<PAGE>
A COMMITMENT TO TRADITIONAL VALUES
================================================================================
WITH A VISION FOR CONTINUED GROWTH
While we have the
technological resources and
banking expertise to effectively
serve our customers into the
next millennia, we recognize the
importance of maintaining the
traditional values established
by our forefathers. Since 1868,
we've been committed to serving
our customers by offering sound
financial advice and investment
strategies to help stimulate
personal and regional growth.
Our success and long-term
stability are the result of a
commitment to local residents
and businesses. Our underlying
philosophy remains as set by our
forefathers...hard work,
initiative, perseverance, and
one-on-one personal
associations.
<PAGE>
===================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Selected Financial Highlights........................................... 3
President's Letter...................................................... 4
Management's Discussion and Analysis.................................... 7
Report of Independent Auditors.......................................... 18
Financial Statements.................................................... 19
Notes to Financial Statements........................................... 24
Form 10-KSB............................................................. 44
Officers and Managers................................................... 62
Board of Directors...................................................... 62
Information on Common Stock............................................. 63
Shareholder Information................................................. 63
</TABLE>
2
<PAGE>
=============================
SELECTED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
($ in thousands, except per share data)
<S> <C> <C> <C>
Net Income $ 2,771 $ 611 $ 1,245
Earnings Per Common Share(1) $ 1.36 $ .36 $ .74
Dividends Declared $ .50 $ .50 $ .50
Dividend Payout Ratio 37.76% 138.89% 67.57%
Return on Average Assets .88% .24% .54%
Return on Average Equity 11.44% 3.15% 6.59%
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
($ in thousands, except book value data)
<S> <C> <C> <C>
Total Assets $ 317,989 $ 264,385 $ 258,216
Total Deposits $ 271,227 $ 213,959 $ 199,971
Total Securities (2) $ 32,167 $ 27,599 $ 28,415
Net Loans $ 255,224 $ 216,003 $ 205,370
Federal Home Loan Bank Advances $ 10,246 $ 20,174 $ 26,936
Shareholders' Equity (3) $ 25,563 $ 19,194 $ 19,544
Book Value of Shares Outstanding $ 12.24 $ 11.26 $ 11.57
Average Equity to Average Assets 7.67% 7.51% 7.72%
Shares Outstanding 2,088,097 1,704,982 1,689,503
Number of Branch Locations 12 10 10
</TABLE>
(1) See Note 1 to Consolidated Financial Statements regarding earnings per
share.
(2) Shown at carrying amount.
(3) See Note 14 to Consolidated Financial Statements regarding the issuance of
common stock.
3
<PAGE>
====================
PRESIDENT'S LETTER
_____________________________
Trading for the year resulted
_____________________________
in a share of stock rising
_____________________________
from a $12.00 to $20.00
_____________________________
range.
1997 was a remarkable year for both the Bank and the Company. Assets,
earnings, activities and strategic planning all played vital roles in our
continuing effort to prepare for the challenges of a rapidly changing business
environment, while at the same time enhancing the value of our community banking
franchise.
RECORD EARNINGS
Our financial performance during 1997 saw record earnings at the end of
each successive quarter, with consolidated net income at year-end being reported
at $2,770,932, or $1.36 per common share. While this compares quite favorably to
the 1996 year-end results of $610,711, or $.36 per common share, it must be
remembered that earnings for 1996 were negatively impacted by the one-time,
after tax charge of $667,000 in payment of the FDIC deposit insurance
recapitalization assessment. With the acquisition of Landmark Bank, the effects
of balance sheet consolidation and operational integration, when coupled with a
strong local economy, resulted in a significant rise in net interest income. The
positive results of the acquisition are reflected in our year-end total assets
of $317,988,962, a net increase of $53,604,000. It should also be noted that
this growth is net of a significant reduction in Federal Home Loan Bank
borrowings and the shedding of over $7,000,000 of acquired higher-costing,
brokered-deposits. Financial details of the year ended December 31, 1997 are
more fully covered in the Management Discussion and Analysis section immediately
following this report.
SHAREHOLDER VALUE INCREASES
Coupled with this healthy financial picture, record activity in the stock
market brought new attention to the Bank and the Company. Trading for the year
resulted in a share of stock rising from a $12.00 to $20.00 range. And, at the
January 1998 board meeting, the regular quarterly dividend was increased from
$.125 per share to $.15 per share. This reflects a 20% increase over the most
recent prior periods.
NEW PRODUCTS
Consistent with our expressed goal of being the leading independent
provider of financial services throughout the Kearsarge-Lake Sunapee-Upper
Valley Region, our strategic planning focuses on the need to continually monitor
our own products and services, be adaptive to changes and modifications, and to
seek out opportunities for bringing expanded services to both our existing and
future customers. One such opportunity presenting itself during the year was the
initiation of discussions between Charter Trust Company, the Concord (NH) based
trust company jointly owned by Lake Sunapee Bank and five other New Hampshire
financial institutions, and Phoenix Home Life Insurance Company of Hartford,
Connecticut. The primary thrust of the dialogue centered on accessing a broad
range of insurance products for distribution throughout our combined banking
franchises. Recognizing that this type of affiliation made the best possible
link between the businesses of banking and insurance, agreement was reached and
a controlling interest in Charter Trust was sold to Phoenix Home Life at the end
of September. For us, this association means greater integration and
coordination of our current trust and securities brokerage activities, as well
as the soon to be introduced insurance product lines and the attendant financial
planning services.
4
<PAGE>
EXPANDING MARKETS
In last year's report it was noted that, as part of our geographic
expansion in the Upper Valley markets of Lebanon, Hanover, White River Junction
and Norwich, we had just agreed to establish a new branch at Centerra
Marketplace in Dartmouth College's Centerra Resource Park. Viewed as a strategic
location for the advancement of our business in that area, we are pleased to
report that this office, our twelfth and newest location, opened for business in
November of 1997. The most technologically advanced of all our locations, the
branch design centers on the use of modular unitization, including direct-access
personal banking stations. We fully expect this office to become one of our most
active branch sites and look forward to building long-term relationships not
only in the community, but also with the companies locating within the Resource
Park and their employees.
TECHNOLOGY
The most significant event of the year was the consummation of our bank
acquisition during the first quarter of 1997. While extensive planning and
testing was involved in the preparation for integrating their customer account
information with our data processing system, until the day actually comes to
make the shift, plans are just plans and tests are just tests. We are,
therefore, pleased to report that the transition of account data was nearly
seamless, with a special note of thanks going to the dedicated efforts of the
individuals on our conversion team.
Continuing on the issue and usage of technology, it is important for you to
know something about how the Year 2000 concerns are being addressed. In mid-
1996, a formal committee on technology, which continues to meet weekly, was
formed in order to identify all areas of concern to the Bank and the Company.
While no data processing programming is performed on an in-house basis, this is
clearly an area of considerable importance that is receiving much attention and
monitoring. In fact, banking regulators have made this issue one of their
highest priorities in an all-out effort to ensure the preservation and integrity
of internal data processing and information systems.
The progressive introduction of technological enhancements continues to be
a primary focus, as the environment within which we operate becomes more and
more globally accessible. To this end, we have just upgraded our data processing
platform (mainframe hardware) and operating systems (application software) to
accommodate the broadest possible range of emerging technologies given the
inherent limitations of our size and marketplace. By mid-1998 we anticipate
having introduced debit cards, check imaging, internal website management, an
upgraded telephone system for inter- and intra-office communications and
increased personal computer station-to-station data transmission capabilities.
Accepting the premises that new technology becomes old technology almost before
it is out of the box, the underlying architecture of our associated systems
should provide us with a window of time during which we can meet the current
needs of our customers while at the same time planning for the next wave of
changes.
COMMUNITY BANKING
The core business of the Bank remains the day-to-day servicing of customer
needs. The gathering of local
______________________
...growth in our basic
______________________
business of lending...
______________________
mortgage loans,
______________________
consumer finance and
______________________
commercial credits...
5
<PAGE>
______________________
This has been an
______________________
exceptional year for
______________________
the Bank and the
______________________
Company...
deposits and their reinvestment into the communities served is the fundamental
premise of a community banking franchise. While more attention is being given to
commercial lending for the diversification of our overall asset mix, it has been
traditional residential mortgage lending that propelled us to the highest level
of production ever during a single calendar year. By the close of the year, the
Bank had originated nearly 650 mortgage loans for almost $70 million. The
strength of the economy and the record level of interest rates that continue
today, resulted in an unanticipated volume of activity and an off-balance sheet
servicing portfolio that is now expected to reach the $100 million level far
sooner than originally planned. It is this sort of growth in our basic business
of lending...mortgage loans, consumer finance, and commercial credits...that
will help to deepen the penetration of our banking franchise into both existing
and new markets.
Looking ahead, we remain committed to seeking out those opportunities for
growth and expansion that will best serve the long-term goals of customers and
shareholders alike. The, as yet, unabated pace of consolidations continues to
provide us with new opportunities and new markets that were not there just a few
months ago. Strategic investments, while sometimes costly in the near-term, are
an essential part of our longer-term vision of a financial services company
well-positioned, well-managed and well-prepared to meet the challenges and
demands of a complex and ever-changing marketplace.
IN CLOSING
It is appropriate that mention be made of the passing of one of our former
directors. Perry R. Smith, Jr. served as a board member of the Bank since 1980
and, having been a banker in up-state New York before moving to this area,
brought supportive guidance and management insight that will be missed.
Recognition must also be given at this time to the tremendous effort
putforth during the year by a highly dedicated, knowledgeable, and motivated
group of employees. This has been an exceptional year for the Bank and the
Company that could not have been as easily achieved without their ongoing
commitment. In addition, on behalf of the Board of Directors and the management
team, we again express our appreciation for the continuing confidence shown by
both our customers and shareholders as we strive to fulfill our mission of
providing high quality service to the local marketplace and increased value to
the shareholder.
/s/ Stephen W. Ensign
Stephen W. Ensign
Vice Chairman of the Board,
President and Chief Executive Officer
6
<PAGE>
============================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
New Hampshire Thrift Bancshares, Inc.'s (the "Company") profitability is
derived from its only subsidiary, Lake Sunapee Bank, fsb (the "Bank"). The
Bank's earnings in turn are primarily generated from the difference between the
yield on its loan and investment portfolios and the cost of its deposit accounts
and borrowings. Loan origination fees, retail banking service fees, and gains on
security transactions supplement these core earnings.
In 1997, the Company earned $2,770,932, or $1.36 per common share, compared to
$610,711, or $.36 per common share in 1996. In accordance with a new accounting
rule, earnings per common share assuming dilution, are also presented. In 1997
and 1996, earnings per common share, assuming dilution were $1.33 and $.35,
respectively. The increase in earnings can be attributed to three factors. In
February, Lake Sunapee Bank, fsb completed its acquisition of Landmark Bank in
Lebanon, NH. This transaction increased the Bank's assets by approximately
$52,000,000 and provided Lake Sunapee Bank with increased yields on its loan
portfolio. As a result, the Bank's net interest income increased. This
corresponded with an increase in overall net income. Second, the Bank's deposit
insurance premium was approximately $850,000 less than in 1996. This was due to
the Bank paying a one-time premium assessment in 1996 of $995,000 to the Federal
Deposit Insurance Corporation (FDIC). The payment was part of the
recapitalization of the Savings Insurance Fund (SAIF). Third, during the third
quarter of 1997, Lake Sunapee Bank, fsb sold a majority of its one-sixth
ownership in Charter Trust Company to Phoenix Life. This transaction produced an
after-tax gain of approximately $300,000 and will enable the Bank to offer
insurance products.
YEAR 2000
Many companies must undertake projects to address the Year 2000 issue. Each
company must determine potential costs and uncertainties based on a number of
factors, including its software and hardware and the nature of its business.
Companies must also coordinate with other entities with which they do business.
Lake Sunapee Bank, through its technology committee, has hired a consultant to
review and make recommendations regarding its 2000-compliance status. Based on a
review of internal practices and communications with third party processors, the
Bank does not expect to encounter significant difficulties in connection with
the transition to the year 2000. The status of the Bank's `Year 2000 Action
Plan' is reported to its Board of Directors monthly. A $50,000 provision has
been established to cover expenses that may be associated with this issue. The
Bank is also subject to regulatory review concerning the Year 2000 from its
primary regulator, The Office of Thrift Supervision (OTS).
FINANCIAL CONDITION
Total assets increased by $53,603,618, or 20.27% from $264,385,344 to
$317,988,962. Total loans increased from $218,461,279 to $258,386,923, or
18.27%. These increases are primarily attributed to the acquisition of Landmark
Bank. The table on page 15 illustrates the maturities of the loan portfolio at
December 31, 1997. Real estate loans increased by $24,968,975, or 13.50% from
$184,982,351 to $209,951,326. The Bank also increased the net level of loans
sold into the secondary market by approximately $20 million. At December 31,
1997, the Bank had $71,551,925 in its servicing portfolio. The Bank expects to
continue to sell fixed rate loans into the secondary market in order to manage
interest rate risk. Adjustable rate mortgages comprise 85% of the Bank's real
estate mortgage loan portfolio. This is consistent with prior years.
As a result of the Landmark acquisition, commercial loans increased 139.76% to
$20,026,574. This corresponds with the Bank's strategic plan of expanding its
commercial banking presence in the Upper Valley.
Total investment securities increased by $4,568,676, or 16.55% from
$27,790,737 to $32,033,122 (at amortized cost). The Bank's net unrealized gain
of $134,112 at December 31, 1997 compares to last year's net unrealized loss of
7
<PAGE>
============================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
$192,179. This change of $326,291 in market value reflects the decrease in
interest rates during 1997 and the resultant rise in bond values.
Real estate owned and property acquired in settlement of loans decreased by
$207,325, or 28.66% to $516,153. This total reflects $309,153, or 59.89% in
market value for the remaining five lots at Blye Hill Landing in Newbury, NH.
During 1997, twelve real estate owned properties totaling $537,389, in carrying
value were sold.
Deposits increased by $57,268,065, or 26.77% to $271,226,960 from
$213,958,895. The acquisition of Landmark Bank accounted for the majority of the
increase. Also, customers took advantage of the Bank's Money Market Deposit
Account's favorable interest rate. As a result, this account increased 111% to
approximately $24 million. Customers continued to place funds in Certificates of
Deposit (CDs) with CDs comprising 49.10% of total deposits versus 49.89% last
year. Total CDs increased by $26,357,185, or 24.69% to $133,097,650.
Advances from the Federal Home Loan Bank (FHLB) decreased by $9,927,707, or
49.21% to $10,246,318 from $20,174,025. The Bank was able to fund its loan
growth through deposit growth and utilize excess funds to pay down FHLB
advances.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain a 5% ratio of liquid assets to net
withdrawable funds. At year-end 1997, the Bank's ratio of 12.81% exceeded
regulatory requirements for long-term liquidity.
The Bank's source of funds comes primarily from net deposit inflows, loan
amortizations, principal pay downs from loans, sold loan proceeds, and advances
from the FHLB. At December 31, 1997, the Bank had approximately $85,000,000 in
additional borrowing capacity from the FHLB.
At December 31, 1997, the Company's shareholders' equity totaled $25,563,125,
or 8.04% of total assets, compared to $19,193,690, or 7.26% of total assets at
year-end 1996. The increase of $6,369,435 reflects net income of $2,770,932,
$3,931,801 as a result of the Landmark Bank acquisition, the payment of $987,032
in common stock dividends, the cashless exchange of 13,928 shares of stock at an
amount of $255,316, the exercise of 64,525 stock options in the amount of
$209,706, a gain of $489,847 on the sale of treasury stock, and the change of
$209,497 in net unrealized holding gains on securities classified as available-
for-sale. As interest rates moved downward throughout 1997, the Bank's bond
portfolio increased in value.
During 1997, the Bank upstreamed $3,000,000 to its parent company New
Hampshire Thrift Bancshares, Inc. The purposes of the upstreams were to fund the
cash portion of the Landmark acquisition and to pay dividends to NHTB
shareholders.
Net cash provided by operating activities was $2,847,283 in 1997 versus
$3,985,360 in 1996. The decrease in accrued expenses and other liabilities
accounted for the majority of the change.
Net cash flows from investing activities amounted to negative $3,955,691 in
1997 compared to negative $9,546,320 in 1996. The $3,315,519 net change in
security activity and the $9,862,090 change in loans, accounted for the change.
In 1997, net cash provided by financing activities was $3,412,285 compared to
$5,570,412 in 1996. The decrease in advances from the Federal Home Loan Bank
accounted for the majority of the change.
The Bank expects to be able to fund loan demand and other investing during
1998 by continuing to use funds provided from customer deposits, as well as the
FHLB's advance program. Management is not aware of any trends, events, or
uncertainties that will have or that are reasonably likely to have a material
effect in the Company's liquidity, capital resources or results of operations.
8
<PAGE>
============================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
As part of the Financial Institution Reform, Recovery, and Enforcement Act of
1989 (FIRREA), banks are required to maintain core capital, leverage ratio, and
total risk based capital of 4.00%, 4.00%, and 8.00%, respectively. As of
December 31, 1997,the Bank's ratios were 6.47%, 6.47%, and 11.86%, respectively,
well in excess of the regulators' requirements.
Book value per share was $12.24 at December 31, 1997 versus $11.26 per share
at December 31, 1996. The change in the market value of the Bank's investment
security portfolio and the increase in paid-in capital and retained earnings
provided the increase in book value per share.
IMPACT OF INFLATION
The financial statements and related data are prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars and
current market value, for certain loans and investments, without considering
changes in the relative purchasing power of money over time due to inflation.
Unlike other companies, virtually all of the assets and liabilities of a bank
are monetary in nature. As a result, interest rates have a far more significant
impact on a bank's performance than the effects of the general level of
inflation. Interest rates do not necessarily move in the same direction or with
the same magnitude as the price of goods and services, since such prices are
affected by inflation. In the current interest rate environment, liquidity and
the maturity structure of the Bank's assets and liabilities are important to the
maintenance of acceptable performance levels.
INTEREST RATE SENSITIVITY
Management has continued to utilize asset/liability management as a strategy
in monitoring interest rate risk. The strategy of matching rate-sensitive assets
with similar liabilities stabilizes profitability during periods of interest
rate fluctuations.
The Bank's one-year Gap at December 31, 1997 was -7.28%, compared to the
December 31, 1996 Gap position of -9.58%. The Bank continues to offer adjustable
rate mortgages, which reprice at one, three, and five-year intervals. In
addition, from time to time, the Bank sells fixed-rate mortgages into the
secondary market in order to minimize interest rate risk.
The Bank's Gap, of approximately negative seven percent at December 31, 1997,
means net interest income would increase if interest rates trended downward. The
opposite would occur if interest rates were to rise. Management feels that
maintaining the Gap within ten points of the parity line provides adequate
protection against severe interest rate swings. In an effort to maintain the Gap
within ten points of parity, the Bank utilizes the Federal Home Loan Bank
advance program to control the repricing of a segment of liabilities.
NET INTEREST INCOME
Net interest income for the year ended December 31, 1997 increased by
$2,401,573, or 28.66%, to $10,781,280. The increase can be attributed to the
increased volume in the Bank's loan portfolio that resulted primarily from the
acquisition of Landmark Bank.
Total interest income increased by $4,681,733, or 25.03%, with 93.49%
attributed to the increase in volume, and 6.51% related to the change in
interest rates. During 1997, the Bank's yield on interest earning assets
increased to 7.97% from 7.67% in 1996.
Total interest expense increased $2,280,160, or 22.08%, with 145.88%
attributed to the increased volume in deposits. The Bank's overall cost of funds
remained the same at 4.54%. The Bank's deposits as a percentage of total
interest bearing liabilities increased from 91.38% in 1996 to 93.15% in 1997.
Deposits' cost in 1997 was 4.46% versus 4.36% in 1996. This increase was a
result of an increase in higher costing deposits such as brokered CD's acquired
from Landmark Bank. These brokered CD's matured in January of 1998 and were not
renewed. Federal Home Loan Bank advances typically are higher costing funding
instruments. In an effort to reduce the Bank's overall cost of funds, the Bank
reduced its average balance in Federal Home Loan Bank advances during 1997 to
$16.5 from $27.9 in 1996 by paying off higher costing advances as they came due.
As a result, the Bank's spread increased to 3.43% at December 31, 1997 compared
to 3.13% at December 31, 1996.
9
<PAGE>
============================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The following table sets forth the average yield on loans and investments, the
average interest rate paid on deposits and borrowings, the net interest rate
margin, and the net yield on interest earning assets for the periods indicated:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------------------------------
<S> <C> <C> <C> <C> <C>
Yield on loans 8.20% 7.86% 7.71% 7.10% 7.49%
Yield on investment securities 6.23% 6.35% 6.53% 6.14% 5.68%
Combined yield on loans and investments 7.97% 7.67% 7.58% 7.00% 7.28%
Cost of deposits 4.46% 4.36% 4.27% 3.63% 3.81%
Cost of other borrowed funds 5.90% 5.86% 6.42% 4.29% 4.55%
Combined cost of deposits and borrowings 4.54% 4.54% 4.50% 3.67% 3.83%
Interest rate spread 3.43% 3.13% 3.08% 3.33% 3.45%
Net interest margin 3.67% 3.44% 3.42% 3.61% 3.75%
</TABLE>
The following table shows the Bank's interest rate sensitivity table at December
31, 1997:
<TABLE>
<CAPTION>
0-3 3-6 6 MONTHS- 1-3 BEYOND
MONTHS MONTHS 1 YEAR YEARS 3 YEARS TOTAL
-----------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (1) $ 32,726 $ 23,962 $ 53,847 $ 83,059 $ 64,888 $ 258,482
Investments and federal
funds sold
funds sold 10,662 2,011 - 23,450 155 36,278
-----------------------------------------------------------------------------
Total $ 43,388 $ 25,973 $ 53,847 $ 106,509 $ 65,043 $ 294,760
-----------------------------------------------------------------------------
Interest bearing liabilities:
Deposits $ 43,157 $ 39,664 $ 43,258 $ 83,490 $ 46,553 $ 256,122
Repurchase agreements 8,393 - - - - 8,393
Borrowings 2,700 2,513 5,000 - 333 10,546
-----------------------------------------------------------------------------
Total $ 54,250 $ 42,177 $ 48,258 $ 83,490 $ 46,886 $ 275,061
-----------------------------------------------------------------------------
Period sensitivity gap $ (10,862) $ (16,204) $ 5,589 $ 23,019 $ 18,157 $ 19,699
Cumulative sensitivity $ (10,862) $ (27,066) $ (21,477) $ 1,542 $ 19,699
Cumulative sensitivity
gap as a percent of interest
earning assets -3.68% -9.18% -7.28% 0.52% 6.68%
</TABLE>
Note: The Bank has used industry decay formulae in establishing repricing
periods for savings and NOW accounts.
