 on the sale of $8.3 million of investments available for sale in the first six months of 2009, including $8,000 from the sale of a debt security that was on the Company’s watch list as of December 31, 2008.

The following table is a summary of the contractual maturities of debt securities available for sale at June 30, 2009. These amounts exclude mutual funds and equity securities, which have no contractual maturities. Mortgage-backed securities consist of FHLMC, FNMA, and GNMA certificates. Mortgage-backed securities and collateralized mortgage obligations are shown at their final contractual maturity date but are expected to have shorter average lives.

		Amortized Cost				Fair Value
		(In thousands)
U.S. Treasury and government-sponsored enterprise obligations:
Within 1 year		$	501			$	502
2 to 5 years			19,281				19,635
Subtotal			19,782				20,137
Mortgage-backed securities			167,192				173,867
Collateralized mortgage obligations:
2 to 5 years			78				78
After 5 years			27,114				27,534
Subtotal			27,192				27,612
Corporate obligations:
Within 1 year			4,469				4,239
Total debt securities available for sale		$	218,635			$	225,855

3.		CONTINGENCIES

The Bank is involved in various legal proceedings incidental to its business. During the quarter ended June 30, 2009, no new legal proceeding was filed and no material development in any pending legal proceeding occurred that the Company expects will have a material adverse effect on its financial condition or operating results.

4.		FAIR VALUES OF ASSETS AND LIABILITIES

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements”, which provides a framework for measuring fair value under generally accepted accounting principles. Effective January 1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”, which delayed the effective date of SFAS 157 for non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008, and did not have a material impact on the Company’s Consolidated Financial Statements.

In accordance with SFAS 157, the Corporation groups its assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Assets measured at fair value on a recurring basis at June 30, 2009 and December 31, 2008, are summarized below. There are no liabilities measured at fair value.

		Quoted Prices in
		Active Markets								Significant
		For Identical				Significant Other				Unobservable
		Assets				Observable Inputs				Inputs				Total
		Level 1				Level 2				Level 3				Fair Value
		(In thousands)
June 30, 2009:
Investment securities available for sale		$	7,466			$	221,029			$	425			$	228,920
December 31, 2008:
Investment securities available for sale		$	7,504			$	256,632			$	425			$	264,561

The table below presents the changes in Level 3 assets measured at fair value on a recurring basis:

		Six months ended June 30,
		2009				2008
		(In thousands)
Balance as of beginning of period		$	425			$	425
Total realized/unrealized gains (losses) included in net income			—				—
Balance as of end of period		$	425			$	425
Change in unrealized gains/(losses) relating to instruments still held at the reporting date		$	—			$	—

The investments carried under Level 3 assumptions are carried at par value since all redemptions have been made at par value and represent non-marketable securities.

Assets measured at fair value on a non-recurring basis

The Company may be required, from time to time, to measure certain other assets and liabilities on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets at June 30, 2009.

		Level 1				Level 2				Level 3				Total Losses
						(In thousands)
At or for the six months ended June 30, 2009:
Impaired loans		$	—			$	—			$	1,600			$	(351	)
Other real estate owned			—				—				120				—
		$	—			$	—			$	1,720			$	(351	)

The amount of impaired loans represents their carrying value (loan balance net of related allocated reserves), for which adjustments are based on the appraised value of the collateral. The amount of other real estate owned represents a property acquired through foreclosure carried at estimated fair value (based on appraised value) less estimated costs to sell. Appraised values are typically based on a blend of (a) an income approach using unobservable cash flows to measure fair value, and (b) a market approach using observable market comparables. These appraised values may be discounted based on management’s historical knowledge, expertise or changes in market conditions from the time of valuation. For these reasons, impaired loans and other real estate owned are categorized as Level 3 assets.

The consolidated balance sheet reports financial assets and financial liabilities at their carrying value, in some instances carrying value and fair value are the same amount, as presented in the following table.

