<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended September 30, 1998
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Commission File Number 0-17859
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NEW HAMPSHIRE THRIFT
BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
State of Delaware 02-0430695
(State of Incorporation) (IRS Employer I.D. Number)
9 Main St., PO Box 9, Newport, NH 03773
(Address of principal executive offices) (Zip Code)
603-863-0886
(registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of each of the issuer's classes of common
stock, $.01 par value per share, as of October 31, 1998, was 2,102,785.
Transitional small business disclosure format:
Yes No X
----- -----
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES, INC.
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION PAGE
Item 1 Financial Statements:
Consolidated Statements of Financial Condition -
September 30, 1998 and December 31, 1997 1
Consolidated Statements of Operations -
For the Three Months Ended September 30, 1998 and 1997
and the Nine Months Ended September 30, 1998 and 1997 2
Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1998 and 1997 3
Notes To Consolidated Financial Statements - 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations - 6
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 13
Item 2 Changes in Securities 13
Item 3 Defaults Upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Common Shareholders 13
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
Part I. Item I.
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1998 and December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,297,694 $ 9,196,626
Federal funds sold 10,996,000 4,110,000
-------------- ---------------
Cash and cash equivalents 19,293,694 13,306,626
Securities available for sale 50,669,518 30,104,674
Securities held to maturity - 75,000
Other investments 2,032,999 1,987,560
Loans held for sale 1,777,200 673,950
Loans receivable, net 238,724,489 255,223,525
Accrued interest receivable 1,971,868 1,556,194
Bank premises and equipment, net 8,425,981 8,178,335
Investments in real estate 535,825 548,257
Real estate owned and property acquired in settlement of loans 681,153 516,153
Goodwill 3,274,817 3,460,184
Other assets 2,447,680 2,358,504
-------------- ---------------
Total assets $ 329,835,224 $ 317,988,962
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Checking accounts (non-interest-bearing) $ 15,496,095 $ 15,105,900
Savings and interest-bearing checking accounts 136,322,693 123,023,410
Time deposits 123,856,513 133,097,650
-------------- ---------------
Total deposits 275,675,301 271,226,960
Other borrowed funds - 300,000
Securities sold under agreements to repurchase 16,795,754 8,393,192
Advances from Federal Home Loan Bank 5,093,812 10,246,318
Accrued expenses and other liabilities 4,956,118 2,259,367
-------------- ---------------
Total liabilities 302,520,985 292,425,837
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COMMITMENTS AND CONTINGENCIES
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,
2,479,858 shares issued and 2,097,785 shares outstanding at
September 30, 1998, 2,479,858 shares issued and 2,088,155 shares
outstanding at December 31, 1997 24,798 24,798
Paid-in capital 17,773,616 17,660,097
Retained earnings 11,482,207 10,221,049
Net unrealized gain on securities available for sale 512,320 82,318
-------------- ---------------
29,792,941 27,988,262
Treasury stock, at cost, 382,073 shares as of September 30, 1998
and 391,703 as of December 31, 1997 (2,478,702) (2,425,137)
-------------- ---------------
Total shareholders' equity 27,314,239 25,563,125
-------------- ---------------
Total liabilities and shareholders' equity $ 329,835,224 $ 317,988,962
============== ===============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
1
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 1998 and 1997
For the Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest income
Interest on loans $ 4,969,663 $ 5,324,092 $ 15,353,220 $ 15,873,096
Interest and dividends on investments 892,665 546,491 2,217,348 1,606,053
------------- ------------- -------------- --------------
Total interest income 5,862,328 5,870,583 17,570,568 17,479,149
------------- ------------- -------------- --------------
Interest expense
Interest on deposits 2,990,434 2,934,551 8,885,138 8,646,282
Interest on advances and other borrowed money 72,803 256,754 302,802 800,713
------------- ------------- -------------- --------------
Total interest expense 3,063,237 3,191,305 9,187,940 9,446,995
------------- ------------- -------------- --------------
Net interest income 2,799,091 2,679,278 8,382,628 8,032,154
Provision for loan losses, net 53,329 253,054 120,167 629,664