(1) Excludes non accrual loans
10
<PAGE>
============================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The following table presents, for the periods indicated, the total dollar amount
of interest income from interest earning assets and the resultant yields as well
as the interest paid on interest bearing liabilities, and the resultant costs:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996
-------------------------------- --------------------------------
Average(1) Yield/ Average(1) Yield/
Balance Interest Cost Balance Interest Cost
-------------------------------- --------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Loans (2) $ 258,704 $ 21,214 8.20% $ 213,473 $ 16,776 7.86%
Investment securities and
other (3) 34,841 2,172 6.23% 30,348 1,928 6.35%
------------------------ ----------------------
Total interest earning
assets 293,545 23,386 7.97% 243,821 18,704 7.67%
------------------------ ----------------------
Non-interest earning assets
Cash 7,766 5,964
Other non-interest earning
assets (4) 14,537 8,425
----------- ----------
Total non-interest earning
assets 22,303 14,389
----------- ----------
Total $ 315,848 $ 258,210
=========== ==========
Liabilities and Shareholders'
Equity:
Interest bearing liabilities:
Savings deposits $ 119,911 $ 3,159 2.63% $ 96,062 $ 2,607 2.71%
Time deposits 135,224 8,214 6.07% 98,248 5,877 5.98%
Repurchase agreements 5,989 257 4.29% 4,922 203 4.12%
Other borrowed funds 16,535 975 5.90% 27,960 1,638 5.86%
------------------------ ----------------------
Total interest bearing
liabilities 277,659 12,605 4.54% 227,192 10,325 4.54%
------------------------ ----------------------
Non-interest bearing
liabilities:
Demand deposits 10,406 6,983
Other 3,555 4,656
----------- ----------
Total non-interest bearing
liabilities 13,961 11,639
----------- ----------
Shareholders' equity 24,228 19,379
----------- ----------
Total $ 315,848 $ 258,210
=========== ==========
Net interest income/interest
rate spread $ 10,781 3.43% $ 8,379 3.13%
=================== ===================
Net earning balance/net yield
on earning assets $ 15,886 3.67% $ 16,629 3.44%
================================== ===============================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------
Average(1) Yield/
Balance Interest Cost
--------------------------------
($ in thousands)
<S> <C> <C> <C>
Assets:
Interest earning assets:
Loans (2) $ 205,548 $ 15,846 7.71%
Investment securities and
other (3) 24,790 1,620 6.53%
---------------------
Total interest earning
assets 230,338 17,466 7.58%
---------------------
Non-interest earning assets
Cash 5,976
Other non-interest earning
assets (4) 8,285
-----------
Total non-interest earning
assets 14,261
-----------
Total $ 244,599
===========
Liabilities and Shareholders'
Equity:
Interest bearing liabilities:
Savings deposits $ 96,698 $ 2,855 2.95%
Time deposits 88,310 5,065 5.74%
Repurchase agreements 4,702 177 3.76%
Other borrowed funds 23,388 1,501 6.42%
---------------------
Total interest bearing
liabilities 213,098 9,598 4.50%
---------------------
Non-interest bearing
liabilities:
Demand deposits 7,050
Other 5,570
-----------
Total non-interest bearing
liabilities 12,620
-----------
Shareholders' equity 18,881
-----------
Total $ 244,599
===========
Net interest income/interest
rate spread $ 7,868 3.08%
================
Net earning balance/net yield
on earning assets $ 17,240 3.42%
==============================
</TABLE>
(1) Monthly average balances have been used for all periods. Management does
not believe that the use of month-end balances instead of daily average balances
caused any material difference in the information presented.
(2) Loans include 90-day delinquent loans, which have been placed on a non-
accruing status. Management does not believe that including the 90-day
delinquent loans in loans caused any material difference in the information
presented.
(3) Investment securities and other includes tax -exempt investment securities.
Management does not believe that including tax-exempt investment securities in
investment securities and other caused any material difference in the
information presented.
(4) Other non-interest earning assets includes non-earning assets and real
estate owned.
11
<PAGE>
============================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The following table sets forth, for the periods indicated, a summary of the
changes in interest earned and interest paid resulting from changes in volume
and rates. The net change attributable to changes in both volume and rate, which
cannot be segregated, has been allocated proportionately to the change due to
volume and the change due to the rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 VS. 1996
INCREASE (DECREASE)
DUE TO
VOLUME RATE TOTAL
-------------- -------------- --------------
($ in thousands)
<S> <C> <C> <C>
Interest income on loans $ 4,140 $ 298 $ 4,438
Interest income on investments 237 7 244
-------------- -------------- --------------
Total interest income 4,377 305 4,682
-------------- --------------- --------------
Interest expense on savings deposits 542 9 551
Interest expense on time deposits 2,784 (446) 2,338
Interest expense on repurchase agreements 297 (243) 54
Interest expense on borrowings (591) (72) (663)
-------------- -------------- --------------
Total interest expense 3,032 (752) 2,280
-------------- -------------- --------------
Net interest income $ 1,345 $ 1,057 $ 2,402
============== ============== ==============
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 VS. 1995
INCREASE (DECREASE)
DUE TO
VOLUME RATE TOTAL
-------------- -------------- --------------
($ in thousands)
<S> <C> <C> <C>
Interest income on loans $ 448 $ 482 $ 930
Interest income on investments 321 (13) 308
-------------- -------------- --------------
Total interest income 769 469 1,238
-------------- -------------- --------------
Interest expense on savings deposits (23) (226) (249)
Interest expense on time deposits 398 414 812
Interest expense on repurchase agreements 3 23 26
Interest expense on borrowings (284) 421 137
-------------- -------------- --------------
Total interest expense 94 632 726
-------------- -------------- --------------
Net interest income $ 675 $ (163) $ 512
============== ============== ==============
</TABLE>
12
<PAGE>
============================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
PROVISION FOR LOAN LOSSES
The Bank considers many factors in determining the allowance for loan
losses. These include the risk and size characteristics of loans, the prior
years' loss experience, the levels of delinquencies, the prevailing economic
conditions, the number of foreclosures, unemployment rates, interest rates, and
the value of collateral securing the loans. No changes were made to the Bank's
procedures with respect to maintaining the loan loss allowances as a result of
any regulatory examinations.
Additionally, the Bank's commercial loan officers review the financial
condition of commercial loan customers on a monthly basis and perform visual
inspections of facilities and inventories. The Bank also has an internal audit
and compliance program. Results of the audit and compliance programs are
reported directly to the Audit Committee of the Bank's Board of Directors.
The allowance for loan losses at December 31, 1997 was $3,061,451, compared
to $2,158,026 at year-end 1996. The allowance in 1997 includes $2,783,484 in
general reserves as compared to $1,801,589 in 1996. During 1997, the Bank had
net charge-offs of $879,340 compared to $1,330,775 in 1996. Due to the general
improvement of the quality of the loan portfolio and a reduction in risk, the
provision for loan losses was reduced by $728,870 from $1,660,741 in 1996 to
$932,491 in 1997. Net charged-off loans during 1997 amounted to 0.35% of average
loans, as compared to 0.63% in 1996. The allowance represented 1.18% of total
loans at year-end 1997 versus 0.98% at year-end 1996.
The allowance for loan losses as a percentage of non-performing assets was
171.40% at December 31, 1997 compared to 92.07% at December 31, 1996. Please
refer to Note 4 "Loans receivable", in the Consolidated Financial Statements for
information regarding SFAS No. 114 and 118.
Loans classified for regulatory purposes as loss, doubtful, substandard or
special mention do not result from trends or uncertainties which the Bank
reasonably expects will materially impact future operating results, liquidity,
or capital resources.
As of December 31, 1997, there were no other loans not included in the table
or discussed above where known information about the possible credit problems of
borrowers caused management to have doubts as to the ability of the borrower to
comply with present loan repayment terms and which may result in disclosure of
such loans in the future.
Total classified loans, excluding special mention, as of December 31, 1997
and 1996 were $4,859,402 and $5,254,069, respectively. Total nonperforming
assets amounted to $1,786,107 and $2,343,898 for the respective years. At
December 31, 1997, loans classified as 90-day delinquent were $691,567 compared
to $787,930 at December 31, 1996.
13
<PAGE>
============================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The following table sets forth the breakdown of non-performing assets:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
90 Day delinquent loans (1) $ 691,567 $ 787,930 $ 1,144,293 $ 23,825 $ 288,663
Non-earning assets (2) 578,387 848,942 297,172 1,692,608 501,408
Real estate owned 516,153 707,026 984,185 1,504,880 1,854,047
------------ ------------ ------------ ------------ ------------
Total non-performing assets $ 1,786,107 $ 2,343,898 $ 2,425,650 $ 3,221,313 $ 2,644,118
============ ============ ============ ============ ============
Troubled debt restructured (3) $ 297,926 $ N/A $ 445,417 $ 2,337,058 $ 3,466,820
============ ============ ============ ============ ============
Impaired Loans $ 1,942,320 $ 1,188,183 N/A N/A N/A
============ ============ ============ ============ ============
</TABLE>
(1) All loans 90 days or more delinquent are placed on a non-accruing status.
(2) Loans considered to be uncollectible, pending foreclosure, or in bankruptcy
proceeding, are placed on a non-earning
status.
(3) Troubled debt restructured loans are included in impaired loans as of
December 31, 1997.
The following table sets forth 90 day delinquent loans by category:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Real estate loans -
Conventional $ 679,356 $ 723,595 $ 1,132,475 $ $ 288,663
Construction 23,825
Consumer loans 11,347 64,335 3,983
Commercial and municipal loans 636 7,835
Other loans 228
------------ ------------ ------------ ------------ ------------
Total $ 691,567 $ 787,930 $ 1,144,293 $ 23,825 $ 288,663
============ ============ ============ ============ ============
</TABLE>
The following table sets forth the allocation of the loan loss valuation
allowance and the percentage of loans in each category to total loans as of
December 31:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------------ ------------------- ------------------ ------------------ --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans -
Conventional $ 1,561,632 80% $ 1,603,860 84% $ 687,547 83% $ 726,959 81% $ 853,710 79%
Construction 111,604 1% 83,750 201,257 1,598,266 2% 1,245,382 2%
Collateral and
consumer loans 59,225 11% 36,873 12% 8,067 12% 5,464 12% 22,907 14%
Commercial and
municipal loans 1,006,335 8% 294,034 4% 276,526 4% 422,196 4% 252,002 5%
Impaired loans 322,655 139,509 654,663 1% N/A N/A
Other 1%
------------------ ------------------- ------------------ ------------------ --------------------
Valuation allowance $ 3,061,451 100% $ 2,158,026 100% $ 1,828,060 100% $ 2,752,885 100% $ 2,374,001 100%
================== =================== ================== ================== ====================
Valuation allowance
as a percentage of
Total loans 1.18% .98% .87% 1.38% 1.35%
================== =================== ================== ================== ====================
</TABLE>
14
<PAGE>
============================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The following sets forth the maturities of the loan portfolio at December 31,
1997:
<TABLE>
<CAPTION>
ONE YEAR ONE THRU OVER
MATURITIES: OR LESS FIVE YEARS FIVE YEARS TOTAL
<S> <C> <C> <C> <C>
Real Estate Loans - $ 9,531,622 $ 29,049,605 $ 171,370,099 $ 209,951,326
------------ ------------ ------------- -------------
Real Estate Loans with:
Predetermined interest rates 1,760,780 7,123,021 22,613,557 31,497,358
Adjustable interest rates 7,770,842 21,926,584 148,756,542 178,453,968
------------ ------------ ------------- -------------
9,531,622 29,049,605 171,370,099 209,951,326
------------ ------------ ------------- -------------
Collateral Loans - 11,430,315 5,721,457 3,483,685 20,635,457
------------ ------------ ------------- -------------
Collateral Loans with:
Predetermined interest rates 10,250,888 3,816,115 725,531 14,792,534
Adjustable interest rates 1,179,427 1,905,342 2,758,154 5,842,923
------------ ------------ ------------- -------------
11,430,315 5,721,457 3,483,685 20,635,457
------------ ------------ ------------- -------------
Consumer Loans - 7,754,725 38,149 7,792,874
------------ ------------ ------------- -------------
Consumer Loans with:
Predetermined interest rates 119,264 37,103 156,367
Adjustable interest rates 7,635,461 1,046 7,636,507
------------ ------------ ------------- -------------
7,754,725 38,149 7,792,874
------------ ------------ ------------- -------------
Commercial/Municipal Loans- 5,219,838 8,900,746 5,905,990 20,026,574
------------ ------------ ------------- -------------
Commercial/Municipal Loans with:
Predetermined interest rates 1,325,676 1,289,958 456,073 3,071,707
Adjustable interest rates 3,894,162 7,610,788 5,449,917 16,954,867
------------ ------------ ------------- -------------
5,219,838 8,900,746 5,905,990 20,026,574
------------ ------------ ------------- -------------
Other Loans - 272,307 319,641 62,694 654,642
------------ ------------ ------------- -------------
Other Loans with:
Predetermined interest rates 182,591 186,232 1,750 370,573
Adjustable interest rates 89,716 133,409 60,944 284,069
------------ ------------ ------------- -------------
272,307 319,641 62,694 654,642
------------ ------------ ------------- -------------
TOTALS $ 34,208,807 $ 44,029,598 $ 180,822,468 $ 259,060,873
============ ============ ============= =============
</TABLE>
The preceding schedule includes $578,387 of non-earning assets and $673,950 of
loans held for sale, categorized within the respective loan types.
15
<PAGE>
============================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
OTHER INCOME AND EXPENSE
Total non-interest income increased by $672,667, or 33.81% to $2,662,276. Net
gains on the sale of securities and loans totaled $441,955. The majority is
attributable to the gain realized on the Charter Trust transaction. Net losses
on the sales of premises and equipment totaled $68,765 as the Bank sold two
investment properties.
Total operating expense increased $695,712, or 8.91% to $8,507,413. The
increase was primarily associated with the integration of Landmark Bank and
start-up costs associated with the Bank's newest office located in the Centerra
Marketplace. Additional staffing, occupancy and marketing expenses were realized
as the Bank expanded into these new locations.
FAS 109-ACCOUNTING FOR INCOME TAXES
The provision for income taxes for the years ended December 31, 1997, 1996 and
1995 includes net deferred income tax expense (benefit) of $(575,835),
$(120,481), and $324,909, respectively. These amounts were determined by the
deferred method in accordance with generally accepted accounting principles for
each year.
The Bank has provided deferred income taxes on the difference between the
provision for loan losses permitted for income tax purposes and the provision
recorded for financial reporting purposes.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
In 1996, the Company earned $610,711, or $.36 per common share, compared to
$1,244,823, or $.74 per common share in 1995. The decline in earnings can be
traced to two events. First, the Bank paid a one-time premium assessment of
$995,000 to the Federal Deposit Insurance Corporation (FDIC) as part of the
recapitalization of the Savings Insurance Fund (SAIF). If the Bank had not made
this payment, net earnings would have been approximately $1,276,711, or $.74 per
share. The Bank also expensed $1,660,741 to the Provision for Loan Losses in
1996, compared to $1,163,710 in 1995. This increase occurred because of the
write-down of the Bank's remaining real estate development loans and the taking
of a more aggressive posture in the methodology used in determining the Bank's
General Allowance for Loan Losses. This is discussed in greater detail under the
section entitled, "Provision for Loan Losses."
FINANCIAL CONDITION
Total assets increased by $6,169,267, or 2.39% from $258,216,077 to
$264,385,344. Total loans increased from $210,676,325 to $219,206,929, or 4.05%.
Real estate loans increased by $8,828,880, or 5.01% from $176,153,471 to
$184,982,351. The Bank also increased the net level of loans sold into the
secondary market by approximately $8,000,000. At December 31, 1996, the Bank had
$52,165,252 in its servicing portfolio.
Investments decreased by $475,266, or 1.68% from $28,266,003 to $27,790,737
(at amortized cost). The Bank's net unrealized loss of $192,179 at December 31,
1996 compares to 1995's net unrealized gain of $148,596. This change of $340,775
in market value reflects the increase in interest rates during 1996 and the
resultant drop in bond values.
Real estate owned and property acquired in settlement of loans decreased by
$260,707, or 26.49% to $723,478. This total reflected $473,219, or 65.41%, in
market value for the then remaining seven lots at Blye Hill Landing in Newbury,
NH. During 1996, six real estate owned properties totaling $413,330, in carrying
value were sold.
Deposits increased by $13,987,974, or 7.00% to $213,958,895 from $199,970,921.
Customers continued to place funds in Certificates of Deposit (CDs) with CDs
comprising 49.89% of total deposits versus 46.61% last year. Total CDs increased
by $13,529,233 or 14.51% to $106,740,465.
Advances from the Federal Home Loan Bank (FHLB) decreased by $6,762,143, or
25.10% to
16
<PAGE>
============================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
$20,174,025 from $26,936,168. The Bank was able to fund its loan growth through
deposit growth and utilize excess funds to pay-down FHLB advances.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company's shareholders' equity totaled $19,193,690
or 7.26% of total assets, compared to $19,544,005 or 7.57% of total assets at
year-end 1995. The decrease of $350,315 reflected net income of $610,711, the
payment of $847,066 in common stock dividends, the repurchase of 3,251 shares of
stock at a cost of $43,482, the exercise of 18,730 of stock options in the
amount of $72,903, a gain of $81,392 on the sale of treasury stock, and the
recording of $127,179 in net unrealized holding losses on securities classified
as available-for-sale. As interest rates moved upward throughout 1996, the
Bank's bond portfolio decreased in value.
On December 23, 1996, the Bank received authorization from the Office of
Thrift Supervision to dividend $1,800,000 to the Company. The purpose of this
upstream was to fund the cash portion of the Landmark acquisition. On February
16, 1996, the Bank paid a dividend of $1,000,000 to the Company.
Net cash provided by operating activities was $3,985,360 in 1996 versus
$1,243,025 in 1995. This change is mostly attributable to a receivable of
approximately $1.2 million from the disposition of available-for-sale securities
as of December 31, 1995. Proceeds were received January 2, 1996. Net cash flows
from investing activities amounted to negative $9,546,320 in 1996 compared to
negative $20,810,142 in 1995. Funds used in lending activities were $10,182,473
in 1996 compared to $13,995,513 in 1995. Net funds used in securities activities
amounted to ($ 401,271) in 1996 compared to $6,880,894 in 1995. These two areas
accounted for the bulk of the change in investing activities. In 1996, net cash
provided by financing activities was $5,570,412 compared to $22,306,826 in 1995.
The Bank utilized the increase of $13,987,974 in deposits to fund the pay-off of
FHLB advances and investing activities.
Book value per share was $11.26 at December 31, 1996 versus $11.57 per share
at December 31, 1995. The change in the market value of the Bank's investment
security portfolio and the decrease in retained earnings, when coupled with an
increase of 15,479 shares outstanding, caused the drop in book value per share.
NET INTEREST INCOME
Net interest income for the year ended December 31, 1996 was $8,379,707,
compared to $7,867,986 for 1995, an increase of $511,721, or 6.50%. The increase
was the result of increased volume of the Bank's loan portfolio.
Total interest income increased $1,237,914, or 7.09%, with 62.12% of the
increase attributed to the change in volume and 37.88% related to the change in
interest rates. Interest expense increased $726,193, or 7.57%, with 13.09%
attributed to the increased volume of both deposits and FHLB advances, and
86.91% related to the rise in interest rates.
Despite the rise in interest rates, the Bank's cost of funds increased
slightly to 4.54% during 1996 from 4.50% in 1995, as the Bank's deposits as a
percentage of total interest bearing liabilities increased from 88.13% in 1995
to 91.38% in 1996. Advances typically are higher costing funding instruments. In
1996, the cost of advances was 5.86% compared to 6.42% in 1995. Deposits' cost
in 1996 was 4.36% versus 4.27% in 1995. As a result, the Bank's spread increased
to 3.13% at December 31, 1996 compared to 3.08% at December 31, 1995.
PROVISION FOR LOAN LOSSES
The allowance for loan losses was $2,158,026 for the year ended December 31,
1996, compared to $1,828,060 at year-end 1995. Charge-offs were $1,380,614 for
1996, and $2,095,220 for 1995. The allowance as a percentage of total loans was
0.98% at year-end 1996 versus 0.87% from 1995. Non-performing assets amounted to
$2,343,898, or 0.89% of total assets for 1996 compared to $2,425,650, or 0.94%
of total assets for year-end 1995.
OTHER INCOME AND EXPENSE
Total non-interest income decreased by $517,762, or 35.18% to $1,989,609. Net
gains in the sale of securities and bank property increased $277,806 due to the
sale of a piece of property located adjacent to the Bank's New London branch
office.
Total non-interest expense increased $1,484,401, or 23.46% to $7,811,701. This
increase was due to the one-time payment of $995,000 to the Federal Deposit
Insurance Corporation to recapitalize the savings Association Insurance Fund and
the expensing of $229,970 to other expense to cover write-downs on real estate
owned.
17
<PAGE>
[LETTERHEAD OF SHATSWELL, MacLEOD & COMPANY,P.C.]
The Board of Directors
New Hampshire Thrift Bancshares, Inc.
Newport, New Hampshire
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying consolidated statements of financial condition
of New Hampshire Thrift Bancshares, Inc. and Subsidiary as of December 31, 1997
and 1996 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of New
Hampshire Thrift Bancshares, Inc. and Subsidiary as of December 31, 1995, were
audited by other auditors whose report dated January 19, 1996, expressed
unqualified opinions on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the 1997 and 1996 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of New Hampshire Thrift Bancshares, Inc. and Subsidiary as of December
31, 1997 and 1996 and the consolidated results of their operations and their
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation," effective January 1, 1996.
/s/ Shatswell, MacLeod & Company, P.C.
