LSBX Lsb Corp (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

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 September 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 (State or other jurisdiction of incorporation or organization)		04-3557612 (I.R.S. Employer Identification Number)
30 Massachusetts Avenue, North Andover, MA (Address of principal executive offices)		01845 (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 a 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 November 6, 2009
Common Stock, par value $.10 per share		4,499,936 shares

 

 

LSB CORPORATION AND SUBSIDIARY

INDEX

				Page:
		PART I — FINANCIAL INFORMATION
ITEM 1		FINANCIAL STATEMENTS
		Consolidated Balance Sheets			3
		Consolidated Statements of Operations			4
		Consolidated Statements of Changes in Stockholders’ Equity			5
		Consolidated Statements of Cash Flows			6
		Notes to Consolidated Financial Statements			7-11
ITEM 2		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			12-24
ITEM 3		QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK			25
ITEM 4T		CONTROLS AND PROCEDURES			25
		PART II — OTHER INFORMATION
ITEM 1		LEGAL PROCEEDINGS			25
ITEM 1A		RISK FACTORS			25
ITEM 2		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			25-26
ITEM 3		DEFAULTS UPON SENIOR SECURITIES			26
ITEM 4		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			26
ITEM 5		OTHER INFORMATION			26
ITEM 6		EXHIBITS			26
SIGNATURES					28
EXHIBIT INDEX					29
EX-31.1 Section 302 Certification of Chief Executive Officer
EX-31.2 Section 302 Certification of Chief Financial Officer
EX-32.1 Section 906 Certification of Chief Executive Officer
EX-32.2 Section 906 Certification of Chief Financial Officer

PART 1 — FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

		September 30,				December 31,
		2009				2008
		(In thousands, except share data)
ASSETS
Assets:
Cash and due from banks		$	8,000			$	6,859
Federal funds sold			10,218				6,469
Total cash and cash equivalents			18,218				13,328
Investment securities available for sale (amortized cost of $231,635 in 2009 and $259,057 in 2008)			240,341				264,561
Federal Home Loan Bank stock, at cost			11,825				11,825
Loans, net of allowance for loan losses			511,806				446,736
Premises and equipment			6,453				5,528
Accrued interest receivable			2,695				2,720
Deferred income tax asset, net			3,087				4,447
Bank-owned life insurance			11,005				10,641
Other real estate owned			120				120
Other assets			1,403				1,418
Total assets		$	806,953			$	761,324
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Core deposits		$	232,255			$	177,639
Term deposits			239,096				231,024
Total deposits			471,351				408,663
Long-term borrowed funds			249,111				259,228
Short-term borrowed funds			5,704				17,262
Mortgagors’ escrow accounts			886				619
Other liabilities			3,541				3,410
Total liabilities			730,593				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			14,537				14,455
Common stock, $.10 par value per share; 20,000,000 shares authorized; 4,499,936 and 4,470,941 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively			450				447
Additional paid-in capital			60,460				60,179
Accumulated deficit			(4,372	)			(6,250	)
Accumulated other comprehensive income, net of tax			5,285				3,311
Total stockholders’ equity			76,360				72,142
Total liabilities and stockholders’ equity		$	806,953			$	761,324

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

LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands, except share data)
Interest and dividend income:
Loans		$	7,462			$	6,570			$	21,216			$	18,636
Investment securities available for sale			2,795				3,212				9,162				9,621
Federal Home Loan Bank stock			—				88				—				344
Short-term interest income			11				55				22				167
Total interest and dividend income			10,268				9,925				30,400				28,768
Interest expense:
Deposits			2,501				2,521				7,746				7,566
Long-term borrowed funds			2,721				2,911				8,265				8,519
Short-term borrowed funds			4				50				47				127
Total interest expense			5,226				5,482				16,058				16,212
Net interest income			5,042				4,443				14,342				12,556
Provision for loan losses			400				330				1,100				835
Net interest income after provision for loan losses			4,642				4,113				13,242				11,721
Non-interest income (loss):
Impairment write-downs on securities			—				(9,383	)			—				(9,383	)
Deposit account fees			253				269				710				782
Loan servicing fees, net			34				27				150				100
Gains on sales of investments			572				—				1,030				—
Income on bank-owned life insurance			115				124				364				317
Other income			122				115				347				341
Total non-interest income (loss)			1,096				(8,848	)			2,601				(7,843	)
Non-interest expense:
Salaries and employee benefits			1,643				1,692				5,013				4,963
Occupancy and equipment			357				312				1,077				985
Data processing			228				228				702				705
Professional			113				160				450				422
Marketing			116				98				374				344
Other real estate owned			4				60				6				116
Deposit insurance			262				18				1,022				47
Other			544				417				1,702				1,206
Total non-interest expense			3,267				2,985				10,346				8,788
Income (loss) before income tax expense			2,471				(7,720	)			5,497				(4,910	)
Income tax expense			910				530				1,911				1,481
Net income (loss)			1,561				(8,250	)			3,586				(6,391	)
Preferred stock dividends and accretion			(215	)			—				(588	)			—
Net income (loss) available to common shareholders		$	1,346			$	(8,250	)		$	2,998			$	(6,391	)
Average common shares outstanding			4,495,356				4,456,821				4,479,316				4,469,884
Common stock equivalents			1,324				12,661				1,031				19,881
Average diluted common shares outstanding			4,496,680				4,469,482				4,480,347				4,489,765
Basic earnings (loss) per share		$	0.30			$	(1.85	)		$	0.66			$	(1.43	)
Diluted earnings (loss) per share		$	0.30			$	(1.85	)		$	0.66			$	(1.42	)