------------- ------------- -------------- --------------
Net interest income after provision for
loan losses 2,745,762 2,426,224 8,262,461 7,402,490
------------- ------------- -------------- --------------
Other income
Loan origination and customer service fees 333,299 356,187 1,004,055 1,021,136
Net gain on sale of securities 7,010 506,806 32,807 549,124
Net gain on sale of loans 182,173 14,806 252,878 145,641
Net gain (loss) on sale of property and equipment - (31,705) 4,918 (31,705)
Rental income 89,297 72,370 248,992 214,154
Brokerage service income 29,477 32,689 101,809 94,247
------------- ------------- -------------- --------------
Total other income 641,256 951,153 1,645,459 1,992,597
------------- ------------- -------------- --------------
Other expenses
Salaries and employee benefits 1,157,899 991,006 3,134,917 2,899,995
Occupancy expenses 424,511 383,616 1,272,476 1,151,493
Advertising and promotion 27,156 83,684 176,126 211,856
Depositors' insurance 34,776 34,979 105,640 88,533
Outside services 167,682 170,097 482,385 423,424
Amortization of goodwill 61,789 61,754 185,367 180,482
Other expenses 404,585 574,399 1,299,222 1,399,971
------------- ------------- -------------- --------------
Total other expenses 2,278,398 2,299,535 6,656,133 6,355,754
------------- ------------- -------------- --------------
Income before provision for income taxes 1,108,620 1,077,842 3,251,787 3,039,333
Provision for income taxes 357,524 376,500 1,049,032 1,005,272
------------- ------------- -------------- --------------
Net income $ 751,096 $ 701,342 $ 2,202,755 $ 2,034,061
============= ============= ============== ==============
Comprehensive net income $ 1,197,466 $ 954,176 $ 2,632,757 $ 2,327,704
============= ============= ============== ==============
Earnings per common share, basic $ 0.36 $ 0.34 $ 1.05 $ 0.99
============= ============= ============== ==============
Earnings per common share, assuming dilution $ 0.36 $ 0.33 $ 1.04 $ 0.97
============= ============= ============== ==============
Dividends declared per common share $ 0.15 $ 0.125 $ 0.45 $ 0.375
============= ============= ============== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
2
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,202,755 $ 2,034,061
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 486,041 441,740
Amortization of goodwill 185,367 180,482
Loans originated for sale (52,788,509) (13,548,007)
Proceeds from sale of loans 53,041,387 13,693,648
Gain from sale of loans (252,878) (145,641)
Gain from sale of debt securities available for sale (34,368) (59,776)
(Gain) loss from sale of bank premises and equipment (4,918) 31,705
Net (gain) loss from sale of equity securities available for
sale and writedowns 1,561 (489,348)
Provision for loan losses and other real estate owned losses 120,167 629,664
Increase in accrued interest and other assets (632,852) (351,235)
Decrease in deferred loan fees (98,789) (75,128)
Increase (decrease) in accrued expenses and other liabilities 2,696,751 (77,412)
-------------- ---------------
Net cash provided by operating activities 4,921,715 2,264,753
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (730,400) (428,251)
Proceeds from sale of bank premises and equipment 9,145 80,774
Proceeds from sale of debt securities available for sale 15,664,260 14,081,796
Proceeds from sale of equity securities available for sale 30,000 2,012,719
Principal reduction on securities held-to-maturity 75,000 25,000
Purchase of securities available for sale (37,196,731) (18,716,457)
Purchase of Federal Home Loan Bank stock (77,000) -
Maturities of securities available for sale 1,560,000 100,000
Net decrease in loans to customers 15,374,408 49,597
Increase in real estate owned (160,082) (2,373)
-------------- ---------------
Net cash used in investing activities (5,451,400) (2,797,195)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 4,448,341 6,978,686
Net increase (decrease) in repurchase agreements 8,402,562 (3,609,756)
Decrease in advances from Federal Home Loan Bank (5,452,506) (2,859,336)
Net change in other borrowed money - (5,000)
Cash and cash equivalents of $7,559,731 acquired in
the purchase of Landmark Bank, less cash of
$2,275,000 paid for the common stock of Landmark Bank
and less $320,261 for acquisition costs 4,964,470
Dividends paid (941,597) (726,926)
Proceeds from exercise of stock options 59,953 250,076
-------------- ---------------
Net cash provided by financing activities 6,516,753 4,992,214
-------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,987,068 4,459,772
CASH AND CASH EQUIVALENTS, beginning of period 13,306,626 11,002,749
-------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 19,293,694 $ 15,462,521
============== ===============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