--------------------------------------
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 26, 1998
18
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
---------------------------------------------------
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
As of December 31, 1997 1996
- --------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,196,626 $ 5,868,749
Federal funds sold 4,110,000 5,134,000
------------ ------------
Cash and cash equivalents 13,306,626 11,002,749
Securities available-for-sale 30,104,674 24,950,725
Securities held-to-maturity 75,000 340,276
Other investments 1,987,560 2,307,557
Loans held for sale 673,950 745,650
Loans receivable, net 255,223,525 216,002,761
Accrued interest receivable 1,556,194 1,354,042
Bank premises and equipment, net 8,178,335 5,104,366
Investments in real estate 548,257 619,487
Real estate owned and property acquired in settlement of loans 516,153 723,478
Goodwill 3,460,184 -
Other assets 2,358,504 1,234,253
------------ ------------
Total assets $317,988,962 $264,385,344
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Demand deposits $ 15,105,900 $ 10,587,756
Savings and NOW accounts 123,023,410 96,630,674
Time deposits 133,097,650 106,740,465
------------ ------------
Total deposits 271,226,960 213,958,895
Other borrowed funds 300,000 5,000
Securities sold under agreement to repurchase 8,393,192 8,662,736
Advances from Federal Home Loan Bank 10,246,318 20,174,025
Accrued expenses and other liabilities 2,259,367 2,390,998
------------ ------------
Total liabilities 292,425,837 245,191,654
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value per share: 2,500,000 shares authorized, - -
no shares issued or outstanding
Common stock, $.01 par value, per share: 5,000,000 shares authorized,
2,479,800 shares issued and 2,088,097 shares outstanding at
December 31, 1997, 2,147,282 shares issued and 1,704,982 shares
outstanding at December 31, 1996 24,798 21,473
Paid-in capital 17,660,097 13,241,774
Retained earnings 10,221,049 8,437,149
Net unrealized holding gain (loss) on securities available-for-sale, net
of tax effect of $51,794 and $65,000 in 1997 and 1996, respectively 82,318 (127,179)
------------ ------------
27,988,262 21,573,217
Treasury stock, at cost, 391,703 shares as of December 31, 1997
and 442,300 shares as of December 31, 1996 (2,425,137) (2,379,527)
------------ ------------
Total shareholders' equity 25,563,125 19,193,690
------------ ------------
Total liabilities and shareholders' equity $317,988,962 $264,385,344
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Interest on loans $21,214,024 $16,775,792 $15,846,308
Interest and dividends on investments 2,171,956 1,928,455 1,620,025
----------- ----------- -----------
Total interest income 23,385,980 18,704,247 17,466,333
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 11,629,770 8,686,678 8,096,851
Interest on advances and other borrowed money 974,930 1,637,862 1,501,496
----------- ----------- -----------
Total interest expense 12,604,700 10,324,540 9,598,347
----------- ----------- -----------
Net interest income 10,781,280 8,379,707 7,867,986
PROVISION FOR LOAN LOSSES 932,471 1,660,741 1,163,710
----------- ----------- -----------
Net interest income after provision for loan losses 9,848,809 6,718,966 6,704,276
----------- ----------- -----------
OTHER INCOME
Loan origination fees 96,510 75,564 89,632
Customer service fees 1,263,989 1,190,726 1,058,868
Net gain (loss) on sale and writedowns of securities 551,357 (26,500) (37,933)
Net gain (loss) on sale of premises and equipment (68,765) 251,770 (14,603)
Rental income 291,308 223,673 227,885
Brokerage service income 148,341 153,261 110,705
Other income 379,536 121,115 37,293
----------- ----------- -----------
Total other income 2,662,276 1,989,609 1,471,847
----------- ----------- -----------
OTHER EXPENSES
Salaries and employee benefits 4,046,725 3,039,929 2,917,180
Occupancy expenses 1,582,589 1,242,216 1,195,834
Advertising and promotion 344,714 188,512 162,745
Depositors' insurance 123,487 1,448,801 440,439
Outside services 489,254 364,101 333,361
Provision for other real estate owned losses - 229,970 -
Amortization of goodwill 242,271 - -
Net loss on sale of loans 109,402 66,370 36,291
Other expenses 1,568,971 1,231,802 1,241,450
----------- ----------- -----------
Total other expenses 8,507,413 7,811,701 6,327,300
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,003,672 896,874 1,848,823
PROVISION FOR INCOME TAXES 1,232,740 286,163 604,000
----------- ----------- -----------
NET INCOME $ 2,770,932 $ 610,711 $ 1,244,823
=========== =========== ===========
Earnings per common share $1.36 $.36 $.74
=========== =========== ===========
Earnings per common share, assuming dilution $1.33 $.35 $.73
=========== =========== ===========
Dividends declared per common share $.50 $.50 $.50
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the years ended December 31, 1997 1996 1995
- ---------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
COMMON STOCK
Balance, beginning of year $ 21,473 $ 21,473 $ 21,473
Shares issued in acquisition of Landmark Bank 3,325 - -
----------- ----------- -----------
Balance, end of year $ 24,798 $ 21,473 $ 21,473
=========== =========== ===========
PAID-IN CAPITAL
Balance, beginning of year $13,241,774 $13,160,382 $13,103,404
Gain on issuance of treasury stock, at cost, for the exercise
of stock options, including tax benefit 489,847 81,392 56,978
Acquisition of Landmark Bank 3,928,476 - -
----------- ----------- -----------
Balance, end of year $17,660,097 $13,241,774 $13,160,382
=========== =========== ===========
RETAINED EARNINGS
Balance, beginning of year $ 8,437,149 $ 8,673,504 $ 8,268,094
Net income 2,770,932 610,711 1,244,823
Cash dividends paid (987,032) (847,066) (839,413)
----------- ----------- -----------
Balance, end of year $10,221,049 $ 8,437,149 $ 8,673,504
=========== =========== ===========
NET UNREALIZED HOLDING GAIN (LOSS) ON
SECURITIES AVAILABLE-FOR-SALE
Balance, beginning of year $ (127,179) $ 97,594 $ (728,667)
Net change 209,497 (224,773) 826,261
----------- ----------- -----------
Balance, end of year $ 82,318 $ (127,179) $ 97,594
=========== =========== ===========
TREASURY STOCK
Balance, beginning of year $(2,379,527) $(2,408,948) $(2,411,430)
Shares repurchased, (13,928 shares in 1997, 3,251 shares
in 1996 and 14,968 shares in 1995) (255,316) (43,482) (144,015)
Exercise of stock options, (64,525 shares in 1997,
18,730 shares in 1996 and 33,485 shares in 1995) 209,706 72,903 146,497
----------- ----------- -----------
Balance, end of year $(2,425,137) $(2,379,527) $(2,408,948)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31, 1997 1996 1995
- ---------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,770,932 $ 610,711 $ 1,244,823
Depreciation and amortization 579,452 455,910 435,467
Amortization of goodwill 242,271 - -
Loans originated for sale (26,395,222) (14,233,140) (18,911,177)
Proceeds from sales of loans 26,286,120 14,166,770 18,874,886
Loss from sales of loans 109,402 66,370 36,291
(Gain) loss from sales of premises and equipment 68,765 (251,770) 14,603
(Gain) loss from sales of debt securities available-for-sale
and writedowns (62,010) 667 3,957
Loss from sales of equity securities available-for-sale
and writedowns 10,653 25,833 33,975
Gain on sales of other investments (500,000) - -
Provision for other real estate owned losses - 229,970 -
Writedowns of other real estate owned - 144,350 -
Provision for loan losses 932,471 1,660,741 1,163,710
Deferred tax expense (benefit) (575,835) (120,481) 324,909
(Increase) decrease in accrued interest and other assets 178,486 861,580 (1,718,404)
Decrease in deferred loan fees (121,484) (81,550) (138,396)
Increase (decrease) in accrued expenses and other liabilities (676,718) 449,399 (121,619)
------------ ------------ ------------
Net cash provided by operating activities 2,847,283 3,985,360 1,243,025
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of premises and equipment 108,149 344,387 84,400
Proceeds from sales of other real estate owned 219,389 182,830 -
Capital expenditures - premises and equipment (1,079,184) (316,986) (545,515)
Capital expenditures - other real estate owned (27,043) (25,188) -
Proceeds from sales of debt securities available-for-sale 20,579,199 2,468,275 3,723,564
Proceeds from sales of equity securities available-for-sale 1,192,719 450,642 794,170
Proceeds from sales of other investments 820,000 - -
Principal reduction on securities held-to-maturity 25,000 52,778 52,778
Purchases of securities available-for-sale (25,726,166) (9,063,424) (13,211,517)
Maturities of securities available-for-sale 200,000 6,498,000 2,665,000
Purchases of other investments - (5,000) (385,289)
Purchase of Federal Home Loan Bank stock - - (519,600)
Net increase in loans (320,383) (10,182,473) (13,995,513)
Recoveries of previously charged off loans 52,629 49,839 6,685
Decrease in real estate owned - - 520,695
------------ ------------ ------------
Net cash used in investing activities (3,955,691) (9,546,320) (20,810,142)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C> <C>
Net increase (decrease) in demand deposits, savings
and NOW accounts 11,487,757 458,741 (9,608,241)
Net increase (decrease) in time deposits (2,411,055) 13,529,233 15,046,096
Net increase (decrease) in repurchase agreements (453,344) (890,089) 5,954,918
Advances from Federal Home Loan Bank - 21,600,000 38,800,000
Principal payments of advances from Federal Home Loan Bank (9,927,707) (28,362,143) (27,074,626)
Net increase (decrease) in other borrowed funds 295,000 (29,077) (31,368)
Cash and cash equivalents of $7,559,731 acquired in the
acquisition of Landmark Bank, less cash of $2,275,000 paid
for the common stock of Landmark Bank and less $320,302
for acquisition costs 4,964,429 - -
Repurchase of treasury stock (255,316) (43,482) (144,015)
Dividends paid (987,032) (847,066) (839,413)
Proceeds from exercise of stock options 699,553 154,295 203,475
----------- ------------ ------------
Net cash provided by financing activities 3,412,285 5,570,412 22,306,826
----------- ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,303,877 9,452 2,739,709
CASH AND CASH EQUIVALENTS, beginning of year 11,002,749 10,993,297 8,253,588
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $13,306,626 $ 11,002,749 $ 10,993,297
=========== ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid $12,750,892 $ 10,379,699 $ 10,095,073
=========== ============ ============
Income taxes paid $ 1,545,183 $ 331,763 $ 363,879
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Loans originated for sales of other real estate owned $ 318,000 $ 207,500 $ -
=========== ============ ============
Transfers from loans to real estate acquired through
foreclosure $ 303,021 $ 478,755 $ 320,000
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Summary of significant accounting policies:
NATURE OF OPERATIONS - New Hampshire Thrift Bancshares, Inc. (Company) is a
savings association holding company headquartered in New London, New Hampshire.
The Company's subsidiary, Lake Sunapee Bank, fsb (Bank), a federal stock savings
bank operates twelve branches primarily in Grafton, Sullivan, and Merrimack
Counties in west central New Hampshire. Although the Company has a diversified
portfolio, a substantial portion of its debtors' abilities to honor their
contracts is dependent on the economic health of the region. Its primary source
of revenue is providing loans to customers who are predominately small and
middle-market businesses and middle-income individuals.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company, the Bank, Lake Sunapee Group, Inc. (LSGI), and Lake
Sunapee Financial Services Corp. (LSFSC). LSGI and LSFSC are wholly-owned
subsidiaries of the Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, the
Company considers federal funds sold and due from banks to be cash equivalents.
SECURITIES AVAILABLE-FOR-SALE - Available-for-sale securities consist of
bonds, notes, debentures, and certain equity securities. Unrealized holding
gains and losses, net of tax, on available-for-sale securities are reported as a
net amount in a separate component of shareholders' equity until realized.
Gains and losses on the sale of available-for-sale securities are determined
using the specific-identification method. Declines that are other than
temporary in the fair value of individual available-for-sale securities below
their cost have resulted in write-downs of the individual securities to their
fair value. The related write-downs of $68,750, $728 and $76,590 have been
included in earnings as realized losses for the years ended 1997, 1996 and 1995,
respectively.
SECURITIES HELD-TO-MATURITY - Bonds, notes and debentures which the Company
has the positive intent and ability to hold to maturity are reported at cost,
adjusted for premiums and discounts recognized in interest income using the
interest method over the period to maturity. Declines that are other than
temporary in the fair value of individual held-to-maturity securities below
their cost result in write-downs of the individual securities to their fair
value. No write-downs have occurred for securities held-to-maturity.
OTHER INVESTMENTS - Other investments are investments which do not have
readily determinable fair values. These types of investments are reported at
cost and are evaluated for other than a temporary decline in value. Other than
temporary declines in value result in write-downs of the individual security.
No write-downs have occurred for securities which are classified as other
investments.
LOANS HELD FOR SALE - Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated market value
in the aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income. No losses have been recorded.
24
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
LOANS RECEIVABLE - Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off are
reported at their outstanding principal adjusted for any charge-offs, the
allowance for loan losses, and any deferred fees or costs on originated loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment to the yield of the related loan. When the interest
accrual is discontinued, all unpaid accrued interest is reversed. The allowance
for loan losses is increased by charges to income and decreased by charge-offs
(net of recoveries). Management's periodic evaluation of the adequacy of the
allowance is an estimate based on the Company's past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions. This material estimate and the estimate of
real estate acquired in connection with foreclosures are particularly
susceptible to significant change in the near term. In connection with the
determination of the allowance for loan losses and the carrying value of real
estate owned, management obtains independent appraisals for significant
properties to arrive at its evaluation.
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." This statement as amended by SFAS No. 118
requires that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral, if the loan is collateral dependent. The adoption of the new
accounting standard did not have a material effect on the Company's financial
position or results of operation. Interest income on impaired loans is
recognized on an accrual basis when the impaired loan is less than 90 days past
due and has not been reclassified to non-accrual status. Interest income on
impaired loans over 90 days past due, and on loans placed on non-accrual status,
is recognized using a cash basis accounting method. Cash receipts on impaired
loans are recorded as both interest income and a reduction in the impaired loan
balance consistent with the terms of the underlying contractual agreements.
The balance of impaired loans is determined by aggregating the fair value
or present value of expected cash flows on individual loans identified as
impaired.
A loan becomes impaired when it appears probable the Company will be unable
to collect all amounts due, including principal and interest, under the
contractual terms of the loan agreement. A loan is placed on non-accrual status
when it appears likely interest income will not be received. Non-accrual loans
are reviewed for possible impairment.
Impaired loans are written-down or charged-off when it has been determined
the asset has such little value that it no longer warrants remaining on the
books. The decision to charge-off is made on a case-by-case basis.
Factors considered by management in determining impairment include payment
status, net worth and collateral value. An insignificant payment delay or an
insignificant shortfall in payment does not in itself result in the review of a
loan for impairment. The Company applies SFAS No. 114 on a loan-by-loan basis.
Homogeneous groups of loans such as consumer installment loans and residential
mortgage loans are collectively evaluated for impairment. The Company does not
apply SFAS No. 114 to aggregations of loans that have risk characteristics in
common with other impaired loans. Substantially all of the Company's loans that
have been identified as impaired have been measured by the fair value of
existing collateral.
BANK PREMISES AND EQUIPMENT - Company premises and equipment are stated at
cost, less accumulated depreciation. Depreciation is computed using straight-
line and accelerated methods over the estimated useful lives of the assets.
Expenditures for replacements or major improvements are capitalized;
expenditures for normal maintenance and repairs are charged to expense as
incurred. Upon the sale or retirement of company premises and equipment, the
cost and accumulated depreciation are removed from the respective accounts and
any gain or loss is included in income.
25
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
INVESTMENT IN REAL ESTATE - Investment in real estate is carried at the
lower of cost or estimated fair value. The buildings are being depreciated over
their useful lives. The properties consist of a condominium that the Company
rents to the public and three buildings that the Company rents for commercial
purposes. Rental income is recorded in income when received and expenses for
maintaining these assets are charged to expense as incurred.
REAL ESTATE OWNED AND PROPERTY ACQUIRED IN SETTLEMENT OF LOANS - The
Company classifies loans as in-substance, repossessed or foreclosed if the
Company receives physical possession of the debtor's assets regardless of
whether formal foreclosure proceedings take place. At the time of foreclosure
or possession, the Company records the property at the lower of fair value minus
estimated costs to sell or the outstanding balance of the loan. All properties
are periodically reviewed and declines in the value of the property are charged
against income.
EARNINGS PER SHARE - In the year ended December 31, 1997, the Company
adopted Statement of Financial Accounting Standards No. 128 (SFAS No. 128)
"Earnings per Share" (EPS) issued by the Financial Accounting Standards Board.
SFAS No. 128 required restatement of all prior-period EPS presented that was not
in accordance with SFAS No. 128. This statement simplifies the standards for
computing earnings per share. It replaces the presentation of primary EPS with
a presentation of Basic EPS which excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS, if applicable, reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. The
adoption of SFAS No. 128 had no material effect on the Bank's 1997 financial
statements and EPS for prior period financial statements was restated in
accordance with SFAS No. 128.
INCOME TAXES - Deferred income taxes are provided in amounts sufficient to
give effect to temporary differences between financial and tax reporting for
deferred loan origination fees, unrealized loss on securities available-for-
sale, provision for loan losses and depreciation.
APPLE COMPUTER PROGRAM - During 1988, the Company offered depositors an
Apple computer as an inducement to open a certificate of deposit. The cost of
acquiring these computers has been treated as a prepayment of interest and is
being amortized over the period to maturity of the deposit accounts. In the
event of early withdrawal, the prorated value of the prepayment will be deducted
from unpaid interest and principal at the time of withdrawal. As of December
31, 1997 and 1996, other assets include $22,263 and $67,019, respectively, of
unamortized computer costs.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The following methods and assumptions
were used by the Company in estimating fair values of financial instruments as
disclosed herein:
Cash and short-term instruments - The carrying amounts of cash and short-term
instruments approximate their fair value.
Available-for-sale and held-to-maturity securities - Fair values for
available-for-sale securities, are based on quoted market prices. The
carrying values of held-to-maturity and other investments approximate fair
values.
Loans receivable - For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying
values. Fair values for all other loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
Deposit liabilities - The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed
term money-market accounts and certificates of deposits (CD's) approximate
their fair values at the reporting date. Fair values for fixed-rate CD's are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
26
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
Borrowings - The carrying amounts of federal funds purchased, and other
borrowings maturing within 90 days approximate their fair values. Fair
values of other borrowings are estimated using discounted cash flow analyses
based on the Bank's current incremental borrowing rates for similar types of
borrowing arrangements.
Accrued interest - The carrying amounts of accrued interest approximate their
fair values.
Off-balance sheet instruments - Fair values for loan commitments have not
been presented as the future revenue derived from such financial instruments
is not significant.
DEFERRED LOAN ORIGINATION FEES - Loan origination, commitment fees and
certain direct origination costs are deferred, and the net amount is being
amortized as an adjustment of the related loan's yield. The Company is
amortizing these amounts over the contractual life of the related loans.
STOCK BASED COMPENSATION - Prior to 1996, the Company recognized stock-
based compensation using the intrinsic value approach set forth in APB Opinion
No. 25. As of January 1, 1996, the Company had the option, under SFAS No. 123,
of changing its accounting method for stock-based compensation from the APB No.
25 method to the fair value method introduced in SFAS No. 123. The Company
elected to continue using the APB No. 25 method. Entities electing to continue
to follow the provisions of APB No. 25 must make pro forma disclosure of net
income and earnings per share, as if the fair value method of accounting defined
in SFAS No. 123 had been applied. The Company has made the pro forma
disclosures required by SFAS No. 123.
LOAN SERVICING - Effective January 1, 1996, the Company adopted Statement
of Financial Accounting Standards No. 122, (SFAS No. 122) "Accounting for
Mortgage Servicing Rights, an amendment of FASB Statement No. 65." Effective
January 1, 1997, the Company adopted Statement of Financial Accounting Standards
No. 125 (SFAS No. 125) which supersedes SFAS No. 122. These statements require
the Company to recognize as separate assets from their related loans the rights
to service mortgage loans for others, either through acquisition of those rights
or from the sale or securitization of loans with the servicing rights retained
on those loans, based on their relative fair values. To determine the fair
value of the servicing rights created, the Company uses the market prices under
comparable servicing sale contracts, when available, or alternatively uses a
valuation model that calculates the present value of future cash flows to
determine the fair value of the servicing rights. In using this valuation
method, the Company incorporates assumptions that market participants would use
in estimating future net servicing income, which includes estimates of the cost
of servicing loans, the discount rate, ancillary income, prepayment speeds and
default rates.
The cost of mortgage servicing rights is amortized on a straight-line basis
which has substantially the same effect as amortizing the rights in proportion
to, and over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those rights.
Fair values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the interest rate risk characteristics of the underlying loans. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value.
CONCENTRATION OF CREDIT RISK - Most of the Company's business activity is
with customers located within the state. There are no concentrations of credit
to borrowers that have similar economic characteristics. The majority of the
Company's loan portfolio is comprised of loans collateralized by real estate
located in the state of New Hampshire.
RECLASSIFICATIONS - Certain amounts in the 1996 and 1995 consolidated
financial statements have been reclassified to conform to the current year's
presentation.
27
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. ACQUISITION OF LANDMARK BANK:
On July 26, 1996, the Company entered into an agreement and plan of
reorganization (the "Merger Agreement") with Landmark Bank. Pursuant to the
Merger Agreement, the Company acquired all of the outstanding shares of Landmark
Bank for total consideration of $7,030,974. The Merger Agreement was approved
by the shareholders of the Company, shareholders of Landmark Bank, and various
regulatory agencies. On January 22, 1997, the Company completed the acquisition
of Landmark Bank.
The purchase method of accounting was used to account for the merger.
Under the terms of the merger agreement, holders of Landmark Bank's stock
could elect to receive $12.00 in cash per share, or exchange their stock for
stock in the Company at a ratio of 1.1707 shares of the common stock of the
Company per Landmark share, subject to 60% of Landmark's stock being converted
to stock and 40% to cash.
Included in the total cost of acquiring Landmark Bank was $2,275,000
representing the fair value of the Company's shares issued to Landmark Bank
shareholders who elected to receive cash.
The results of operations of Landmark Bank from January 22, 1997 to
December 31, 1997 are included in the 1997 consolidated statement of income of
the Company.
Goodwill recorded in the acquisition transaction is being amortized over
fifteen years on the straight-line method.
Results of operations for 1997 as though the Company and Landmark Bank had
combined as of January 1, 1997 are not presented because the acquisition was so
close to the beginning of 1997.
Results of operations for 1996 as though the Company and Landmark Bank had
combined as of January 1, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Net interest income after provision for loan losses $ 8,292,025
Noninterest income 2,324,330
-----------
Total 10,616,355
Noninterest expense 10,625,213
-----------
Loss before income taxes (8,858)
Income taxes 131,163
-----------
Net loss $ (140,021)
===========
</TABLE>
Loss per common share $ (.07)
===========
The above results of operations reflect adjustments of Landmark Bank's
financial statements to reflect purchase accounting adjustments, including
goodwill.
28
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SECURITIES:
The amortized cost and approximate market value of securities are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Gross Gross
Unrealized Unrealized
Fair Holding Holding Amortized
Value Gain Loss Cost
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity:
Bonds and notes -
Municipal bonds $ 75,000 $ - $ - $ 75,000
----------- -------- -------- -----------
Total held-to-maturity 75,000 - - 75,000
----------- -------- -------- -----------
Available-for-sale:
Bonds and notes -
U. S. Treasury Notes 20,196,281 119,295 10,726 20,087,712
U. S. Government, including agencies 3,777,080 9,681 1,721 3,769,120
Other bonds and debentures 6,131,313 23,908 6,325 6,113,730
----------- -------- -------- -----------
Total available-for-sale 30,104,674 152,884 18,772 29,970,562
----------- -------- -------- -----------
Other investments:
Federal Home Loan Bank stock 1,861,000 - - 1,861,000
Other securities 126,560 - - 126,560
----------- -------- -------- -----------
Total other investments 1,987,560 - - 1,987,560
----------- -------- -------- -----------
Total securities $32,167,234 $152,884 $ 18,772 $32,033,122
=========== ======== ======== ===========
<CAPTION>
December 31, 1996
-----------------
<S> <C> <C> <C> <C>
Held-to-maturity:
Bonds and notes -
Municipal bonds $ 340,276 $ - $ - $ 340,276
----------- -------- -------- -----------
Total held-to-maturity 340,276 - - 340,276
----------- -------- -------- -----------
Available-for-sale:
Bonds and notes -
U. S. Treasury Notes 12,884,840 31,066 94,145 12,947,919
U. S. Government, including agencies 3,269,758 17,393 18,099 3,270,464
Other bonds and debentures 7,641,502 17,692 97,336 7,721,146
----------- -------- -------- -----------
23,796,100 66,151 209,580 23,939,529
Equity securities 1,154,625 45,575 94,325 1,203,375
----------- -------- -------- -----------
Total available-for-sale 24,950,725 111,726 303,905 25,142,904
----------- -------- -------- -----------
Other investments:
Federal Home Loan Bank stock 1,861,000 - - 1,861,000
Other securities 446,557 - - 446,557
----------- -------- -------- -----------
Total other investments 2,307,557 - - 2,307,557
----------- -------- -------- -----------
Total securities $27,598,558 $111,726 $303,905 $27,790,737
=========== ======== ======== ===========
</TABLE>
Gross gains of $105,627, $810 and $3,425, and gross losses of $36,097, $807
and $7,382, were realized during 1997, 1996 and 1995, respectively, on sales of
available-for-sale debt securities. Gross gains of $63,164 and gross losses of
$10,277 were realized during 1997 on sales of available-for-sale equity
securities. Gross gains of $500,000 were realized on sales of other
investments.