The estimated fair values of the Company’s financial instruments at June 30, 2009, and December 31, 2008 follow:

		June 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
						(In thousands)
Financial assets:
Cash and due from banks		$	8,555			$	8,555			$	6,859			$	6,859
Short-term investments			17,916				17,916				6,469				6,469
Investment securities available for sale			228,920				228,920				264,561				264,561
Federal Home Loan Bank stock			11,825				11,825				11,825				11,825
Accrued interest receivable			2,686				2,686				2,720				2,720
Loans, net			495,347				489,602				446,736				446,609
Financial liabilities:
Deposits			448,731				453,584				408,663				414,082
Borrowed funds			261,194				278,247				276,490				297,385
Mortgagors’ escrow accounts			632				632				619				619
Accrued interest payable			1,027				1,027				1,106				1,106

The fair values for cash and short-term investments approximate their carrying amounts because of the short maturity of these instruments. The fair values for investment securities available for sale are based on quoted bid prices received from securities dealers or third-party pricing services. The fair value of stock in the Federal Home Loan Bank of Boston equals its carrying amount as reported in the balance sheet because this stock is redeemable only at par by the FHLBB. The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. These securities include marketable equity securities and U.S. Treasury obligations. Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and net issue data. These securities include government-sponsored enterprise obligations, mortgage-backed securities, collateralized mortgage obligations and corporate obligations. Securities measured at fair value in Level 3 include

non-marketable equity securities that are carried at par value based on the redemptive provisions of the issuers. Loans are estimated by discounting contractual cash flows adjusted for prepayment estimates and using discount rates approximately equal to current market rates on loans with similar characteristics and maturities. The incremental credit risk for non-performing loans has been considered in the determination of the fair value of the loans. The fair values of demand deposit accounts, NOW accounts, savings accounts and money market accounts are equal to their respective carrying amounts since they are equal to the amounts payable on demand at the reporting date. Certificates of deposit, Federal Home Loan Bank advances, and wholesale repurchase agreements are based on the discounted value of contractual cash flows. The discount rates used are representative of approximate market rates currently offered on instruments with similar remaining maturities. The fair values of short-term borrowed funds, accrued interest receivable, mortgagors’ escrow accounts and accrued interest payable approximate their carrying amounts because of the short-term nature of these financial instruments. The majority of the Company’s commitments for unused lines and outstanding standby letters of credit and unadvanced portions of loans are at floating rates and, therefore, there is no fair value adjustment.

5. RECENT ACCOUNTING PRONOUNCEMENTS

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities and is intended to enhance the current disclosure framework in SFAS 133. The Statement requires that objectives for using derivative instruments be disclosed in terms of the underlying risk and accounting designation and to improve disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial position, financial performance and cash flows of the sellers of credit derivatives. This Statement is effective for fiscal years and interim periods beginning after November 15, 2008 and did not have a material impact on the Company’s Consolidated Financial Statements.

In May 2008, the FASB issued Statement No. 163, “Accounting for Financial Guarantee Insurance Contracts-an Interpretation of FASB Statement No. 60” (“SFAS 163”). SFAS 163 is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, this Statement does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). This Statement is effective for fiscal years beginning after December 15, 2008 and did not have a material impact on the Company’s Consolidated Financial Statements.

In May 2009, the FASB issued Statement No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 was issued to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Statement does not result in significant changes in current recognition or disclosure standards, but requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 also clarifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. SFAS 165 is effective for interim and annual periods ending after June 15, 2009 and did not have a material impact on the Company but may result in additional financial statement disclosures. For purposes of this accounting standard, the Company has evaluated subsequent events through August 12, 2009, the date these Consolidated Financial Statements were issued.

In June 2009, the FASB issued Statement No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (“SFAS 166”) and Statement No. 167 “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). The two standards were issued to improve and simplify accounting standards for special-purpose entities, to improve the comparability and consistency in accounting for transferred financial assets, and to enhance disclosure about the transferor’s obligation or continuing involvement in the transferred financial assets. SFAS 166 and SFAS 167 are effective for calendar year companies on January 1, 2010. The adoption of SFAS 166 and SFAS 167 are not expected to have a material impact on the Company.

In June 2009, the FASB approved the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative nongovernmental U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The Codification does not change current U.S. GAAP but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be

considered nonauthoritative. The Codification is effective for interim and annual periods ending after September 15, 2009. The Codification is effective for the Company during its interim period ending September 30, 2009 and is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In April 2009, the FASB issued three related Staff Positions to (1) clarify the guidance in Statement No. 157 for fair value measurement in inactive markets, (2) modify Statement No. 115 for recognition and measurement of other-than-temporary impairments of debt securities and require additional disclosures for interim and annual periods and (3) require companies to disclose the fair values of financial instruments in accordance with Statement No. 107 in interim periods. These Staff Positions are effective for interim and annual periods ending after June 15, 2009. These Staff Positions did not have a material impact on the Company’s Consolidated Financial Statements.

