<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 millennium, 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>
<S> <C>
Selected Financial Highlights............................................. 3
President's Letter........................................................ 4
Management's Discussion and Analysis...................................... 7
Report of Independent Auditors............................................ 20
Financial Statements...................................................... 21
Notes to Financial Statements............................................. 27
Form 10-KSB............................................................... 47
Board of Directors........................................................ 65
Officers and Managers..................................................... 65
Board of Advisors......................................................... 66
Shareholder Information................................................... 66
Information on Common Stock............................................... 66
</TABLE>
2
<PAGE>
_________________________________________________
SELECTED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
($ in thousands, except per share data)
<S> <C> <C> <C>
Net Income $ 3,119 $ 2,771 $ 611
Earnings Per Common Share/1)/ $ 1.49 $ 1.36 $ .36
Earnings Per Common Share, Assuming Dilution/1)/ $ 1.47 $ 1.33 $ .35
Dividends Declared $ .60 $ .50 $ .50
Dividend Payout Ratio 40.27% 36.76% 138.89%
Return on Average Assets .96% .88% .24%
Return on Average Equity 11.76% 11.44% 3.15%
</TABLE>
<TABLE>
<C>
AS OF DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
($ in thousands, except book value data)
<S> <C> <C> <C>
Total Assets $ 323,408 $ 317,989 $ 264,385
Total Deposits $ 282,049 $ 271,227 $ 213,959
Total Securities/(2) $ 54,171 $ 32,167 $ 27,599
Net Loans $ 232,321 $ 255,224 $ 216,003
Federal Home Loan Bank Advances $ - $ 10,246 $ 20,174
Shareholders's Equity/(3) $ 27,780 $ 25,563 $ 19,194
Book Value of Shares Outstanding $ 13.20 $ 12.24 $ 11.26
Average Equity to Average Assets 8.19% 7.67% 7.51%
Shares Outstanding 2,104,285 2,088,097 1,704,982
Number of Branch Locations 12 12 10
</TABLE>
(1) See Note 1 to Consolidated Financial Statements regarding earnings per
share.
(2) Shown at fair value.
(3) See Note 14 to Consolidated Financial Statements regarding the issuance of
common stock.
3
<PAGE>
______________________________________________________________________________
PRESIDENT'S LETTER
- -------------------
...a concerted and
- -------------------
continued emphasis
- -------------------
on the "community"
- -------------------
part of community
- -------------------
banking...
- -------------------
1998...our best year ever... brought record earnings to the Bank and
the Company amid a backdrop of an exceptionally high level of residential
mortgage loan production and a resulting rebalancing of our mix of assets. It is
a concerted and continued emphasis on the `community' part of community banking
that has been the enabling factor behind our 1998 results and the focus on our
efforts to further refine our primary business lines.....consumer banking at the
retail level, commercial services for our growing number of small business
customers, and direct access to an associated family of financial products that
include both trust and investment services and, now, life insurance.
RECORD EARNINGS
Consecutive quarterly record earnings throughout the year resulted in
consolidated net income for the year-ended December 31, 1998 of $3,118,750, or
$1.49 per share of common stock. This compares favorably to the net income of
$2,770,932, or $1.36 per share, that was reported for year-end 1997. Net asset
growth, impacted by the substantial volume of secondary-market mortgage loan
production, resulted in total assets at year-end of $323,407,769, as compared to
$317,988,962 at December 31, 1997. While this increase appears particularly
modest, it must be noted that slightly more than $10,000,000 in advances from
the Federal Home Loan Bank of Boston that were part of the 1997 year-end numbers
were retired during 1998. Complete financial details of the year-ended December
31, 1998 are more fully covered in the Management Discussion and Analysis
section that immediately follows this report.
SHAREHOLDER VALUE
Consistent with the generally accepted economic forecast of slower
growth in 1999, the stock market's concerns about the financial services
industry now appears to over-shadow, and discount, financial stocks, with the
market price for the Company's stock ending the year at $15.50 per share.
However, the contribution of net earnings for 1998, after the payment of
dividends, brought about another steady year-end increase to shareholder's
equity from $25,563,125 to $27,779,606 and a book value that rose by $.96, from
$12.24 to $13.20 per share. The fundamental strength of the Company was
acknowledged by the Board of Directors at their January 1999 meeting when the
regular quarterly cash dividend was raised from $.15 to $.16 per share. This
reflects an increase of 6.66% over the most current prior period.
PRIMARY BUSINESS
In responding to the financial performance pressures of margins,
expenses and growth, the Company's operating emphasis must continue to be
focused on the core business lines that are the life-blood of community banking.
The standard products and services that banking customers have come to
expect....checking and savings accounts....mortgage and consumer lending....and
small business lending...must now be complemented by trust services, investment
brokerage and insurance products. As the defining lines between financial
service providers becomes increasingly blurred, community banks find themselves
in an interesting position. The `personal' banking role that has long sustained
the success of our business is being attacked and rewarded at the same time.
Attacked by the very nature of a society that desires to get things the quickest
and easiest way and rewarded by that very same society that continues to
recognize an inherent and continuing value in the more personalized services of
community banks. It is our primary goal to foster and expand our relationship
end-points, and in turn our business, through a dedicated
4
<PAGE>
______________________________________________________________________________
PRESIDENT'S LETTER (continued)
commitment to customer service .....responsive, knowledgeable, and professional.
The ability to spread costs and lower efficiency ratios beyond a certain level
is limited at smaller institutions by the dynamics of scale and scope. It
becomes, then, an almost continuous undertaking to identify areas for increased
profitability, refine and implement new pricing strategies, further develop
cross-selling techniques, and broaden the access to funding sources.
CHALLENGES AND OPPORTUNITIES
The demographics of generational change present us with a fast-
changing and highly-competitive business environment. The customer patterns of
the `Traditionalist' generation are far afield from that of the `Baby-Boomers'
and, in-turn, the `Generation X-ers' and `Millennium Kids' that will soon come
into their own as a growing economic force. Priority must be given not just to
customer retention, but also to new customer cultivation and development.
Successfully building financial-service bridges from one generation to the next
will be a major part of our effort going forward. The design and delivery of
products and services to not just meet a financial need, but first attract and
then retain the customer will be essential for the longer-term. From our newest
`Skipper Account' holder (for those under age sixteen) to our more seasoned
depositors with their `Navigator Club' accounts, our energy remains focused on
building customer relationships. Having assembled an effective team of managers
and supervisors, we feel confident that a strong footing has been laid that will
allow us to become ever-more adaptive and flexible without losing sight of the
uniquely-local identity that is so vitally important to community banking.
FUNDAMENTALS AND TECHNOLOGY
Our existing network of branch offices have continued to bring us greater
marketplace presence as we further expanded our commercial lending capabilities
and, at the same time, witnessed an unprecedented volume of residential mortgage
loan production. With a net loan portfolio at year end 1998 down some $20
million over year end 1997, these numbers belie the record level of activity
that resulted in gross loan origination of more than $140 million. In fact,
recent statistics reveal that, in the combined markets we serve, the Bank was
clearly the leading lender for purchase-money mortgages with a substantially
dominant position over both other financial institutions and mortgage companies.
And, as seller/servicer of fixed-rate mortgages for the secondary market, our
off-balance sheet sold loan portfolio grew to nearly $130 million by year end
December 31, 1998. This was truly a remarkable year for our lending team.
Asset quality, despite this record volume, remains high and a
continued emphasis in the areas of audit and compliance are an important part of
our daily operations. The importance of maintaining a concentration of effort in
this area should not be diminished by the current level of generally robust
economic conditions. The economic expansion that blessed the decade of the
1990's can not last forever and, although no significant signs of concern are
yet discernible on the horizon, a measure of caution is not inappropriate as we
embark upon a new decade...a new century...and a new millennium.
With an eye on new products and services...and customer retention...
1998 saw the introduction of debit cards and check imaging. Both part
- ------------------
...building
- ------------------
financial-service
- ------------------
bridges from one
- ------------------
generation to the
- ------------------
next...
5
<PAGE>
_______________________________________________________________________________
PRESIDENT'S LETTER (continued)
- --------------------
...the Bank was
- --------------------
clearly the leading
- --------------------
lender for
- --------------------
purchase- money
- --------------------
mortgages... This
- --------------------
was truly a
- --------------------
remarkable year for
- --------------------
our lending team...
of our longer-term strategic technology plan, these were viewed as important
tools that enabled our customers to better access and manage their personal
finances. Future enhancements will await the new year as the issues of Year 2000
preparedness take front-stage across the country. For our part, Year 2000
planning started in 1996 and will continue as an action item for the Bank and
Company right through year end 1999. While the importance of this issue must be
not under-estimated, we have, to date, met all of our major targets and have had
our regulators from the Office of Thrift Supervision conduct both Phase I and
Phase II on-site Year 2000 examinations.
LOOKING AHEAD
As in the past, we continue to be fully committed to the principles of
community banking for the benefit of our customers, our communities and our
shareholders. The underlying value of our banking franchise is comprised of a
balance between a modest growth in assets and a consistent enhancement in
earnings. Our organizational structure and balance sheet mix are designed to
provide safety and soundness over the long-term. We envision future marketplace
expansions that will complement our existing operations and recognize that the
costs of certain near-term investments in both people and technology will result
in greater returns in the years ahead.
IN CLOSING
Failing to make mention of the tremendous effort of all our employees
during the year just past would be a great injustice. We are fortunate to have a
highly dedicated and committed group of professionals working at all levels of
the institution. This has, indeed, been an exceptional year for the Bank and the
Company that simply could not have been accomplished without their loyalty and
support. On behalf of our Board of Directors and management team, we would like
to express our sincere appreciation for the continued confidence that is
evidenced by customers and shareholders alike. It is our mission to provide
exceptional banking services of the highest quality.....both now and in the
future.... for the benefit of all our constituencies.
/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 are primarily generated from the difference between the yield on
its loans and investments 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 1998, the Company earned $3,118,750, or $1.47 per common share, assuming
dilution, compared to $2,770,932, or $1.33 per common share, assuming dilution,
in 1997. The increase in earnings can be primarily attributed to the overall
increase in loan production, an increase in investment securities, and a
decrease in advances from the Federal Home Loan Bank. In 1998, the Bank
originated a record $142 million in loans. Favorable interest rates coupled with
a dedicated loan origination team and support staff allowed existing and new
customers to refinance or seek new funding more easily. The Bank sells fixed
rate loans into the secondary market and retains the servicing. As a result,
fees from loan originations, mortgage servicing rights, and gains on the sale of
loans increased 19.93%. The increase in investment securities resulted from a
strategy implemented to offset the decrease in interest earned on loans. In
addition, during 1998, the Bank was able to prepay all of its FHLB advances. By
increasing the interest earned on investment securities and decreasing its
interest expense on advances, net interest income increased 2.76%.
YEAR 2000
Many companies continue to undertake projects to address the Year 2000
(Y2K). Companies 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 and an outside
consultant, has implemented many hardware and software changes in 1998, in an
effort to become Y2K compliant. During 1998, the Bank installed a new data
processing mainframe computer, upgraded its mainframe software, and installed a
new proof of deposit and check imaging system. All of these Y2K compliant
systems have been in operation throughout most of 1998.