29
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SECURITIES: (continued)
Maturities of debt securities classified as available-for-sale are as
follows as of December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Amortized Fair Average
Cost Value Yield
----------- ----------- ---------
<S> <C> <C> <C>
Available-for-sale: bonds and notes -
U.S. Treasury Notes $ 999,268 $ 999,375 5.129%
Other bonds and debentures 1,907,353 1,908,970 5.799
----------- -----------
Total due in one year or less 2,906,621 2,908,345 5.679
----------- -----------
U.S. Treasury Notes 19,088,444 19,196,906 6.104
Other bonds and debentures 1,306,672 1,308,382 6.421
----------- -----------
Total due after one year through five years 20,395,116 20,505,288 6.122
----------- -----------
U.S. Government, including agencies 3,201,467 3,202,997 6.947
Other bonds and debentures 2,058,129 2,075,340 7.180
----------- -----------
Total due after five years through ten years 5,259,596 5,278,337 6.897
----------- -----------
U.S. Government, including agencies 567,653 574,083 7.043
Other bonds and debentures 841,576 838,621 6.954
----------- -----------
Total due after ten years 1,409,229 1,412,704 6.998
----------- -----------
$29,970,562 $30,104,674 6.654%
=========== ===========
</TABLE>
HELD-TO-MATURITY: Included in the caption bonds and notes is one municipal
bond classified as held-to-maturity. The security is a Health Facility bond
purchased by the Bank with a coupon rate and maturity date of 6.48%, June 1,
2000 at an amount of $100,000.
There were no issuers of securities whose aggregate book value exceeded 10%
of shareholders' equity as of December 31, 1997.
A total par value of $1,000,000 was pledged to secure the treasury, tax and
loan account as of December 31, 1997.
NOTE 4. LOANS RECEIVABLE:
Loans receivable consisted of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Real estate loans
Conventional $207,311,314 $183,550,150 $175,130,966 $161,091,563 $139,580,597
Construction 3,540,870 2,702,613 2,456,763 7,793,601 4,301,243
------------ ------------ ------------ ------------ ------------
210,852,184 186,252,763 177,587,729 168,885,164 143,881,840
Less - Unadvanced portion 900,858 1,270,412 1,434,258 2,841,500 1,222,932
------------ ------------ ------------ ------------ ------------
209,951,326 184,982,351 176,153,471 166,043,664 142,658,908
Collateral loans 20,635,457 20,574,710 19,524,706 18,776,523 19,584,411
Consumer loans 7,792,874 4,860,325 5,025,818 5,264,449 5,158,271
Commercial and municipal loans 20,026,574 8,352,789 9,301,028 8,066,390 8,049,016
Other loans 654,642 436,754 671,302 625,006 977,633
------------ ------------ ------------ ------------ ------------
Total loans 259,060,873 219,206,929 210,676,325 198,776,032 176,428,239
Less - Loans held for sale 673,950 745,650 3,095,971 3,753,657 -
------------ ------------ ------------ ------------ ------------
258,386,923 218,461,279 207,580,354 195,022,375 176,428,239
Less - Allowance for loan losses 3,061,451 2,158,026 1,828,060 2,752,885 2,374,001
Deferred loan origination fees 101,947 300,492 382,042 520,438 719,200
------------ ------------ ------------ ------------ ------------
Loans receivable, net $255,223,525 $216,002,761 $205,370,252 $191,749,052 $173,335,038
============ ============ ============ ============ ============
</TABLE>
30
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS RECEIVABLE: (continued)
The following is a summary of activity in the allowance for loan loss
account for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, beginning of year $2,158,026 $1,828,060 $2,752,885 $2,374,001 $2,094,931
---------- ---------- ---------- ---------- ----------
Loans charged-off:
Real estate loans
Conventional 291,437 628,107 141,541 252,258 723,131
Construction 85,000 614,355 1,014,670 2,871 333,581
Collateral and consumer loans 226,710 36,721 25,568 612 5,289
Commercial and municipal loans 328,822 101,431 913,441 140,375 57,719
---------- ---------- ---------- ---------- ----------
Total charged-off loans 931,969 1,380,614 2,095,220 396,116 1,119,720
---------- ---------- ---------- ---------- ----------
Recoveries on loans:
Real estate loans
Conventional 6,786 19,063 3,300 11,666 24,532
Collateral and consumer loans 22,257 22,105 2,099 1,779 1,584
Commercial and municipal loans 23,586 8,671 1,286 - -
---------- ---------- ---------- ---------- ----------
Total recoveries 52,629 49,839 6,685 13,445 26,116
---------- ---------- ---------- ---------- ----------
Net charged-off loans: 879,340 1,330,775 2,088,535 382,671 1,093,604
---------- ---------- ---------- ---------- ----------
Balance relating to acquisition
of Landmark Bank: 850,294 - - - -
---------- ---------- ---------- ---------- ----------
Provision for loan losses charged
to income: 932,471 1,660,741 1,163,710 761,555 1,372,674
---------- ---------- ---------- ---------- ----------
BALANCE, end of year $3,061,451 $2,158,026 $1,828,060 $2,752,885 $2,374,001
========== ========== ========== ========== ==========
Ratios of net charged-off loans during
the period to average loans
outstanding during the period .35% .63% 1.02% .20% .64%
========== ========== ========== ========== ==========
</TABLE>
The Company had no extensions of credit to related parties in excess of 5%
of shareholders' equity at any time during the year ended December 31, 1997 and
1996. Certain directors and executive officers of the Bank and companies in
which they have significant ownership interest were customers of the Bank during
1997. Total loans to such persons and their companies amounted to $1,214,774 as
of December 31, 1997. During 1997 advances of $503,201 were made and repayments
totaled $150,535.
<TABLE>
<CAPTION>
Impaired loans as of December 31, 1997 1996
- ----------------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Average recorded investment in impaired loans $1,766,918 $ 837,357
Recorded investment in impaired loans at December 31 $1,942,320 $1,188,183
Portion of valuation allowance allocated to impaired loans $ 322,655 $ 139,509
Net balance of impaired loans $1,619,665 $1,048,674
Interest income recognized on impaired loans $ 84,154 $ 40,006
Interest income on impaired loans on cash basis $ 7,702 $ 37,592
Recorded investment in impaired loans with related allowance for credit losses $1,562,949 $ 814,182
Recorded investment in impaired loans with no related allowance for credit losses $ 379,371 $ 374,001
</TABLE>
31
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS RECEIVABLE: (continued)
In addition to total loans previously shown, the Company services loans for
other financial institutions. Participation loans are loans originated by the
Company for a group of banks. Sold loans are loans originated by the Company and
sold to the secondary market. The Company services these loans and remits the
payments received to the buyer. The Company specifically originates long-term,
fixed-rate loans to sell. The amount of loans sold and participated out which
are serviced by the Company are as follows as of December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Sold loans $71,551,925 $52,165,252
=========== ===========
Participation loans $ 4,601,826 $ 2,664,278
=========== ===========
</TABLE>
Servicing assets of $374,533 and $118,086 were capitalized in 1997 and
1996, respectively. Amortization of servicing assets was $63,805 in 1997 and
$15,056 in 1996.
Following is an analysis of the aggregate changes in the valuation
allowances for servicing assets:
<TABLE>
<CAPTION>
1997 1996
-------- -----
<S> <C> <C>
Balance, beginning of year $ 0 $ 0
Additions 57,422 -
------- -----
Balance, end of year $57,422 $ 0
======= =====
</TABLE>
The Company has issued letters of credit and has approved lines of credit
loans to specific individuals and companies. The unused portions are as follows
as of December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Letters of credit $ 665,850 $ 468,750
=========== ===========
Lines of credit $16,187,526 $13,110,069
=========== ===========
</TABLE>
NOTE 5. BANK PREMISES AND EQUIPMENT:
Bank premises and equipment are shown on the consolidated statements of
financial condition at cost, net of accumulated depreciation, as follows as of
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land $ 1,426,130 $ 823,218
Buildings and premises 7,183,344 4,891,724
Furniture, fixtures and equipment 4,287,616 3,610,607
----------- ----------
12,897,090 9,325,549
Less - Accumulated depreciation 4,718,755 4,221,183
----------- ----------
$ 8,178,335 $5,104,366
=========== ==========
</TABLE>
NOTE 6. Real estate owned and property acquired:
As of December 31, 1997 and 1996, the Company owned property acquired by
foreclosure and chattel property. The balances consisted of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Residential real estate $144,000 $ 75,000
Commercial real estate 372,153 632,026
Chattel property - 16,452
-------- --------
$516,153 $723,478
======== ========
</TABLE>
32
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. REAL ESTATE OWNED AND PROPERTY ACQUIRED: (continued)
It is the policy of the Company, upon the acquisition of real estate by
foreclosure, to evaluate the condition of the property, make any appropriate or
necessary structural and/or cosmetic improvements and place the property as an
open listing with all area real estate agents. Company employees are also
encouraged to participate in the selling of these properties.
For 1997, 1996 and 1995, $84,832, $179,443 and $112,544, respectively, of
net operating cost of other real estate is included in net income.
NOTE 7. DEPOSITS:
Deposits consisted of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
<S> <C> <C> <C> <C>
Checking accounts (non-interest-bearing) $ 15,105,900 5.6% $ 10,587,756 4.9%
NOW accounts 33,488,870 12.3 26,030,170 12.2
Ever-Ready Money Market 23,651,154 8.7 11,207,455 5.2
Regular savings accounts 7,901,726 2.9 9,167,458 4.3
Treasury savings accounts 57,915,167 21.4 50,154,503 23.5
Club deposits 66,493 .0 71,088 .0
------------ ----- ------------ -----
138,129,310 50.9 107,218,430 50.1
------------ ----- ------------ -----
Time deposits
2.00% - 2.99% 250,790 .1 448,874 .2
3.00% - 3.99% - - - -
4.00% - 4.99% 2,931,518 1.1 2,738,534 1.3
5.00% - 5.99% 98,425,330 36.3 77,115,922 36.0
6.00% - 6.99% 14,837,481 5.5 11,667,942 5.5
7.00% - 7.99% 14,461,393 5.3 12,503,732 5.8
8.00% - 8.99% 2,191,138 .8 2,265,461 1.1
------------ ----- ------------ -----
133,097,650 49.1 106,740,465 49.9
------------ ----- ------------ -----
$271,226,960 100.0% $213,958,895 100.0%
============ ===== ============ =====
<CAPTION>
The following is a summary of maturities of time deposits as of December 31, 1997:
<S> <C> <C> <C> <C>
1998 $ 96,554,358
1999 31,450,609
2000 3,594,856
2001 672,197
2002 657,927
Thereafter 167,703
------------
$133,097,650
============
</TABLE>
As of December 31, 1997, time deposits include $16,700,496 of certificates
of deposit with a minimum balance of $100,000. Maturities of these certificates
are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Less than 3 months $ 3,625,650
Over 3 months and less than 6 months 6,497,816
Over 6 months and less than 12 months 4,171,978
Over 12 months 2,405,052
-----------
$16,700,496
===========
</TABLE>
33
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
The purchasers of the agreements have agreed to resell to the Company
substantially identical securities at the maturities of the agreements.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Average balance during the year $ 6,145,622 $ 5,060,481
Average interest rate during the year 4.18% 4%
Maximum month-end balance during the year $ 8,393,192 $ 8,662,736
Securities underlying the agreements at year end:
Amortized cost $19,086,674 $12,947,919
Estimated fair value $19,201,594 $12,884,841
</TABLE>
The maturity dates of the repurchase agreements are from January 27, 1998
to October 25, 1998 on the anniversary date of the repurchase agreement. The
securities are under control of the Bank.
NOTE 9. ADVANCES FROM FEDERAL HOME LOAN BANK:
Advances from the Federal Home Loan Bank consisted of loans, at various
interest rates ranging from 4.87% to 6.78%, maturing as follows at December 31,
1997.
<TABLE>
<CAPTION>
<S> <C>
1998 $ 5,173,713
1999 60,579
2000 4,860,579
2001 and thereafter 151,447
-----------
$10,246,318
===========
</TABLE>
These advances are secured by Federal Home Loan Bank stock (Note 2) and
unspecified first mortgage loans. The Company is able to borrow up to an
additional $85,000,000 of Federal Home Loan Bank advances.
In addition to the above advances, the Company has credit available up to
$6,260,000 under a revolving loan agreement with the Federal Home Loan Bank.
There was an outstanding balance of $300,000 as of December 31, 1997. No amounts
were borrowed against the line of credit as of December 31, 1996. Interest is
payable monthly as funds are borrowed.
NOTE 10. INCOME TAXES:
The components of income tax expense are as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- --------
<S> <C> <C> <C>
Current tax expense $1,808,575 $ 406,644 $279,091
Deferred tax expense (575,835) (120,481) 324,909
---------- --------- --------
Total income tax expense $1,232,740 $ 286,163 $604,000
========== ========= ========
</TABLE>
34
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. INCOME TAXES: (continued)
The reasons for the differences between the statutory federal income tax
rates and the effective tax rates are summarized as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------ -----
<S> <C> <C> <C>
Federal income tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from:
Tax-exempt income (.3) (1.6) (1.0)
Dividends received deduction (.4) (3.0) (1.9)
Goodwill amortization 2.1 - -
Other, net (4.6) 2.5 1.6
---------- --------- ----
30.8% 31.9% 32.7%
========== ========= ====
</TABLE>
The Company had gross deferred tax assets and gross deferred tax
liabilities as follows as of December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Deferred tax assets:
Interest on non-performing loans $ 11,598 $ 9,728
Allowance for loan losses 953,119 -
Loan origination fees 39,371 98,399
Mark to market loans available-for-sale 81 2,389
Accrued directors fees 29,564 23,858
Unrealized holding loss on securities available-for-sale - 65,000
---------- ---------
Gross deferred tax assets 1,033,733 199,374
---------- ---------
Deferred tax liabilities:
Allowance for loan losses - 182,186
Prepaid pension 144,229 132,395
Accelerated depreciation 239,969 178,921
Investment write-down - 26,601
Mortgage servicing rights 137,617 39,790
Unrealized holding gain on securities available-for-sale 51,794 -
---------- ---------
Gross deferred tax liabilities 573,609 559,893
---------- ---------
Net deferred tax asset (liability) $ 460,124 $(360,519)
========== =========
</TABLE>
Deferred tax assets as of December 31, 1997 includes $361,602 acquired from
the acquisition of Landmark Bank.
Deferred tax assets as of December 31, 1997 have not been reduced by a
valuation allowance because management believes that it is more likely than not
that the full amount of deferred tax assets will be realized.
As of December 31, 1997, the Company had no operating loss and tax credit
carryover for tax purposes.
35
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. STOCK COMPENSATION PLANS:
As of December 31, 1997, the Company had three fixed option, stock-based
compensation plans, which are described below. The Company has adopted the
disclosure only provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation" but applies APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock option plans. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of FASB
Statement 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---------- -------- ----------
<S> <C> <C> <C> <C>
Net income As reported $2,770,932 $610,711 $1,244,823
Pro forma $2,770,932 $500,828 $1,216,275
Earnings per common share As reported $ 1.36 $ .36 $ .74
Pro forma $ 1.36 $ .30 $ .72
Earnings per common share, As reported $ 1.33 $ .35 $ .73
assuming dilution Pro forma $ 1.33 $ .29 $ .72
</TABLE>
Under the 1986 plan, the Company may grant options to its employees for up
to 57,880 additional shares of common stock. Under the 1987 plan, the Company
may grant options to its employees for up to 27,666 additional shares of common
stock. Under both plans, the exercise price of each option equals the market
price of the Company's stock on the date of grant and an option's maximum term
is 10 years. Options are exercisable immediately.
On April 10, 1996, the shareholders approved the adoption of the "1996
Stock Option Plan." Under this plan, an amount equal to 10% of the issued and
outstanding common stock of the Company has been reserved for future issuance.
On December 2, 1996 48,000 options were granted from the 1996 stock option plan
at an exercise price of $12.50 per share, the fair market value on that date.
The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Weighted risk-free interest rate 6.37% 6.67%
Weighted expected life 9.25 years 9.25 years
Weighted expected volatility 17.33% 17.33%
Weighted expected dividend yield 5.0% per year 5.0% per year
</TABLE>
No options were granted in 1997.
No modifications have been made to the terms of the option agreements.
36
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. STOCK COMPENSATION PLANS: (continued)
A summary of the status of the Company's fixed stock option plans as of
December 31, 1997, 1996 and 1995 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- ---------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------- -------- ------------ --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 141,760 $ 10.34 62,590 $ 8.22 66,075 $6.78
Granted 0 - 97,900 11.29 30,000 9.00
Exercised (64,525) 9.58 (18,730) 8.24 (33,485) 6.08
Forfeited (1,800) 10.125 - -
-------- ----------- --------
Outstanding at
end of year 75,435 $ 10.99 141,760 $10.34 62,590 $8.22
======== =========== ========
Options exercisable
at year-end 75,435 141,760 62,590
Weighted-average
fair value of
options granted
during the year N/A $ 1.84 $1.56
</TABLE>
The following table summarizes information about fixed stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
-------------------------------------------------------
Number
Outstanding Remaining
Exercise Prices as of 12/31/97 Contractual Life
--------------- -------------- ----------------
<S> <C> <C> <C>
$9.00 13,685 7.0 years
10.125 27,750 8.0 years
12.50 34,000 8.9 years
-------
10.99 75,435 8.2 years
=======
</TABLE>
NOTE 12. EMPLOYEE BENEFIT PLANS:
Defined benefit pension plan - The Company has a defined benefit pension
plan covering substantially all full-time employees who have attained age 21 and
have completed one year of service. Annual contributions to the plan are based
on actuarial estimates.
Net pension cost for the Company's defined benefit pension plan consisted
of the following components as of December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Service cost $ 91,465 $ 84,057 $ 88,168
Interest cost on projected benefit obligation 112,553 109,326 104,325
Actual return on plan assets (229,694) (143,470) (143,671)
Net amortization and deferral 137,125 72,337 85,790
--------- --------- ---------
$ 111,449 $ 122,250 $ 134,612
========= ========= =========
</TABLE>
37
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. Employee benefit plans: (continued)
The following table sets forth the plan's funded status and amounts
recognized in the accompanying consolidated statements of financial position as
of December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $1,385,979 $1,297,443
========== ==========
Accumulated benefit obligation $1,452,874 $1,350,262
========== ==========
Projected benefit obligation $1,636,696 $1,516,431
Plan assets at fair value, primarily invested in debt and equity securities 1,852,640 1,636,405
---------- ----------
Projected benefit obligation less than plan assets 215,944 119,974
Unrecognized net loss 239,357 286,143
Unrecognized prior service cost (29,965) (32,658)
---------- ----------
Prepaid expense, included in other assets $ 425,336 $ 373,459
========== ==========
</TABLE>
Assumptions used by the Company in the determination of pension plan
information consisted of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Discount rate 7.00% 7.00%
Rate of increase in compensation levels 3.00 3.00
Expected long-term rate of return on plan assets 7.00 7.00
</TABLE>
Profit Sharing - Stock Ownership Plan - Lake Sunapee Bank, fsb, adopted a
Profit Sharing - Stock Ownership Plan which became effective January 1, 1987.
The purpose of the Plan is to reward eligible employees for long and loyal
service by providing them with retirement benefits. The Plan is a qualified
defined contribution plan designed to meet the requirements of ERISA and to
conform to Section 40l(k) of the Internal Revenue Code. All employees of Lake
Sunapee Bank, fsb, and its subsidiaries who have attained age 21 and have
completed one year of service are eligible to participate in the Plan.
Participation is not required. Eligible employees electing to participate may
contribute between 2% and 15% of their salary to the Plan up to $9,500 for 1997.
Participants will not be subject to federal income taxation on such
contributions which constitute salary reductions at the time such contributions
are made. Lake Sunapee Bank, fsb may elect, but is not required, to make
discretionary and/or matching contributions to the Plan.
Discretionary and matching contributions to the Plan are invested primarily
in company stock. Benefits under the Profit Sharing - Stock Ownership Plan will
be payable upon retirement, death or other separation from service.
The assets of the Profit Sharing - Stock Ownership Plan are held pursuant
to an Investment Management Agreement with Charter Trust Company as Agent. The
assets are invested as directed by participating employees and the Bank.
For 1997, 1996 and 1995, participating employees' contributions totaled
$139,992, $118,346 and $96,452, respectively. The Bank made a matching
contribution of $14,000 for 1997 and $10,000 for 1996. A participant's
retirement benefit will depend on the amount of the contributions to the Plan
together with the gains or losses on the investments.
NOTE 13. COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Company has outstanding various
commitments and contingent liabilities, such as legal claims, which are not
reflected in the consolidated financial statements. Management does not
anticipate any material loss as a result of these transactions. As of December
31, 1997, the Company had entered into commitments to fund loans totaling
$8,317,435. The majority of these loans will have fixed rates.
38
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. COMMITMENTS AND CONTINGENCIES: (continued)
The following is a schedule, by interest rate, of loan commitments
outstanding as of December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
6.00% - 6.99% $2,187,875 $2,439,825
7.00% - 7.99% 5,799,460 1,500,194
8.00% - 8.99% 240,000 210,137
9.00% - 9.99% 74,000 20,000
10.00% - 10.99% 16,100 25,000
---------- ----------
$8,317,435 $4,195,156
========== ==========
</TABLE>
As of December 31, 1997, the Company was obligated under non-cancelable
operating leases for bank premises expiring between 2005 and 2007. The total
minimum rental due in future periods under these existing agreements is as
follows as of December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 98,781
1999 98,781
2000 98,781
2001 98,781
2002 98,781
Years thereafter 361,565
--------
Total minimum lease payments $855,470
========
</TABLE>
Certain leases contain provisions for escalation of minimum lease payments
contingent upon increases in real estate taxes and percentage increases in the
consumer price index. The total rental expense amounted to $60,632 for the year
ended December 31, 1997.
NOTE 14. SHAREHOLDERS' EQUITY:
Liquidation account - On May 22, 1986, Lake Sunapee Bank, fsb received
approval from the Federal Home Loan Bank Board and converted from a federally-
chartered mutual savings bank to a federally-chartered stock savings bank. At
the time of conversion, the Bank established a liquidation account in an amount
of $4,292,510 (equal to the Bank's net worth as of the date of the latest
financial statement included in the final offering circular used in connection
with the conversion). The liquidation account will be maintained for the
benefit of eligible account holders who maintain their deposit accounts in the
Bank after conversion. In the event of a complete liquidation of the Bank
subsequent to conversion (and only in such event), each eligible account holder
will be entitled to receive a liquidation distribution from the liquidation
account before any liquidation distribution may be made with respect to capital
stock. The amount of the liquidation account is reduced to the extent that the
balances of eligible deposit accounts are reduced on any year-end closing date
subsequent to the conversion. Company management believes the balance in the
liquidation account would be immaterial to the consolidated financial statements
as of December 31, 1997.
Dividends - The Bank may not declare or pay a cash dividend on or purchase
any of its stock if the effect would be to reduce the net worth of the Bank
below either the amount of the liquidation account or the net worth requirements
of the banking regulators.
Treasury stock - On July 15, 1993, the Company announced a buy back program
whereby the Company intends to repurchase, on the open market, 10% of its
currently outstanding common stock. As of December 31, 1997, 103,854 shares
remained to be purchased from the 1993 buy back program.
Treasury stock is recorded at cost, as purchased. Treasury stock sold is
accounted for on a first-in, first-out basis.
39
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. SHAREHOLDERS' EQUITY: (continued)
Special bad debts deduction - In prior years, Lake Sunapee Savings Bank,
fsb, a wholly-owned subsidiary of the Company, was allowed a special tax-basis
under certain provisions of the Internal Revenue Code. As a result, retained
income of Lake Sunapee Bank, fsb, as of December 31, 1997 includes approximately
$1,896,000 for which federal and state income taxes have not been provided. If
the Bank no longer qualifies as a bank as defined in certain provisions of the
Internal Revenue Code, this amount will be subject to recapture in taxable
income ratably over six (6) years, subject to a combined federal and state tax
rate of approximately 39%.