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
NINE MONTHS ENDED SEPTEMBER 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			—				—				—				3,586				—				3,586
Other comprehensive income — Unrealized gain on securities available for sale, (tax effect $1,228)			—				—				—				—				1,974				1,974
Total comprehensive income															—				—				5,560
Stock-based compensation			—				—				19				—				—				19
Accretion of discount on preferred stock			82				—				—				(82	)			—				—
Exercise of stock options (28,995 shares)			—				3				262				—				—				265
Dividends paid on Series B preferred stock 5%			—				—				—				(507	)			—				(507	)
Dividends declared and paid ($0.25 per common share)			—				—				—				(1,119	)			—				(1,119	)
Balance at September 30, 2009		$	14,537			$	450			$	60,460			$	(4,372	)		$	5,285			$	76,360

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

LSB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		Nine months ended September 30,
		2009				2008
		(In thousands)
Cash flows from operating activities:
Net income (loss)		$	3,586			$	(6,391	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses			1,100				835
Impairment write-down on securities			—				9,383
Net losses on sales of other real estate owned			—				52
Gains on sales of investments			(1,030	)			—
Net accretion of investment securities			(528	)			(386	)
Depreciation and amortization of premises and equipment			453				472
Decrease (increase) in accrued interest receivable			25				(189	)
Deferred income tax provision (benefit)			132				(172	)
Stock-based compensation			19				47
Income on Bank-owned life insurance			(364	)			(317	)
Decrease (increase) in other assets			15				(40	)
Increase in other liabilities			131				806
Net cash provided by operating activities			3,539				4,100
Cash flows from investing activities:
Proceeds from maturities of investment securities available for sale			20,367				8,246
Proceeds from sales of investment securities available for sale			19,348				—
Purchases of investment securities available for sale			(74,902	)			(62,841	)
Purchases of FHLBB stock			—				(1,602	)
Principal payments of investment securities available for sale			64,167				33,984
Loan originations, net of principal payments			(59,333	)			(80,470	)
Proceeds from sales of other real estate owned			—				490
Loans purchased			(6,837	)			—
Purchases of premises and equipment			(1,378	)			(1,897	)
Net cash used in investing activities			(38,568	)			(104,090	)
Cash flows from financing activities:
Net increase in deposits			62,688				78,278
Additions to long-term borrowed funds			—				63,000
Payments on long-term borrowed funds			(10,117	)			(27,111	)
Net (decrease) increase in short-term borrowed funds			(11,558	)			1,563
Increase in advance payments by borrowers			267				144
Dividends paid to preferred shareholders			(507	)			—
Dividends paid to common shareholders			(1,119	)			(1,920	)
Proceeds from exercise of stock options			265				117
Common stock repurchased			—				(1,035	)
Net cash provided by financing activities			39,919				113,036
Net increase in cash and cash equivalents			4,890				13,046
Cash and cash equivalents, beginning of period			13,328				7,550
Cash and cash equivalents, end of period		$	18,218			$	20,596
Cash paid during the period for:
Interest on deposits		$	7,758			$	7,547
Interest on borrowed funds			8,399				8,593
Income taxes			1,791				1,775
Supplemental noncash investing and financing activities:
Transfers to other real estate owned			—				1,481

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

LSB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2009, and December 31, 2008:

		9/30/09																12/31/08
		Amortized				Unrealized								Fair				Amortized				Unrealized								Fair
		Cost				Gains				Losses				Value				Cost				Gains				Losses				Value
		(In thousands)
U.S. Treasury obligations		$	5,561			$	275			$	—			$	5,836			$	5,578			$	426			$	—			$	6,004
Government-sponsored enterprise obligations			24,508				220				(3	)			24,725				15,485				240				(3	)			15,722
Mortgage-backed securities			155,480				7,960				(2	)			163,438				181,367				5,919				(80	)			187,206
Collateralized mortgage obligations			40,132				654				—				40,786				46,725				379				(45	)			47,059
Corporate obligations			2,486				—				(130	)			2,356				6,433				—				(750	)			5,683
Mutual funds			1,000				—				(20	)			980				1,000				—				(42	)			958
Equity securities			2,468				—				(248	)			2,220				2,469				—				(540	)			1,929
Total investment securities available for sale		$	231,635			$	9,109			$	(403	)		$	240,341			$	259,057			$	6,964			$	(1,460	)		$	264,561

The net unrealized gains on securities available for sale as of September 30, 2009 totaled $8.7 million, or $5.3 million net of taxes. The unrealized gains are attributable to changes in interest rates. One corporate debt obligation and one preferred equity security are 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 $4.5 million as of September 30, 2009, with an unrealized loss of $378,000, or 8.4% of amortized cost. These watch list securities recovered a significant portion of the unrealized losses during the third quarter of 2009 due to the improved outlook of the two issuers. 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 September 30, 2009. The remainder of the unrealized losses resulted from changes in interest rates and are not material as of September 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 September 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		$	4,997			$	(3	)		$	—			$	—			$	4,997			$	(3	)
Mortgage-backed securities			—				—				1,696				(2	)			1,696				(2	)
Collateralized mortgage obligations			—				—				—				—				—				—
Corporate obligations			—				—				2,356				(130	)			2,356				(130	)
Mutual funds			—				—				980				(20	)			980				(20	)
Equity securities			—				—				1,792				(248	)			1,792				(248	)
Total temporarily impaired securities		$	4,997			$	(3	)		$	6,824			$	(400	)		$	11,821			$	(403	)

The Company realized gains of $1.0 million on the sale of $19.3 million of investments available for sale in the first nine months of 2009, including $6,000 in net gains from the sale of two debt securities that were 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 September 30, 2009. These amounts exclude mutual funds and equity securities, which have no contractual maturities. The mortgage-backed securities and collateralized mortgage obligations consist of FHLMC, FNMA, SBA, and GNMA certificates, except for $1.6 million in private label securities. 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		$	499			$	500
2 to 5 years			29,570				30,061
Subtotal			30,069				30,561
Mortgage-backed securities			155,480				163,438
Collateralized mortgage obligations:
2 to 5 years			76				84
After 5 years			40,056				40,702
Subtotal			40,132				40,786
Corporate obligations:
Within 1 year			2,486				2,356
Total debt securities available for sale		$	228,167			$	237,141

3. CONTINGENCIES

The Bank is involved in various legal proceedings incidental to its business. During the quarter ended September 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

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

		September 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
		(In thousands)
Financial assets:
Cash and due from banks		$	8,000			$	8,000			$	6,859			$	6,859
Short-term investments			10,218				10,218				6,469				6,469
Investment securities available for sale			240,341				240,341				264,561				264,561
Federal Home Loan Bank stock			11,825				11,825				11,825				11,825
Accrued interest receivable			2,695				2,695				2,720				2,720
Loans, net			511,806				517,888				446,736				446,609
Financial liabilities:
Core deposits			232,255				232,255				177,639				177,639
Certificates of deposit			239,096				243,827				231,024				236,443
Borrowed funds			254,815				273,566				276,490				297,385
Mortgagors’ escrow accounts			886				886				619				619
Accrued interest payable			1,006				1,006				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 because 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.

In accordance with the fair value measurements, the Company 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

Assets measured at fair value on a recurring basis at September 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)
September 30, 2009:
Investment securities available for sale		$	7,628			$	232,288			$	425			$	240,341
December 31, 2008:
Investment securities available for sale		$	7,504			$	256,632			$	425			$	264,561

There were no changes in Level 3 assets measured at fair value on a recurring basis during the nine months ended September 30, 2009 or 2008.

The investments carried under Level 3 assumptions are carried at par value because 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 September 30, 2009.

		Level 1				Level 2				Level 3				Total Losses
		(In thousands)
At or for the nine months ended September 30, 2009:
Impaired loans		$	—			$	—			$	4,587			$	(399	)
Other real estate owned			—				—				120				—
		$	—			$	—			$	4,707			$	(399	)

Impaired loan balances in the above table represent collateral dependent loans where management has estimated the credit loss by comparing the loans’ carrying values against the expected realizable fair 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.