Y2K testing has been on going and will continue throughout 1999. 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 annual provision
has been established to cover Y2K related expenses. In conjunction with the
`Action Plan', the Bank has developed a `Business Continuity Plan'. This Plan is
designed to allow the Bank to operate should a system it relies on fail. As part
of the `Business Continuity Plan', the Bank has arranged for power generators
and designed a manual accounting system. It is unlikely the Bank will need to
utilize these systems, but nevertheless, they are being developed and tested.
The Bank is subject to regulatory review concerning the Year 2000 from its
primary regulator, The Office of Thrift Supervision (OTS). The Bank has been
examined twice as part of the OTS's program to ensure Y2K compliance.
In addition, monitoring and managing the year 2000 project has and will
likely continue to 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
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.
FINANCIAL CONDITION
Total assets increased by $5,418,807, or 1.70% from $317,988,962 to
$323,407,769. The increase in total assets resulted primarily from an increase
in investment securities and federal funds sold. Total loans decreased from
$259,060,873 to $239,116,440, or 7.70%. The decrease in loans is primarily
attributed to a change in the mix of the Bank's loan portfolio. As interest
rates fell during 1998, many consumers refinanced their loans into fixed rate
instruments. In order to protect against interest rate risk, the Bank
7
<PAGE>
------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
sells fixed rate loans into the secondary market, retaining the servicing. To
offset the decrease in loans, the Bank invested proceeds from the sale of loans
into corporate bonds and government agency securities. As mentioned, this
practice also enabled the Bank to maintain its interest rate spread. The table
on page 16 illustrates the maturities of the loan portfolio at December 31,
1998. Real estate loans decreased by $17,569,384, or 8.37% from $209,951,326 to
$192,381,942. The net level of loans sold into the secondary market increased by
approximately $60 million. At December 31, 1998, the Bank had approximately $130
million 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 approximately 80% of the Bank's real
estate mortgage loan portfolio. This is consistent with prior years.
Total investment securities increased by $21,722,129, or 67.81% from
$32,033,122 to $53,755,251 (at amortized cost). As mentioned, the Bank used
proceeds from the sale of loans to purchase investment securities. This strategy
provided an increase in interest and dividends on investment of $1,067,737,
which primarily offset the $1,190,531 decrease in interest on loans. The Bank's
net unrealized gain of $415,501 at December 31, 1998 compares to $134,112 for
the same period in 1997. This change of $281,389 in market value reflects the
decrease in interest rates during 1998 and the resultant rise in bond values.
Real estate owned and property acquired in settlement of loans
increased by a net $154,000, or 29.84% to $670,153. The total reflects $315,153,
or 47.03% in market value for the remaining five lots at Blye Hill Landing in
Newbury, NH. During 1998, six real estate owned properties totaling $163,076, in
carrying value, were sold.
Deposits increased by $10,822,196, or 3.99% to $282,049,156 from
$271,226,960. During 1998, the Bank introduced the Navigator Club. Customers
with combined account balances of $5,000 or more are eligible to join. During
1998, the Bank opened approximately 1,500 of these accounts. Customers also took
advantage of the Bank's favorable Money Market Deposit Account interest rate. As
a result, this account increased 15% to approximately $27 million. During 1998,
Certificates of Deposit (CDs) decreased $12,000,676 from $133,097,650 to
$121,096,974. The decrease was primarily attributed to the maturity of brokered
and non-personal CD's that were acquired from Landmark Bank during 1997. Lake
Sunapee Bank elected not to renew these high costing brokered deposits. In
addition, 1998 was the final year for the `Apple' CD program the Bank offered 10
years ago. Still, many customers continued to place funds in CDs, with CDs
comprising 42.93% of total deposits versus 49.07% last year.
Advances from the Federal Home Loan Bank (FHLB) decreased by
$10,246,318, or 100.00% as the Bank used its increase in deposits and repurchase
agreements to prepay its FHLB advances in order to reduce interest expense.
Repurchase agreements increased $3,455,924 as businesses sought investment
alternatives through the Bank. The Bank was able to fund its loan production
through its growth in deposits and repurchase agreements.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required by its regulator, the OTS, to maintain a 4% ratio
of liquid assets to net withdrawable funds. At year-end 1998, the Bank's ratio
of 12.88% 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, 1998, the Bank had approximately $96
million in additional borrowing capacity from the FHLB.
At December 31, 1998, the Company's shareholders' equity totaled
$27,779,606, or 8.59% of total assets, compared to $25,563,125, or 8.04% at
year-end 1997. The increase of $2,216,481 reflects net income of $3,118,750, the
payment of $1,257,015 in common stock dividends, the cashless exchange of 4,650
shares of stock at an amount of $73,975, the exercise of 20,780 stock options in
the amount of $41,535, a gain of $156,406 on the sale of treasury stock, a tax
benefit on stock options of $58,064, and the change of $172,716 in net
unrealized holding gains on securities classified as available-for-sale. As
interest rates continued to move downward throughout 1998, the Bank's bond
portfolio increased in value.
During 1998, the Bank upstreamed $500,000 to its parent company New
Hampshire Thrift Bancshares, Inc. (NHTB). The purpose of the upstream was to
help offset the payment of dividends to NHTB shareholders.
8
<PAGE>
------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Net cash provided by operating activities increased $378,035 to
$3,225,318 in 1998 from $2,847,283 in 1997. The change in gains and losses on
other investments and deferred taxes accounted for the majority of the change.
Net cash flows used in investing activities decreased by $1,109,552
from negative $3,955,691 in 1997 to negative $2,846,139 in 1998. The change in
net cash flows used for securities activity of $18,787,981 was offset by a
decrease in loans held in portfolio of $19,847,490.
In 1998, net cash provided by financing activities was $2,598,753
compared to $3,412,285 in 1997. During 1998, the Bank made principal payments on
FHLB advances of $10,246,318 bringing the balance in FHLB advances to zero. Time
deposits decreased $12,000,676. The Bank was able to repay all of its FHLB
advances and cover its outflow of certificates of deposit by using cash inflows
of $26,278,796 provided by an increase in other deposits and repurchase
agreements.
The Bank expects to be able to fund loan demand and other investing
during 1999 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.
The Bank is required to maintain tangible, Tier I core, and risk-based
capital ratios of 1.50%, 3.00%, and 8.00%, respectively. As of December 31,
1998, the Bank's ratios were 7.31%, 7.31%, and 12.63%, respectively, well in
excess of the regulators' requirements.
Book value per share was $13.20 at December 31, 1998 versus $12.24 per
share at December 31, 1997. 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 presented elsewhere herein
are prepared in accordance with generally accepted accounting principles (GAAP)
which require the measurement of the Company's financial position and operating
results generally 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. The impact of inflation is
reflected in the increased cost of operations.
Unlike other companies, nearly all of the assets and liabilities of a
bank are monetary in nature. As a result, interest rates have a far greater
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 to
the same extent 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
The principal objective of the Bank's interest rate management function
is to evaluate the interest rate risk inherent in certain balance sheet accounts
and determine the appropriate level of risk given the Bank's business
strategies, operating environment, capital and liquidity requirements and
performance objectives and to manage the risk consistent with the Board of
Director's approved guidelines. The Bank's Board of Directors has established an
Asset/Liability Committee (ALCO) to review its asset/liability policies and
interest rate position monthly. Trends and interest rate positions are reported
to the Board of Directors quarterly.
Gap analysis is used to examine the extent to which assets and
liabilities are "rate sensitive". An assets or liability is said to be interest
rate sensitive within a specific time-period if it will mature or reprice within
that time. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets maturing or repricing within a
specified period of time and the amount of interest-bearing liabilities maturing
or repricing within the same specified period of time. 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, 1998, was - 6.78%, (see the
table on page 11) compared to the December 31, 1997 gap of -7.28%. The Bank
continues to offer adjustable rate mortgages, which reprice at one, three, and
five-year intervals. In addition, the Bank sells fixed-rate mortgages into the
secondary market in order to minimize interest rate risk.
9
<PAGE>
------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The Bank's gap, of approximately negative seven percent at December 31,
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 swings. 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.
As another part of its interest rate risk analysis, the Bank uses an
interest rate sensitivity model, which generates estimates of the change in the
Bank's net portfolio value (NPV) over a range of interest rate scenarios (see
the table on page 11). The OTS produces the data quarterly using its own model
and data submitted by the Bank.
NPV is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The NPV ratio, under any rate
scenario, is defined as the NPV in that scenario divided by the market value of
assets in the same scenario. Modeling changes requires making certain
assumptions, which may or may not reflect the manner in which actual yields and
costs respond to the changes in market interest rates. In this regard, the NPV
model assumes that the composition of the Bank's interest sensitive assets and
liabilities existing at the beginning of a period remain constant over the
period being measured and that a particular change in interest rates is
reflected uniformly across the yield curve. Accordingly, although the NPV
measurements and net interest income models provide an indication of the Bank's
interest rate risk exposure at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of changes
in market rates on the Bank's net interest income and will likely differ from
actual results.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income for the year ended December 31, 1998 increased by
$297,542, or 2.76%, to $11,078,822. This increase can be primarily attributed to
the decrease in interest expense on FHLB advances and the increased volume in
the Bank's investment portfolio.
Total interest income decreased by $122,794, or .53%, the decrease is
primarily related to the change in interest rates. Interest on loans decreased
$1,190,531 while interest and dividends on investments increased $1,067,737.
During 1998, the Bank's yield on interest earning assets decreased to 7.75% from
7.97% in 1997.
Total interest expense decreased $420,336, or 3.33%, with 129.21%
attributed to a volume related decrease in interest expense on borrowings. The
Bank's overall cost of funds decreased from 4.54% to 4.32% in 1998. The Bank's
average deposits as a percentage of total interest bearing liabilities increased
from 91.89% in 1997 to 93.22% in 1998. Total deposit costs in 1998 were 4.29%
versus 4.46% in 1997. This decrease was a result of lower balances in higher
costing instruments. As mentioned above, the Bank elected not to renew the
brokered CD's acquired from Landmark Bank, which matured in January of 1998.
FHLB advances typically are higher costing funding instruments. In an effort to
reduce the Bank's overall cost of funds, the Bank repaid all of its outstanding
advances as of December 31, 1998. During 1998, the Bank's cost of advances
decreased from 5.90% to 5.53%.
The Bank's interest rate spread, which represents the difference
between the weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities, was 3.43% for both 1998 and 1997.
The Bank's net interest margin, representing net interest income as a percentage
of average interest-earning assets, increased slightly to 3.69% from 3.67%.