3
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
For the Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
-------------- ---------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposit accounts $ 8,886,881 $ 8,644,430
Interest on advances and other borrowed money 329,738 818,931
-------------- ---------------
Total interest paid $ 9,216,619 $ 9,463,361
============== ===============
Income taxes, net $ 984,905 $ 1,003,733
============== ===============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Transfers from loans to real estate acquired through foreclosure $ 363,000 $ 84,021
============== ===============
In 1997 the Company purchased all of the common stock of Landmark Bank for $6,206,803. In Conjunction
with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 55,790,558
Value of common stock issued (3,931,803)
Cash paid for the common stock (2,275,000)
Deferred acquisition costs (778,755)
---------------
Liabilities assumed $ 48,805,000
===============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
4
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and December 31, 1997
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB and, accordingly, do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
management of New Hampshire Thrift Bancshares, Inc., all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months and the nine months ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
Note B - Accounting Policies
- ----------------------------
The accounting principles followed by New Hampshire Thrift Bancshares, Inc. and
Subsidiary and the methods of applying these principles which materially affect
the determination of financial position, results of operations, or changes in
financial position are consistent with those used at year end 1997.
The consolidated financial statements of New Hampshire Thrift Bancshares, Inc.
include its wholly owned subsidiary, Lake Sunapee Bank, fsb, and its
subsidiaries Lake Sunapee Group, Inc., and Lake Sunapee Financial Services Corp.
All significant intercompany balances have been eliminated.
Note C - Merger with 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 approximately $6 million. On January 22, 1997,
the Company completed the acquisition of Landmark Bank.
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. Allocation of the merger consideration took place in
February, 1997.
5
<PAGE>
Part I. Item II.
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
New Hampshire Thrift Bancshares, Inc. (The Company), a Delaware holding
company organized on July 5, 1989, is the parent company of Lake Sunapee Bank,
fsb (The Bank), a federally chartered savings bank. The Bank is a member of the
Federal Deposit Insurance Corporation (FDIC) and its deposits are insured
through the Savings Association Insurance Fund (SAIF). The Bank is regulated by
the Office of Thrift Supervision (OTS).
The Company's profitability is derived from its only subsidiary, Lake Sunapee
Bank, fsb. The Bank's earnings in turn are generated from the net income from
the yield on its loan and investment portfolios less the cost of its deposit
accounts and borrowings. These core revenues are supplemented by loan
origination fees, retail banking service fees, gains on the sale of investment
securities, and brokerage fees. The Bank passes its earnings to the Company to
the extent allowed by OTS regulations. Current regulations enable the Bank to
pay to the Company the higher of an amount equal to seventy-five per cent of the
Bank's prior four quarter earnings or up to fifty per cent of excess capital
plus total current year earnings. As of September 30, 1998, the Company had
$1,038,823, which it plans to use to continue its annual dividend payout of
$0.60 per share.
YEAR 2000
The Year 2000 (Y2K) Problem centers on the inability of computer systems to
recognize the Year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. For example at the turn of the century, many legacy
systems would recognize the Year 2000 as 00 and interpret it as the year 1900.
In order to address the Y2K issue and to minimize its potential adverse
impact, management began working on Y2K issue in November 1996. The Bank's
Technology Committee developed a Y2K Plan to identify the areas that would be
affected by the "Year 2000 Problem". A computer specialist was hired to oversee
the Bank's Y2K plan and report to the Board of Directors. In December 1997, the
Bank's Board of Directors approved a capital expenditure budget of $880,000 to
address Y2K solutions. During 1998, a new mainframe computer and a proof of
deposit system have been installed. The Bank also awarded a contract for a new
Y2K compliant phone system. The new equipment replaces items that were fully
depreciated as of this year.
