<PAGE>
A Vision For Continued Growth
================================================================================
With A Commitment To Traditional Values
While we have the technological resources and banking expertise to
effectively serve our customers through 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... hard work,
initiative, perseverance, and one-on-one personal associations.
<PAGE>
Table of Contents
Selected Financial Highlights....................................... 1
President's Letter.................................................. 2
Management's Discussion and Analysis................................ 5
Report of Independent Auditors...................................... 20
Financial Statements................................................ 21
Notes to Financial Statements....................................... 27
Form 10-KSB......................................................... 48
Board of Directors.................................................. 67
Officers and Managers............................................... 67
Board of Advisors................................................... 68
Shareholder Information............................................. 68
Information on Common Stock......................................... 68
<PAGE>
Selected Financial Highlights
<TABLE>
<CAPTION>
For the Periods Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------
($ in thousands, except per share data)
<S> <C> <C> <C>
Net Income $ 3,309 $ 3,119 $ 2,771
Earnings Per Common Share/(1)/ $ 1.57 $ 1.49 $ 1.36
Earnings Per Common Share, Assuming Dilution/(1)/ $ 1.56 $ 1.47 $ 1.33
Dividends Declared $ .64 $ .60 $ .50
Dividend Payout Ratio 40.76% 40.27% 36.76%
Return on Average Assets .91% .96% .88%
Return on Average Equity 12.08% 11.76% 11.44%
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------
($ in thousands, except book value data)
<S> <C> <C> <C>
Total Assets $ 461,448 $ 323,408 $ 317,989
Total Deposits $ 366,638 $ 282,049 $ 271,227
Total Securities/(2)/ $ 59,581 $ 54,171 $ 32,167
Net Loans $ 346,492 $ 232,321 $ 255,224
Federal Home Loan Bank Advances $ 22,000 $ - $ 10,246
Shareholders' Equity/(3)/ $ 27,243 $ 27,780 $ 25,563
Book Value of Shares Outstanding $ 12.93 $ 13.20 $ 12.24
Average Common Equity to Average Assets 7.50% 8.19% 7.67%
Shares Outstanding 2,106,685 2,104,285 2,088,097
Number of Branch Locations 15 12 12
</TABLE>
(1) See Note 1 to Consolidated Financial Statements regarding earnings per
share.
(2) Shown at fair value.
(3) See Note 16 to Consolidated Financial Statements regarding the issuance of
common stock.
1
<PAGE>
President's Letter
...another year
of consistent
earnings
improvement in
1999...
The Company realized yet another year of consistent earnings improvement in
1999. Strong market conditions continued throughout the year in residential
mortgage lending and significant growth in commercial lending helped to further
balance the assets within the loan portfolio. While the fourth quarter
acquisition of three New London Trust offices brought with it a level of growth
for 1999 that was not anticipated at this same time last year, our focus remains
firmly fixed upon the delivery of products and services that bring value to our
customers and meet their needs at the community level. The underlying goal of
the Company continues to be the building of a franchise that will provide
sustainable growth over time.
Record Earnings
A progressive growth in earnings over the course of the year resulted in
consolidated net income for the year-ended December 31, 1999 of $3,308,844, or
$1.57 per share of common stock. This compares to net income of $3,118,750, or
$1.49 per share, that the Company reported for year-end 1998. Integration of the
New London Trust branches, combined with our own internal growth, resulted in
total assets of $461,448,330 at year-end, as compared to $323,407,769 at
December 31, 1998. All areas of the balance sheet saw significant changes over
the course of the year that have repositioned the Company at a new baseline as
we move forward into the next decade. Complete financial details of the year-
ended December 31, 1999 are more fully covered in the Management Discussion and
Analysis section immediately following this report.