------------------------------------------------------------
The following table sets forth the average yield on loans and investments, the
average interest rate paid on deposits and borrowings, the interest rate spread,
and the net interest rate margin:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Yield on loans 8.13% 8.20% 7.86% 7.71% 7.10%
Yield on investment securities 6.03% 6.23% 6.35% 6.53% 6.14%
Combined yield on loans and investments 7.75% 7.97% 7.67% 7.58% 7.00%
Cost of deposits 4.29% 4.46% 4.36% 4.27% 3.63%
Cost of other borrowed funds 5.53% 5.90% 5.86% 6.42% 4.29%
Combined cost of deposits and borrowings 4.32% 4.54% 4.54% 4.50% 3.67%
Interest rate spread 3.43% 3.43% 3.13% 3.08% 3.33%
Net interest margin 3.69% 3.67% 3.44% 3.42% 3.61%
</TABLE>
The following table shows the Bank's interest rate sensitivity (gap) table at
December 31, 1998:
10
<PAGE>
------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
<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)/ $ 24,659 $ 24,652 $ 51,288 $ 86,922 $ 49,745 $ 237,266
Investments and federal
funds sold 15,667 4,636 7,087 17,522 16,842 61,754
---------------------------------------------------------------------------------------------------
Total 40,326 29,288 58,375 104,444 66,587 299,020
---------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Deposits 53,596 39,414 43,403 72,475 56,640 265,528
Repurchase agreements 11,849 - - - - 11,849
Borrowings - - - - - -
---------------------------------------------------------------------------------------------------
Total 65,445 39,414 43,403 72,475 56,640 277,377
---------------------------------------------------------------------------------------------------
Period sensitivity gap (25,119) (10,126) 14,972 31,969 9,947 21,643
Cumulative sensitivity gap $ (25,119) $ (35,245) $ (20,273) $ 11,696 $ 21,643
Cumulative sensitivity gap as a percentage
of interest-earning assets -8.40% -11.79% -6.78% 3.91% 7.24%
</TABLE>
Note: The Bank has used industry decay formulae in establishing repricing
periods for savings and NOW accounts.
(1) Excludes non accrual loans
The following table sets forth the Bank's NPV as of September 30, 1998 (the
latest NPV analysis prepared by the OTS), as calculated by the OTS.
<TABLE>
<CAPTION>
Change Net Portfolio Value NPV as % of PV Assets
in Rates $ Amount $ Change % Change NPV Ratio Change
- ---------------------- -------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
+400 bp.......... 21,300 - 7,706 -27% 6.59% -211 bp
+300 bp.......... 24,350 - 4,655 -16% 7.46% -125 bp
+200 bp.......... 26,727 - 2,278 - 8% 8.11% - 60 bp
+100 bp.......... 28,221 - 785 - 3% 8.51% - 20 bp
0 bp.......... 29,006 -- -- 8.71% --
- 100 bp.......... 29,712 706 + 2% 8.88% + 17 bp
- 200 bp.......... 30,987 1,982 + 7% 9.20% + 49 bp
- 300 bp.......... 33,492 4,486 +15% 9.84% +114 bp
- 400 bp.......... 36,682 7,676 +26% 10.65% +195 bp
</TABLE>
11
<PAGE>
_______________________________________________
MANAGEMENT'S DISCUSSION AND ANALSIS (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 1998 1997 1996
------------------------------ --------------------------------- ---------------------------------
AVERAGE/(1)/ YIELD/ AVERAGE/(1)/ YIELD/ AVERAGE/(1)/ YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------------------------------------- -------------------------------- --------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Loans/(2)/ $ 246,373 $ 20,023 8.13% $ 258,704 $ 21,214 8.20% $ 213,473 $ 16,776 7.86%
Investment securities and
other/(3)/ 53,732 3,240 6.03% 34,841 2,172 6.23% 30,348 1,928 6.35%
----------------------- ----------------------- -------------------------
Total interest earning
Assets 300,105 23,263 7.75% 293,545 23,386 7.97% 243,821 18,704 7.67%
----------------------- ----------------------- -------------------------
Non-interest earning assets
Cash 8,283 7,766 5,964
Other non-interest earning
assets/(4)/ 15,437 14,537 8,425
------------- ------------ --------------
Total non-interest earning
Assets 23,720 22,303 14,389
------------- ------------
Total $ 323,825 $ 315,848 $ 258,210
============= ============ ==============
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings deposits $ 136,137 $ 3,233 2.37% $ 119,911 $ 3,159 2.63% $ 96,062 $ 2,607 2.71%
Time deposits 127,065 7,978 6.28% 135,224 8,214 6.07% 98,248 5,877 5.98%
Repurchase agreements 12,775 621 4.86% 5,989 257 4.29% 4,922 203 4.12%
Other borrowed funds 6,365 352 5.53% 16,535 975 5.90% 27,960 1,638 5.86%
----------------------- ----------------------- -------------------------
Total interest bearing
Liabilities 282,342 12,184 4.32% 277,659 12,605 4.54% 227,192 10,325 4.54%
----------------------- ----------------------- -------------------------
Non-interest bearing
Liabilities:
Demand deposits 11,672 10,406 6,983
Other 3,285 3,555 4,656
------------- ------------ --------------
Total non-interest bearing
Liabilities 14,957 13,961 11,639
------------- ------------ --------------
Shareholders' equity 26,526 24,228 19,379
------------- ------------
Total $ 323,825 $ 315,848 $ 258,210
============= ============ ==============
Net interest rate spread $ 11,079 3.44% $ 10,781 3.43% $ 8,379 3.13%
===================== =================== ====================
Net interest margin 3.69% 3.67% 3.44%
=========== =========== ==========
Ratio of interest-earning assets
to interest bearing
liabilities 106.29% 105.72% 107.32%
=========== =========== ==========
</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.
12
<PAGE>
_______________________________________________
MANAGEMENT'S DISCUSSION AND ANALSIS (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 rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 VS. 1997
INCREASE (DECREASE)
DUE TO
VOLUME RATE TOTAL
----------------------------------------
($ in thousands)
<S> <C> <C> <C>
Interest income on loans $ (1,157) $ (34) $ (1,191)
Interest income on investments 1,178 (110) 1,068
---------------------------------------------
Total interest income 21 (144) (123)
---------------------------------------------
Interest expense on savings deposits 252 (178) 74
Interest expense on time deposits (371) 135 (236)
Interest expense on repurchase agreements 312 52 364
Interest expense on borrowings (805) 183 (622)
---------------------------------------------
Total interest expense (612) 192 (420)
---------------------------------------------
Net interest income $ 633 $ (336) $ 297
---------------------------------------------
</TABLE>
<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
---------------------------------------------
</TABLE>
13
<PAGE>
_______________________________________________
MANAGEMENT'S DISCUSSION AND ANALSIS (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, 1998 was $3,117,068,
compared to $3,061,451 at year-end 1997. The allowance in 1998 includes
$2,731,374 in general reserves as compared to $2,783,484 in 1997. During 1998,
the Bank had net charge-offs of $112,726 compared to $879,340 in 1997. 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 $812,304 to $120,167 in 1998
from $932,471 in 1997. In addition, net charged-off loans during 1998 amounted
to 0.03% of average loans, as compared to 0.35% in 1997. The allowance
represented 1.30% of total loans at year-end 1998 versus 1.18% at year-end 1997.
The allowance for loan losses as a percentage of total non-performing
assets was 115.82% at December 31, 1998 compared to 171.40% at December 31,
1997. 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, 1998 there were no other loans not included in the
tables below 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,
1998 and 1997 were $5,356,046 and $4,859,402, respectively. Total non-performing
assets amounted to $2,691,366 and $1,786,107 for the respective years. As of
December 31, 1998, non-earning assets includes impaired loans. At December 31,
1998, loans classified as 90-day delinquent were $170,999 compared to $691,567
at December 31, 1997.
------------------------------------
The following table sets forth the breakdown of non-performing assets:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
90 day delinquent loans/(1)/ $ 170,999 $ 691,567 $ 787,930 $ 1,144,293 $ 23,825
Non-earning assets/(2)/ 1,850,214 578,387 848,942 297,172 1,692,608
Real estate owned 670,153 516,153 707,026 984,185 1,504,880
----------------------------------------------------------------------------------------
Total non-performing assets $ 2,691,366 $ 1,786,107 $ 2,343,898 $ 2,425,650 $ 3,221,313
========================================================================================
Troubled debt restructured $ 114,110 $ 297,926 $ N/A $ 445,417 $ 2,337,058
========================================================================================
Impaired loans $ 1,850,214 $ 1,942,320 $ 1,188,183 $ 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 classified as impaired.
14
<PAGE>
_______________________________________________
MANAGEMENT'S DISCUSSION AND ANALSIS (continued)
The following table sets forth 90 day delinquent loans by category:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate loans -
Conventional $ 136,699 $ 679,356 $ 723,595 $ 1,132,475 $
Construction 23,825
Consumer loans 4,300 11,347 64,335 3,983
Commercial and municipal loans 30,000 636 7,835
Other loans 228
-------------------------------------------------------------------------------------------
Total $ 170,999 $ 691,567 $ 787,930 $ 1,144,293 $ 23,825
===========================================================================================
</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>
1998 1997 1996 1995 1994
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans -
Conventional $ 1,473,248 79% $ 1,561,632 80% $ 1,603,860 84% $ 687,547 83% $ 726,959 81%
Construction 122,587 2% 111,604 1% 83,750 201,257 1,598,266 2%
Collateral and
consumer loans 68,283 11% 59,225 11% 36,873 12% 8,067 12% 5,464 12%
Commercial and
municipal loans 1,007,256 8% 1,006,335 8% 294,034 4% 276,526 4% 422,196 4%
Impaired loans 385,694 322,655 139,509 654,663 1%
Other 60,000 1%
-----------------------------------------------------------------------------------------------------------
Valuation allowance $ 3,117,068 100% $ 3,061,451 100% $ 2,158,026 100% $ 1,828,060 100% $ 2,752,885 100%
===========================================================================================================
Valuation allowance
as a percentage of
total loans 1.30% 1.18% .98% .87% 1.38%
===========================================================================================================
</TABLE>
15
<PAGE>
________________________________________________
MANAGEMENTS'S DISCUSSION AND ANALYSIS (continued)
The following sets forth the maturities of the loan portfolio at December 31,
1998:
<TABLE>
<CAPTION>
ONE YEAR ONE THRU OVER
MATURITIES: OR LESS FIVE YEARS FIVE YEARS TOTAL
<S> <C> <C> <C> <C>
Real Estate Loans - $ 11,312,719 $ 26,672,876 $ 154,396,347 $ 192,381,942
------------------------------------------------------------------------------
Real Estate Loans with:
Predetermined interest rates 2,274,117 6,718,958 26,498,852 35,491,927
Adjustable interest rates 9,038,602 19,953,918 127,897,495 156,890,015
------------------------------------------------------------------------------
11,312,719 26,672,876 154,396,347 192,381,942
------------------------------------------------------------------------------
Collateral Loans - 11,323,445 5,692,281 3,319,704 20,335,430
------------------------------------------------------------------------------
Collateral Loans with:
Predetermined interest rates 10,200,594 3,915,236 828,940 14,944,770
Adjustable interest rates 1,122,851 1,777,045 2,490,764 5,390,660
------------------------------------------------------------------------------
11,323,445 5,692,281 3,319,704 20,335,430
------------------------------------------------------------------------------
Consumer Loans - 7,089,760 35,210 - 7,124,970
------------------------------------------------------------------------------
Consumer Loans with:
Predetermined interest rates 138,595 35,210 - 173,805
Adjustable interest rates 6,951,165 - - 6,951,165
------------------------------------------------------------------------------
7,089,760 35,210 - 7,124,970
------------------------------------------------------------------------------
Commercial/Municipal Loans- 6,024,903 7,460,892 5,771,945 19,257,740
------------------------------------------------------------------------------
Commercial/Municipal Loans with:
Predetermined interest rates 1,711,959 1,492,412 260,266 3,464,637
Adjustable interest rates 4,312,944 5,968,480 5,511,679 15,793,103
------------------------------------------------------------------------------
6,024,903 7,460,892 5,771,945 19,257,740
------------------------------------------------------------------------------
Other Loans - 4,493 7,701 4,164 16,358
------------------------------------------------------------------------------
Other Loans with:
Predetermined interest rates 3,652 3,732 - 7,384
Adjustable interest rates 841 3,969 4,164 8,974
------------------------------------------------------------------------------
4,493 7,701 4,164 16,358
------------------------------------------------------------------------------
TOTALS $ 35,755,320 $ 39,868,960 $ 163,492,160 $ 239,116,440
==============================================================================
</TABLE>
The preceding schedule includes $2,691,366 of non-performing loans and
$3,775,802 of loans held for sale, categorized within the respective loan types.