NOTE 15. EARNINGS PER SHARE (EPS)
Reconciliation of the numerators and the denominators of the basic and
diluted per share computations for net income are as follows:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Year ended December 31, 1997
Basic EPS
Net income and income available to common stockholders $2,770,932 2,037,706 $1.36
Effect of dilutive securities, options 41,254
---------- ---------
Diluted EPS
Income available to common stockholders and assumed
conversions $2,770,932 2,078,960 $1.33
========== ========= =====
Year ended December 31, 1996 - As restated
Basic EPS
Net income and income available to common stockholders $ 610,711 1,694,410 .36
Effect of dilutive securities, options 28,573
---------- ---------
Diluted EPS
Income available to common stockholders and assumed
conversion $ 610,711 1,722,983 $ .35
========== ========= =====
Year ended December 31, 1995 - As restated
Basic EPS
Net income and income available to common stockholders $1,244,823 1,678,647 $ .74
Effect of dilutive securities, options 20,889
---------- ---------
Diluted EPS
Income available to common stockholders and assumed
conversion $1,244,823 1,699,536 $ .73
========== ========= =====
</TABLE>
NOTE 16. REGULATORY MATTERS:
The Company and the Bank are subject to various capital requirements
administered by their primary federal regulator, the Office of Thrift
Supervision (OTS). Failure to meet minimum regulatory requirements can initiate
mandatory, and possible additional discretionary actions by regulators, that if
undertaken, could have a direct material effect on the Company's and the
consolidated financial statements. Under the regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines involving quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications under the prompt corrective action guidelines are also subject
to qualitative judgments by the regulators about components, risk weightings and
other factors.
40
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. REGULATORY MATTERS: (continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total risk-based capital and Tier 1 capital to risk-weighted assets
(as defined in the regulations), Tier 1 capital to adjusted total assets (as
defined) and tangible capital to adjusted total assets (as defined).
Management believes, as of December 31, 1997, that the Bank meets all
capital requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the regulatory
frame work for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
--------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- --------- ------- -----
(Dollar amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Risk-Based Capital (to Risk
Weighted Assets) $21,611 11.86% $14,577 >8.0% $18,222 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets) 20,341 11.12 7,320 >4.0 10,979 >6.0
- -
Tier 1 Capital (to Adjusted Total Assets) 20,341 6.47 12,569 >4.0 15,711 >5.0
- -
Tangible Capital (to Adjusted Total Assets) 20,341 6.47 4,713 >1.5 N/A N/A
-
As of December 31, 1996:
Total Risk-Based Capital (to Risk
Weighted Assets) 18,146 12.00 12,097 >8.0 15,121 >10.0
- -
Tier 1 Capital (to Risk Weighted Assets) 17,862 11.81 9,072 >4.0 13,606 >6.0
- -
Tier 1 Capital (to Adjusted Total Assets) 17,862 6.76 7,932 >4.0 9,915 >5.0
- -
Tangible Capital (to Adjusted Total Assets) 17,862 6.76 3,966 >1.5 N/A N/A
-
</TABLE>
41
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values of the Company's financial instruments, all of
which are held or issued for purposes other than trading, were as follows as of
December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 13,306,626 $ 13,306,626 $ 11,002,749 $ 11,002,749
Securities available-for-sale 30,104,674 30,104,674 24,950,725 24,950,725
Securities held-to-maturity 75,000 75,000 340,276 340,276
Other investments 1,987,560 1,987,560 2,307,557 2,307,557
Loans 255,223,525 256,938,000 216,002,761 216,136,350
Loans held-for-sale 673,950 673,950 745,650 745,650
Accrued interest receivable 1,556,194 1,556,194 1,354,042 1,354,042
Financial liabilities:
Regular savings, NOW, demand and
money market deposits 138,129,310 138,129,310 107,218,430 107,218,430
Time deposits 133,097,650 133,535,000 106,740,465 107,416,000
Other borrowed funds 300,000 300,000 5,000 5,000
Securities sold under agreements to repurchase 8,393,192 8,393,192 8,662,736 8,662,736
Advances from Federal Home Loan Bank 10,246,318 10,237,000 20,174,025 20,162,000
</TABLE>
The carrying amounts of financial instruments shown in the above table are
included in the consolidated statements of financial condition under the
indicated captions.
The Company has no derivative financial instruments subject to the
provisions of SFAS No. 119 "Disclosure About Derivative Financial Instruments
and Fair Value of Financial Instruments." Accounting policies related to
financial instruments are described in Note 1.
NOTE 18. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS:
The following are condensed statements of financial condition, income and
cash flows for New Hampshire Thrift Bancshares, Inc. ("Parent Company") for the
years ended December 31:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Investment in subsidiary, Lake Sunapee Bank $24,128,876 $17,855,719
Advances to Lake Sunapee Bank 1,434,249 1,337,971
----------- -----------
Total assets $25,563,125 $19,193,690
=========== ===========
SHAREHOLDERS' EQUITY $25,563,125 $19,193,690
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Dividends from subsidiary $3,000,000 $1,000,000 $1,000,000
Operating expenses 4,380 13,874 12,830
---------- ---------- ----------
Income before equity in earnings of subsidiary 2,995,620 986,126 987,170
Equity in earnings (loss) of subsidiary (224,688) (375,415) 257,653
---------- ---------- ----------
Net income $2,770,932 $ 610,711 $1,244,823
========== ========== ==========
</TABLE>
42
<PAGE>
===============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. Condensed parent company financial statements: (continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,770,932 $ 610,711 $1,244,823
Equity in earnings (loss) of subsidiary 224,688 375,415 (257,653)
----------- --------- ----------
Net cash provided by operating activities 2,995,620 986,126 987,170
----------- --------- ----------
Cash flows from investing activities:
Additional investment in subsidiary (81,547) - -
Advances to subsidiary, net (96,278) (249,873) (207,217)
----------- --------- ----------
Net cash used in investing activities (177,825) (249,873) (207,217)
----------- --------- ----------
Cash flows from financing activities:
Proceeds from stock options exercised 699,553 154,295 203,475
Dividends paid (987,032) (847,066) (839,413)
Acquisition of Landmark Bank (2,275,000)
Repurchase of treasury stock (255,316) (43,482) (144,015)
----------- --------- ----------
Net cash used in financing activities (2,817,795) (736,253) (779,953)
----------- --------- ----------
Cash, end of year $ - $ - $ -
=========== ========= ==========
</TABLE>
The Parent Only Statements of Changes in Shareholders' Equity are identical
to the Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995, and therefore are not reprinted here.
43
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
SEC Commission Number 17859
For the fiscal year ended:
DECEMBER 31, 1997
NEW HAMPSHIRE THRIFT BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 02-0430695
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9 MAIN STREET, PO BOX 9
NEWPORT, NEW HAMPSHIRE 03773-0009
(Address)
Registrant's telephone number, including area code: (603) 863-0886
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Title of Class
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 reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
-------
The aggregate market value of the voting stock held by non-affiliates of the
registrant is between $41,339,306 and $40,431,811 based on a $21.41 average bid
and a $20.94 average asked price, respectively, as of December 31, 1997.
Number of shares of Common Stock Outstanding as of February 12, 1998: 2,088,497
44
<PAGE>
=====================================
NEW HAMPSHIRE THRIFT BANCSHARES, INC.
INDEX
<TABLE>
<CAPTION>
PART I
<S> <C> <C>
Item 1. Business....................................................................... 46
Item 2. Properties..................................................................... 57
Item 3. Legal Proceedings.............................................................. 58
Item 4. Submission of Matters to a Vote of Security Holders............................ 58
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters....... 58
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 58
Item 7. Financial Statements and Supplementary Information
Report of Independent Auditors................................................. 58
Consolidated Statements of Financial Condition................................. 58
Consolidated Statements of Income.............................................. 58
Consolidated Statements of Changes in Shareholders' Equity..................... 58
Consolidated Statements of Cash Flows.......................................... 58
Notes to Consolidated Financial Statements..................................... 58
Item 8. Disagreements on Accounting and Financial Disclosure........................... 59
PART III
Item 9. Directors and Executive Officers of the Registrant............................. 59
Item 10. Executive Compensation......................................................... 59
Item 11. Security Ownership of Certain Beneficial Owners and Management................. 59
Item 12. Certain Relationships and Related Transactions................................. 59
Item 13. Exhibits and Reports on Form 8-K
Exhibits....................................................................... 59
Reports on Form 8-K............................................................ 60
Signatures..................................................................... 61
</TABLE>
45
<PAGE>
PART I.
Item 1. Business
GENERAL
Organization
New Hampshire Thrift Bancshares, Inc. (NHTB), a Delaware holding company
organized on July 5, 1989, is the parent company of Lake Sunapee Bank, fsb
(LSB), a federally chartered savings bank. The Bank was originally chartered by
the State of New Hampshire in 1868 as the Newport Savings Bank. The Bank became
a member of the Federal Deposit Insurance Corporation (FDIC) in 1959 and a
member of the Federal Home Loan Bank of Boston in 1978. On December 1, 1980,
the Bank was the first bank in the United States to convert from a state-
chartered mutual savings bank to a federally-chartered mutual savings bank and
its deposits became insured by the Federal Savings and Loan Insurance
Corporation (FSLIC). In 1981, the Bank changed its name to "Lake Sunapee
Savings Bank, fsb" and in 1994, refined its name to "Lake Sunapee Bank, fsb."
In 1989, as a result of the Financial Institution Reform, Recovery, and
Enforcement Act (FIRREA), the Bank's deposits were insured by the Savings
Association Insurance Fund (SAIF).
Lake Sunapee Bank, fsb is a thrift institution established for the purposes of
providing the public with a convenient and safe place to invest funds, for the
financing of housing, consumer-oriented products and commercial loans, and for
providing a variety of other consumer-oriented financial services. The Bank is
a full-service community institution promoting the ideals of thrift, security,
home ownership and financial independence for its customers. The Bank's
operations are conducted from its home office located in Newport, New Hampshire
and its branch offices located in Sunapee, New London, Bradford, Grantham,
Guild, Lebanon, West Lebanon, Hillsboro, and Andover, New Hampshire. The Bank
had assets of approximately $318 million as of December 31, 1997.
Through its subsidiary, Lake Sunapee Financial Services Corporation (LSFSC),
the Bank offers brokerage services to its customers.
MARKET AREA
The Bank's market area consists of west-central New Hampshire in the counties
of Merrimack, Sullivan, Hillsboro, and Grafton. This area is best known for its
recreational facilities and its resort/retirement environment. Within the
market area are two major ski areas, several lakes, retirement communities, a
four-season recreational development center designed to support 3,500 families,
Colby Sawyer, New England, and Dartmouth Colleges and several industrial
manufacturing employers.
In addition to the year-round regional population, the Upper Valley-Kearsarge-
Lake Sunapee area has a sizable number of seasonal residents. In 1990, a total
of over 3,600 seasonal dwellings were listed by the Census Bureau. Based on an
occupancy rate of five persons per seasonal unit, the regional seasonal
population can be estimated to be over 18,000 persons.
LENDING ACTIVITIES
The Bank's loan portfolio totaled $259,060,873, including $673,950 of loans
held for sale at December 31, 1997, representing approximately 81% of total
assets. As of December 31, 1997, approximately 85% of the mortgage loan
portfolio had adjustable rates. As of December 31, 1997, the Bank had sold
$71,551,925 in fixed rate mortgage loans in an effort to meet customer demands
for fixed rate loans, minimize interest rate risk, and build a servicing
portfolio.
RESIDENTIAL LOANS. The Bank's loan origination team solicits residential
mortgage loans in the local real estate marketplace. Residential borrowers are
frequently referred to the Bank by its existing customers or real estate agents.
Generally, the Bank makes conventional mortgage loans (loans of 80% of value or
less that are neither insured nor partially guaranteed by government agencies)
on one- to four-family owner occupied dwellings. The Bank also makes
residential loans up to 95% of the appraised value if the top 20% of the loan is
covered by private mortgage insurance. Residential mortgage loans typically
have terms up to 30 years and are amortized on a monthly basis with principal
and interest due each month. Currently, the Bank offers one-year, three-year
and five-year adjustable-rate mortgage loans and long-term fixed rate loans.
Borrowers may prepay loans at their option or refinance their loans on
46
<PAGE>
terms agreeable to the Bank. The Bank's management believes that due to
prepayments in connection with refinancing and sales of property, the average
length of the Bank's long-term residential loans is approximately nine years.
Since the middle of the 1960's, the terms of conventional residential mortgage
loans granted by the Bank have contained a "due-on-sale" clause which permits
the Bank to accelerate the indebtedness of a loan upon the sale or other
disposition of the mortgaged property. Due-on-sale clauses are an important
means of increasing the turnover of mortgage loans in the Bank's portfolio.
CONSUMER LOANS. The Bank makes various types of secured and unsecured
consumer loans, including home improvement loans. The Bank offers loans secured
by automobiles, boats and other recreational vehicles. The Bank believes that
the shorter terms and the normally higher interest rates available on various
types of consumer loans is helpful in maintaining a more profitable spread
between the Bank's average loan yield and its cost of funds.
COMMERCIAL LOANS. The Bank offers commercial loans in accordance with
regulatory requirements. Under current regulation the bank is limited to 20% of
total assets. The Bank currently has approximately 8% commercial loans.
MUNICIPAL LOANS. The Bank's activity in the municipal lending market is
limited to those towns and school districts located within our primary lending
area and such loans are extended for the purposes of either tax anticipation,
building improvements or other capital spending requirements. Municipal lending
is considered to be an area of accommodation and part of the Bank's continuing
involvement with the communities it serves.
HOME EQUITY LOANS. The Bank provides Home Equity Loans secured by liens on
residential real estate located within the Bank's market area. These include
loans with regularly scheduled principal and interest payments as well as
revolving credit agreements. The interest rate on these loans is adjusted
quarterly and tied to the movement of the Prime Rate.
ORIGINATION, PURCHASE AND SALE OF LOANS
The primary lending activity of the Bank is the origination of conventional
loans (i.e., loans that are neither insured nor guaranteed in whole or in part
by governmental agencies) secured by first mortgage liens on residential
properties, principally single-family residences, substantially all of which are
located in the west-central area of New Hampshire.
The Bank appraises the security for each new loan made. Appraisals are made
for the Bank by qualified sub-contracted appraisers. The appraisal of the real
property upon which the Bank makes a mortgage loan is of particular significance
to the Bank in the event that the loan is foreclosed, since an improper
appraisal may contribute to a loss by or other financial detriment to the Bank
in the disposition of the loan.
Detailed applications for mortgage loans are verified through the use of
credit reports, financial statements and confirmations. Depending upon the size
of the loan involved, a varying number of senior officers of the Bank must
approve the application before the loan can be granted. At times, the Executive
Committee of the Bank is called together to review particularly large loans.
The Bank requires title certification on all first mortgage loans and the
borrower is required to maintain hazard insurance on the security property.
SERVICE CORPORATIONS
The Bank has an expanded service corporation authority because of its
conversion from a state-chartered mutual savings bank to a federal institution
in 1980. This authority, grandfathered in that conversion, permits the Bank to
invest 15% of its deposits, plus an amount of approximately $825,000, in service
corporation activities permitted by New Hampshire law. However, the first 3% of
these activities is subject to federal regulation and the remainder is subject
to state law. This permits a 3% investment in activities not permitted by state
law.
47
<PAGE>
As of December 31, 1997, the Bank had two service corporations, the Lake
Sunapee Group, Inc., and the Lake Sunapee Financial Services Corporation. The
Lake Sunapee Group owns and maintains the Bank's buildings and investment
properties.
COMPETITION
The Bank faces strong competition in the attraction of deposits. Its most
direct competition for deposits comes from the other thrifts and commercial
banks located in its primary market area. The Bank faces additional significant
competition for investors' funds from mutual funds and other corporate and
government securities.
The Bank competes for deposits principally by offering depositors a wide
variety of savings programs, a market rate of return, tax-deferred retirement
programs and other related services. The Bank does not rely upon any
individual, group or entity for a material portion of its deposits.
The Bank's competition for real estate loans comes from mortgage banking
companies, other thrift institutions and commercial banks. The Bank competes
for loan originations primarily through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers, real
estate brokers and builders. The Bank's competition for loans varies from time
to time depending upon the general availability of lendable funds and credit,
general and local economic conditions, current interest rate levels, volatility
in the mortgage markets and other factors which are not readily predictable.
During 1994, the Bank increased its outside origination staff to four loan
officers. These officers call on real estate agents, follow leads, and are
available seven days a week to service the mortgage loan market.
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination, and
supervision by the OTS, as its chartering agency, and the FDIC, as its deposit
insurer. The Bank's deposit accounts are insured up to applicable limits by the
SAIF administered by the FDIC, and the Bank is a member of the FHLB of Boston.
The Bank must file reports with the OTS and the FDIC concerning its activities
and financial condition, and it must obtain regulatory approvals prior to
entering into certain transactions, such as mergers with, or acquisitions of
other depository institutions. The OTS and the FDIC conduct periodic
examinations to assess the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which a savings association can engage and is
intended primarily for the protection of the insurance fund and depositors. The
Company, as a savings association holding company, is also required to file
certain reports with, and otherwise comply with, the rules and regulations of
the OTS and of the Securities and Exchange Commission (the "SEC") under the
federal securities laws.
The OTS and the FDIC have a significant discretion in connection with
their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations and their holding
companies, and it does not purport to be a comprehensive description of all such
statutes and regulations.
REGULATIONS OF FEDERAL SAVINGS ASSOCIATIONS
BUSINESS ACTIVITIES. The Bank derives its lending and investment
powers from the Home Owners' Loan Act, as amended (the "HOLA"), and the
regulations of the OTS thereunder. Under these laws and regulations, the Bank
may invest in mortgage loans secured by residential and commercial real estate,
commercial and consumer loans, certain types of debt securities, and certain
other assets. The Bank may also establish service corporations that may engage
in activities not otherwise permissible for the Bank, including certain real
estate equity investments and securities and insurance brokerage. These
investment powers are subject to various limitations, including (a) a
prohibition against the acquisition of any corporate debt security that is not
rated in one of the four highest rating categories; (b) a limit of 20% of an
association's assets on the aggregate amount of commercial loans; (d) a limit of
35% of an association's assets on the aggregate amount of consumer loans and
48
<PAGE>
acquisitions of certain debt securities; (e) a limit of 5% of assets or an
association's capital on certain construction loans made for the purpose of
financing what is or is expected to become residential property.
LOANS TO BORROWER. Under the HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. Additional amounts may be
lent, not in excess of 10% of impaired capital and surplus, if such loans or
extensions of credit are fully secured by readily marketable collateral. Such
collateral is defined to include certain debt and equity securities and bullion
but generally does not include real estate. At December 31, 1997, the Bank's
regulatory limit on loans to one borrower was $3.7 million. At December 31,
1997, the Bank's largest aggregate amount of loans to one borrower was
$2,415,966, and the second largest borrower had an aggregate balance of
$1,638,000. The Bank is in compliance with all applicable limitations on loans
to one borrower.
QTL TEST. The HOLA requires a savings association to meet a qualified
thrift leader, or "QTL" test. Under the QTL test, a savings association is
required to maintain at least 65% of its "portfolio assets" in certain
"qualified thrift investments" in at least nine months of the most recent 12-
month period. "Portfolio assets" means in general, an association's total
assets less the sum of (a) specified liquid assets up to 20% of total assets,
(b) certain intangibles, including goodwill and credit card and purchased
mortgage servicing rights, and (c) the value of property used to conduct the
association's business. "Qualified thrift investments" includes various types
of loans made for residential and housing purposed, investments related to such
purposes, including certain mortgage-backed and related securities, consumer
loans, small business loans, educational loans, and credit card loans. At
December 31, 1997, the Bank maintained 88.38% of its portfolio assets in
qualified thrift investments. The Bank had also met the QTL test in each of the
prior 12 months and was, therefore, a qualified thrift leader. A savings
association may also satisfy the QTL test by qualifying as a "domestic building
and loan association" as defined in the Internal Revenue Code of 1986.
A savings association that fails the QTL test must either operate
under certain restrictions on its activities or convert to a bank charter. The
initial restrictions include prohibitions against (a) engaging in any new
activity not permissible for a national bank, (b) paying dividends not
permissible under national bank regulations, (c) obtaining new advances from any
federal Home Loan Bank and (d) establishing any new branch office in a location
not permissible for a national bank in the association's home state. In
addition, within one year of the date that a savings association ceases to meet
the QTL test, any company controlling the association would have to register
under, and become subject to the requirements of, the Bank Holding Company Act
of 1956, as amended (the"BHC Act"). If the savings association does not
requalify under the QTL test within the three-year period after it failed the
QTL test, it would be required to terminate any activity and to dispose of any
investment not permissible for a national bank and would have to repay as
promptly as possible any outstanding advances from a Federal Home Loan Bank. A
savings association that has failed the QTL test may requalify under the QTL
test and be free of such limitations, but it may only do so once.
CAPITAL REQUIREMENTS. The OTS regulations require savings
associations to meet three minimum capital standards: a tangible capital to such
adjusted total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 3% of core capital to such adjusted assets and a risk-based
capital ratio requirement of 8% of total risk-based capital to total risk-
weighted assets. In determining compliance with the risk-based capital
requirement, a savings association must compute its risk-weighted assets by
multiplying its assets and certain off balance sheet items by risk weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. Tangible capital is defined, generally, as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related earnings), certain noncumulative perpetual
preferred stock and related earnings and minority interests in equity accounts
of fully consolidated subsidiaries, less intangibles (other than certain
purchased mortgage servicing rights) and investments in and loans to
subsidiaries engaged in activities not permissible for a national bank. Core
capital is defined similarly to tangible capital, but core capital also includes
certain qualifying supervisory goodwill and certain purchased credit card
relationships. Supplementary capital currency includes cumulative and other
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses.
The allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital. The OTS has promulgated a regulation that requires a
savings association with "above normal" interest rate risk, when determining
compliance with its risk-based capital requirement, to hold additional capital
to account for its "above normal" interest rate risk. Pending resolution of
related regulatory issues, the OTS has deferred enforcement of this regulation.
A savings association's assets as calculated in accordance with
49
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guidelines set forth by the OTS. At the times when the 3 month Treasury bond
equivalent yield falls below 4% an association may compute its interest rate
risk on the basis of a decrease equal to one-half of that Treasury rate rather
than on the basis of 2%. A savings association whose measured interest rate risk
exposure exceeds 2% would be considered to have "above normal" risk. The
interest rate risk and 2% multiplied by the estimated economic value o the
association's assets. That dollar amount is deducted from an association's total
capital in calculating compliance with its risk based capital requirement. Any
required deduction for interest rate risk becomes effective on the last day of
the third quarter following the reporting date of the association's financial
data on which the interest rate risk was computed. An institution with assets of
less than $300 million and risk-based capital ratio in excess of 12% is not
subject to the interest rate risk component, unless the OTS determines
otherwise. The rule also provides the Director of the OTS may waive or defer an
institution's interest rate risk component on a case-by case basis. The OTS has
indefinitely deferred the implementation of the interest rate component in the
computation of an institution's risk-based capital requirements. The OTS
continues to monitor the interest rate risk of individual institutions and
retains the right to impose additional capital requirements on individual
institutions. For information pertaining to capital requirements please see Note
14 of the Financial Statements.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations currently
impose limitations upon capital distributions by savings associations, such as
cash dividends, payments to repurchase or otherwise acquire it shares, payments
to shareholders of another institution in a cash cut merger and other
distributions charged against capital. At least 30-days written notice must be
given to the OTS of a proposed capital distribution by a savings association,
and capital distributions in excess of specified earnings or by certain
institutions are subject to approval by the OTS. An association that has
capital in excess of all fully phased-in regulatory capital requirements before
and after a proposed capital distribution may, after prior notice but without
the approval of the OTS, make capital distributions during a calendar year equal
to the greater of (a) 100% of its net earnings to date during the calendar year
plus the amount that would reduce by its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning of the
calendar year, or (b) 75% of its net earnings for the previous four quarters.