Shareholder Value
Tempered by concerns over the systematic rise in the level of interest
rates over the course of the year and the impending date change issues
surrounding the coming of the year 2000, the marketplace continued its late-1998
trend of discounting the value of financial oriented stocks. The Company was not
immune from the effects of this general malaise, with the stock price ending
this year at a closing price of $12.68 per share. Despite the growth in
earnings, shareholder's equity was directly impacted by the level of interest
rates at the end of the fourth quarter, resulting in a net reduction to
$27,243,147 at December 31, 1999, from $27,779,606 at year-end 1998, and a
corresponding book value adjustment to $12.93 from $13.20 per share. With the
issuance of $16,400,000 in Capital Trust Preferred securities in August of 1999
associated with the branch acquisitions, the Company was able to complete the
transaction without increasing the number of shares outstanding in the
marketplace, thus creating a structure where the future growth in earnings will
become immediately accretive to existing shareholders.
Primary Business
The operating premise of community banking is the establishment and
maintenance of long-term customer relationships. In some circles this is now
being referred to in terms of 'brand-loyalty'. It is rooted in the underlying
belief that value-related relationships last the longest when supported by the
continuing enhancement of core services, coupled with multiple points of access.
Competition in the financial services industry now comes from many different
'non-bank' sources, it will continue to strengthen, and it will become even more
prolific and unfettered with the recent passage of financial reform legislation
at the federal level in November of 1999.
Choosing to compete within this expanding market place and diversified
delivery system not only requires, it demands, the development of a clear
strategic direction that embraces the blending of the best of technology with
the fundamental aspects of our core business...the
2
<PAGE>
President's Letter (continued)
managing and nurturing customer relationships. This, then, is at the heart of
what now faces the industry in general and our business in particular. We must
address...at every level of the organization...the basic truth that all smaller
institutions have a greater need to identify and understand their own specific
areas of inherent vulnerability that arises from their limited base and scale.
With this as background, an ever-evolving strategic plan has been crafted that
mandates the continued development of a highly-skilled and motivated team of
banking professionals, establishes a course for the expansion of products and
services with a complementary variety of systems for their delivery to, and
access by, our customers, and focuses on the need to reinforce the positioning
of the Bank in its role as the dominant bank within clearly delineated markets.
Acquisition of Branches
On April 13, 1999, we announced that agreements had been executed that
would result in the purchase of three New London Trust branches and their
associated $100 million in assets. While the process of successfully completing
a transaction involving the allocation of assets among four parties on the buy-
side created a number of logistical hurdles, the acquisition was accomplished
with little or no disruption of service to the customer base. This makes the
second acquisition for the Company over the last three-year period, with the
purchase of Landmark Bank having been completed in early 1997. It is interesting
to note that both of these transactions have taken place within our existing
marketplace. The financial services industry looks favorably upon what are now
called 'in-market' consolidations as the most beneficial of all possible
transactions.
As we proceed with the integration of banking cultures, dedicated employees, and
valued customers during this coming year, it is already clear that this will
turn out to have been an important link to fulfilling the strategic mission of
the institution.
Challenges and Opportunities
The evolutionary role of community banking is adjusting from the world of
branch banks located on street corners to branch banks located on the internet.
This, in some circles, is becoming known as an environment of 'bricks and
clicks'...where, in the course of any given day, a customer may find themselves
strolling through a bank lobby in the morning and then scrolling through their
account balances from home that evening. The customer, in either case, expects
to receive service from the bank. From the perspective of the customer, the
banking industry is supposed to provide safety and security...and solutions to
their problems. The balance between 'high-touch' and 'high-tech' demands that we
strive to be the best alternative for our customer base.
By nature, tradition, and regulatory oversight, banks are responsive
organizations and are not known as creative entities beyond the borders of
product design. Growth for the institution must come from the identification of
opportunities in the marketplace that will enhance existing customer
relationships and develop new ones. The value of community banking lies in its
'people-to-people' business approach and the Bank will continue to seek out
areas for expansion that are consistent with the underlying mission of the
organization.
...the second
acquisition for the
Company over the
last three-year
period...within
our existing
market place
3
<PAGE>
President's Letter (continued)
... strategic
direction that
embraces the
blending of the
best of technology
with the
fundamental
aspects of our core
business...