16
<PAGE>
________________________________________________
MANAGEMENTS'S DISCUSSION AND ANALYSIS (continued)
OTHER INCOME AND EXPENSE
Total non-interest income increased by $89,927, or 3.52% to $2,642,801.
Net gains on the sale of securities, loans and bank property totaled $531,946 at
year-end 1998 compared to $750,517 for the same period in 1997. The change was
primarily attributed to a $397,878, or 72.16% decrease in investment security
gains. In 1997, the Bank sold a majority of its one-sixth ownership in Charter
Trust Company. This transaction produced an after-tax gain of approximately
$300,000. Gains on the sale of loans were $371,991 in 1998 compared to $267,925
for 1997, an increase of 38.84%. The 23.33% increase in customer service fees
was primarily due to an increase in transaction-type accounts. Rental income
increased by 15.09% as the Bank leased some of its previously unoccupied
property.
Total operating expenses increased $481,731, or 5.74% to $8,879,742.
The increase was due to many factors. Salaries and benefits increased $175,481,
or 4.34% due to normal wage increases and rising health insurance costs.
Occupancy costs increased $155,466, or 9.82% as the Bank realized twelve months
of costs associated with its newest branch at Centerra Market Place. In
addition, depreciation costs increased approximately 22% during 1998 as new
computer hardware and software was capitalized as part of the Bank's Y2K
efforts. Outside services increased $150,374, or 30.74%. Included in outside
services is an increase of $34,309 for loan processing services that were
outsourced during 1998 and an increase in consulting fees of $61,160 as the Bank
hired a Y2K consultant and outsourced some of its internal audit functions.
IMPACT OF NEW ACCOUNTING STANDARDS
In July 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income." Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Statement is effective for fiscal years beginning
after December 15, 1997 with earlier application permitted.
In July 1997, the FASB issued SFAS No. 131 "Disclosure about Segments
of an Enterprise and Related Information." Statement No. 131 requires
disclosures for each segment that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. The Statement is effective for fiscal
years beginning after December 15, 1997 with earlier application permitted.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits." Statement No. 132 revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. The Statement is
effective for fiscal years beginning after December 15, 1997.
In management's opinion, SFAS Nos. 130, 131, and 132 did not have a
material effect on the Bank's financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 132 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999.
In management's opinion, SFAS Nos. 133 when adopted will not have a
material effect on the Bank's financial statements.
ACCOUNTING FOR INCOME TAXES
The provision for income taxes for the years ended December 31, 1998,
1997 and 1996 includes net deferred income tax expense (benefit) of $364,723,
$(575,835), and $(120,481), 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, 1997 AND 1996
In 1997, the Company earned $2,770,932, or $1.33 per common share,
assuming dilution, compared to $610,711, or $.35, assuming dilution, per common
share in 1996. The increase in earnings was attributable to three factors. In
February 1997, Lake
17
<PAGE>
________________________________________________
MANAGEMENTS'S DISCUSSION AND ANALYSIS (continued)
Sunapee Bank completed its acquisition of Landmark Bank of Lebanon, NH. This
transaction increased the Bank's assets by approximately $52 million and
provided Lake Sunapee Bank with increased yields on its loan portfolio. As a
result, the Bank's net interest income increased 28.66%. Second, the Bank's
deposit insurance premium was approximately $850,000 less than 1996. This was
due to the Bank paying a one-time premium assessment in 1996 of $995,000 to the
Federal Deposits Insurance Corporation (FDIC). The payment was part of the
recapitalization of the savings association insurance fund (SAIF). Third, during
the third quarter of 1997, Lake Sunapee Bank sold a majority of its one-sixth
ownership in Charter Trust Company. This transaction produced an after-tax gain
of approximately $300,000.
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%. 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 majority of the increases were
attributable to the acquisition of Landmark Bank.
Investments securities increased by $4,242,385, or 15.27% 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 1996's net unrealized loss of
$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 reflected $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. In addition, customers took advantage of the Bank's favorable Money
Market rates. 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 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 by its regulator, the OTS, to maintain a 4% 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.
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 was able to fund loan demand and other investing during 1998
by using funds provided by customer deposits.
18
<PAGE>
________________________________________________
MANAGEMENTS'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 1.50%, 3.00%, 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.
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 average deposits as a percentage of total
interest bearing liabilities increased from 85.53% in 1996 to 91.89% 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 million from $27.9 million 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.
PROVISION FOR LOAN LOSSES
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 $728,270 from $1,660,741 in
1996 to $932,471 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.
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.
OTHER INCOME AND EXPENSE
Total non-interest income increased by $629,635, or 32.74% to
$2,552,874. Net gains on the sale of securities and loans totaled $819,282. 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 $652,680, or 8.43% to $8,398,011. 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.
19
<PAGE>
[LETTERHEAD OF SHATSWELL, MACLEOD & COMPANY, P.C. APPEARS HERE]
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, 1998
and 1997 and the related consolidated statements of income, changes in
shareholders' equity, cash flows and comprehensive income for each of the years
in the three-year period ended December 31, 1998. 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 audits.
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 1998 and 1997 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, 1998 and 1997 and the consolidated results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1998, 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 25, 1999
20
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
---------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,701,558 $ 9,196,626
Federal funds sold 7,583,000 4,110,000
---------------------------
Cash and cash equivalents 16,284,558 13,306,626
Securities available-for-sale 52,137,753 30,104,674
Securities held-to-maturity - 75,000
Other investments 2,032,999 1,987,560
Loans held-for-sale 3,775,802 673,950
Loans receivable, net 232,321,171 255,223,525
Accrued interest receivable 1,725,235 1,556,194
Bank premises and equipment, net 8,416,182 8,178,335
Investments in real estate 531,729 548,257
Real estate owned and property acquired in settlement of loans 670,153 516,153
Goodwill 3,213,028 3,460,184
Other assets 2,299,159 2,358,504
---------------------------
Total assets $323,407,769 $317,988,962
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Demand deposits $ 16,521,820 $ 15,105,900
Savings deposits 76,837,104 65,883,386
NOW and MMDA deposits 67,593,258 57,140,024
Time deposits 121,096,974 133,097,650
---------------------------
Total deposits 282,049,156 271,226,960
Other borrowed funds - 300,000
Securities sold under agreement to repurchase 11,849,116 8,393,192
Advances from Federal Home Loan Bank - 10,246,318
Accrued expenses and other liabilities 1,729,891 2,259,367
---------------------------
Total liabilities 295,628,163 292,425,837
---------------------------
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 2,104,285 shares outstanding at
December 31, 1998 and 2,479,858 shares issued and 2,088,155 shares
outstanding at December 31, 1997 24,798 24,798
Paid-in capital 17,874,567 17,660,097
Retained earnings 12,082,784 10,221,049
Accumulated other comprehensive income 255,034 82,318
---------------------------
30,237,183 27,988,262
Treasury stock, at cost, 375,573 shares as of December 31, 1998 and
391,703 shares as of December 31, 1997 (2,457,577) (2,425,137)
---------------------------
Total shareholders' equity 27,779,606 25,563,125
---------------------------
Total liabilities and shareholders' equity $323,407,769 $317,988,962
===========================
</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 INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest on loans $20,023,493 $21,214,024 $16,775,792
Interest and dividends on investments 3,239,693 2,171,956 1,928,455
--------------------------------------
Total interest income 23,263,186 23,385,980 18,704,247
--------------------------------------
INTEREST EXPENSE
Interest on deposits:
Savings deposits 3,233,429 3,158,505 2,432,150
NOW accounts and MMDA deposits 621,132 256,717 615,849
Time deposits 7,977,963 8,214,548 5,638,679
--------------------------------------
Total interest on deposits 11,832,524 11,629,770 8,686,678
Interest on advances and other borrowed money 351,840 974,930 1,637,862
--------------------------------------
Total interest expense 12,184,364 12,604,700 10,324,540
--------------------------------------
Net interest income 11,078,822 10,781,280 8,379,707
PROVISION FOR LOAN LOSSES 120,167 932,471 1,660,741
--------------------------------------
Net interest income after provision for loan losses 10,958,655 9,848,809 6,718,966
--------------------------------------
OTHER INCOME
Loan origination fees 90,186 96,510 75,564
Customer service fees 1,558,886 1,263,989 1,190,726
Net gain (loss) on sale and writedowns of securities 153,479 551,357 (26,500)
Net gain (loss) on sale of premises, equipment and other
real estate owned 6,476 (68,765) 251,770
Net gain on sale of loans 371,991 267,925 51,716
Rental income 335,255 291,308 223,673
Brokerage service income 126,528 148,341 153,261
Other income - 2,209 3,029
--------------------------------------
Total other income 2,642,801 2,552,874 1,923,239
--------------------------------------
OTHER EXPENSES
Salaries and employee benefits 4,222,206 4,046,725 3,039,929
Occupancy expenses 1,738,055 1,582,589 1,242,216
Advertising and promotion 253,883 344,714 188,512
Depositors' insurance 139,214 123,487 1,448,801
Outside services 639,628 489,254 364,101
Provision for other real estate owned losses - - 229,970
Amortization of goodwill 247,156 242,271 -
Other expenses 1,639,600 1,568,971 1,231,802
--------------------------------------
Total other expenses 8,879,742 8,398,011 7,745,331
--------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,721,714 4,003,672 896,874
PROVISION FOR INCOME TAXES 1,602,964 1,232,740 286,163
--------------------------------------
NET INCOME $ 3,118,750 $ 2,770,932 $ 610,711
======================================
Earnings per common share $ 1.49 $ 1.36 $ .36
======================================
Earnings per common share, assuming dilution $ 1.47 $ 1.33 $ .35
======================================
Dividends declared per common share $ .60 $ .50 $ .50
======================================
</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 CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK
Balance, beginning of year $ 24,798 $ 21,473 $ 21,473
Shares issued in acquisition of Landmark Bank - 3,325 -
-----------------------------------------
Balance, end of year $ 24,798 $ 24,798 $ 21,473
=========================================
PAID-IN CAPITAL
Balance, beginning of year $17,660,097 $13,241,774 $13,160,382
Gain on issuance of treasury stock for the exercise
of stock options 156,406 489,847 81,392
Tax benefit for stock options 58,064 - -
Acquisition of Landmark Bank - 3,928,476 -
-----------------------------------------
Balance, end of year $17,874,567 $17,660,097 $13,241,774
=========================================
RETAINED EARNINGS
Balance, beginning of year $10,221,049 $ 8,437,149 $ 8,673,504
Net income 3,118,750 2,770,932 610,711
Cash dividends paid (1,257,015) (987,032) (847,066)
-----------------------------------------
Balance, end of year $12,082,784 $10,221,049 $ 8,437,149
=========================================
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized holding gain (loss) on securities
available-for-sale
Balance, beginning of year $ 82,318 $ (127,179) $ 97,594
Net change 172,716 209,497 (224,773)
-----------------------------------------
Balance, end of year $ 255,034 $ 82,318 $ (127,179)
=========================================
TREASURY STOCK
Balance, beginning of year $(2,425,137) $(2,379,527) $(2,408,948)
Shares repurchased, (4,650 shares in 1998, 13,928 shares
in 1997 and 3,251 shares in 1996) (73,975) (255,316) (43,482)
Exercise of stock options, (20,780 shares in 1998, 64,525
shares in 1997 and 18,730 shares in 1996) 41,535 209,706 72,903
-----------------------------------------
Balance, end of year $(2,457,577) $(2,425,137) $(2,379,527)
=========================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the years ended December 31,
1996
- ----
<S> <C>
Net income $ 610,711
Other comprehensive income
Net unrealized holding loss on
securities available-for-sale, net of tax
effect of $116,000 (224,773)
----------
Comprehensive income $ 385,938
==========
1997
- ----
Net income $2,770,932
Other comprehensive income
Net unrealized holding gain on
securities available-for-sale, net of tax
effect of $116,794 209,497
----------
Comprehensive income $2,980,429
==========
1998
- ----
Net income $3,118,750
Other comprehensive income
Net unrealized holding gain on