Any additional capital distributions would require prior OTS approval. In
addition, the OTS can prohibit a proposed capital distribution, otherwise
permissible under the regulation, if the OTS has determined that the association
is in need of more than normal supervision or if it determines that a proposed
distribution by an association would constitute an unsafe or unsound practice.
Furthermore, under the OTS prompt corrective action regulations, the Bank would
be prohibited from making any capital distribution; the Bank failed to meet its
minimum capital requirements, as described above.
ASSESSMENTS. Savings associations are required by OTS regulators to
pay assessments to the OTS to find the operations of the OTS. The general
assessment, paid on a semiannual basis, is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported in
the association's latest quarterly Thrift Financial Report. During July 1997,
the Bank paid the semiannual assessment of $40,274.
BRANCHING. Subject to certain limitations, the HOLA and the OTS
regulations permit federally chartered savings associations to establish
branches in any state of the United States. The authority to establish such
branches is available (a) in states that expressly authorize branches of savings
associations located in another state or (b) to an association that either
satisfies the "QTL" test for a qualified thrift leader or qualifies as a
"domestic building and loan association" under the Internal Revenue Code of
1986, which composes qualification requirements similar to those for a
"qualified thrift leader" under the HOLA. See "QTL" Test. The authority for a
federal savings association to establish an interstate branch network would
facilitate a geographic diversification of the association's activities. This
authority under the HOLA and the OTS regulations preempts any state law
purporting to regulate branching by federal savings associations.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (the
"CRA"), as implemented by OTS regulations, a savings association has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with it examination of a savings
association, to asses the association's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such association. The CRA also requires all institutions to
make public disclosure of their CRA ratings. The Bank received a "Satisfactory"
CRA rating in its most recent examinations.
In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in
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meeting community needs. In particular, the system will focus on three tests:
(a) a lending test, to evaluate the institution's record of making loans in its
assessment areas; (b) an investment test, to evaluate the institutions record of
investing in community development projects, affordable housing, and programs
benefiting low or moderate income individuals and businesses; and (c) a service
test, to evaluate the institution's delivery of services through its branches,
ATMs and other offices. The amended CRA regulations also clarify how an
institution's CRA performance would be considered in the application process.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act (the "FRA"). In general, an
affiliate of the Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank or any other company that
is controlled by a company that controls the Bank, excluding the Banks'
subsidiaries other than those that are insured depository institutions. The OTS
regulations prohibit a savings association (a) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) at the BHC Act and (b) from purchasing the
securities of any affiliates other than a subsidiary. Section 23A limits the
aggregate amount of transactions with all affiliates to 20% of the savings
association's capital and surplus. Extensions of credit to affiliates are
required to be secured by collateral in an amount and of a type described in
Section 23A, and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the association as those prevailing at the time for comparable
transactions with nonaffiliated companies. In the absence of comparable
truncations, such truncations may only occur under terms and circumstances,
including credit standards, which in good faith would be offered to or would
apply to nonaffiliated companies.
The Bank's authority to extend credit to its directors, executive
officers, and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Section 22(g) and 22(h) of
the FRA and Regulation O of the FRB thereunder. Among other things, these
provisions require that extensions of credit to insiders (a) be made on terms
that are substantially the same as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features and (b) not exceed certain
limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of the
association's capital. In addition, extensions of credit in excess of certain
limits must be approved by the association's board of directors.
ENFORCEMENT. Under the Federal Deposit Insurance Act (the "FDIC Act),
the OTS has primary enforcement responsibility over savings associations and has
the authority to bring enforcement action against all "institution affiliated
parties," including any controlling stockholder, attorney, appraiser or
accountant who knowingly or recklessly participates in any violation of
applicable law or regulation or regulation or breach of fiduciary duty or
certain other wrongful actions that causes or is likely to cause more than a
minimal loss or other significant adverse effect on an insured savings
association. Civil penalties cover a wide range of violations and actions and
range from $5,000 for each day during which violations of law, regulations,
orders, and certain written agreements and conditions continue, up to $1 million
per day for such violations if the person obtained a substantial pecuniary gain
as a result of such violation or knowingly or recklessly caused a substantial
loss to the institution. Criminal penalties for certain financial institution
crimes include fines up to $1 million and imprisonment for up to 30 years. In
addition, regulators have substantial discretion to take enforcement action
against an institution that fails to comply with its regulatory requirements,
particularly with respect to its capital requirements. Possible enforcement
actions range from the imposition of a capital plan and capital directive to
receivership, conservatorship, of the termination of deposit insurance. Under
the FDI Act, the FDIC has the authority to recommend to the Director of OTS the
enforcement action be taken with respect to a particular savings association.
If action is not taken by the Director of OTS the enforcement action be taken
with respect to a particular savings association. If action is not taken by the
Director of the OTS, the FDIC has authority to take such action under certain
circumstances.
STANDARDS FOR SAFETY AND SOUNDNESS. Pursuant to the FDI Act, as
amended by FDICIA and the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "Community Development Act"), the OTS and the
federal bank regulatory agencies have adopted, a set of guidelines prescribing
safety and soundness standards pursuant to FDIC, as amended. The guidelines
establish general standards relating to internal controls and information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, asset quality, earnings standards, and
compensation, fees and benefits. In general, the guidelines require, among
other things, appropriate systems and practices to identify and manage the risks
and exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or
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disappropriate to the services performed by an executive officer, employee,
director or principal stockholder. In addition, the OTS adopted regulations that
authorize, but do not require, the OTS to order an institution that has been
given notice by the OTS that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If, after being so notified, an
institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the OTS must issue an
order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association is
subject under the "prompt corrective action" provisions of FDICIA. If an
institution fails to comply with such an order, the OTS may seek to enforce such
order in judicial proceedings and to impose civil money penalties.
REAL ESTATE LENDING STANDARDS. The OTS and other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (a) are secured by real estate or (b) are made for the purpose of financing
the construction of improvements on real estate. The OTS regulations require
each savings association to establish and maintain written internal real estate
lending standards that are consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its real
estate lending activities. The standards also must be consistent with
accompanying OTS guidelines, which include loan-to-value ratios for the
different types of real estate loans. Associations are also permitted to make a
limited amount of loans that do not conform to proposed loan-to-value
limitations so long as such exemptions are reviewed and justified appropriately.
The guidelines also list a number of lending situations in which exceptions to
the loan-to-value standards are justified.
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective
action regulations, the OTS is required to take certain, and is authorized to
take other, supervisory actions against undercapitalized savings associations.
For this purpose, a savings association would be placed in one of five
categories based on the association's capital. Generally, a savings association
is treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10.0%, its ratio of core capital to risk weighted assets is
at least 6.0%, its ratio of core capital to total assets is at least 5.0%, and
it is not subject to any order or directive by the OTS to meet a specified
capital level. A savings association will be treated as "adequately
capitalized" if its ratio of total to risk-weighted assets is at least 8.0%, its
ratio of core capital to risk weighted assets is at least 4.0%, and its ratio of
core capital to total assets is at least 8.0%, its ratio core capital to risk
weighted assets is at least 4.0%, and its ratio o core capital to total assets
is at least 4.0% (3.0% leverage ratio if the association receives the highest
rating on the CAMEL financial institution rating system). A savings association
that has a total risk based capital of less than 8.0% or a leverage ratio of or
a Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if the
association receives the highest rating on the CAMEL: financial institutions
rating system) is considered to be "undercapitalized." A savings association
that has a total risk based capital of less than 6.0% or a Tier 1 risk based
capital ratio or a leverage of less than 3.0% is considered to be "significantly
undercapitalized". A savings association that has tangible capital to assets
ratio equal to or less than 2% is deemed to be "critically undercapitalized."
The elements of an association's capital for purposes of the prompt corrective
action regulations are defined generally as they are under the regulations for
minimum capital requirements.
The severity of the action authorized or required to be taken under
the prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital distribution or paying management fees to any
controlling person if, following such distribution, the association would be
undercapitalized. An undercapitalized association is required to file a capital
restoration plan within 45 days of the date the association receives notice that
it is within any of the three undercapitalized categories. The OTS is required
to monitor closely the condition of an undercapitalized association and to
restrict the asset growth, acquisitions, branching, and new lines of business of
such an association. Significantly undercapitalized associations are subject to
restrictions on compensation of senior executive officers; such an association.
Significantly undercapitalized associations are subject to restrictions on
compensation of senior executive officers; such an association may not, without
OTS consent, pay any bonus or provide compensation to any senior executive
officer at a rate exceeding the officer's average rate of compensation
(excluding bonuses, stock options and profit-sharing) during the 12 months
preceding the month when the association became undercapitalized. A
significantly undercapitalized association may also be subject, among other
things, to forced changes in the composition of its board of directors or senior
management, additional restrictions on transactions with affiliates,
restrictions on acceptance of deposits from correspondence associations, further
restrictions on asset growth, restrictions on rates paid on deposits, forced
termination or reduction of activities deemed risky, and any further operational
restrictions deemed necessary by the OTS.
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If one or more grounds exist for appointing a conserver or receiver
for an association, the OTS may require the association to issue additional debt
or stock, sell assets; be acquired by a depository association holding company
or combine with another depository association. The OTS and the FDIC have a
broad range of grounds under which they may appoint a receiver or conservator
for an insured depository association holding company or combine with another
depository association. The OTS and the FDIC have a broad range of grounds
under which they may appoint a receiver or conservator for an insured depository
association. Under FDICIA, the OTS is required to appoint a receiver (or with
the concurrence of the FDIC, a conservator) for a critically undercapitalized
association within 90 days after the association becomes critically
undercapitalized or, with the concurrence of the FDIC, to take such other action
that would better achieve the purposes of the prompt corrective action
provisions. Such alternative action can be renewed for successive 90-day
periods. However, if the association continues to be critically
undercapitalized on average during the quarter that begins 270 days after it
first became critically undercapitalized, a receiver must be appointed, unless
the OTS makes certain findings with which the FDIC concurs and the Director of
the OTS and the Chairman of the FDIC certify that the association is viable. In
addition, an association that is critically undercapitalized is subject to more
severe restrictions on its activities, and is prohibited, without prior approval
of the FDIC from, among other things, entering into certain material
transactions or paying interest on new or renewed liabilities at a rate that
would significantly increase the association's weighted average cost of funds.
When appropriate, the OTS can require corrective action by a savings
association holding company under the "prompt corrective action" provisions of
FDICIA.
INSURANCE OF DEPOSIT ACCOUNTS
The Bank is a member of the SAIF, and the Bank pays its deposit insurance
assessments to the SAIF. The FDIC also maintains another insurance fund, the
BIF, which primarily insures the deposits of banks and state chartered savings
banks.
Pursuant to FDICIA, the FDIC established a new risk-based assessment system
for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the new assessment system, which began in 1993,
the FDIC assigns an institution to one of three capital categories based on the
institution's financial information of the reporting period ending seven months
before the assessment period. The three capital categories consist of (a) well-
capitalized, (b) adequately capitalized or (c) undercapitalized. The FDIC also
assigns an institution to one of three supervisory subcategories within each
capital group. The supervisory subgroup to which an institution is assigned is
based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's assessment rate depends on the
capital category and supervisory category to which it is assigned. Under the
regulation, there are nine assessment risk classifications (i.e., combinations
of capital groups and supervisory subgroups) to which different assessment rates
are applied. Assessment rates for both the BIF and the SAIF had ranged from 0%
of deposits for an institution in the highest category (i.e., well-capitalized
and financially sound, with no more than a few minor weaknesses) to 0.27% of
deposits for an institution in the lowest category (i.e., undercapitalized and
substantial supervisory concern).
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "1996
Act") was enacted into law, and it amended the FDI Act in several ways to
recapitalize the SAIF and reduce the disparity in the assessment rates for the
BIF and the SAIF. The 1996 Act authorized the FDIC to impose a special
assessment on all institutions with SAIF-assessable deposits in the amount
necessary to recapitalize the SAIF. As implemented by the FDIC, the special
assessment has been fixed, subject to adjustment, at 65.7 basis points of an
institution's SAIF-assessable deposits, and the special assessment will be paid
on November 27, 1996. The special assessment is based on the amount of SAIF-
assessable deposits held on March 31, 1995. The special SAIF assessment was
paid by the Bank on November 27, 1996 in the amount of $994,025. The impact on
operations net of related tax effects; reduced reported earnings by
approximately $350,000 for the year ended December 31, 1996.
The 1996 Act also provides, that the FDIC cannot assess regular insurance
assessments for an insurance fund unless required to maintain or to achieve the
designated reserve ratio of 1.25%, except on those of its member institutions
that are not classified as "well capitalized" or that have been found to have
"moderately severe" or "unsatisfactory" financial, operational or compliance
weakness. The Bank has not been so classified by the FDIC or the OTS.
Accordingly, assuming that the designated reserve ratio is maintained by the BIF
and by the SAIF after the collection of the special SAIF assessment and the Bank
maintains its regulatory status, the Bank will have to pay substantially lower
regular assessments on its deposits compared to those paid in recent years.
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In addition, the 1996 Act expanded the assessment base for the payments on the
FICO bonds to include, beginning January 1, 1997, the deposits of both BIF- and
SAIF-insured institutions. Until December 31, 1999, or such earlier date on
which the last savings association ceases to exist, the rate of assessment for
BIF-assessable deposits shall be one-fifth of the rate imposed on SAIF-
assessable deposits. It has been estimated that the rate of assessments for the
payment of interest on the FICO bonds will be approximately 1.3 basis points for
BIF assessable deposits and approximately 6.4 basis points for SAIF-assessable
deposits beginning on January 1, 1997.
The 1996 Act also provides for the merger of the BIF and SAIF on January 1,
1999, with such merger being conditioned upon the prior elimination of the
thrift charter. The Secretary of the Treasury is required to conduct a study of
relevant factors with respect to the development of a common charter for all
insured depository institutions and abolition of separate chargers for banks and
thrift and to report the Secretary's conclusions and findings to the Congress.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition, or
violation that might lead to termination of deposit insurance.
REGULATIONS OF SAVINGS ASSOCIATION HOLDING COMPANIES
NHTB is a non-diversified unitary savings association holding company within
the meaning of the HOLA. As such, NHTB is required to register with the OTS and
is subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority of NHTB and its
non-savings association subsidiaries, if any. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the financial safety, soundness, or stability of a
subsidiary savings association.
The HOLA prohibits a savings association holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
association or holding company thereof, without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-
subsidiary savings association, a non-subsidiary holding company, or a non-
subsidiary company engaged in activities other than those permitted by the HOLA;
or acquiring or retaining control of a depository institution that is not
insured by the FDIC. In evaluating an application by a holding company to
acquire a savings association, the OTS must consider the financial and
managerial resources and future prospects of the company and savings association
involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community and competitive factors.
As a unitary savings association holding company, NHTB is not restricted under
existing laws as to the types of business activities in which it may engage,
provided that the Bank continues to satisfy the QTL test. See "--Regulation of
Federal Savings Associations--QTL Test" for a discussion of the QTL
requirements. Upon any non-supervisory acquisition by NHTB of another savings
association or savings bank that meets the QTL test and is deemed to be a
savings association by the OTS and that will be held as a separate subsidiary,
NHTB would become a multiple savings association holding company and would be
subject to limitations on the types of business activities in which it could
engage. The HOLA limits the activities of a multiple savings association
holding company and its non-insured association subsidiaries primarily to
activities permissible for bank holding companies under Section 4(c)(8) of the
BHC Act, subject to the prior approval of the OTS, and to other activities
authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings association holding company controlling savings associations in
more than one state, subject to two exceptions: an acquisition of a savings
association in another state (a) in a supervisory transaction or (b) pursuant to
authority under the laws of the state of the association to be acquired that
specifically permit such acquisitions. The conditions imposed upon interstate
acquisitions by those states that have enacted authorizing legislation vary.
Some states impose conditions of reciprocity, which have the effect of requiring
that the laws of both the state in which the acquiring holding company is
located (as determined by the location of its subsidiary savings association)
and the state in which the association to be acquired is located, have each
enacted legislation allowing its savings associations to be acquired to out-of-
state holding companies on the condition that the laws of the other state
authorize such transactions on terms no more restrictive than those imposed on
the acquiror by the state of the target association. Some of these states also
impose regional limitations, which restrict such acquisitions to states within a
defined geographic region. Other states allow
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full nationwide banking without any condition of reciprocity. Some states do not
authorize interstate acquisitions of savings associations.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB of Boston, which is one of the regional
Federal Home Loan Banks composing the Federal Home Loan Bank System. Each
Federal Home Loan Bank provides a central credit facility primarily for its
member institutions. The Bank, as a member of the FHLB of Boston, is required
to acquire and hold shares of capital stock in the FHLB of Boston in an amount
at least equal to the greater of 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year or 1/20 of its advances (borrowings) from the FHLB of Boston. The
Bank was in compliance with this requirement with an investment in the capital
stock of the FHLB of Boston at December 31, 1997, of $1.9 million. Any advance
from a Federal Home Loan Bank must be secured by specified types of collateral,
and all long-term advances may be obtained only for the purpose of providing
funds for residential housing finance.
The Federal Home Loan Banks are required to provide funds for the resolution
of insolvent thrifts and to contribute funds for affordable housing programs.
These requirements could reduce the amount of earnings that the Federal Home
Loan Banks can pay as dividends to their members and could also result in the
Federal Home Loan Banks imposing a higher rate of interest on advances to their
members. The Bank earned dividends on the FHLB of Boston capital stock in
amounts equal to $119,109, $120,506, and $150,058 during the years ended
December 31, 1997, 1996, and 1995, respectively. If dividends were reduced, or
interest on future Federal Home Loan Bank advances increased, the Bank's net
interest income would likely also be reduced.
LIQUIDITY
The Bank is required to maintain an average daily balance of liquid assets
(cash, certain time deposits, bankers' acceptances, specified United States
Government, state or federal agency obligations, shares of certain mutual funds
and certain corporate debt securities and commercial paper) equal to a monthly
average of not less than a specified percentage of its net withdrawable deposit
accounts plus short-term borrowings. This liquidity requirement may be changed
from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member institutions,
and is currently 5%. OTS regulations also require each savings association to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1%) of the total of its net withdrawable deposit accounts
and borrowings payable in one year or less. Monetary penalties may be imposed
for failure to meet these liquidity requirements. The Bank's average long-term
liquidity ratio for the month ended December 31, 1997 was 12.81% which exceeded
the applicable requirements. The Bank has never been subject to monetary
penalties for failure to meet its liquidity requirements.
YEAR 2000
Certain computer equipment, computer programs and systems that are controlled
by computer programs were originally programmed with six digit dates that
provided only two digits for the calendar year. With the impending millennium,
these programs and computers will recognize "00" as the year 1900 rather than
the year 2000. Therefore, if the problem is not adequately addressed, this
software could produce inaccurate or unpredictable results on January 1, 2000.
The Company, like most financial services providers, may be significantly
affected by the "Year 2000 Issue" due to the nature of financial information.
Software, hardware, and equipment both within and outside the Company's direct
control and with whom the Company electronically or operationally interfaces
(e.g. vendors providing credit bureau information) are likely to be affected.
As a result, many calculations which rely on the date field information, such as
interest, payment or due dates and other operating functions, will generate
results which could be significantly misstated.
Financial institution regulators have recently increased their focus upon Year
2000 Issues, issuing guidance concerning the responsibilities of senior
management and directors. Year 2000 testing and certification is being
addressed as a key safety and soundness issue in conjunction with regulatory
exams. Each federal regulated financial institution is under a mandate to
survey its exposure, measure the risk and to prepare a plan in order to solve
the Year 2000 Issue.
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In order to address the Year 2000 Issue and to minimize its potential adverse
impact, management has begun a process to identify areas that will be affected
by the Year 2000 Issue assess its potential; impact on the operations of the
Bank, monitor the progress of third party software vendors in addressing the
matter, test changes provided by these vendors, and develop contingency plans
for any critical systems which are not effectively reprogrammed.
Because the Company outsources its data processing and item processing
operations, a significant component of the Year 2000 plan is working with
external vendors to test and certify their systems as Year 2000 compliant. The
Company's external vendors have surveyed its programs to inventory the necessary
changes and have begun correcting the applicable computer programs and replacing
equipment so that the Company's information systems will be Year 2000 compliant
prior to the end of 1998. This will enable the Company to devote substantial
time to the testing of the upgraded systems prior to the arrival of the
millennium in order to comply with all applicable regulations.
In addition, monitoring and managing the year 2000 project will result in
additional direct and indirect costs to the Bank. Direct costs include
potential charges by third party software vendors for product enhancements,
costs involved in testing software for year 2000 compliance, and any resulting
costs for developing and implementing contingency plans for critical software
products not enhanced. Indirect costs will principally consist of the time
devoted by existing employees in monitoring software vendor progress, testing
enhanced software products and implementing any necessary contingency plans.
Both direct and indirect costs of addressing the Year 2000 Issue will be charged
to earnings incurred. Such costs have not been material to date.
TAXATION
A thrift institution organized in stock form which utilizes the bad debt
reserve method for bad debt will be subject to certain recapture taxes on such
reserves in the event it makes certain types of distributions to its
stockholders. Dividends may be paid out of appropriated retained income without
the imposition of any tax on an institution to the extent that the amounts paid
as dividends do not exceed such current and accumulated earnings and profits as
calculated for federal income tax purposes. Stock redemptions, dividends paid
in excess of an institution's current and accumulated earnings and profits as
calculated for tax purposes, and partial or complete liquidation distributions
made with respect to an institution's stock, however, are deemed under
applicable provisions of the Code to be made from the institution's bad debt
reserve, to the extent that such reserve exceeds the amount that could have been
accumulated under the actual experience method. In the event a thrift
institution makes a distribution that is treated as having been made from the
tax bad debt reserve, the distribution is treated as an after tax distribution
and the institution will be liable for tax on the gross amount before tax at the
then current tax rate. Amounts added to the bad debt reserves for federal
income tax purposes are also used by the Bank to meet the OTS reserve
requirements described under "Regulation-Insurance of Accounts."
The Bank's tax returns have been audited and accepted through December 31,
1996 by the Internal Revenue Service.
STATE INCOME TAX
The Bank is subject to an annual Business Profits Tax (BPT) imposed by the
State of New Hampshire at the rate of 7.00% of the total amount of federal
taxable income, less deductions for interest earned on United States government
securities. During 1993, the State of New Hampshire instituted a Business
Enterprise Tax (BET), which places a tax on certain expense items. Interest,
dividends, wages, benefits and pensions are taxed at a rate of 0.25%. Business
Enterprise Taxes are allowed as a credit against the Business Profits Tax.
Upon conversion to a holding company, NHTB became subject to a state franchise
tax imposed by Delaware. For the year ended 1997, the tax amounted to $13,783.
At December 31, 1997, LSB had a total of 108 full-time employees and 24 part-
time employees. These employees are not represented by collective bargaining
agents. LSB believes that its relationship with its employees is good.
FEDERAL SECURITIES LAWS
The Company's common stock is registered with the SEC under Section 12 (g) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
company is subject to information, proxy solicitation, insider trading
restrictions and other requirements of the Exchange Act.