Fundamentals and Technology
The day-to-day, month-to-month business of the Bank remains substantially
unchanged. 1999 turned out to be another excellent year in the residential
mortgage and commercial lending markets, with total gross loan production
exceeding $160 million...an increase of roughly $20 million over 1998. While
interest rates rose at a moderate pace during the year, borrowers continued to
seek out fixed-rate mortgages and, as a result, our off-balance-sheet sold loan
portfolio grew to nearly $154 million by year-end, an increase of $24 million
over year-end 1998. Now that the fixed-rate mortgage market has reflected the
recent rate increases introduced by the Federal Reserve, customers have turned
their attentions back to adjustable-rate mortgages and the expectation is that
the industry will not see the high level of activity that has prevailed over the
last couple of years.
A continuing emphasis on asset quality in the areas of audit and compliance
remain the keystone to the value and stability of the Bank's loan portfolio. The
economic expansion that has driven the prosperity of the 1990's is now showing
signs of sector weakness and concern is being expressed over the sustainability
of a robust economy. The lending of money has inherent risk and the Bank remains
committed to the ongoing review of our lending activities to ensure the highest
level of integrity, while minimizing potential areas of exposure. During 1999,
the Bank was examined for 'Safety and Soundness' and 'Compliance and CRA' by the
Office of Thrift Supervision. In each case, the examination process reinforced
the fundamental value and operation of the banking franchise.
Turning to technology, the Bank is preparing to offer full Internet banking
by mid-year 2000. Viewed as yet another point of service, the introduction of
internet banking will further enhance the ability of our customers to access
their accounts and transact business in ways that best fit their individual
lifestyles. Whether business is transacted in a branch lobby...at a drive-up
ATM...over the touch-tone telephone banking system...or soon on the
internet...it is a primary goal of the Bank to be as available and accessible as
possible to meet the needs of our customers.
Looking Ahead
A shared belief in the value of community banking is one common denominator
between customers, employees and shareholders. It is this commitment that has,
over the years, continued to foster our growth in assets and earnings, while at
the same time enhancing the value of the banking franchise. As we look to build
upon this success, we are humbled by the recognition that a bank is simply a
bank and we should not envision ourselves to be, or that we can become,
something that we are not. Community Banks should be different from other
businesses or companies. As we continue to seek out opportunities that will be
beneficial to the customer and profitable to the Bank and the Company, we will
do so in a manner consistent within the expectations that have been laid before
us.
In Closing
The commitment and dedication of our employees is the foundation of our
institution and our success. 1999 was filled with challenging events...all
managed by a team of professionals who worked together at all levels to achieve
a common goal. On behalf of our Board of Directors and management team, we would
like to express our appreciation for the continuing support and confidence that
is shown by our many customers and shareholders.
/s/ Stephen W. Ensign
Stephen W. Ensign
Vice Chairman of the Board,
President and Chief Executive Officer
4
<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 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 1999, the Company earned $3,308,844, or $1.56 per common share, assuming
dilution, compared to $3,118,750, or $1.47 per common share, assuming dilution,
in 1998, an increase of 6.10%. The increase in earnings is primarily attributed
to the overall increase in loan production and investment activity and a
decrease in interest expense.
In 1999, the Bank originated a record $161.0 million in loans. Favorable
interest rates during the first half of 1999, coupled with a dedicated loan
origination team and support staff allowed existing and new customers to
refinance or seek new funding more easily. As rates rose during the third
quarter, customers elected to write adjustable rate mortgages. The Company
holds these loans in portfolio. The Bank sells fixed rate loans into the
secondary market and retains the servicing. For the year ended 1999, loan
interest income increased 1.88%.
Interest and dividends on investment securities increased 21.61% as the
Company increased its investment securities portfolio by $9,526,344, or 17.72%
(at amortized cost). Approximately $10.0 million of the proceeds from the
issuance of a Capital Trust Preferred Securities ("capital securities"), issued
as part of the New London Trust (NLT) transaction, were used.