In April 2009, the FASB issued a Staff Position “FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arises from Contingencies”. This Staff Position clarified the guidance in Statement No. 141(R) for business combinations regarding its initial recognition and measurement, subsequent measurement and accounting, and enhanced disclosure of assets acquired and liabilities assumed. The final Staff Position was effective for business combinations with an acquisition date and annual reporting periods beginning on or after December 15, 2008. This Staff Position did not have a material impact on the Company.

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 third party debit card fraud coupled with increases in recurring costs such as printing costs, telephone expenses and office supplies, primarily in conjunction with the Derry, New Hampshire branch opening.

Income Taxes:

The Company reported an income tax expense of $524,000 for the three months ended June 30, 2009 for an effective income tax rate of 33.1%. This compares to an income tax expense of $410,000 for the three months ended June 30, 2008 or an effective income tax rate of 30.3%. The modest increase in the effective tax rate in the second quarter of 2009 was due primarily to the adjustments in the second quarter of 2008 effective tax rate resulting from additional dividend income and tax-exempt income as a percentage of total consolidated income before income tax expense. Subsidiaries within the consolidated group pay various state income tax rates, the mix of taxable earnings within the group can change and, beginning in 2009, the taxable losses of one subsidiary can be used to offset taxable income in another subsidiary in the consolidated group.

The following table presents the Company’s average balance sheet, net interest income and average interest rates for the three months ended June 30, 2009 and 2008. Average loans include non-performing loans.

		Three months ended												Three months ended
		6/30/09												6/30/08
										Average												Average
		Average								Interest				Average								Interest
		Balance				Interest				Rate				Balance				Interest				Rate
		(Dollars in thousands)
A ssets
Investment securities:
Short-term investments		$	17,269			$	7				0.16	%		$	11,547			$	53				1.85	%
U. S. Treasury and government-sponsored enterprise obligations			21,138				179				3.40				24,997				252				4.05
Corporate and other investment securities			19,357				125				2.59				30,944				447				5.81
Collateralized mortgage obligations and mortgage-backed securities			208,114				2,699				5.20				214,700				2,759				5.17
Total investment securities			265,878				3,010				4.54				282,188				3,511				5.00
Loans:
Residential real estate			122,415				1,680				5.50				93,086				1,306				5.64
Home equity			24,558				248				4.05				22,564				291				5.19
Consumer			634				11				6.96				951				16				6.77
Total retail loans			147,607				1,939				5.27				116,601				1,613				5.56
Construction and land			75,308				1,014				5.40				64,350				999				6.24
Commercial real estate			234,589				3,752				6.42				180,282				3,046				6.80
Commercial			30,044				372				4.97				25,822				391				6.09
Total corporate loans			339,941				5,138				6.06				270,454				4,436				6.60
Total loans			487,548				7,077				5.82				387,055				6,049				6.29
Total interest-earning assets			753,426				10,087				5.37	%			669,243				9,560				5.75	%
Allowance for loan losses			(6,232	)											(4,915	)
Other assets			30,861												26,551
Total assets		$	778,055											$	690,879
L iabilities and Stockholders’ Equity
Deposits:
NOW and super NOW accounts		$	18,590			$	9				0.19	%		$	18,175			$	9				0.20	%
Regular savings accounts			67,559				221				1.31				37,513				105				1.13
Money market accounts			76,803				281				1.47				77,978				412				2.13
Certificates of deposit and escrow			245,892				2,074				3.38				185,723				1,907				4.13
Total interest-bearing deposits			408,844				2,585				2.54				319,389				2,433				3.06
Borrowed funds:
Long-term borrowed funds			256,405				2,770				4.33				269,173				2,861				4.27
Short-term borrowed funds			6,161				4				0.26				9,703				41				1.70
Total borrowed funds			262,566				2,774				4.24				278,876				2,902				4.19
Total interest-bearing liabilities			671,410				5,359				3.20	%			598,265				5,335				3.59	%
Non-interest-bearing deposits			30,515												29,185
Other liabilities			3,013												2,840
Total liabilities			704,938												630,290
Stockholders’ equity			73,117												60,589
Total liabilities and stockholders’ equity		$	778,055											$	690,879
Net interest rate spread											2.17	%											2.16	%
Net interest income						$	4,728											$	4,225
Net interest margin on average earning assets											2.52	%											2.54	%