56
<PAGE>
ITEM 2. PROPERTIES
The following table sets forth the location of the LSB offices and certain
additional information relating to these offices at December 31, 1997:
<TABLE>
<CAPTION>
YEAR NET BOOK VALUE EXPIRATION LEASE RENEWAL
Location Opened LEASED Owned DATE OF LEASE OPTION
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Corporate Office
9 Main Street
Newport, NH 1868 $ 1,473,416
Guild Office
300 Sunapee Street
Newport, NH 1978 $ 103,758
Bradford Office
115 East Main Street
Bradford, NH 1975 $ 77,853
Grantham Office
165 Route 10 South
Grantham, NH 1980 $ 308,945.
Hanover Street Office
106 Hanover Street
Lebanon, NH 1997 $ 2,152,778.
Lebanon Office
200 Heater Road
Lebanon, NH 1986 $ 571,868
New London Office
24 Newport Road
New London, NH 1981 $ 401,354
Sunapee Office
565 Route 11
Sunapee, NH 1965 $ 88,147
Andover Office (1)
720 Main Street
Andover, NH 1987 $ 33,695 -
Centerra Office (1)
12 Centerra Pkwy.
Lebanon, NH 1997 $ 174,451 2007 5 Years
Hillsboro Office (1)
15 Antrim Road
Hillsboro, NH 1994 $ 17,603 2000 4 Years
West Lebanon Office (1)
83 Main Street
West Lebanon, NH 1994 $ 126,593 1999 15 Years
</TABLE>
(1) Operating lease, value of improvements.
57
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There is no material litigation pending in which the Company is a party or which
the property of the Company is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the security holders of the company during the
fourth quarter.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The following table shows the market range for the Company's Common Stock based
on reported sales prices on the NASDAQ Market System. New Hampshire Thrift
Bancshares, Inc. is traded under the symbol NHTB.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
----------------------------------------------------------
<S> <C> <C> <C>
1997 First Quarter $ 12 3/4 $ 11 3/4
Second Quarter 15 1/2 11 3/4
Third Quarter 21 1/4 15 3/8
Fourth Quarter 22 3/4 18 1/4
1996 First Quarter $ 10 1/2 $ 9 1/4
Second Quarter 10 7/16 9 1/2
Third Quarter 12 1/2 9 3/4
Fourth Quarter 13 1/2 11 3/8
</TABLE>
The bid quotations set forth above represent prices between dealers and do not
include retail mark-ups, mark-downs or commissions and may not represent actual
transactions. As of December 31, 1997, New Hampshire Thrift Bancshares, Inc.
had approximately 785 stockholders of record. The number of stockholders does
not reflect the number of persons or entities who held their stock in nominee or
"street" name through various brokerage firms.
The following table sets forth certain information regarding per share dividends
declared on the Company's Common Stock:
<TABLE>
<CAPTION>
1997 1996
------------------
<S> <C> <C>
First Quarter $ .125 $ .125
Second Quarter .125 .125
Third Quarter .125 .125
Fourth Quarter .125 .125
</TABLE>
For information regarding limitations of the declaration and payment of
dividends by New Hampshire Thrift Bancshares, Inc., see Note 14 of the Notes to
Consolidated Financial Statements.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OPERATING RESULTS
The information called for by this item is contained on pages 7 through 17 of
this document.
ITEM 7. FINANCIAL STATEMENTS
The report of independent accountants and the financial information called for
by this item are contained on pages 18 through 43 of this document.
58
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information relating to directors and executive officers of the Company,
executive compensation, security ownership of certain beneficial owners and
management, and certain relationships and related transactions is incorporated
by reference herein from the Company's definitive proxy statement in connection
with its Annual Meeting of Shareholders to be held on April 8, 1998, which proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the close of the fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
Certain information relating to directors and executive officers of the Company,
executive compensation, security ownership of certain beneficial owners and
management, and certain relationships and related transactions is incorporated
by reference herein from the Company's definitive proxy statement in connection
with its Annual Meeting of Shareholders to be held on April 8, 1998, which proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the close of the fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Certain information relating to directors and executive officers of the Company,
executive compensation, security ownership of certain beneficial owners and
management, and certain relationships and related transactions is incorporated
by reference herein from the Company's definitive proxy statement in connection
with its Annual Meeting of Shareholders to be held on April 8, 1998, which proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the close of the fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain information relating to directors and executive officers of the Company,
executive compensation, security ownership of certain beneficial owners and
management, and certain relationships and related transactions is incorporated
by reference herein from the Company's definitive proxy statement in connection
with its Annual Meeting of Shareholders to be held on April 8, 1998, which proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the close of the fiscal year.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
The exhibits filed as a part of this Registration Statement are as
follows:
(A). LIST OF EXHIBITS. (Filed herewith unless otherwise noted.)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement as Plan of Reorganization, dated as of July 26,
1996, by and among New Hampshire Thrift Bancshares, Inc.
("NHTB"), Lake Sunapee Bank, fsb (the "Bank") and Landmark
Bank. ("Landmark"), including Annex A, Agreement and Plan of
Merger, dated as of July 26, 1996, by and between Landmark
and the Bank, and joined in by NHTB (previously filed as an
Exhibit to the Company's Form S-4 (No. 333-12645) filed with
the Securities and Exchange Commission (the "Commission") on
November 5, 1996 (the "November 5, 1996 S-4"))
59
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of NHTB
(previously filed as an exhibit to the November 5, 1996
S-4).
3.2 Amended and Restated Bylaws of NHTB.
4.1 Stock Certificate of New Hampshire Thrift Bancshares, Inc.
(previously filed as an exhibit to the Company's Form S-4
(file No. 33-27192) filed with the Commission on March 1,
1989).
10.1 Profit Sharing-Stock Ownership Plan of Lake Sunapee Bank,
fsb (previously filed as an exhibit to the November 5, 1996
S-4).
10.2 New Hampshire Thrift Bancshares, Inc. 1996 Stock Option Plan
(previously filed as an exhibit in the November 5, 1996
S-4).
10.3 Lake Sunapee Bank, fsb 1987 Incentive Stock Option Plan
(previously filed as an exhibit to the Company's Form S-4
(file No. 33-27192), filed with the Commission on March 1,
1989).
10.4 New Hampshire Thrift Bancshares, Inc. 1996 Incentive Stock
Option Plan (previously filed as an exhibit to the Company's
Form S-4 (file No. 33-27192), filed with the Commission on
March 1, 1989).
10.5 Employment Agreement between NHTB and Stephen W. Ensign
(previously filed as an exhibit to the November 5, 1996
S-4).
10.6 Employment Agreement between the Bank and Stephen R. Theroux
(previously filed as an exhibit to the November 5, 1996
S-4).
10.7 Stock Option Agreement, dated as of July 26, 1996, between
NHTB and Landmark, (previously filed as an exhibit to the
November 5, 1996 S-4).
11.1 Computation of Per Share Earnings (see Note 1 to
Consolidated Financial Statements).
16.1 Letter on Change in Certifying Accountant (previously filed
as an exhibit to the Company's Current Report on Form 8-K
dated July 10, 1996).
21.1 Subsidiaries of the Company (previously filed as an exhibit
to the November 5, 1996 S-4).
27.1 Financial Data Schedule (submitted only with filing in
electronic format).
99.1 Proxy Statement for the 1997 Annual Meeting of Shareholders
of the Company (to be filed pursuant to Rule 14a-6 under the
Securities and Exchange Act of 1934, as amended).
(B) REPORTS OF FORM 8-K.
None.
60
<PAGE>
==========
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
New Hampshire Thrift Bancshares, Inc.
<TABLE>
<CAPTION>
<S> <C> <C>
By: /s/ John J. Kiernan Chairman of the Board March 6, 1998
-------------------
(John J. Kiernan)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ John J. Kiernan Chairman of the Board March 6, 1998
-------------------
(John J. Kiernan)
/s/ Stephen W. Ensign Vice Chairman of the Board, March 6, 1998
---------------------
(Stephen W. Ensign) President and Chief Executive Officer
/s/ Stephen R. Theroux Director, Executive Vice President March 6, 1998
----------------------
(Stephen R. Theroux) and Chief Financial Officer
/s/ Leonard R. Cashman Director March 6, 1998
----------------------
(Leonard R. Cashman)
/s/ Ralph B. Fifield, Jr. Director March 6, 1998
-------------------------
(Ralph B. Fifield, Jr.)
/s/ John A. Kelley, Jr. Director March 6, 1998
-----------------------
(John A. Kelley, Jr.)
/s/ Peter R. Lovely Director March 6, 1998
-------------------
(Peter R. Lovely)
/s/ Dennis A. Morrow Director March 6, 1998
--------------------
(Dennis A. Morrow)
/s/ Jack H. Nelson Director March 6, 1998
------------------
(Jack H. Nelson)
/s/ Priscilla W. Ohler Director March 6, 1998
----------------------
(Priscilla W. Ohler)
/s/ Kenneth D. Weed Director March 6, 1998
-------------------
(Kenneth D. Weed)
</TABLE>
61
<PAGE>
DIRECTORS AND OFFICERS OF NEW HAMPSHIRE THRIFT BANCSHARES, INC.
DIRECTORS
- ---------
John J. Kiernan
Chairman of the Board
Stephen W. Ensign
Vice Chairman of the Board,
President and Chief Executive Officer
Stephen R. Theroux
Executive Vice President
and Chief Financial Officer
Leonard R. Cashman
Owner and Partner C.O.H.
Properties, Owner, President,
and Director C.O.H. Enterprises, Inc.,
Partner Etna Real Estate
Ralph B. Fifield, Jr. Retired
Executive Vice President
Lending and Commercial Finance
John A. Kelley, Jr.
Real Estate Developer
Peter R. Lovely
Senior Vice President
Brokerage Services
Dennis A. Morrow
Sales Manager
Cote & Reney Lumber Company
Jack H. Nelson
Chairman North East Environmental Products, Inc.,
President Hanover Water Company
Priscilla W. Ohler
Community Representative
Kenneth D. Weed, Partner
L.E. Weed and Son
John E. Johannessen
(Emeritus)
Retired Executive
Mobil Corporation
OFFICERS
- --------
John J. Kiernan
Chairman of the Board
Stephen W. Ensign
Vice Chairman of the Board,
President and Chief Executive Officer
Stephen R. Theroux
Executive Vice President
and Chief Financial Officer
Linda L. Oldham
Senior Vice President and Secretary
Sandra M. Blackington
Assistant Secretary
DIRECTORS AND OFFICERS OF LAKE SUNAPEE BANK, FSB
DIRECTORS
- ---------
John J. Kiernan
Chairman of the Board
Stephen W. Ensign
Vice Chairman of the Board,
President and Chief Executive Officer
Stephen R. Theroux
Executive Vice President
and Chief Operating Officer
Peter R. Lovely
Senior Vice President
Investment Services
Leonard R. Cashman
Owner and Partner C.O.H.
Properties, Owner, President,
and Director C.O.H. Enterprises, Inc.,
Partner Etna Real Estate
Ralph B. Fifield, Jr. Retired
Executive Vice President
Lending and Commercial Finance
John E. Johannessen
Retired Executive
Mobil Corporation
John A. Kelley, Jr.
Real Estate Developer
Dennis A. Morrow
Sales Manager
Cote & Reney Lumber Company
Jack H. Nelson
Chairman North East Environmental Products, Inc.,
President Hanover Water Company
Priscilla W. Ohler
Community Representative
Kenneth D. Weed, Partner
L.E. Weed and Son
Joseph B. Willey
Principal Owner, President
and Director Pro-Cut International
OFFICERS
- --------
John J. Kiernan
Chairman of the Board
Stephen W. Ensign
Vice Chairman of the Board,
President and Chief Executive Officer
Stephen R. Theroux
Executive Vice President
and Chief Operating Officer
ACCOUNTING
Daryl J. Cady
Vice President and
Chief Financial Officer
ADMINISTRATION
Sandra M. Blackington
Assistant Secretary
BUSINESS DEVELOPMENT
Peter R. Lovely
Senior Vice President
COMPLIANCE AND INTERNAL AUDIT
H. Bliss Dayton
Vice President
Arthur W. Phillips
Assistant Vice President
and Certified Real Estate Appraiser
COMMERCIAL LENDING
W. Grant MacEwan
Senior Vice President
Scott Laughinghouse
Vice President
Scott Walters
Vice President
Erik Cinquemani
Assistant Vice President
Commercial Lending Analyst
Dana Favor
Assistant Vice President
Loan Review
Louis Shelzi, Jr.
Assistant Vice President
Commercial Loan Officer
MORTGAGE LENDING
Sharon L. Whitaker
Vice President
Francetta Raymond
Assistant Vice President
LOAN ORIGINATION
Robert C. O'Brien
Senior Vice President
Colin S. Campbell
Vice President
Stephen B. Ellis
Assistant Vice President
Peter N. Jennings
Loan Officer
MARKETING
Douglas S. Baxter
Vice President
OPERATIONS
Sandra J. Luckury
Assistant Vice President
Gail A. Fraser
Assistant Vice President
SHAREHOLDER RELATIONS AND CORPORATE SECRETARY
Linda L. Oldham
Senior Vice President
RETAIL OFFICES
Darlene Romano
Assistant Vice President
Retail Manager
9 Main Street
Newport, NH 03773
(603) 863-5772
(800) 281-5772
Terri G. Spanos
Assistant Vice President
720 Main Street
Andover, NH 03216
(603) 735-5772
Sue-Anne C. Bourbeau Supervisor
115 East Main Street
Bradford, NH 03221
(603) 938-2277
Nancy E. Desmarais Supervisor
165 Route 10 South
Grantham, NH 03753
(603) 863-5600
Anita G. Wise
Manager
15 Antrim Road
Hillsboro, NH 03244
(603) 464-4820
Virginia S. Landers
Supervisor
200 Heater Road
Lebanon, NH 03766
(603) 448-2566
Michelle LeClair
Manager
106 Hanover Street
Lebanon, NH 03766
(603) 448-0101
12 Centerra Parkway, Suite 10
Lebanon, NH 03766
(603) 643-9912
Dorisann Ross
Manager
24 Newport Road
New London, NH 03257
(603) 526-6933
Richard G. Biron
Assistant Vice President
Maxine B. Wiggins
Customer Service Officer
300 Sunapee Street
Newport, NH 03773
(603) 863-1428
Sherri A. Cummings
Supervisor
565 Route 11
Sunapee, NH 03782
(603) 763-2511
Heide Hubert Menard
Manager
83 Main Street
West Lebanon, NH 03784
(603) 298-7500
Koreen Henne
Manager
AFFILIATED COMPANY
Charter Trust Company
90 North Main Street
Concord, NH 03302
(603) 224-1350
(800) 639-5903
62
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- ----------------------- --------------------------
BOARD OF ADVISORS SHAREHOLDER INFORMATION
Philip D. Allen (1) Paul J. Linehan CORPORATE HEADQUARTERS
Prunella O. Anastos Robert MacNeil
Benjamin K. Barton Elizabeth W. Maiola New Hampshire Thrift Bancshares, Inc.
Kenneth O. Barton Raymond A. Manning 9 Main Street
George O. Binzel John J. Marcotte PO Box 9
William A. Bittinger Jerry N. Mathis Newport, New Hampshire 03773-0009
Paul R. Boucher David W. McClintic
James F. Briggs Denise A. McClintic TRANSFER AGENT
Robert S. Burgess Thomas F. McCormick
Walton W. Chadwick J. David McCrillis ChaseMellon Shareholder Services, L.L.C.
Earle W. Chandler John C. McCrillis Overpeck Centre
F. Read Clarke Paul Olsen 85 Challenger Road
Jacqueline C. Cote Daniel P. O'Neill Ridgefield Park, NJ 07660
Robert J. Cricenti Betty H. Rampsott Tel: Domestic Holders 1-800-851-9677
Richard F. Curtis David N. Reney Tel: Foreign Holders 201-329-8660
Ernest G. Dennis, Jr. Everett R. Reney Tel: Hearing Impaired 1-800-231-5469
William J. Faccone, Sr. Genelle M. Richards Website: http://www.chasemellon.com
Gordon B. Flint, Sr. J. Barrie Sellers
John W. Flynn, Jr. Edwin G. Sielewicz INDEPENDENT ACCOUNTANTS
John W. Flynn, Sr. Fredric M. Smith
Charles E. Goyette, Jr. Herbert N. Smith Shatswell, MacLeod & Company, P.C.
Sam N. Hale Fred F. Stockwell 83 Pine Street
Sheffield J. Halsey Earl F. Strout West Peabody, Massachusetts 01960-3635
Louise K. Hastings James R. Therrien
Douglas J. Homan Janis H. Wallace INFORMATION ON COMMON STOCK
Rita M. Hurd James P. Wheeler
Lisa S. Hustis Bradford C. White The common stock is traded over-the-counter and quoted on the
Alf E. Jacobson John W. Wiggins, Sr. NASDAQ National Market System under the symbol NHTB. There were
Robert B. Jennings Peter Wittman approximately 785 shareholders of record on December 31, 1997.
Michael D. Johnson Thomas B. Woodger
John J. Kiernan, Jr. Michael J. Work The following table sets forth the Company's high and low prices
Victor W. Laro (1) Honorary for the common stock as reported by NASDAQ for the periods
indicated:
1997 HIGH LOW
--------------------------------------------------------------
First Quarter $ 12 3/4 $ 11 3/4
Second Quarter 15 1/2 11 3/4
9 8
Third Quarter 21 1/4 15 3/8
Fourth Quarter 22 3/4 18 1/4
</TABLE>
This Annual Report has been written by the Bank's staff.
63
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
NEW HAMPSHIRE THRIFT BANCSHARES, INC.
(the "Corporation")
ARTICLE I - OFFICES
SECTION 1. Registered Office. The registered office of the
-----------------
Corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware.
SECTION 2. Other Offices. The Corporation may also have an office
-------------
at 9 Main Street, P.O. Box 9, Newport, New Hampshire 03773 or at such other
places both within and without the State of Delaware as the board of directors
may from time to time determine.
ARTICLE II - SHAREHOLDERS
SECTION 1. Place of Meetings. All annual and special meetings of
-----------------
shareholders shall be held at 9 Main Street, Newport, New Hampshire or at such
other place, either within or without the State of Delaware, as the board of
directors may determine.
SECTION 2. Annual Meeting. A meeting of the shareholders of the
--------------
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually within 150 days after the end
of the Corporation's fiscal year on the date and at the hour determined by the
board of directors.
SECTION 3. Special Meetings. Special meetings of the shareholders
----------------
for any purpose or purposes may be called at any time only by the chairman of
the board or the president of the Corporation, or a majority of the board of
directors of the Corporation.
SECTION 4. Conduct of Meetings. Annual and special meetings shall
-------------------
be conducted in accordance with the rules specified by the officer presiding at
the meeting unless otherwise prescribed by law.
<PAGE>
SECTION 5. Notice of Meeting. Written notice stating the place,
-----------------
day, and hour of the meeting and the purposes for which the meeting is called
shall be delivered not less than 20 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction of the chairman of
the board or president, or the directors calling the meeting, to each
shareholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the mail, addressed to the
shareholder at the address as it appears on the stock transfer books or records
of the Corporation as of the record date prescribed in Section 6 of this Article
II with postage prepaid. When any shareholders' meeting, either annual or
special, is adjourned for 30 days or more, notice of the adjourned meeting shall
be given as in the case of an original meeting. Provided no new record date for
the meeting is set, it shall not be necessary to give any notice of the time and
place of any meeting adjourned for less than 30 days or of the business to be
transacted at the meeting, other than an announcement at the meeting at which
such adjournment is taken.
SECTION 6. Fixing of Record Date. For the purposes of determining
---------------------
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the board of directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more
than 60 days nor less than 10 days prior to the date on which the particular
action requiring such determination of shareholders is to be taken. When a
determination of shareholders entitled to vote at any meeting of shareholders
has been made as provided in this section, such determination shall apply to any
adjournment.
SECTION 7. Voting Lists. At least 10 days before each meeting of
------------
the shareholders, the officer or agent having charge of the stock transfer books
for shares of the Corporation shall make a complete list of the shareholders
entitled to vote at such meeting, or any adjournment, arranged in alphabetical
order, with the address and the number of shares held by each. This list of
shareholders shall be kept on file either at a place within the city where the
meeting is to be held, which place shall be
2
<PAGE>
specified in the notice of meeting, or at the place where the meeting is to be
held and shall be subject to inspection by any shareholder at any time during
usual business hours for a period of at least 10 days prior to such meeting.
Such list shall also be produced and kept open at the time and place of the
meeting and shall be subject to the inspection of any shareholder during the
entire time of the meeting. The original stock transfer book shall constitute
prima facie evidence of the shareholders entitled to examine such list or
transfer books or to vote at any meeting of shareholders.
SECTION 8. Quorum. One third of the outstanding shares of the
------
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of shareholders. If less than one third of the
outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice.
Subject to Section 5 of this Article II of these bylaws, at such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment notwithstanding the withdrawal of enough
shareholders to constitute less than a quorum.
SECTION 9. Voting. Except as otherwise required by law, the
------
certificate of incorporation or these bylaws, any matter brought before any
meeting of shareholders shall be decided by the affirmative vote of the majority
of the votes cast on the matter. Each shareholder represented at a meeting of
shareholders shall be entitled to cast one vote for each share of the capital
stock entitled to vote thereat held by such shareholder. The board of
directors, in its discretion, may require that any votes cast at such meeting
shall be cast by written ballot.
SECTION 10. Proxies. At all meetings of shareholders, a shareholder
-------
may vote by proxy executed in writing by the shareholder or his duly authorized
attorney in fact. Proxies solicited on behalf of the board of directors shall
be voted as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
more than three years from its date, unless the
3
<PAGE>
proxy provides for a longer period. A duly executed proxy shall be irrevocable
if it states that it is irrevocable and if, and only as long as, it is coupled
with an interest sufficient in law to support an irrevocable power.
SECTION 11. Voting of Shares in the Name of Two or More Persons. If
---------------------------------------------------
shares or other securities having voting power stand of record in the names of
two or more persons, whether fiduciaries, members of a partnership, joint
tenants, tenants in common, tenants by the entirety or otherwise, or if two or
more persons have the same fiduciary relationship respecting the same shares,
unless the secretary of the Corporation is given written notice to the contrary
and is furnished with a copy of the instrument or order appointing them or
creating the relationship wherein it is so provided, their acts with respect to
voting shall have the following effect: (1) if only one votes, his act binds
all; (2) if more than one vote, the act of the majority so voting binds all; (3)
if more than one vote, but the vote is evenly split on any particular matter,
each faction may vote the securities in question proportionally, or any person
voting the shares, or a beneficiary, if any, may apply to the Court of Chancery
of the State of Delaware or such other court as may have jurisdiction to appoint
an additional person to act with the persons so voting the shares, which shall
then be voted as determined by the majority of such persons and the person
appointed by the Court. If the instrument so filed shows that any such tenancy
is held in unequal interests, a majority or even-split for the purposes of this
subsection shall be a majority or even-split in interest.