Interest expense decreased 2.68% during 1999 as many customers elected to
deposit funds into lower-costing overnight accounts rather than long-term
certificates of deposit. In addition, many customers sought alternative
investment options. As a result, interest on deposits decreased 8.28%.
Year 2000
Based on a review of the Bank's and the Company's business since January 1,
2000, the Company has not experienced any material effects of the Year 2000
problem. Although the Company has not been informed of any material risks
associated with the Year 2000 problem from third parties, there can be no
assurance that the Company will not be impacted in the future. The Company will
continuously monitor its business applications and maintain contact with its
third party vendors and key business partners to resolve any Year 2000 problems
that may arise in the future.
Monitoring and managing the Year 2000 project has resulted in direct and
indirect costs to the Company and the Bank. Total direct costs associated with
the Year 2000 problem incurred, as of December 31, 1999, were approximately
$100,000. The Company currently does not believe that such costs had a material
effect on the results of operations. Both direct and indirect costs of
addressing the Year 2000 problem were charged to earnings as incurred.
Acquisition of Assets
On October 13, 1999, the Bank received regulatory approval to purchase
three New London Trust, FSB branches located in New London, Andover, and
Newbury, New Hampshire.
As of the close of business on October 29, 1999, the Bank completed its
purchase of certain assets and assumption of certain liabilities of New London
Trust, FSB, including the three branches, pursuant to an agreement entered with
PM Holdings, Inc., ("PM Holdings"), a wholly owned subsidiary of Phoenix Home
Life Mutual Insurance Company ("Phoenix"), and PM Trust Holding Company, a
wholly owned subsidiary of PM Holdings. The acquisition occurred immediately
after PM Trust's acquisition of all outstanding capital stock of New London
Trust from Sun Life Assurance Company of Canada (U.S.). Lake Sunapee Bank, fsb
intends to use the property and equipment acquired in the same capacity as New
London Trust, FSB. The agreements among the parties relating to this
transaction were filed as exhibits to the Form 10-QSB for the quarter ended
March 31, 1999.
In connection with the acquisition, the Bank acquired the New London main
office, Andover and Newbury branches of New London Trust with deposits totaling
approximately $100.0 million and gross loans totaling approximately $81.0
million. The consolidated assets of the Company upon consummation of the
acquisition of the three branches are in excess of $450.0 million. The
acquisition was consummated after satisfaction of certain conditions, including
the receipt of all requisite regulatory approvals and will be
5
<PAGE>
Management's Discussion and Analysis (continued)
accounted for as a purchase under generally accepted accounting principles. The
Bank paid a $10,576,000 deposit premium. Systems were successfully converted
over the weekend of October 30, 1999.
On August 12, 1999, NHTB Capital Trust I (the "Trust"), a Delaware business
trust formed by the Company, completed the sale of $16.4 million of 9.25%
Capital Securities . The Trust also issued Common Securities to the Company and
used the net proceeds from the offering to purchase a like amount of 9.25%
Junior Subordinated Deferrable Interest Debentures (the "Debentures') of the
Company. The Debentures are the sole assets of the Trust and are eliminated,
along with the related income statement effects, in the consolidated financial
statements. The Company contributed $15.0 million from the sale of the
Debentures to the Bank as Tier I Capital to support the acquisition of the three
branches of New London Trust, FSB. Total expenses associated with the offering
approximating $900,000 are included in other assets and are being amortized on a
straight-line basis over the life of the Debentures.
The Capital Securities accrue and pay distributions quarterly at an annual
rate of 9.25% of the stated liquidation amount of $10 per Capital Security. The
first distribution was September 30, 1999. The Company has fully and
unconditionally guaranteed all of the obligations of the Trust. The guaranty
covers the quarterly distributions and payments on liquidation or redemption of
the Capital Securities, but only to the extent of the Trust has funds necessary
to make these payments.