The Company is continuing to assess the potential impact on the operations of
the Bank, monitoring the progress of software vendors, testing changes provided
by these vendors and developing contingency plans for any mission critical
systems that may not be effectively reprogrammed. The Bank's plan is divided
into five phases: 1) awareness; 2) assessment; 3) renovation; 4) validation and
5) implementation.
The Bank has substantially completed the first three phases of the plan and is
currently working with vendors on the final two phases. Because the Bank
utilizes an in-house data processing provider, a significant component of the
Year 2000 plan is working with the provider to test and verify the system as Y2K
compliant. The Bank's primary service provider has surveyed its programs and is
complete with
6
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
respect to correcting the applicable computer programs. The renovated systems
software has been loaded onto the Bank's test system allowing the Bank to devote
substantial time to testing the upgraded systems. After complete validation,
the Y2K compliant software will be transferred into production. This is
expected to occur by the end of November 1998. The Bank plans to complete its
regulatory timetable for carrying out it plans to address the Year 2000.
In addition to the Bank's status of the `Y2K Plan' being reported to its staff
and Board of Directors monthly, information is available to customers both in
branch offices and on the Bank's website. Monitoring and managing the Year 2000
project will result in additional direct and indirect costs. A $50,000
provision has been established to cover expenses that may be associated with the
Y2K issue. The Company and the Bank do not believe that such costs will have a
material effect on its results of operations. However, there can be no
guarantee that the systems of other companies on which the Bank's systems rely
will be timely converted, or that a failure to convert by another company or a
conversion that is incompatible with the Bank's systems, would not have material
adverse effect on the Bank. Although no independent analysis of the Bank's
potential exposure has been obtained, the Bank believes it has no exposure to
contingencies related to the Year 2000 problem for the products it offers.
The costs of the project and the dates on which the Bank plans to complete Y2K
modification are based on management's best estimates. However, there can be no
guarantee that these estimates will be achieved, and actual results could differ
from those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties. The Bank has developed a contingency plan, which would
be implemented in the unlikely event that it is not Year 2000 compliant. The
Bank will continue to closely monitor the progress of its Year 2000 compliance
plan. The Bank is also subject to regulatory review concerning the Year 2000
from its primary regulator, The Office of Thrift Supervision (OTS). The OTS
conducted a Y2K examination in June 1998.
FINANCIAL CONDITION
During the first nine months of 1998, total assets increased by $11,846,262,
or 3.73% from $317,988,962 to $329,835,224. This change was primarily due to a
$21 million increase in securities purchased as available for sale. As loan
customers refinanced and paid off loans, cash and cash equivalents increased.
In order to maintain spreads, the Bank converted much of this cash into
available for sale securities.
Total gross loans decreased $16,533,987 from $258,386,923 to $241,852,936, or
6.40%. During the first nine months of 1998, the Bank originated over $102
million of loans, had pay-offs of approximately $56 million, normal amortization
of approximately $26 million and loans sold of $37 million. At September 30,
1998, the Bank had $1,777,200 in loans held for sale. Due to lower fixed
interest rates, many of the Bank's variable rate loan customers refinanced into
fixed rate products. The Bank sold much of the fixed rate product into the
secondary market, retaining the servicing. Selling fixed rate loans into the
secondary market protects the Bank against interest rate risk and provides the
Bank with a consistent fee income stream. The proceeds from the sales are then
available for lending in the Bank's market area. At September 30, 1998, the
Bank had $113,331,182 in its servicing portfolio. The Bank expects to exceed
$125 million in serviced loans by the end of 1998. The Bank expects to continue
to sell fixed rate loans into the secondary market in order to manage interest
rate risk. Market risk exposure
7
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
during the production cycle is managed through the use of secondary market
forward commitments. At September 30, 1998, adjustable rate mortgages comprised
approximately 84% of the Bank's real estate mortgage loan portfolio. This is
consistent with prior years.