securities available-for-sale, net of tax
effect 172,716
----------
Comprehensive income $3,291,466
==========
Reclassification disclosure for the year ended December 31, 1998:
Net unrealized gains on available-for-sale securities $ 436,429
Less reclassification adjustment for realized gains in net income 155,040
----------
Other comprehensive income before income tax effect 281,389
Income tax expense (108,673)
----------
Other comprehensive income, net of tax $ 172,716
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,118,750 $ 2,770,932 $ 610,711
Depreciation and amortization 788,529 579,452 455,910
Amortization of goodwill 247,156 242,271 -
Loans originated for sale (73,567,590) (26,395,222) (14,233,140)
Proceeds from sales of loans 73,939,581 26,663,447 14,284,856
Gain from sales of loans (371,991) (267,925) (51,716)
(Gain) loss from sales of premises, equipment and other
real estate owned (6,476) 68,765 (251,770)
(Gain) loss from sales of debt securities available-for-sale
and writedowns (155,040) (62,010) 667
Loss from sales of equity securities available-for-sale
and writedowns, net - 10,653 25,833
(Gain) loss on sales of other investments 1,561 (500,000) -
Provision for other real estate owned losses - - 229,970
Writedowns of other real estate owned - - 144,350
Provision for loan losses 120,167 932,471 1,660,741
Deferred tax expense (benefit) 364,723 (575,835) (120,481)
(Increase) decrease in accrued interest and other assets (109,696) 178,486 861,580
Decrease in deferred loan origination fees, net (199,548) (121,484) (81,550)
Increase (decrease) in accrued expenses and other liabilities (944,808) (676,718) 449,399
------------------------------------------
Net cash provided by operating activities 3,225,318 2,847,283 3,985,360
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of premises and equipment 9,145 108,149 344,387
Proceeds from sales of other real estate owned 163,076 219,389 182,830
Capital expenditures - premises and equipment (890,414) (1,079,184) (316,986)
Capital expenditures - other real estate owned (6,000) (27,043) (25,188)
Proceeds from sales of debt securities available-for-sale 27,592,324 20,579,199 2,468,275
Proceeds from sales of equity securities available-for-sale - 1,192,719 450,642
Proceeds from sales of other investments 30,000 820,000 -
Principal reduction on securities held-to-maturity 75,000 25,000 52,778
Purchases of securities available-for-sale (50,877,553) (25,726,166) (9,063,424)
Maturities of securities available-for-sale 1,560,000 200,000 6,498,000
Purchases of other investments (77,000) - (5,000)
Net (increase) decrease in loans 19,527,107 (320,383) (10,182,473)
Recoveries of previously charged off loans 48,176 52,629 49,839
------------------------------------------
Net cash used in investing activities (2,846,139) (3,955,691) (9,546,320)
------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C> <C>
Net increase in demand deposits, savings and NOW accounts 22,822,872 11,487,757 458,741
Net increase (decrease) in time deposits (12,000,676) (2,411,055) 13,529,233
Net increase (decrease) in repurchase agreements 3,455,924 (453,344) (890,089)
Advances from Federal Home Loan Bank - - 21,600,000
Principal payments of advances from Federal Home Loan Bank (10,246,318) (9,927,707) (28,362,143)
Net increase (decrease) in other borrowed funds (300,000) 295,000 (29,077)
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 (73,975) (255,316) (43,482)
Dividends paid (1,257,015) (987,032) (847,066)
Proceeds from exercise of stock options 197,941 699,553 154,295
------------ ----------- ------------
Net cash provided by financing activities 2,598,753 3,412,285 5,570,412
------------ ----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,977,932 2,303,877 9,452
CASH AND CASH EQUIVALENTS, beginning of year 13,306,626 11,002,749 10,993,297
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 16,284,558 $13,306,626 $ 11,002,749
============ =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid $ 12,220,262 $12,750,892 $ 10,379,699
============ =========== ============
Income taxes paid $ 1,376,990 $ 1,545,183 $ 331,763
============ =========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Loans originated for sales of other real estate owned $ 130,000 $ 318,000 $ 207,500
============ =========== ============
Transfers from loans to real estate acquired through
foreclosure $ 434,600 $ 303,021 $ 478,755
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<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 Newport, 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 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) which
owns and maintains all buildings, and Lake Sunapee Financial Services Corp.
(LSFSC) which was formed to handle the flow of funds from the brokerage and
trust services. 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 $0, $68,750 and $728 have been included
in earnings as realized losses for the years ended 1998, 1997 and 1996,
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.
27
<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 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 expense 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.
Impaired loans are 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. 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.
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 reviews its loans for impairment 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 review for impairment 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.
28
<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 1996 EPS presented 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
1996 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.
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.
Loans held-for-sale - Fair values of loans held for sale are based on
estimated market values.
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.
29
<PAGE>
_______________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
Borrowings - The carrying amounts of securities sold under agreements to
repurchase and other borrowings approximate their fair values.
Federal Home Loan Bank Advances - Fair values for FHLB advances are estimated
using a discounted cash flow technique that applies interest rates currently
being offered on advances to a schedule of aggregated expected monthly
maturities on FHLB advances.
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 1997 and 1996 consolidated
financial statements have been reclassified to conform to the current year's
presentation.
30
<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)
===========
Loss per common share $ (.07)
===========
</TABLE>
The above results of operations reflect adjustments of Landmark Bank's
financial statements to reflect purchase accounting adjustments, including
goodwill.
31
<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, 1998
-----------------
Gross Gross
Unrealized Unrealized
Fair Holding Holding Amortized
Value Gain Loss Cost
-------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
Bonds and notes -
U. S. Treasury Notes $12,226,872 $163,412 $ - $12,063,460
U. S. Government, including agencies 14,398,276 24,132 64,521 14,438,665
Mortgage-backed securities 358,052 - 5,930 363,982
Other bonds and debentures 24,900,303 409,634 91,251 24,581,920
Equity securities 254,250 - 19,975 274,225
------------------------------------------------
Total available-for-sale 52,137,753 597,178 181,677 51,722,252
------------------------------------------------
Other investments:
Federal Home Loan Bank stock 1,938,000 - - 1,938,000
Other securities 94,999 - - 94,999
------------------------------------------------
Total other investments 2,032,999 - - 2,032,999
------------------------------------------------
Total securities $54,170,752 $597,178 $181,677 $53,755,251
================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<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
Mortgage-backed securities 149,997 128 - 149,869
Other bonds and debentures 5,981,316 23,780 6,325 5,963,861
------------------------------------------------
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
================================================
</TABLE>
Gross gains of $161,193, $105,627 and $810, and gross losses of $6,153,
$36,097 and $807, were realized during 1998, 1997 and 1996, respectively, on
sales of available-for-sale debt securities. There were no sales of available-
for-sale equity securities during 1998. 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 $0 and $500,000 and gross losses of $1,561 and $0
were realized on sales of other investments during 1998 and 1997, respectively.
32
<PAGE>
_______________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SECURITIES: (continued)
Maturities of debt securities, excluding mortgage-backed securities,
classified as available-for-sale are as follows as of December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Amortized Fair Average
Cost Value Yield
-----------------------------------
<S> <C> <C> <C>
U.S. Treasury Notes $ 1,015,966 $ 1,030,000 7.628%
Other bonds and debentures 695,365 697,008 7.309
------------------------
Total due in one year or less 1,711,331 1,727,008 7.592
------------------------
U.S. Treasury Notes 11,047,494 11,196,872 5.857
U.S. Government, including agencies 2,498,937 2,519,374 5.636
Other bonds and debentures 2,011,925 2,047,290 7.066
------------------------
Total due after one year through five years 15,558,356 15,763,536 6.045
------------------------
U.S. Government, including agencies 4,402,952 4,395,468 6.304
Other bonds and debentures 1,274,192 1,301,187 6.667
------------------------
Total due after five years through ten years 5,677,144 5,696,655 6.419
------------------------
U.S. Government, including agencies 7,536,776 7,483,434 6.918
Other bonds and debentures 20,600,438 20,854,818 7.267
------------------------
Total due after ten years 28,137,214 28,338,252 7.205
------------------------
$51,084,045 $51,525,451 7.109%
========================
</TABLE>
There were no issuers of securities whose aggregate book value exceeded 10%
of shareholders' equity as of December 31, 1998.
Securities, carried at $1,016,562 were pledged to secure the treasury, tax
and loan account as of
December 31, 1998.
NOTE 4. LOANS RECEIVABLE:
Loans receivable consisted of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate loans
Conventional $188,609,359 $207,311,314 $183,550,150 $175,130,966 $161,091,563
Construction 5,461,451 3,540,870 2,702,613 2,456,763 7,793,601
------------------------------------------------------------------------
194,070,810 210,852,184 186,252,763 177,587,729 168,885,164
Less - Unadvanced portion 1,688,868 900,858 1,270,412 1,434,258 2,841,500
------------------------------------------------------------------------
192,381,942 209,951,326 184,982,351 176,153,471 166,043,664
Collateral loans 20,335,430 20,635,457 20,574,710 19,524,706 18,776,523
Consumer loans 7,124,970 7,792,874 4,860,325 5,025,818 5,264,449
Commercial and municipal loans 19,257,740 20,026,574 8,352,789 9,301,028 8,066,390
Other loans 16,358 654,642 436,754 671,302 625,006
------------------------------------------------------------------------
Total loans 239,116,440 259,060,873 219,206,929 210,676,325 198,776,032
Less - Loans held for sale 3,775,802 673,950 745,650 3,095,971 3,753,657
------------------------------------------------------------------------
235,340,638 258,386,923 218,461,279 207,580,354 195,022,375
Allowance for loan losses (3,117,068) (3,061,451) (2,158,026) (1,828,060) (2,752,885)
Deferred loan origination costs
(fees), net 97,601 (101,947) (300,492) (382,042) (520,438)
------------------------------------------------------------------------
Loans receivable, net $232,321,171 $255,223,525 $216,002,761 $205,370,252 $191,749,052
========================================================================
</TABLE>
33
<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>
1998 1997 1996 1995 1994
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, beginning of year $3,061,451 $2,158,026 $1,828,060 $2,752,885 $2,374,001
---------- ---------- ---------- ---------- ----------
Loans charged-off:
Real estate loans
Conventional 71,077 291,437 628,107 141,541 252,258
Construction 30,000 85,000 614,355 1,014,670 2,871
Collateral and consumer loans 2,229 226,710 36,721 25,568 612
Commercial and municipal loans 9,420 328,822 101,431 913,441 140,375
--------------------------------------------------------------
Total charged-off loans 112,726 931,969 1,380,614 2,095,220 396,116
--------------------------------------------------------------
Recoveries on loans:
Real estate loans
Conventional 28,549 6,786 19,063 3,300 11,666
Collateral and consumer loans 2,796 22,257 22,105 2,099 1,779
Commercial and municipal loans 16,831 23,586 8,671 1,286 -
--------------------------------------------------------------
Total recoveries 48,176 52,629 49,839 6,685 13,445
--------------------------------------------------------------
Net charged-off loans: 64,550 879,340 1,330,775 2,088,535 382,671
--------------------------------------------------------------
Balance relating to acquisition
of Landmark Bank: - 850,294 - - -
--------------------------------------------------------------
Provision for loan losses charged
to income: 120,167 932,471 1,660,741 1,163,710 761,555
--------------------------------------------------------------
BALANCE, end of year $3,117,068 $3,061,451 $2,158,026 $1,828,060 $2,752,885
==============================================================
Ratios of net charged-off loans during
the period to average loans
outstanding during the period .03% .35% .63% 1.02% .20%
==============================================================
</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, 1998 and
1997. Certain directors and executive officers of the Bank and companies in
which they have significant ownership interest were customers of the Bank during
1998. Total loans to such persons and their companies amounted to $809,180 as
of December 31, 1998. During 1998 advances of $81,224 were made and repayments
totaled $400,931.