The Preferred Securities are mandatorily redeemable upon the maturing of
the Debentures on September 30, 2029 or upon earlier redemption as provided in
the Indenture. The Company has the right to redeem the Debentures, in whole or
in part on or after September 20, 2004 at the liquidation amount plus any
accrued but unpaid interest to the redemption date.
Financial Condition
Total assets increased by $138,040,561, or 42.68% from $323,407,769 to
$461,448,330. As mentioned above, the increase in total assets resulted
primarily from the acquisition of three NLT branches. The Company acquired
approximately $100.0 million in assets mid-way through the fourth quarter.
Total loans increased $111,001,376, or 46.42% from $239,116,440 to $350,117,816.
Excluding the impact of the NLT acquisition, total loans increased $29,769,007,
or 12.45% from $239,116,440 to $268,885,447. This increase was primarily
attributed to a change in the mix of the Bank's loan portfolio. As interest
rates rose during 1999, many consumers sought adjustable rate loans. As
mentioned above, the Company holds adjustable rate loans in portfolio.
Adjustable rate mortgages comprise approximately 75% of the Bank's real estate
mortgage loan portfolio. This is consistent with prior years. The net level of
loans sold into the secondary market increased by approximately $24.0 million
during 1999. At December 31, 1999, the Bank had approximately $154.0 million in
its servicing portfolio. The Bank expects to continue to sell fixed rate loans
into the secondary market, retaining the servicing, in order to manage interest
rate risk. The table on page 15 illustrates the maturities of the loan
portfolio at December 31, 1999. Real estate loans increased by $87,440,692, or
45.45% from $192,381,942 to $279,822,634, the majority of which was NLT related.
Gross investment securities increased by $9,526,344, or 17.72% from
$53,755,251 to $63,281,596 (at amortized cost). As mentioned, the Bank used
proceeds from the issuance of the Company's capital securities to purchase
investment securities. This provided an increase in interest and dividends on
investment of $700,069, or 21.61%. The Bank's net unrealized loss of $3,700,908
at December 31, 1999 compares to a net unrealized gain of $415,501 for the same
period in 1998. This change of $4,116,409 in market value reflects the increase
in interest rates during 1999 and the resultant decrease in bond values.
Real estate owned and property acquired in settlement of loans decreased by
a net $451,153, or 67.32% to $219,000. This total includes two properties.
During 1999, nine real estate owned properties totaling $690,243, in carrying
value, were sold. Included in the nine properties was $341,993 in carrying
value for the sale of the five remaining lots at Blye Hill Landing, Newbury, NH.
Deposits increased by $84,588,933, or 29.99% to $366,638,089 from
$282,049,156. The increase was attributable to the acquisition of three NLT
branches, as mentioned above. Excluding the deposits acquired from NLT,
deposits decreased $12,975,715, or 4.60% and Certificates of Deposit (CDs)
decreased $20,629,825, or 17.04% as many customers sought non-bank investment
alternatives. At December 31, 1999, CDs comprised 37% of total deposits versus
43% last year. Many other customers took advantage of the Bank's favorable
Money Market Deposit Account interest rate as this account increased to 15% of
total deposits compared to 10% in 1998.
6
<PAGE>
Management's Discussion and Analysis (continued)
Advances from the Federal Home Loan Bank ("FHLB") and other borrowed funds
increased by $34,440,000. The increase was used to fund liquidity needs
including vault cash and loan activity. During the last 5 months of 1999, the
Bank gradually increased vault cash in anticipation of Y2K withdrawals. The
need never materialized and subsequent to year-end, the excess vault cash was
returned to the Federal Reserve Bank. As a result, Federal Home Loan Bank
advances and other borrowings decreased $14,440,000 in January 2000. During
1999, repurchase agreements increased $2,189,001 as businesses sought investment
alternatives through the Bank.