Total investment securities increased by $19,904,739, or 62.14% from
$32,033,122 to $51,937,861 (at amortized cost). As mentioned above, the Bank
used proceeds from sold loans and paid loans to purchase investment securities
in order to increase yields, and thereby mitigate the reduction in the Bank's
interest rate spread. The Bank's net unrealized gain was $764,657 at September
30, 1998 compared to a net unrealized gain of $134,112 at September 30, 1997.
This change of $630,545 in market value reflects the decrease in interest rates
over the last 12 months and the corresponding rise in investment security values
during such period.
Real estate owned and property acquired in settlement of loans increased by
$165,000, or 31.97% to $681,153. This total reflects $315,153 in market value
for the remaining five lots at Blye Hill Landing in Newbury, NH. During the
first nine months of 1998, three real estate owned properties totaling $204,000
in carrying value, were sold.
Deposits increased by $4,448,341, or 1.64% to $275,675,301 from $271,226,960.
Savings and interest-bearing checking accounts increased 10.81% as the Bank
introduced an enhanced cash management checking account for higher balance
customers and a pay check plus program for businesses and their employees.
Certificates of deposit decreased primarily due to the maturity of brokered CD's
and premium rate personal CD's that were acquired from Landmark Bank.
Securities sold under agreement to repurchase increased by $8,402,562, to
$16,795,754 from $8,393,192 as business customers sought alternative investment
products for their deposits. Repurchase agreements are collateralized by the
Bank's government and agency investment securities.
Advances from the Federal Home Loan Bank (FHLB) decreased by $5,152,506 to
$5,093,812 from $10,246,318. The decrease was a result of the Bank prepaying a
$5 million, 5.82% FHLB advance and principal amortizations on two FHLB advances.
The prepayment decreased the cost of borrowings to 5.55% from 5.70%.
Accrued expenses and other liabilities increased $2,696,751, to $4,956,118
from $2,259,367. The increase was primarily the result of an increase in
payments held on sold loans, which amounted to $2,149,581. Customer's loan
payments are received throughout the month and held in escrow until they are due
to the secondary market servicer.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain a 4% ratio of liquid assets to net
withdrawable funds. At September 30, 1998, the Bank's ratio of 13.85% 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 September 30, 1998, the Bank had approximately $95,000,000 in
additional borrowing capacity from the FHLB.
8
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
At September 30, 1998, the Company's shareholders' equity totaled $27,314,239,
or 8.28% of total assets, compared to $25,563,125, or 8.04% of total assets at
year-end 1997. The increase of $1,751,114 reflects net income of $2,202,755,
the payment of $941,597 in common stock dividends, the exercise of 9,630 stock
options in the amount of $53,565, a gain of $113,519 on the sale of treasury
stock, and the change of $430,002 in net unrealized holding gains on securities
classified as available-for-sale.
For the nine months ended September 30, 1998, net cash provided by operating
activities was $4,921,715, versus $2,264,753 for the same period in 1997. An
increase in other liabilities accounted for the majority of the change as
securities purchased and booked as a payable at the end of the quarter settled
in October.
Net cash flows used in investing activities amounted to $5,451,400 for the
nine months ended September 30, 1998, compared to $2,797,195 in 1997.
Investment security activity used net cash flows of $19,944,471 compared to
$2,496,942 in 1997. A net decrease in loans to customers provided net cash
flows of $15,374,408 as compared to $49,597 for the same period in 1997.
At September 30, 1998, net cash provided by financing activities was
$6,516,753 compared to $4,992,214 for the same period in 1997. An increase in
deposits and repurchase agreements of $12,850,903 offset the prepayment and
subsequent decrease of $5,452,506 in Federal Home Loan Bank advances. This
compares with a net increase in deposits, repurchase agreements, and Federal
Home Loan Bank advances of $509,594 for the nine months ended 1997. In 1997,
the Bank acquired net cash and cash equivalents of $4,964,470 as a result of its
acquisition of Landmark Bank.