SECTION 12. Voting of Shares by Certain Holders. Shares standing in
-----------------------------------
the name of another corporation may be voted by any officer, agent, or proxy as
the bylaws of such corporation may prescribe, or, in the absence of such
provision, as the board of directors of such corporation may determine. Shares
held by an administrator, executor, guardian, or conservator may be voted by him
or her, either in person or by proxy, without a transfer of such shares into his
or her name. Shares standing in the name of a trustee may be voted by him or
her, either in person or by proxy, but no trustee shall be entitled to vote
shares held by him or her without a transfer of such shares into his or her
name. Shares standing in the name of a receiver
4
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may be voted by such receiver, and shares held by or under the control of a
receiver may be voted by such receiver without the transfer into his or her name
if authority to do so is contained in an appropriate order of the court or other
public authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Corporation nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
SECTION 13. Inspectors of Election. In advance of any meeting of
----------------------
shareholders, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the meeting may, or on the request of not fewer than
10 percent of the votes represented at the meeting shall, make such appointment
at the meeting. If appointed at the meeting, the majority of the votes present
shall determine whether one or three inspectors are to be appointed. In case
any person appointed as inspector fails to appear or fails or refuses to act,
the vacancy may be filled by appointment by the board of directors in advance of
the meeting or at the meeting by the chairman of the board.
Unless otherwise prescribed by law, the duties of such inspectors
shall include: determining the number of shares and the voting power of each
share, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity and effect of proxies; receiving votes, ballots, or
consents; hearing and determining all challenges and questions in any way
arising in connection with the rights to vote; counting and tabulating all votes
or consents; determining the result; and such
5
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acts as may be proper to conduct the election or vote with fairness to all
shareholders.
SECTION 14. Nominating Committee. Only persons who are nominated in
--------------------
accordance with the procedures set forth in this Section 14 shall be eligible
for election as directors. Nominations of persons for election to the board of
directors of the Corporation may be made at a meeting of shareholders by or at
the direction of the board of directors or by any shareholder of the Corporation
entitled to vote for the election of directors at the meeting who complies with
the notice procedures set forth in this Section 14. Such nominations, other
than those made by or at the direction of the board of directors, shall be made
pursuant to timely notice in writing to the secretary of the Corporation. To be
timely, a shareholder's notice shall be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 30 days nor
more than 90 days prior to the meeting; provided, however, that in the event
-------- -------
that less than 40 days' notice or prior public disclosure of the date of the
meeting is given or made to shareholders, notice by the shareholder to be timely
must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such shareholder's notice shall set forth (a)
as to each person whom the shareholder proposes to nominate for election or re-
election as a director, (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of the Corporation which are
beneficially owned by such person, and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or as otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including
without limitation such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); and (b) as to
the shareholder giving the notice, (i) the name and address, as they appear on
the Corporation's books, of such shareholder and (ii) the class and number of
shares of the Corporation which are beneficially owned by such shareholder. At
the request of the board of directors, any person nominated by the board of
directors for election as a director shall furnish to the secretary of the
Corporation that
6
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information required to be set forth in a shareholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
director of the Corporation unless nominated in accordance with the procedures
set forth in this Section 14. The chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by the bylaws, and if he should so
determine, he shall declare to the meeting that the defective nomination shall
be disregarded.
SECTION 15. Business at Annual Meeting. At an annual meeting of the
--------------------------
shareholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the board of directors, (b) otherwise
properly brought before the meeting by or at the direction of the board of
directors, or (c) otherwise properly brought before the meeting by a
shareholder.
For business to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 30 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 40 days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be so received not later than the
close of business on the 10th day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure was made. A
shareholder's notice to the secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (a) a brief description
of the business desired to be brought before the annual meeting, (b) the name
and address, as they appear on the Corporation's books, of the shareholder
proposing such business, (c) the class and number of shares of the Corporation
which are beneficially owned by the shareholder, and (d) any material interest
of the shareholder in such business. Notwithstanding anything in these bylaws
to the contrary, no business shall be conducted at an annual meeting except in
7
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accordance with the procedures set forth in this Section 15. The chairman of an
annual meeting shall, if the facts warrant, determine and declare to the annual
meeting that a matter of business was not properly brought before the meeting in
accordance with the provisions of this Section 15, and that such business shall
not be transacted.
ARTICLE III - BOARD OF DIRECTORS
SECTION 1. General Powers. The business and affairs of the
--------------
Corporation shall be under the direction of its board of directors. The board of
directors shall annually elect a chairman from among its members who shall
preside at all meetings. In the absence of the chairman, the board of directors
may designate one of its members to preside at such meeting.
SECTION 2. Number and Term. The board of directors shall consist of
---------------
11 members and shall be divided into three classes as nearly equal in number as
possible. The members of each class shall be elected for a term of three years
and until their successors are elected and qualified or until earlier
resignation or removal. One class shall be elected by ballot annually. The size
of the board of directors may be increased or decreased only by a two-thirds
vote of the board of directors or by a vote of two-thirds of the shares eligible
to be voted at a duly constituted meeting of stockholders called for such
purpose.
SECTION 3. Qualifications. After the Corporation becomes publicly-
--------------
owned, each director shall at all times be the beneficial owner of not less than
100 shares of capital stock of the Corporation.
SECTION 4. Regular Meetings. A regular meeting of the board of
----------------
directors shall be held without other notice than this bylaw immediately after,
and at the same place as, the annual meeting of the shareholders. The board of
directors may provide, by resolution, the time and place for the holding of
additional regular meetings without other notice than such resolution.
SECTION 5. Special Meetings. Special meetings of the board of
----------------
directors may be called by or at the request of the
8
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chairman of the board, the president, or one-third of the directors.
SECTION 6. Telephonic Participation. Members of the board of
------------------------
directors may participate in regular or special meetings by means of conference
telephone or similar communications equipment by which all persons participating
in the meeting can hear each other. Such participation shall constitute presence
in person and shall constitute attendance for the purpose of compensation
pursuant to Section 13 of this Article III.
SECTION 7. Notice. Written notice of any special meeting shall be
------
given to each director at least two days prior thereto when delivered personally
or by telegram or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice shall be
deemed to be delivered when deposited in the mail so addressed, with postage
prepaid if mailed or when delivered to the telegraph company if sent by
telegram. Any director may waive notice of any meeting by a writing filed with
the secretary. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the board of directors need be
specified in the notice or waiver of notice of such meeting.
SECTION 8. Quorum. Two-thirds of the number of directors fixed by
------
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the board of directors; but if less than two-thirds
of the directors are present at a meeting, two thirds of the directors present
may adjourn the meeting from time to time. Notice of any adjourned meeting shall
be given in the same manner as prescribed by Section 7 of this Article III.
SECTION 9. Manner of Acting. The act of the majority of the
----------------
directors present at a meeting at which a quorum is present shall be the act of
the board of directors, unless a greater number is prescribed by law or by the
certificate of incorporation or these bylaws.
9
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SECTION 10. Action Without a Meeting. Any action required or
------------------------
permitted to be taken by the board of directors at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the directors.
SECTION 11. Resignation. Any director may resign at any time by
-----------
sending a written notice of such resignation to the Corporation addressed to the
chairman of the board. Unless otherwise specified, such resignation shall take
effect upon receipt by the chairman of the board. More than three consecutive
absences from regular meetings of the board of directors, unless excused by
resolution of the board of directors, shall automatically constitute a
resignation, effective when such a resignation is accepted by the board of
directors.
SECTION 12. Vacancies. Vacancies and newly created directorships
---------
resulting from any increase in the authorized number of directors may be filled,
for the unexpired term, by the concurring vote of a majority of the directors
then in office, whether or not a quorum, and any director so chosen shall hold
office for the remainder of the full term of the class of directors in which the
new directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified.
SECTION 13. Compensation. Directors, as such, may receive a stated
------------
salary for their services. By resolution of the board of directors, a reasonable
fixed sum, and reasonable expenses of attendance, if any, may be allowed for
actual attendance at each regular or special meeting of the board of directors.
Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the board of
directors may determine.
SECTION 14. Presumption of Assent. A director of the Corporation who
---------------------
is present at a meeting of the board of directors at which action on any matter
is taken shall be presumed to have assented to the action taken unless his
dissent or abstention shall be entered into the minutes of the meeting or unless
he shall file his written dissent to such action with the person
10
<PAGE>
acting as the secretary of the meeting before the adjournment thereof or shall
forward such dissent by registered mail to the secretary of the Corporation
within five days after the date a copy of the minutes of the meeting is
received. Such right to dissent shall not apply to a director who voted in favor
of such action.
SECTION 15. Removal of Directors. No director shall be removed
--------------------
except for cause and then only by an affirmative vote of a majority of the total
votes eligible to be cast by shareholders at a duly constituted meeting of
shareholders called expressly for such purpose. At least 30 days prior to such
meeting of shareholders, written notice shall be sent to the director whose
removal will be considered at such meeting.
SECTION 16. Age Limitation. No person 75 years of age shall be
--------------
eligible for election, reelection, appointment, or reappointment to the board of
directors of the Corporation. No director shall serve as such beyond the annual
meeting of shareholders of the Corporation immediately following the date on
which the director attained 75 years of age.
ARTICLE IV - EXECUTIVE AND OTHER COMMITTEES
SECTION 1. Appointment. The board of directors, by resolution
-----------
adopted by a majority of the full board, may designate the chief executive
officer and four of the other directors to constitute an executive committee.
The designation of any committee pursuant to this Article IV and the delegation
of authority shall not operate to relieve the board of directors, or any
director, of any responsibility imposed by law or regulation.
SECTION 2. Authority. The executive committee, when the board of
---------
directors is not in session, shall have and may exercise all of the authority of
the board of directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the board of
directors with reference to: the declaration of dividends; the amendment of the
certificate of incorporation or bylaws of the Corporation, or recommending to
the shareholders a
11
<PAGE>
plan of merger, consolidation, or conversion; the sale, lease or other
disposition of all or substantially all of the property and assets of the
Corporation otherwise than in the usual and regular course of its business; a
voluntary dissolution of the Corporation; a revocation of any of the foregoing;
or the approval of a transaction in which any member of the executive committee,
directly or indirectly, has any material beneficial interest.
SECTION 3. Tenure. Subject to the provisions of Section 8 of this
------
Article IV, each member of the executive committee shall hold office until the
next regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
SECTION 4. Meetings. Regular meetings of the executive committee may
--------
be held without notice at such times and places as the executive committee may
fix from time to time by resolution. Special meetings of the executive committee
may be called by any member thereof upon not less than one day's notice stating
the place, date, and hour of the meeting, which notice may be written or oral.
Any member of the executive committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attends in person.
The notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
SECTION 5. Quorum. A majority of the members of the executive
------
committee shall constitute a quorum for the transaction of business at any
meeting thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
SECTION 6. Action Without a Meeting. Any action required or
------------------------
permitted to be taken by the executive committee at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the members of the executive committee.
SECTION 7. Vacancies. Any vacancy in the executive committee may be
---------
filled by a resolution adopted by a majority of the full board of directors.
12
<PAGE>
SECTION 8. Resignations and Removal. Any member of the executive
------------------------
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the chairman of the board or the secretary of the Corporation. Unless
otherwise specified, such resignation shall take effect upon its receipt; the
acceptance of such resignation shall not be necessary to make it effective.
SECTION 9. Procedure. The executive committee shall elect a
---------
presiding officer from its members and may fix its own rules of procedure which
shall not be inconsistent with these bylaws. It shall keep regular minutes of
its proceedings and report the same to the board of directors for its
information at the meeting held next after the proceedings shall have occurred.
SECTION 10. Other Committees. The board of directors may by
----------------
resolution establish an audit committee, a loan committee, and such other
committees composed of directors that are deemed necessary or appropriate for
the conduct of the business of the Corporation and may prescribe the duties,
constitution, and procedures thereof.
ARTICLE V - OFFICERS
SECTION 1. Positions. The officers of the Corporation shall be a
---------
president, one or more vice presidents, a secretary and a treasurer, each of
whom shall be elected by the board of directors. The board of directors may also
designate the chairman of the board as an officer. The president shall be the
chief executive officer, unless the board of directors designates the chairman
of the board as chief executive officer. The offices of the secretary and
treasurer may be held by the same person and a vice president may also be either
the secretary or the treasurer. The board of directors may also elect or
authorize the appointment of such other officers as the business of the
Corporation may require. The officers shall have such authority and perform such
duties as the board of directors may from time to time authorize or determine.
In the absence of action by the board of directors,
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the officers shall have such powers and duties as generally pertain to their
respective offices.
SECTION 2. Election and Term of Office. The officers of the
---------------------------
Corporation shall be elected annually at the first meeting of the board of
directors held after each annual meeting of the shareholders. If the election of
the officers is not held at such meeting, such election shall be held as soon
thereafter as possible. Each officer shall hold office until a successor has
been elected and qualified or until the officer's death, resignation, or removal
in the manner hereinafter provided. Election or appointment of an officer,
employee or agent shall not of itself create contractual rights. The board of
directors may authorize the Corporation to enter into an employment contract
with any officer in accordance with applicable law; but no such contact shall
impair the right of the board of directors to remove any officer at any time in
accordance with Section 3 of this Article V.
SECTION 3. Removal. Any officer may be removed by the board of
-------
directors whenever in its judgment the best interests of the Corporation will be
served thereby, but such removal, other than for cause, shall be without
prejudice to the contract rights, if any, of the person so removed.
SECTION 4. Vacancies. A vacancy in any office because of death,
---------
resignation, removal, disqualification, or otherwise may be filled by the board
of directors for the unexpired portion of the term.
SECTION 5. Remuneration. The remuneration of the officers shall be
------------
fixed from time to time by the board of directors.
SECTION 6. Age Limitation. No person 70 years of age shall be
--------------
eligible for reelection, appointment, or reappointment as an officer of the
Corporation.
14
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ARTICLE VI - CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. Certificates for Shares. Certificates representing
-----------------------
shares of capital stock of the Corporation shall be in such form as shall be
determined by the board of directors pursuant to applicable law. Such
certificates, which shall represent the number of shares registered in
certificate form, shall be signed by the president of the Corporation, attested
by the secretary or an assistant secretary, and sealed with the corporate seal
or a facsimile thereof. The signatures upon a certificate may be facsimiles. In
case any officer, transfer agent or registrar who had signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer before such certificate is issued, it may be used by the Corporation
with the same effect as if he were such officer at the date of issue. Each
certificate for shares of capital stock shall be consecutively numbered or
otherwise identified. The name and address of the person to whom the shares are
issued, with the number of shares and date of issue, shall be entered on the
stock transfer books of the Corporation. All certificates surrendered to the
Corporation for transfer shall be cancelled and no new certificate shall be
issued until the former certificate for a like number of shares has been
surrendered and cancelled, except that in case of a lost or destroyed
certificate, a new certificate may be issued upon such terms and indemnity to
the Corporation as the board of directors may prescribe.
SECTION 2. Transfer of Shares. Transfer of shares of capital stock
------------------
of the Corporation shall be made only on its stock transfer books. Authority for
such transfer shall be given only by the holder of record or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney authorized by a duly executed power of attorney and filed with the
Corporation. Such transfer shall be made only on surrender for cancellation of
the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the Corporation shall be deemed by the Corporation
to be the owner for all purposes.
15
<PAGE>
ARTICLE VII - FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Corporation shall end on December 31 of each
year. The Corporation shall be subject to an annual audit as of the end of its
fiscal year by independent public accountants appointed by and responsible to
the board of directors. The appointment of such accountants shall be subject to
annual ratification by the shareholders.
ARTICLE VIII - DIVIDENDS
Subject to the terms of the Corporation's certificate of incorporation
and the laws of the State of Delaware, the board of directors may, from time to
time, declare, and the Corporation may pay, dividends on its outstanding shares
of capital stock.
ARTICLE IX - INDEMNIFICATION
SECTION 1. Power to Indemnify in Actions, Suits or Proceedings Other
---------------------------------------------------------
Than Those by or in the Right of the Corporation. Subject to Section 3 of this
- ------------------------------------------------
Article IX, the Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, and any appeal therein, whether civil, criminal,
administrative, arbitrative or investigate (other than an action by or in the
right of the Corporation) by reason of the fact that he or she is or was a
director, officer, trustee, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, trustee,
employee or agent of another corporation, association, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees), judgments, fines, penalties and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding,
and any appeal therein, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding, and any appeal therein, by judgment,
16
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order, settlement, conviction, or upon a plea of nolo contendere or its
---- ----------
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
SECTION 2. Power to Indemnify in Actions, Suits or Proceedings by or
---------------------------------------------------------
in the Right of the Corporation. Subject to Section 3 of this Article IX, the
- -------------------------------
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, and any appeal therein, and against amounts paid in settlement by or
in the right of the Corporation to procure a judgment in its favor by reason of
the fact he is or was a director, officer, trustee, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, trustee, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action, suit, or proceeding,
and any appeal therein, and against amounts paid in settlement if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation; provided, however, that no indemnification
-------- -------
shall be made against expenses in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Corporation or against amounts
paid in settlement unless and only to the extent that there is a determination
(as set forth in Section 3 of this Article IX) that despite the adjudication of
liability or the settlement, but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses or
amounts paid in settlement.
17
<PAGE>
SECTION 3. Authorization of Indemnification. Any indemnification
--------------------------------
under this Article IX (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, trustee, employee or agent is proper
in the circumstances because such director, officer, trustee, employee or agent
has met the applicable standard of conduct set forth in Section 1 or Section 2
of this Article IX and, if applicable, is fairly and reasonably entitled to
indemnity as set forth in the proviso in Section 2 of this Article IX, as the
case may be. Such determination shall be made (i) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, and any appeal therein, (ii) if such a quorum is not
obtainable, or, even if obtainable and a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
shareholders. To the extent, however, that a director, officer, trustee,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding, and any appeal therein,
described above, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith, without the necessity of
authorization in the specific case. No director, officer, trustee, employee or
agent of the Corporation shall be entitled to indemnification in connection with
any action, suit or proceeding, and any appeal therein, voluntarily initiated by
such person unless the action, suit or proceeding, and any appeal therein, was
authorized by a majority of the entire board of directors.
SECTION 4. Good Faith Defined. For purposes of any determination
------------------
under Section 3 of this Article IX, a person shall be deemed to have acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his conduct was unlawful,
if his action is based on (i) the records or books of account of the Corporation
or another enterprise, (ii) information supplied to him by the officers of the
Corporation or another enterprise in the course of their duties, (iii) the
advice of legal counsel for the Corporation or another enterprise, or
18
<PAGE>
(iv) information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable care by the Corporation or another
enterprise. The term "another enterprise" as used in this Section 4 shall mean
any other corporation or any association, partnership, joint venture, trust or
enterprise of which such person is or was serving at the request of the
Corporation as a director, officer, trustee, employee or agent. The provisions
of this Section 4 shall not be deemed to be exclusive or to limit in any way the
circumstances in which a person may be deemed to have met the applicable
standards of conduct set forth in Sections 1 and 2 of this Article IX, as the
case may be.
SECTION 5. Indemnification by a Court. Notwithstanding any contrary
--------------------------
determination in the specific case under Section 3 of this Article IX, and
notwithstanding the absence of any determination thereunder, any director,
officer, trustee, employee or agent may apply to any court of competent
jurisdiction in the State of Delaware for indemnification to the extent
otherwise permissible under Sections 1 and 2 of this Article IX. The basis of
such indemnification by a court shall be a determination by such court that
indemnification of the director, officer, trustee, employee or agent is proper
in the circumstances because he has met the applicable standards of the conduct
set forth in Sections 1 and 2 of this Article IX, as the case may be. Notice of
any application for indemnification pursuant to this Section 5 shall be given to
the Corporation promptly upon the filing of such application. Notwithstanding
any of the foregoing, unless otherwise required by law, no director, officer,
trustee, employee or agent of the Corporation shall be entitled to
indemnification in connection with any action, suit or proceeding, and any
appeal therein, voluntarily initiated by such person unless the action, suit or
proceeding, and any appeal therein, was authorized by a majority of the entire
board of directors.
19
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SECTION 6. Expenses Payable in Advance. Expenses incurred in
---------------------------
connection with a threatened or pending action, suit or proceeding, and any
appeal therein, may be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding, and any appeal therein, as
authorized by the board of directors in the specific case upon receipt of an
undertaking by or on behalf of the director, officer, trustee, employee or agent
to repay such amount unless it shall be determined that he is entitled to be
indemnified by the Corporation as authorized in this Article IX.
SECTION 7. Contract, Non-exclusivity and Survival of
-----------------------------------------
Indemnification. The indemnification provided by this Article IX shall be deemed
- ---------------
to be a contract between the Corporation and each director, officer, employee
and agent who serves in such capacity at any time while this Article IX is in
effect, and any repeal or modification thereof shall not affect any rights or
obligations then existing or any action, suit or proceeding, and any appeal
therein, theretofore or thereafter brought based in whole or in part upon any
such state of facts. Further, the indemnification provided by this Article IX
shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any certificate of incorporation, bylaw,
agreement, contract, vote of shareholders or disinterested directors or pursuant
to the direction (howsoever embodied) of any court of competent jurisdiction or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, it being the policy of the
Corporation that, subject to the limitation in Section 3 of this Article IX
concerning voluntary initiation of actions, suits or proceedings,
indemnification of the persons specified in Sections 1 and 2 of this Article IX
shall be made to the fullest extent permitted by law. The provisions of this
Article IX shall not be deemed to preclude the indemnification of any person who
is not specified in Sections 1 or 2 of this Article IX but whom the Corporation
has the power or obligation to indemnify under the provisions of the law of the
State of Delaware. The indemnification provided by this Article IX shall
continue as to a person who has ceased to be a director, officer, trustee,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such person.
20
<PAGE>
SECTION 8. Insurance. The Corporation may purchase and maintain
---------
insurance on behalf of any person who is or was a director, trustee, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, trustee, employee or agent of another corporation,
association, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have the
power or the obligation to indemnify him against such liability under the
provisions of this Article IX.
SECTION 9. Meaning of "Corporation" for Purposes of Article IX. For
---------------------------------------------------
purposes of this Article IX, references to the "Corporation" shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers and employees and agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, association,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this Article IX with respect to the resulting
or surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
ARTICLE X - CORPORATE SEAL
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise attached.
21
<PAGE>
ARTICLE XI - AMENDMENTS
The board of directors or the shareholders may from time to time amend
the bylaws of the Corporation. Such action by the board of directors shall
require the affirmative vote of at least two-thirds of the directors then in
office at a duly constituted meeting of the board of directors called for such
purpose. Such action by the shareholders shall require the affirmative vote of
at least two-thirds of the total votes eligible to be voted at a duly
constituted meeting of the shareholders called for such purpose.
Revision Date: February 12, 1997
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,196,626
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,110,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,104,764
<INVESTMENTS-CARRYING> 75,000
<INVESTMENTS-MARKET> 75,000
<LOANS> 259,060,873
<ALLOWANCE> 3,061,451
<TOTAL-ASSETS> 317,988,962
<DEPOSITS> 271,226,960
<SHORT-TERM> 0<F1>
<LIABILITIES-OTHER> 21,198,877
<LONG-TERM> 0<F1>
0
0
<COMMON> 24,798
<OTHER-SE> 25,538,327
<TOTAL-LIABILITIES-AND-EQUITY> 25,563,125
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<INTEREST-TOTAL> 5,906,831
<INTEREST-DEPOSIT> 2,983,488
<INTEREST-EXPENSE> 3,157,705
<INTEREST-INCOME-NET> 2,749,126
<LOAN-LOSSES> 302,807
<SECURITIES-GAINS> 0<F1>
<EXPENSE-OTHER> 2,151,659
<INCOME-PRETAX> 964,339
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 736,871
<EPS-PRIMARY> 0.36
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<YIELD-ACTUAL> 7.97
<LOANS-NON> 1,269,954
<LOANS-PAST> 0
<LOANS-TROUBLED> 297,926
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<ALLOWANCE-FOREIGN> 0
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<FN>
<F1>Not listed specifically in financials, do not have to show here. Information
obtained from SEC EDGAR NEWS newsletter (October 1995).
</FN>
</TABLE>