Liquidity and Capital Resources
The Bank is required by its regulator, the Office of Thrift Supervision
("OTS"), to maintain a 4% ratio of liquid assets to net withdrawable funds. At
year-end 1999, the Bank's ratio of 5.23% 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, 1999, the Bank had approximately $100.0 million
in additional borrowing capacity from the FHLB.
At December 31, 1999, the Company's shareholders' equity totaled
$27,243,147 compared to $27,779,606 at year-end 1998. The decrease of $536,459
reflects net income of $3,308,844, the payment of $1,347,201 in common stock
dividends, the exercise of 2,400 stock options in the amount of $7,800, a gain
of $16,500 on the sale of treasury stock, a tax benefit on stock options of
$4,249, and the change of $2,526,651 in accumulated other comprehensive income.
As interest rates continued to increase throughout 1999, the Bank's bond
portfolio decreased in value.
During 1999, the Bank upstreamed $1,000,000 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.
Net cash provided by operating activities increased $8,608,479 to
$8,731,945 in 1999 from $123,466 in 1998. The change in loans held-for-sale and
the change in accrued expenses and other liabilities accounted for the majority
of the change.
Net cash flows used in investing activities changed by $37,560,035 from
$255,713 in 1998 to negative $37,304,322 in 1999. The change was primarily
attributed to a $33,555,975 increase in loans, excluding the impact of the NLT
acquisition versus a $22,628,959 decrease in 1998..
In 1999, net cash provided by financing activities increased $32,247,995 to
$34,846,748 from $2,598,753 in 1998. During 1999, net proceeds from FHLB and
Ideal Way advances and an increase in borrowed funds of $34,440,000 coupled with
net proceeds from the issuance of the NHTB capital trust of $15,493,290, offset
by a net deposits decrease of $13,763,641, including repurchase agreements,
excluding the impact of the NLT acquisition, accounted for the majority of the
change.
The Bank expects to be able to fund loan demand and other investing during
2000 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, core, and total risk-based
capital ratios of 1.50%, 4.00%, and 8.00%, respectively. As of December 31,
1999, the Bank's ratios were 6.74%, 6.74%, and 11.59%, respectively, well in
excess of the regulators' requirements.
Book value per share was $12.93 at December 31, 1999 versus $13.20 per
share at December 31, 1998. The change in the market value of the Bank's
investment security portfolio accounted for the majority of the change 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
7
<PAGE>
Management's Discussion and Analysis (continued)
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 asset 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, 1999, was - 9.47%, compared to the
December 31, 1998 gap of -6.78%. 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.
The Bank's one-year gap, of approximately negative nine percent at December
31, 1999, 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 FHLB
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. 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.
8
<PAGE>
Management's Discussion and Analysis (continued)
The following table shows the Bank's interest rate sensitivity (gap) table at
December 31, 1999:
<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), (2)/ $ 31,675 $ 28,173 $ 63,099 $ 93,257 $ 132,875 $ 349,079
Investments and federal
funds sold 9,959 8,973 10,830 6,478 23,341 59,581
---------------------------------------------------------------------------------
Total 41,634 37,146 73,929 99,735 156,216 408,660
---------------------------------------------------------------------------------
Interest bearing liabilities:
Deposits 58,029 39,133 45,754 118,027 84,098 345,041
Repurchase agreements 14,038 - - - - 14,038
Borrowings 19,440 15,000 - - - 34,440
---------------------------------------------------------------------------------
Total 91,507 54,133 45,754 118,027 84,098 393,519
---------------------------------------------------------------------------------
Period sensitivity gap (49,873) (16,987) 28,175 (18,292) 72,118 15,141
Cumulative sensitivity gap $ (49,873) $ (66,860) $ (38,685) $ (56,977) $ 15,141
Cumulative sensitivity gap
as a percentage of
interest-earning assets -12.20% -16.36% -9.47% 13.94% 3.71%
</TABLE>
Note: The Bank has used industry decay formulae in establishing repricing
periods for savings and NOW accounts.
(1) Excludes non-earning assets.