5. RECENT ACCOUNTING PRONOUNCEMENTS

In April 2009, the FASB issued two accounting pronouncements relating to interim disclosures about fair value of financial instruments, one pronouncement related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly, and two pronouncements relating to the recognition and presentation of other-than-temporary impairments. These pronouncements provide additional guidance for estimating fair value and recognition of other-than-temporary

impairment as well as additional disclosures. These pronouncements were adopted for the quarter ended June 30, 2009 and did not have a material impact on the Company’s Consolidated Financial Statements.

In May 2009, the FASB issued an accounting pronouncement which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Company’s adoption of this pronouncement for the quarter ended June 30, 2009 did not have a material impact on the Company’s Consolidated Financial Statements. For the purposes of this accounting pronouncement, the Company has evaluated subsequent events through November 12, 2009, the date Consolidated Financial Statements were issued.

In June 2009, the FASB amended its guidance surrounding the accounting for transfers and servicing of financial assets and extinguishments of liabilities and will not require more information about transfers of financial assets, including securitization transactions, where entities have continuing exposure to the risks related to transferred financial assets. This guidance eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. This guidance will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Management does not believe this guidance will have a material impact on the Company’s Consolidated Financial Statements.

In June 2009, the FASB amended its guidance on the consolidation of variable interest entities and changed how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. This guidance will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Management does not believe this guidance will have a material impact on the Company’s Consolidated Financial Statements.

In August 2009, the FASB amended its guidance on fair value measurements and disclosures. This guidance provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update. This guidance was adopted by the Company for the quarter ended September 30, 2009 and did not have an impact on the Company’s Consolidated Financial Statements.

In September 2009, the FASB amended its guidance on fair value measurements and disclosures relating to investments in certain entities that calculate net asset value per share (or its equivalent). This guidance permits a reporting entity to measure the fair value of certain investments on the basis of the net asset value per share of the investment (or its equivalent). This guidance also requires new disclosures, by major category of investments, about the attributes of investments within the scope of this guidance. This guidance is effective for interim and annual periods ending after December 15, 2009. Early adoption is permitted for earlier interim and annual periods that have not been issued. Adoption of this guidance is not expected go have a material impact on the Company’s Consolidated Financial Statements.

6. SUBSEQUENT EVENTS

On October 20, 2009, the registrant entered into a subordinated debt agreement between River Bank (as borrower) and Commerce Bank & Trust Company (as lender) whereby River Bank borrows $6.0 million under an unsecured term subordinated loan with a final maturity on October 20, 2016. The subordinated debt agreement calls for a fixed interest rate of 8.5% and equal annual principal payments of $1.2 million commencing on the third anniversary.

River Bank’s obligations under the subordinated debt agreement, including the principal, premium, if any, and interest, are subordinate and junior in right of payment to River Bank’s obligations to its depositors, and its other obligations to its general and secured creditors, except such other creditors holding obligations of River Bank ranking on a parity with or junior to the subordinated note, if any.

The Company expects that the entire amount of the subordinated debt will be included as part of River Bank’s Tier 2 capital as of December 31, 2009.

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 third quarter 2009 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 third quarter of 2008. The largest factor in the 2009 quarter’s results was the increase in the FDIC deposit insurance premiums from $18,000 for the third quarter of 2008 to $262,000 for the third quarter of 2009 which was more than offset by gains on sales of investments in the third quarter of 2009 totaling $572,000. The largest factor in the quarterly results for 2008 was the other-than-temporary impairment write-downs of investments in Fannie Mae and Freddie Mac preferred stock, the value of which was adversely affected by events surrounding the September 7, 2008 appointment of a conservator for Fannie Mae and Freddie Mac. This non-cash charge reduced earnings by $(9.4) million, or $(2.10) per diluted share, for the quarter ended September 30, 2008.

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 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 September 30, 2009 and 2008, respectively, due to the increase in the number of loans processed. Income on bank-owned life insurance decreased $9,000 to $115,000 for the three months ended September 30, 2009 from $124,000 for the same period in 2008 based on lower investment income earned by the underlying insurance company. Other income increased to $122,000 from $115,000 for the three months ended September 30, 2009 and 2008, respectively.