<TABLE>
<CAPTION>
Impaired loans as of December 31, 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Average recorded investment in impaired loans $1,925,907 $1,766,918
Recorded investment in impaired loans at December 31 $1,850,214 $1,942,320
Portion of valuation allowance allocated to impaired loans $ 385,694 $ 322,655
Net balance of impaired loans $1,464,520 $1,619,665
Interest income recognized on impaired loans $ 100,683 $ 84,154
Interest income on impaired loans on cash basis $ 100,683 $ 7,702
Recorded investment in impaired loans with related allowance for credit losses $1,676,226 $1,562,949
Recorded investment in impaired loans with no related allowance for credit losses $ 173,988 $ 379,371
</TABLE>
34
<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>
1998 1997
-------------------------
<S> <C> <C>
Sold loans $128,115,971 $71,551,925
=========================
Participation loans $ 2,788,528 $ 4,601,826
========================
</TABLE>
Servicing assets of $798,758 and $374,533 wer e capitalized in 1998 and
1997, respectively. Amortization of servicing ass ets was $186,841 in 1998 and
$63,805 in 1997.
The fair value of servicing assets was $995,5 96 and $390,340 as of
December 31, 1998 and 1997, respectively. Following is an analysis of the
aggregate changes in the valuation allowances for servicing assets:
<TABLE>
<CAPTION>
1998 1997
-------------------
<S> <C> <C>
Balance, beginning of year $ 57,422 $ 0
Additions 72,116 57,422
------------------
Balance, end of year $129,538 $57,422
==================
</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>
1998 1997
-----------------------
<S> <C> <C>
Letters of credit $ 694,098 $ 665,850
=======================
Lines of credit $7,632,913 $16,187,526
=======================
</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>
1998 1997
----------- -----------
<S> <C> <C>
Land $ 1,043,586 $ 1,043,586
Landdings and premises 7,256,000 7,171,794
Furniture, fixtures and equipment 5,462,370 4,681,710
------------------------
13,761,956 12,897,090
Less - Accumulated depreciation 5,345,774 4,718,755
------------------------
$ 8,416,182 $ 8,178,335
========================
</TABLE>
NOTE 6. REAL ESTATE OWNED AND PROPERTY ACQUIRED:
As of December 31, 1998 and 1997, the Company owned property acquired by
foreclosure. The balances consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-------------------
<S> <C> <C>
Residential real estate $ 72,000 $144,000
Commercial real estate 598,153 372,153
-------------------
$670,153 $516,153
===================
</TABLE>
35
<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 1998, 1997 and 1996, $70,646, $84,832 and $179,443, 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>
1998 1997
-------------------------------------------
<S> <C> <C> <C> <C>
Checking accounts (non-interest-bearing) $ 16,521,820 5.9% $ 15,105,900 5.6%
NOW accounts 40,431,129 14.3 33,488,870 12.3
Ever-Ready Money Market 27,162,129 9.6 23,651,154 8.7
Regular savings accounts 13,146,531 4.7 7,901,726 2.9
Treasury savings accounts 63,608,465 22.6 57,915,167 21.4
Club deposits 82,108 .0 66,493 .0
------------------------------------------
160,952,182 57.1 138,129,310 50.9
------------------------------------------
Time deposits
2.00% - 2.99% 41,956 .0 250,790 .1
3.00% - 3.99% 1,912,878 .7 - -
4.00% - 4.99% 19,668,581 7.0 2,931,518 1.1
5.00% - 5.99% 84,160,709 29.8 98,425,330 36.3
6.00% - 6.99% 6,268,060 2.2 14,837,481 5.5
7.00% - 7.99% 9,044,790 3.2 14,461,393 5.3
8.00% - 8.99% - - 2,191,138 .8
------------------------------------------
121,096,974 42.9 133,097,650 49.1
------------------------------------------
$282,049,156 100.0% $271,226,960 100.0%
==========================================
</TABLE>
The following is a summary of maturities of time deposits as of December 31,
1998:
<TABLE>
<S> <C>
1999 $101,425,326
2000 14,993,066
2001 2,890,222
2002 766,317
2003 852,539
Thereafter 169,504
------------
$121,096,974
============
</TABLE>
As of December 31, 1998, time deposits include $13,810,657 of certificates
of deposit with a minimum balance of $100,000. Maturities of these certificates
are as follows:
<TABLE>
<S> <C>
Less than 3 months $ 3,187,364
Over 3 months and less than 6 months 4,068,224
Over 6 months and less than 12 months 4,731,903
Over 12 months 1,823,166
------------
$ 13,810,657
============
</TABLE>
36
<PAGE>
___________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
The purchasers of the securities under agreements to repurchase have agreed
to resell to the Company substantially identical securities at the maturities of
the agreements.
The maturity dates of the repurchase agreements are from January 15, 1999
to October 30, 1999 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 consisted of funds borrowed from the Federal Home Loan Bank of
Boston (FHLB).
These advances were secured by Federal Home Loan Bank stock (Note 2) and
unspecified first mortgage loans. The Company is able to borrow up to
$96,349,000 of Federal Home Loan Bank advances.
In addition to the above advances, the Company has credit available up to
$6,411,000 under a revolving loan agreement with the Federal Home Loan Bank.
There was no outstanding balance as of December 31, 1998. There was an
outstanding balance of $300,000 as of December 31, 1997. 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>
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Current tax expense $1,238,241 $1,808,575 $ 406,644
Deferred tax expense (benefit) 364,723 (575,835) (120,481)
-----------------------------------
Total income tax expense $1,602,964 $1,232,740 $ 286,163
===================================
</TABLE>
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>
1998 1997 1996
-------------------
<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 (.2) (.3) (1.6)
Dividends received deduction (.2) (.4) (3.0)
Goodwill amortization 1.8 2.1 -
Other, net (1.5) (4.6) 2.5
-------------------
33.9% 30.8% 31.9%
===================
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. INCOME TAXES: (continued)
The Company had gross deferred tax assets and gross deferred tax
liabilities as follows as of December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Deferred tax assets:
Interest on non-performing loans $ 5,412 $ 11,598
Allowance for loan losses 930,260 953,119
Loan origination fees, net of costs - 39,371
Deferred compensation 20,011 -
Deferred retirement expense 10,443 -
Mark to market loans available-for-sale - 81
Accrued directors fees 34,005 29,564
---------- ----------
Gross deferred tax assets 1,000,131 1,033,733
---------- ----------
Deferred tax liabilities:
Deferred loan costs, net of fees 37,694 -
Prepaid pension 189,762 144,229
Accelerated depreciation 279,392 239,969
Mortgage servicing rights 346,088 137,617
Unrealized holding gain on securities available-for-sale 160,467 51,794
---------- ----------
Gross deferred tax liabilities 1,013,403 573,609
---------- ----------
Net deferred tax asset (liability) $ (13,272) $ 460,124
========== ==========
</TABLE>
Deferred tax assets as of December 31, 1998 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, 1998, the Company had no operating loss and tax credit
carryover for tax purposes.
NOTE 11. STOCK COMPENSATION PLANS:
As of December 31, 1998, 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>
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C> <C>
Net income As reported $3,118,750 $2,770,932 $610,711
Pro forma $2,876,087 $2,770,932 $500,828
Earnings per common share As reported $ 1.49 $ 1.36 $ .36
Pro forma $ 1.37 $ 1.36 $ .30
Earnings per common share, As reported $ 1.47 $ 1.33 $ .35
assuming dilution Pro forma $ 1.36 $ 1.33 $ .29
</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.
38
<PAGE>
NOTE 11. STOCK COMPENSATION PLANS: (continued)
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>
1998 1996
------------- -------------
<S> <C> <C>
Weighted risk-free interest rate 5.80% 6.37%
Weighted expected life 8 years 9 years
Weighted expected volatility 23.74% 17.33%
Weighted expected dividend yield 4.0% 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.
A summary of the status of the Company's fixed stock option plans as of
December 31, 1998, 1997 and 1996 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------
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 75,435 $ 10.99 141,760 $ 10.34 62,590 $ 8.22
Granted 60,000 21.00 0 - 97,900 11.29
Exercised (20,780) 10.78 (64,525) 9.58 (18,730) 8.24
Forfeited - (1,800) 10.125 -
-------- ------- --------
Outstanding at
end of year 114,655 $ 16.27 75,435 $ 10.99 141,760 $10.34
======== ======= ========
Options exercisable
at year-end 114,655 75,435 141,760
Weighted-average
fair value of
options granted
during the year $ 4.82 N/A $ 1.84
</TABLE>
The following table summarizes information about fixed stock options
outstanding as of December 31, 1998:
Options Outstanding and Exercisable
----------------------------------------------------------
Number
Outstanding Remaining
Exercise Prices as of 12/31/98 Contractual Life
--------------- --------------- ----------------
$9.00 8,855 6 years
10.125 19,800 7 years
12.50 26,000 8 years
21.00 60,000 9 years
-------
114,655
-------
39
<PAGE>
__________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The following tables set forth information about the plan as of December 31
and the years then ended:
<TABLE>
<CAPTION>
1998 1997
-----------------------
<S> <C> <C>
Change in projected benefit obligation:
Benefit obligation at beginning of year $1,636,696 $1,516,431
Service cost 148,182 91,465
Interest cost 124,942 112,553
Actuarial loss 253,262 93,031
Benefits paid (180,946) (176,784)
-----------------------
Benefit obligation at end of year 1,982,136 1,636,696
------------------------
Change in plan assets:
Plan assets at estimated fair value at beginning of year 1,852,640 1,636,404
Actual return on plan assets 179,212 229,694
Employer contribution 224,912 163,326
Benefits paid (180,946) (176,784)
-----------------------
Fair value of plan assets at end of year 2,075,818 1,852,640
-----------------------
Funded status 93,682 215,944
Unrecognized net actuarial loss 424,948 239,357
Unrecognized prior service cost (27,272) (29,965)
-----------------------
Prepaid benefit cost included in other assets $ 491,358 $ 425,336
=======================
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7% and 4% for 1998, and 7% and 3% for 1997 and
1996, respectively. The weighted-average expected long-term rate of return on
assets was 7% for 1998, 1997 and 1996.