(2) Includes discount on purchased loans.
The following table sets forth the Bank's NPV as of September 30, 1999 (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>
+300 bp............. 35,907 -12,768 - 26% 10.37% - 318 bp
+200 bp............. 40,779 - 7,896 - 16% 11.62% - 194 bp
+100 bp............. 45,169 - 3,506 - 7% 12.71% - 85 bp
0 bp............. 48,675 -- -- 13.56% --
- -100 bp............. 50,823 2,148 + 4% 14.06% + 50 bp
- -200 bp............. 52,160 3,485 + 7% 14.36% + 80 bp
- -300 bp............. 53,824 5,149 + 11% 14.73% + 117 bp
</TABLE>
9
<PAGE>
Management's Discussion and Analysis (continued)
Results of Operations
Net Interest Income
Net interest income for the year ended December 31, 1999 increased by
$1,403,763, or 12.67%, to $12,482,585. This increase can be primarily attributed
to the increased volume in the loan and investment portfolios of the Bank and
the decrease in interest expense on deposits.
Total interest income increased by $1,076,884, or 4.63%. The increase is
primarily related to the volume in the loan and investment portfolios. As rates
began to rise during the second half of 1999, the Bank held adjustable rate
loans in portfolio. In addition, portfolio adjustable rate loans began to re-
price. As a result, interest on loans increased $376,815. Interest and dividends
on investments increased $700,069. As mentioned above, during the third quarter
of 1999, the Company issued capital securities. The majority of the proceeds
were used to purchase investment securities. During 1999, the Bank's yield on
investment securities increased to 6.65% from 6.03% in 1998.
Total interest expense decreased $326,879, or 2.68%, with 91.94% attributed
to a rate related decrease in interest expense on deposits. The Bank's overall
cost of funds decreased from 4.32% to 3.75% in 1999. As mentioned above,
interest rates decreased during the first half of 1999. The Bank's average
deposits as a percentage of total interest bearing liabilities decreased from
93.22% in 1998 to 90.61% in 1999 as other funding sources were utilized during
1999. The cost of deposits, including repurchase agreements, in 1999 was 3.60%
versus 4.29% in 1998. This decrease was a result of lower balances in higher
costing instruments. During 1999, the Bank utilized the FHLB advance program to
fund loan growth and to neutralize the effect of decreased deposits. FHLB
advances typically are higher costing instruments than deposits. The cost of
other borrowed money was 5.86% in 1999 compared to 5.53% in 1998.
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 3.57% in 1999 compared to 3.43% in
1998. The Bank's net interest margin, representing net interest income as a
percentage of average interest-earning assets, increased to 3.75% from 3.69%.
______________________________________________________________
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>
1999 1998 1997 1996 1995
-------- ------- -------- ------- ----
<S> <C> <C> <C> <C> <C>
Yield on loans 7.46% 8.13% 8.20% 7.86% 7.71%
Yield on investment securities 6.65% 6.03% 6.23% 6.35% 6.53%
Combined yield on loans and investments 7.32% 7.75% 7.97% 7.67% 7.58%
Cost of deposits, including repurchase agreements 3.60% 4.29% 4.46% 4.36% 4.27%
Cost of other borrowed funds 5.86% 5.53% 5.90% 5.86% 6.42%
Combined cost of deposits and borrowings 3.75% 4.32% 4.54% 4.54% 4.50%
Interest rate spread 3.57% 3.43% 3.43% 3.13% 3.08%
Net interest margin 3.75% 3.69% 3.67% 3.44% 3.42%
</TABLE>
10
<PAGE>
Management's Discussion and Analysis (continued)
The following table presents, for the periods indicated, the total dollar amount
of interest income from interest earning assets and the resultant yields as well
as the interest paid on interest bearing liabilities, and the resultant costs:
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
------------------------------- ------------------------------ ------------------------------
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)/ $ 273,344 $ 20,400 7.46% $ 246,373 $ 20,023 8.13% $ 258,704 $ 21,214 8.20%
Investment securities and