Non-Interest Expense:

Non-interest expenses increased $282,000, or 9.4%, during the third quarter of 2009 to $3.3 million versus $3.0 million for the same period of 2008 primarily resulting from the increase of $244,000 in FDIC deposit insurance premiums. These FDIC deposit insurance premiums totaled $262,000 for the three months ended September 30, 2009 compared to $18,000 for the same period of 2008. Salary and employee benefits totaled $1.6 million and $1.7 million in the third quarter of 2009 and 2008, respectively. Occupancy and equipment expense increased $45,000, or 14.4%, to $357,000 in the third quarter of 2009 from $312,000 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 Hampshire. Data processing expense remained stable at $228,000 in the third quarters of 2009 and 2008, respectively. Professional fees decreased $47,000, or 29.4%, to $113,000 in the third quarter of 2009 from $160,000 in the third quarter of 2008 due primarily to a decrease in legal and consulting fees. Marketing expense increased $18,000, or 18.4%, due to increased direct mail solicitations. OREO expense totaled $4,000 in the three months ended September 30, 2009 compared to $60,000 in the same period of 2008. Other expenses increased $127,000, or 30.5%, to $544,000 in the third quarter of 2009 from $417,000 in the same period of 2008 due primarily to an increase in loan workout expenses associated with one nonaccrual loan 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 $910,000 for the three months ended September 30, 2009 for an effective income tax rate of 36.8%. This compares to an income tax expense of $530,000 for the three months ended September 30, 2008 for an effective income tax rate of 31.9%, excluding the non-cash impairment write-down. The Company recognized the tax benefit of $3.3 million on the Fannie Mae and Freddie Mac preferred stock impairment charges in the fourth quarter of 2008. The modest increase in the effective tax rate in the third quarter of 2009 was due primarily to the adjustments in the third 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 September 30, 2009 and 2008. Average loans include non-performing loans.

		Three months ended												Three months ended
		9/30/09												9/30/08
										Average												Average
		Average								Interest				Average								Interest
		Balance				Interest				Rate				Balance				Interest				Rate
		(Dollars in thousands)
Assets
Investment securities:
Short-term investments		$	18,057			$	11				0.24	%		$	12,094			$	55				1.81	%
U. S. Treasury and government- sponsored enterprise obligations			26,640				148				2.20				23,057				229				3.95
Corporate and other investment securities			18,983				107				2.24				28,453				338				4.73
Collateralized mortgage obligations and mortgage- backed securities			199,933				2,540				5.04				210,005				2,733				5.18
Total investment securities			263,613				2,806				4.22				273,609				3,355				4.88
Loans:
Residential real estate			127,655				1,735				5.39				101,850				1,431				5.59
Home equity			25,611				257				3.98				22,922				295				5.12
Consumer			636				11				6.86				1,100				16				5.79
Total retail loans			153,902				2,003				5.16				125,872				1,742				5.51
Construction and land			79,821				1,170				5.82				68,585				1,062				6.16
Commercial real estate			244,662				3,937				6.38				199,705				3,356				6.69
Commercial			29,407				352				4.75				26,792				410				6.09
Total corporate loans			353,890				5,459				6.12				295,082				4,828				6.51
Total loans			507,792				7,462				5.83				420,954				6,570				6.21
Total interest-earning assets			771,405				10,268				5.28	%			694,563				9,925				5.68	%
Allowance for loan losses			(6,454	)											(5,328	)
Other assets			30,855												29,482
Total assets		$	795,806											$	718,717
Liabilities and Stockholders’ Equity
Deposits:
NOW and super NOW accounts		$	18,482			$	9				0.19	%		$	18,402			$	9				0.19	%
Regular savings accounts			80,411				244				1.20				46,605				183				1.56
Money market accounts			86,088				277				1.28				87,856				497				2.25
Certificates of deposit and escrow			244,543				1,971				3.20				200,742				1,832				3.63
Total interest-bearing deposits			429,524				2,501				2.31				353,605				2,521				2.84
Borrowed funds:
Long-term borrowed funds			250,309				2,721				4.31				265,409				2,911				4.36
Short-term borrowed funds			5,819				4				0.27				10,109				50				1.97
Total borrowed funds			256,128				2,725				4.22				275,518				2,961				4.28
Total interest-bearing liabilities			685,652				5,226				3.02	%			629,123				5,482				3.47	%
Non-interest-bearing deposits			32,383												29,294
Other liabilities			3,211												2,804
Total liabilities			721,246												661,221
Stockholders’ equity			74,560												57,496
Total liabilities and stockholders’ equity		$	795,806											$	718,717
Net interest rate spread											2.26	%											2.21	%
Net interest income						$	5,042											$	4,443
Net interest margin on average earning assets											2.59	%											2.54	%