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, if necessary. 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.
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 September 30,
1998, the Bank's ratios were 6.88%, 6.88%, and 12.50%, respectively, well in
excess of the regulators' requirements.
Book value per share was $13.02 at September 30, 1998, versus $12.04 per share
at September 30, 1997. The increase in paid-in capital and retained earnings
provided the increase in book value per share.
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 September 30, 1998, was -9.14%, compared to the
December 31, 1997 Gap position of -7.28%. The Bank continues to offer
adjustable rate mortgages, which reprice at one, three, and five-year intervals.
In addition (as mentioned above), the Bank sells fixed-rate mortgages into the
secondary market in order to minimize interest rate risk.
9
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The Bank's Gap, of -9.14% at September 30, 1998, 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 fluctuations. In an effort to maintain the Gap within ten points
of parity, the Bank may utilize the Federal Home Loan Bank advance program to
control the repricing of a segment of liabilities.
ALLOWANCE FOR LOAN LOSSES AND ASSET QUALITY
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 September 30, 1998 was $3,125,289, compared
to $3,061,451 at year-end 1997. The allowance in 1998 includes $2,765,557 in
general reserves as compared to $2,783,484 at year-end. Due to the decline in
non-performing loans and a lower loan portfolio balance combined with
management's assessment that reserve levels are adequate and risk has been
reduced, the total provision for loan losses was reduced by $509,497 from
$629,664 at September 30, 1997 to $120,167 for the same period in 1998.
During the first nine months of 1998, the Bank had net charge-offs of
$56,329, or less than .025% of total loans compared to 743,277, or .28% for
1997. In the charge-off amount of $743,277, 245,051, or 32.97% was for one loan
that is no longer being held by the Bank. The total allowance represented 1.28%
of total loans at September 30, 1998 versus 1.18% at year-end 1997. The
allowance for loan losses as a percentage of non-performing assets was 101.26%
at September 30, 1998, compared to 97.21% at December 31, 1997.
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 September 30, 1998, there were no other loans not
included in the table below or discussed 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 September 30, 1998
were $5,132,916 compared to $4,859,402 at December 31, 1997. Total non-
performing assets amounted to $3,085,560 and $3,150,040, respectively. At
September 30, 1998, loans classified as 90 days and over delinquent were
$269,903 compared to $691,567 at December 31, 1997.
10
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The following table shows the breakdown of non-performing assets and non-
performing assets as a percentage of total assets (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------- ----------------
<S> <C> <C> <C> <C>
90 days and over delinquent (1) $ 270 0.08% $ 692 0.22%
Non-accrual & impaired loans (2) 2,020 0.61% 1,644 0.52%
Restructured loans 115 0.03% 298 0.09%
---------------- ----------------
Total non-performing loans $ 2,405 0.72% $ 2,634 0.83%
Other real estate owned 681 0.21% 516 0.16%
---------------- ----------------
Total non-performing assets $ 3,086 0.93% $ 3,150 0.99%
================ ================
</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.
The following table sets forth the allocation of the loan loss valuation
allowance and the percentage of loans in each category to total loans (dollars
in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------- ----------------
<S> <C> <C> <C> <C>
Real estate loans -
Conventional $ 1,631 79% $ 1,562 80%
Construction 28 1% 112 1%
Collateral and Consumer 110 2% 59 11%
Commercial and Municipal 996 8% 1,006 8%
Impaired Loans 360 - 323 -
---------------- ----------------
Valuation allowance $ 3,125 100% $ 3,062 100%
================ ================
Total valuation allowance as a
percentage of total loans 1.28% 1.18%
========= =========
</TABLE>
RESULTS OF OPERATIONS
Net income for the nine months ended September 30, 1998, was $2,202,755, or
$1.04 per common share (assuming dilution) compared to $2,034,061, or $0.97 per
common share (assuming dilution) for the same period in 1997. Net income for
the third quarter in 1998 was $751,096, or $0.36 per share (assuming dilution)
as compared to $701,342, or $0.33 per share (assuming dilution) for the same
period in 1997, an increase of $168,694, or 8.29% and $49,754, or 7.09%,
respectively. The increase was due primarily to an overall increase in the
yield on loans and investments and a decrease in the cost of deposits and
advances, which resulted in an overall increase in net interest income. A
reduction in the provision for loan losses for the nine months and the three
months ended September 30, 1998 also contributed to the increase.