Components of net periodic benefit cost:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Service cost $ 148,182 $ 91,465 $ 84,057
Interest cost on benefit obligation 124,942 112,553 109,326
Expected return on assets (135,624) (115,361) (97,664)
Amortization of prior service cost (2,693) (2,693) (2,693)
Recognized net actuarial cost 24,083 25,485 29,224
--------------------------------
Net periodic benefit cost $ 158,890 $ 111,449 $122,250
================================
</TABLE>
The amounts and types of securities of the Company included in plan assets
as of December 31, 1998 and 1997 consist of 7,500 shares of New Hampshire Thrift
Bancshares, Inc.
40
<PAGE>
__________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. EMPLOYEE BENEFIT PLANS: (continued)
Profit Sharing - Stock Ownership Plan - Lake Sunapee Bank, fsb, sponsors
a Profit Sharing - Stock Ownership Plan. Lake Sunapee Bank, fsb may elect, but
is not required, to make discretionary and/or matching contributions to the
Plan.
For 1998, 1997 and 1996, participating employees' contributions totaled
$170,048, $139,992 and $118,346, respectively. The Bank made a matching
contribution of $10,000 for 1998, $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, 1998, the Company had entered into commitments to fund loans totaling
$12,235,700. The majority of these loans will have fixed rates.
The following is a schedule, by interest rate, of loan commitments
outstanding as of December 31:
<TABLE>
<CAPTION>
1998 1997
---------------------------
<S> <C> <C>
5.00% - 5.99% $ 118,500 $ -
6.00% - 6.99% 7,930,600 2,187,875
7.00% - 7.99% 3,459,200 5,799,460
8.00% - 8.99% 662,400 240,000
9.00% - 9.99% - 74,000
10.00% - 10.99% 65,000 16,100
---------------------------
$12,235,700 $8,317,435
===========================
</TABLE>
As of December 31, 1998, the Company was obligated under non-cancelable
operating leases for bank premises expiring between 1999 and 2007. The total
minimum rental due in future periods under these existing agreements is as
follows as of December 31, 1998:
1999 $140,481
2000 103,656
2001 98,781
2002 98,781
2003 98,781
Years thereafter 262,784
--------
Total minimum lease payments $803,264
========
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 $141,456 and $96,481
for the years ended December 31, 1998 and 1997, respectively.
41
<PAGE>
__________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998.
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, 1998, 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.
Special bad debts deduction - In prior years, Lake Sunapee 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, 1998 includes approximately
$2,069,898 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%.
42
<PAGE>
_____________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998
Basic EPS
Net income and income available to common stockholders $3,118,750 2,095,305 $1.49
Effect of dilutive securities, options 26,128
-------------------------
Diluted EPS
Income available to common stockholders and assumed
conversions $3,118,750 2,121,433 $1.47
=========================
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
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
=========================
</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.
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, 1998, that the Bank meets all
capital requirements to which it is subject.
43
<PAGE>
NOTE 16. REGULATORY MATTERS: (continued)
As of December 31, 1998, 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, 1998:
Total Capital (to Risk Weighted Assets) $24,571 12.63% $15,564 *8.0% $19,455 10.0%
Core Capital (to Adjusted Tangible Assets) 23,398 7.31 12,801 *4.0 16,002 5.0
Tangible Capital (to Tangible Assets) 23,398 7.31 4,801 *1.5 N/A N/A
Tier 1 Capital (to Risk Weighted Assets) 23,398 12.03 N/A N/A 11,673 6.0
As of December 31, 1997:
Total Capital (to Risk Weighted Assets) 21,611 11.86 14,577 *8.0 18,222 *10.0
Core Capital (to Adjusted Tangible Assets) 20,341 6.47 12,569 *4.0 15,711 *5.0
Tangible Capital (to Tangible Assets) 20,341 6.47 4,713 *1.5 N/A N/A
Tier 1 Capital (to Risk Weighted Assets) 20,341 11.12 N/A N/A 10,979 *16.0
</TABLE>
* Greater than and equal to
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
December 31:
<TABLE>
<CAPTION>
1998
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 16,284,558 $ 16,284,558 $ 13,306,626 $ 13,306,626
Securities available-for-sale 52,137,753 52,137,753 30,104,674 30,104,674
Securities held-to-maturity - - 75,000 75,000
Other investments 2,032,999 2,032,999 1,987,560 1,987,560
Loans 232,321,171 235,730,000 255,223,525 256,938,000
Loans held-for-sale 3,775,802 3,775,802 673,950 673,950
Accrued interest receivable 1,725,235 1,725,235 1,556,194 1,556,194
Financial liabilities:
Regular savings, NOW, demand and
money market deposits 160,952,182 160,952,182 138,129,310 138,129,310
Time deposits 121,096,974 121,492,000 133,097,650 133,535,000
Other borrowed funds - - 300,000 300,000
Securities sold under agreements to repurchase 11,849,116 11,849,116 8,393,192 8,393,192
Advances from Federal Home Loan Bank - - 10,246,318 10,237,000
</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.
44
<PAGE>
_____________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS: (continued)
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>
1998 1997
------------------------
ASSETS
<S> <C> <C>
Investment in subsidiary, Lake Sunapee Bank $26,932,719 $24,128,876
Advances to Lake Sunapee Bank 848,778 1,434,249
------------------------
Total assets $27,781,497 $25,563,125
========================
OTHER LIABILITY $ 1,891 $ -
SHAREHOLDERS' EQUITY 27,779,606 25,563,125
------------------------
Total liabilities and shareholders' equity $27,781,497 $25,563,125
========================
</TABLE>
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Dividends from subsidiary $ 500,000 $3,000,000 $1,000,000
Operating expenses 12,377 4,380 13,874
-------------------------------------
Income before equity in earnings of subsidiary 487,623 2,995,620 986,126
Equity in undistributed earnings (loss) of subsidiary 2,631,127 (224,688) (375,415)
-------------------------------------
Net income 3,118,750 2,770,932 610,711
Other comprehensive income, net of taxes
Unrealized holding gains (losses) on available-for-sale securities,
Lake Sunapee Bank 172,716 209,497 (224,773)
-------------------------------------
Comprehensive income $3,291,466 $2,980,429 $ 385,938
=====================================
</TABLE>
45
<PAGE>
_____________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. Condensed parent company financial statements: (continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,118,750 $ 2,770,932 $ 610,711
Increase in taxes payable 1,891 - -
Equity in undistributed (earnings) loss of subsidiary (2,631,127) 224,688 375,415
-------------------------------------
Net cash provided by operating activities 489,514 2,995,620 986,126
-------------------------------------
Cash flows from investing activities:
Additional investment in subsidiary - (81,547) -
Net change in advances to subsidiary 643,535 (96,278) (249,873)
-------------------------------------
Net cash provided by (used in) investing activities 643,535 (177,825) (249,873)
-------------------------------------
Cash flows from financing activities:
Proceeds from stock options exercised 197,941 699,553 154,295
Dividends paid (1,257,015) (987,032) (847,066)
Acquisition of Landmark Bank - (2,275,000) -
Repurchase of treasury stock (73,975) (255,316) (43,482)
-------------------------------------
Net cash used in financing activities (1,133,049) (2,817,795) (736,253)
-------------------------------------
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, 1998, 1997 and 1996, and therefore are not reprinted here.
46
<PAGE>
UNITED STATES
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, 1998
NEW HAMPSHIRE THRIFT BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 02-0430695
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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 issuer's revenues for its most recent fiscal year were $25,905,987
The aggregate market value of the voting stock held by non-affiliates of the
registrant is between $32,016,752 and $31,016,229 based on a $16.00 average bid
and a $15.50 average asked price, respectively, as of December 31, 1998.
Number of shares of Common Stock Outstanding as of February 9, 1999 were
2,104,285
Transitional Small Business Disclosure Format. Yes _______ No X
-----
47
<PAGE>
-------------------------------------
NEW HAMPSHIRE THRIFT BANCSHARES, INC.
INDEX
<TABLE>
<S> <C>
PART I
Item 1. Business.............................................................................................. 49
Item 2. Properties............................................................................................ 60
Item 3. Legal Proceedings..................................................................................... 61
Item 4. Submission of Matters to a Vote of Security Holders................................................... 61
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.............................. 61
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 61
Item 7. Financial Statements and Supplementary Information Report of Independent Auditors..................... 61
Consolidated Statements of Financial Condition........................................................ 61
Consolidated Statements of Income..................................................................... 61
Consolidated Statements of Changes in Shareholders' Equity............................................ 61
Consolidated Statements of Cash Flows................................................................. 61
Notes to Consolidated Financial Statements............................................................ 61
Item 8. Disagreements on Accounting and Financial Disclosure.................................................. 62
PART III
Item 9. Directors and Executive Officers of the Registrant.................................................... 62
Item 10. Executive Compensation................................................................................ 62
Item 11. Security Ownership of Certain Beneficial Owners and Management........................................ 62
Item 12. Certain Relationships and Related Transactions........................................................ 62
Item 13. Exhibits and Reports on Form 8-K Exhibits............................................................. 62
Reports on Form 8-K................................................................................... 63
Signatures............................................................................................ 64
</TABLE>
48
<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 $324 million as of December 31,
1998.
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 $239,116,440, including $3,775,802 of
loans held for sale at December 31, 1998, representing approximately 75% of
total assets. As of December 31, 1998, approximately 80% of the mortgage loan
portfolio had adjustable rates. As of December 31, 1998, the Bank had sold
$128,115,971 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
terms agreeable to the
49
<PAGE>
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 8.50% 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.
As of December 31, 1998, 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.
50
<PAGE>
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 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.
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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, 1998, the Bank's
regulatory limit on loans to one borrower was approximately $4.2 million. At
December 31, 1998, the Bank's largest aggregate amount of loans to one borrower
was $1,857,186, and the second largest borrower had an aggregate balance of
$1,836,455. 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, 1998, the Bank maintained 81.29% 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
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"
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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 16 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 1998,
the Bank paid the semiannual assessment of $40,959.
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 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
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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 disappropriate to the services performed by an executive
officer,
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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 risk-based capital to risk-weighted assets is at least 10.0%,
its ratio of Tier I capital to risk weighted assets is at least 6.0%, its ratio
of leverage (core) capital to adjusted 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 risk-based capital to risk-weighted assets is at least 8.0%, its
ratio of Tier I capital to risk weighted assets is at least 4.0%, and its ratio
of leverage (core) capital to adjusted total assets is at least 4.0%, (3.0%
leverage ratio if the association receives the highest rating on the CAMELS
financial institution rating system). A savings association that has a total
risk based capital to risk-weighted assets of less than 8.0% or a leverage
(core) 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 CAMELS: financial
institutions rating system) is considered to be "undercapitalized." A savings
association that has a total risk based capital to risk-weighted assets of less
than 6.0% or a Tier 1 risk based capital ratio or a leverage (core) 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 required by the Funds Act, the FDIC
imposed a special assessment of 65.7 basis points on SAIF-assessable deposits
held as of March 31, 1995. The special assessment was paid on November 27, 1996.