Total interest income for the nine months ended September 30, 1998 increased
by $91,419, or 0.52%, to $17,570,568. The increase was primarily attributable
to an increase in interest and dividends on investments. Realizing that many of
the Bank's variable rate loans were refinancing into fixed rate loans and
subsequently being sold into the secondary market, the Bank took steps to
stabilize its yield on interest-earning assets. During the first nine months,
the Bank increased its investment portfolio by approximately $20 million by
purchasing corporate bonds and government agencies with favorable yields. The
Bank sells
11
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
loans into the secondary market, retaining servicing, in order to reduce
interest rate risk. Fee income associated with the sales is recorded in other
income. For the three months ended September 30, 1998, total interest income
decreased slightly by $8,255, or 0.14% to $5,862,328. While yields remain
favorable on interest earning assets, the volume associated with the Bank's loan
portfolio has declined, resulting in a $354,429, or 6.66% decrease in interest
income on loans. For the three months ended September 30, 1998, interest and
dividends on investments increased $346,174, or 63.34%.
For the nine months and the three months ended September 30, 1998, total
interest expense decreased $259,055, or 2.74% and $128,068, or 4.01%,
respectively. The decrease was primarily a result of lower interest expense
associated with FHLB advances. At September 30, 1998, FHLB advances totaled
$5,093,812 compared to $10,246,318 for the same period in 1997. During the
second quarter, the Bank prepaid a $5 million, 5.82% advance, which lowered the
cost of advances from 5.70% to 5.55%.
Net interest income increased $350,474, or 4.36%, for the first nine months
of 1998 and $119,813, or 4.47%, for the third quarter. As mentioned above, the
increase was primarily attributable to an increase in balances and yields on
investment securities, a decrease in the average outstanding balances of FHLB
advances and a reduction in the provision for loan losses.
Due to the decline in non-performing loans and lower loan portfolio
balances combined with management's assessment that reserve levels are adequate
and risk has been reduced, the net provision for loan losses was reduced by
$509,497, from $629,664 at September 30, 1997 to $120,167 for the same period in
1998. For the third quarter, the net provision for loan losses was reduced by
$199,725, from $253,054 to $53,329. The total allowance represented 1.28% of
total loans at September 30, 1998 versus 1.14% for the same period in 1997.
The Bank considers many factors in determining the allowance for loan
losses. They include, but are not limited to, 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. Provisions and
the resulting allowance for loan loss are amounts management believes will be
adequate to absorb losses on existing loans that may become uncollectible.
Loans are charged against the allowance when management believes collectibility
is unlikely. No changes were made to the Bank's procedures with respect to
maintaining the loan loss allowances as a result of any regulatory examinations.
For the nine month ended September 30, 1998, total other income decreased by
$347,138, or 17.42% from $1,992,597 in 1997 to $1,645,459 for the same period in
1998. For the third quarter, total other income decreased by $309,897, or
32.58%. The changes were primarily a result of a $516,317, or 74.03% decrease
in net gains on the sale of securities. During 1997, the Bank realized gains on
the settlement of various bonds it acquired from Landmark Bank and recorded a
gain on the sale of the Company's share of Charter Trust Company. Net gains
realized on the sale of loans increased $107,237, or 73.63% to $252,878 from
$145,641 for the nine months ended September 30, 1998 and increased $167,367 for
the third quarter. During the first nine months of 1998, approximately $38
million of loans were sold into the secondary market.
Total operating expenses increased $300,379, or 4.73% for the nine months
ended September 30, 1998. The increase was primarily due to costs associated
with the Bank's newest office located in the Centerra Marketplace and increased
expenses associated with greater loan volume. Additional staffing and occupancy
costs were realized as the Bank opened its new location and managed its
increased loan production. For the three months ended September 30, 1998, total
operating expenses decreased $21,137, or 0.92%. During the third quarter of
1997 a theft in one of the Bank's branches resulted in a recorded loss of
approximately $190,000. Subsequent to September 30, 1997, approximately
$150,000 of the loss was located and booked as a recovery in the fourth quarter
of 1997.
12
<PAGE>
Part II. NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARY
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
There is no material litigation pending in which the Company or its
subsidiary is a party or which the property of the Company or its
subsidiary is subject.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Common Shareholders
------------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A.) Exhibits:
Exhibit 11 - Earnings per share are presented in accordance with
Statement of Financial Accounting Standards No. 128 (SFAS No. 128)
`Earnings per Share'. This statement simplifies the standard for
computing earnings per share. It replaces the presentation of
Basic EPS, which excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS,
if applicable, reflects potential dilution that could occur if
securities or other contracts to issue common stock were exercised
or converted into common stock.
Exhibit 27 - Financial Data Schedules (EDGAR filing only)
B.) Reports on Form 8-K:
None
13
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements 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.
-------------------------------------
(Registrant)
Date: November 13, 1998 /s/ Stephen W. Ensign
------------------------------- -------------------------------------
Stephen W. Ensign
Vice Chairman of the Board, President
and Chief Executive Officer
Date: November 13, 1998 /s/ Stephen R. Theroux
------------------------------- -------------------------------------
Stephen R. Theroux
Executive Vice President and
Chief Operating Officer
Date: November 13, 1998 /s/ Daryl J. Cady
------------------------------- -------------------------------------
Daryl J. Cady
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,297,694
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,996,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,669,518
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 243,626,978
<ALLOWANCE> 3,125,289
<TOTAL-ASSETS> 329,835,224
<DEPOSITS> 275,675,301
<SHORT-TERM> 0
<LIABILITIES-OTHER> 26,845,684
<LONG-TERM> 0
0
0
<COMMON> 24,798
<OTHER-SE> 27,289,441
<TOTAL-LIABILITIES-AND-EQUITY> 27,314,239
<INTEREST-LOAN> 4,969,663
<INTEREST-INVEST> 892,665
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,862,328
<INTEREST-DEPOSIT> 2,990,434
<INTEREST-EXPENSE> 3,063,237
<INTEREST-INCOME-NET> 2,799,091
<LOAN-LOSSES> 53,329
<SECURITIES-GAINS> 7,010
<EXPENSE-OTHER> 2,278,398
<INCOME-PRETAX> 1,108,620
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 751,096
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> 0
<LOANS-NON> 2,019,656
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3,125,289
<ALLOWANCE-DOMESTIC> 3,125,289
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,050,521
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,412,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,711,356
<INVESTMENTS-CARRYING> 75,000
<INVESTMENTS-MARKET> 75,000
<LOANS> 257,423,643
<ALLOWANCE> 2,945,042
<TOTAL-ASSETS> 319,338,036
<DEPOSITS> 269,128,944
<SHORT-TERM> 0
<LIABILITIES-OTHER> 25,232,745
<LONG-TERM> 0
0
0
<COMMON> 24,798
<OTHER-SE> 24,951,549
<TOTAL-LIABILITIES-AND-EQUITY> 24,976,347
<INTEREST-LOAN> 5,324,092
<INTEREST-INVEST> 546,491
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,870,583
<INTEREST-DEPOSIT> 2,934,551
<INTEREST-EXPENSE> 3,191,305
<INTEREST-INCOME-NET> 2,679,278
<LOAN-LOSSES> 253,054
<SECURITIES-GAINS> 506,806
<EXPENSE-OTHER> 2,299,535
<INCOME-PRETAX> 1,077,842
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 701,342
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.33
<YIELD-ACTUAL> 0
<LOANS-NON> 1,342,995
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,945,042
<ALLOWANCE-DOMESTIC> 2,945,042
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