The special SAIF assessment was paid on November 27, 1996. The SAIF Special
Assessment paid by the Bank amounted to $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, 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 full nationwide
banking without any condition of reciprocity. Some states do not authorize
interstate acquisitions of savings associations.
57
<PAGE>
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, 1998, 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 $122,911, $119,109, and $120,506 during the
years ended December 31, 1998, 1997, and 1996, 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 4%. 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, 1998 was 12.88% 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.
In order to address the Year 2000 Issue and to minimize its potential
adverse impact, management, in 1996, began the 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.
58
<PAGE>
Because the Company outsources its data processing and item processing
operations, a significant component of the Year 2000 plan has been working with
external vendors to test and certify their systems as Year 2000 compliant. The
Company's vendors have surveyed their programs to inventory the necessary
changes and have upgraded and corrected the applicable computer programs and
replaced equipment so that the Company's information systems were 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.
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 1998, the tax amounted to
$16,860.
At December 31, 1998, LSB had a total of 113 full-time employees and 21
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.
59
<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, 1998:
<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 $ 1,430,731
Guild Office
300 Sunapee Street
Newport, NH 1978 $ 99,741
Bradford Office
115 East Main Street
Bradford, NH 1975 $ 74,672
Grantham Office
165 Route 10 South
Grantham, NH 1980 $ 305,148.
Hanover Street Office
106 Hanover Street
Lebanon, NH 1997 $ 2,101,621.
Lebanon Office
200 Heater Road
Lebanon, NH 1986 $ 569,859
New London Office
24 Newport Road
New London, NH 1981 $ 394,329
Sunapee Office
565 Route 11
Sunapee, NH 1965 $ 82,938
Andover Office /(1)/
720 Main Street
Andover, NH 1987 $ 32,571
Centerra Office /(1)/
12 Centerra Pkwy.
Lebanon, NH 1997 $ 188,949 2007 5 Years
Hillsboro Office /(1)/
15 Antrim Road
Hillsboro, NH 1994 $ 17,123 2000 4 Years
West Lebanon Office /(1)/
83 Main Street
West Lebanon, NH 1994 $ 123,171 1999 15 Years
</TABLE>
/(1)/ Operating lease, value of improvements.
60
<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>
1998 First Quarter $ 20 1/2 $ 17
Second Quarter 22 17 1/2
Third Quarter 18 3/4 12 7/8
Fourth Quarter 19 12
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
</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, 1998, New Hampshire Thrift Bancshares, Inc. had
approximately 740 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>
1998 1997
------------------------
<S> <C> <C>
First Quarter $ .15 $ .125
Second Quarter .15 .125
Third Quarter .15 .125
Fourth Quarter .15 .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 19 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 20 through 46 of this document.
61
<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, 1999, 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, 1999, 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, 1999, 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, 1999, 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"))
62
<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.
63
<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.
By: /s/ John J. Kiernan Chairman of the Board March 11, 1999
-------------------
(John J. Kiernan)
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 11, 1999
-------------------
(John J. Kiernan)
/s/ Stephen W. Ensign Vice Chairman of the Board, March 11, 1999
---------------------
(Stephen W. Ensign) President and Chief Executive Officer
/s/ Stephen R. Theroux Director, Executive Vice President March 11, 1999
----------------------
(Stephen R. Theroux) and Chief Operating Officer
/s/ Leonard R. Cashman Director March 11, 1999
----------------------
(Leonard R. Cashman)
/s/ Ralph B. Fifield, Jr. Director March 11, 1999
-------------------------
(Ralph B. Fifield, Jr.)
/s/ John A. Kelley, Jr. Director March 11, 1999
-----------------------
(John A. Kelley, Jr.)
/s/ Peter R. Lovely Director March 11, 1999
-------------------
(Peter R. Lovely)
/s/ Dennis A. Morrow Director March 11, 1999
--------------------
(Dennis A. Morrow)
/s/ Jack H. Nelson Director March 11, 1999
------------------
(Jack H. Nelson)
/s/ Priscilla W. Ohler Director March 11, 1999
----------------------
(Priscilla W. Ohler)
/s/ Kenneth D. Weed Director March 11, 1999
-------------------
(Kenneth D. Weed)
/s/ Joseph B. Willey Director March 11, 1999
--------------------
(Joseph B. Willey)
/s/ Daryl J. Cady Senior Vice President and March 11, 1999
-----------------
(Daryl J. Cady) Chief Financial Officer
(Principal Accounting Officer)
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
NEW HAMPSHIRE THRIFT BANCSHARES, INC.
DIRECTORS OFFICERS
--------- --------
<S> <C> <C>
John J. Kiernan, Chairman John J. Kiernan Daryl J. Cady, CPA
Stephen W. Ensign, Vice Chairman Chairman of the Board Senior Vice President and
Stephen R. Theroux Chief Financial Officer
Leonard R. Cashman Stephen W. Ensign
Ralph B. Fifield, Jr. Vice Chairman of the Board, Linda L. Oldham
John A. Kelley, Jr. President and Chief Executive Senior Vice President and
Peter R. Lovely Officer Secretary
Dennis A. Morrow
Jack H. Nelson Stephen R. Theroux Sandra M. Blackington
Priscilla W. Ohler Executive Vice President and Assistant Secretary
Kenneth D. Weed Chief Operating Officer
Joseph B. Willey
----------------------------------------------------------------------------------------
LAKE SUNAPEE BANK, FSB
DIRECTORS
---------
John J. Kiernan, Chairman Robert C. O'Brien Erik C. Cinquemani
Stephen W. Ensign, Vice Chairman Loan Origination Commercial Lending
Stephen R. Theroux
Leonard R. Cashman Linda L. Oldham Frances E. Clow
Ralph B. Fifield, Jr. Shareholder Relations Human Resources
John E. Johannessen
John A. Kelley, Jr. VICE PRESIDENTS Stephen B. Ellis
---------------
Peter R. Lovely Douglas S. Baxter Loan Origination
Dennis A. Morrow Marketing
Jack H. Nelson Gail A. Fraser
Priscilla W. Ohler Colin S. Campbell Deposit Operations
Kenneth D. Weed Loan Origination
Joseph B. Willey Ann M. Howard
H. Bliss Dayton Retail Manager
EXECUTIVE OFFICERS Compliance and Internal Audit
------------------
John J. Kiernan Peter N. Jennings
Chairman of the Board Dana C. Favor Loan Origination
Loan Review
Stephen W. Ensign Sandra J. Luckury
Vice Chairman of the Board, Scott W. Laughinghouse Information Technology
President and Chief Executive Commercial Lending
Officer Arthur W. Phillips
William J. McIver Loan Review
Stephen R. Theroux Commercial Lending
Executive Vice President and Francetta Raymond
Chief Operating Officer Theodore M. Thompson Loan Operations
Commercial Lending
Sandra M. Blackington Louis A. Shelzi, Jr.
Assistant Secretary Scott B. Walters Commercial Lending
Commercial Lending
SENIOR VICE PRESIDENTS Terri G. Spanos
----------------------
Daryl J. Cady, CPA Sharon L. Whitaker Retail Manager
Chief Financial Officer Mortgage Lending
W. Grant MacEwan ASSISTANT VICE PRESIDENTS
-------------------------
Commercial Lending Richard G. Biron
Retail Manager
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------ ----------------------------------------------------------------
BOARD OF ADVISORS SHAREHOLDER INFORMATION
<S> <C> <C>
Philip D. Allen/(1)/ Victor W. Laro CORPORATE HEADQUARTERS
Prunella O. Anastos Paul J. Linehan New Hampshire Thrift Bancshares, Inc.
Benjamin K. Barton Robert MacNeil 9 Main Street
Kenneth O. Barton Elizabeth W. Maiola PO Box 9
George O. Binzel Raymond A. Manning Newport, NH 03773-0009
William A. Bittinger John J. Marcotte Tel: 1-603-863-0886
Paul R. Boucher Jerry N. Mathis Fax: 1-603-863-9571
James F. Briggs Thomas F. McCormick
Robert S. Burgess J. David McCrillis TRANSFER AGENT
Walton W. Chadwick John C. McCrillis ChaseMellon Shareholder Services, L.L.C.
Earle W. Chandler Paul Olsen Overpeck Centre
F. Read Clarke Daniel P. O'Neill 85 Challenger Road
Jacqueline C. Cote Betty H. Ramspott Ridgefield Park, NJ 07660
Robert J. Cricenti David N. Reney Tel: Domestic Holders 1-800-851-9677
Richard F. Curtis Everett R. Reney Tel: Foreign Holders 1-201-329-8660
Ernest G. Dennis, Jr. Genelle M. Richards Tel: Hearing Impaired 1-800-231-5469
William J. Faccone, Sr. J. Barrie Sellers Website: www.chasemellon.com
Gordon B. Flint, Sr. Edwin G. Sielewicz
John W. Flynn, Jr. Fredric M. Smith INDEPENDENT AUDITORS
John W. Flynn, Sr. 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, MA 01960-3635
Louise K. Hastings James R. Therrien
Douglas J. Homan Janis H. Wallace
----------------------------------------------------------------
Rita M. Hurd James P. Wheeler INFORMATION ON COMMON STOCK
Lisa S. Hustis Bradford C. White
Alf E. Jacobson John W. Wiggins, Sr. The common stock is traded over-the-counter and
Robert B. Jennings Peter Wittman quoted on the NASDAQ National Market System
Michael D. Johnson Thomas B. Woodger under the symbol NHTB. There were approximately
Edward T. Kerrigan Michael J. Work 740 shareholders of record on December 31, 1998.
John J. Kiernan, Jr. (1)Honorary
The following table sets forth the Company's high And low prices
for the common stock as reported by NASDAQ for the periods
indicated:
1998 HIGH LOW
----------------------------------------------------------------
First Quarter $ 20 1/2 $ 17
Second Quarter 22 17 1/2
Third Quarter 18 3/4 12 7/8
Fourth Quarter 19 12
</TABLE>
This Annual Report has been written by the Bank's staff.
66
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,701,558
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,583,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52,137,753
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 239,116,440
<ALLOWANCE> 3,117,068
<TOTAL-ASSETS> 323,407,769
<DEPOSITS> 282,049,156
<SHORT-TERM> 0
<LIABILITIES-OTHER> 13,579,007
<LONG-TERM> 0
0
0
<COMMON> 24,798
<OTHER-SE> 27,754,808
<TOTAL-LIABILITIES-AND-EQUITY> 27,779,606
<INTEREST-LOAN> 4,670,273
<INTEREST-INVEST> 1,022,345
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,692,618
<INTEREST-DEPOSIT> 2,947,386
<INTEREST-EXPENSE> 2,996,424
<INTEREST-INCOME-NET> 2,696,194
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 120,672
<EXPENSE-OTHER> 2,355,809
<INCOME-PRETAX> 1,337,727
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 915,995
<NET-INCOME> 0
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.43
<YIELD-ACTUAL> 7.75
<LOANS-NON> 1,850,214
<LOANS-PAST> 0
<LOANS-TROUBLED> 114,110
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,061,451
<CHARGE-OFFS> 112,726
<RECOVERIES> 48,176
<ALLOWANCE-CLOSE> 3,117,068
<ALLOWANCE-DOMESTIC> 3,117,068
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