other/ (3)/ 59,285 3,940 6.65% 53,732 3,240 6.03% 34,841 2,172 6.23%
--------------------- --------------------- ---------------------
Total interest earning
Assets 332,629 24,340 7.32% 300,105 23,263 7.75% 293,545 23,386 7.97%
--------------------- --------------------- ---------------------
Non-interest earning assets
Cash 11,872 8,283 7,766
Other non-interest earning
assets/ (4)/ 21,002 15,437 14,537
---------- ---------- ----------
Total non-interest earning
Assets 32,874 23,720 22,303
---------- ---------- ----------
Total $ 365,503 $ 323,825 $ 315,848
========== ========== ==========
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings, NOW and MMAs $ 166,621 $ 4,188 2.51% $ 136,137 $ 3,996 2.94% $ 119,911 $ 3,749 3.13%
Time deposits 119,688 6,095 5.09% 127,065 7,215 5.68% 135,224 7,624 5.64%
Repurchase agreements 8,924 358 4.01% 12,775 621 4.86% 5,989 257 4.29%
Capital securities and
Other borrowed funds 20,749 1,216 5.86% 6,365 352 5.53% 16,535 975 5.90%
--------------------- --------------------- ---------------------
Total interest bearing
Liabilities 315,982 11,857 3.75% 282,342 12,184 4.32% 277,659 12,605 4.54%
--------------------- --------------------- ---------------------
Non-interest bearing
Liabilities:
Demand deposits 17,291 11,672 10,406
Other 4,843 3,285 3,555
---------- ---------- ----------
Total non-interest bearing
Liabilities 22,134 14,957 13,961
---------- ---------- ----------
Shareholders' equity 27,387 26,526 24,228
---------- ---------- ----------
Total $ 365,503 $ 323,825 $ 315,848
========== ========== ==========
Net interest rate spread $ 12,483 3.57% $ 11,079 3.43% $ 10,781 3.43%
================= ================= =================
Net interest margin 3.75% 3.69% 3.67%
====== ====== ======
Ratio of interest-earning assets
to interest bearing liabilities 105.27% 106.29% 105.72%
====== ====== ======
</TABLE>
/(1)/ Monthly average balances have been used for all periods. Management does
not believe that the use of month-end balances instead of daily average balances
caused any material difference in the information presented.
/(2)/ Loans include 90-day delinquent loans, which have been placed on a non-
accruing status. Management does not believe that including the 90-day
delinquent loans in loans caused any material difference in the information
presented.
/(3)/ Investment securities and other includes tax-exempt investment securities.
Management does not believe that including tax-exempt investment securities in
investment securities and other caused any material difference in the
information presented.
/(4)/ Other non-interest earning assets includes non-earning assets and real
estate owned.
11
<PAGE>
Management's Discussion and Analysis (continued)
The following table sets forth, for the periods indicated, a summary of the
changes in interest earned and interest paid resulting from changes in volume
and rates. The net change attributable to changes in both volume and rate, which
cannot be segregated, has been allocated proportionately to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Year ended December 31, 1999 vs. 1998
Increase (Decrease)
due to
Volume Rate Total
---------------------------------------------
($ in thousands)
<S> <C> <C> <C>
Interest income on loans $ 2,099 $ (1,722) $ 377
Interest income on investments 368 332 700
---------------------------------------------
Total interest income 2,467 (1,390) 1,077
---------------------------------------------
Interest expense on savings, NOW and MMAs 451 (259) 192
Interest expense on time deposits (393) (727) (1,120)
Interest expense on repurchase agreements (154) (109) (263)
Interest expense on capital securities and other borrowings 843 21 864
---------------------------------------------
Total interest expense 747 (1,074) (327)
---------------------------------------------
Net interest income $ 1,720 $ (316) $ 1,404
=============================================
</TABLE>
<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 $ (1,010) $ (181) $ (1,191)
Interest income on investments 1,135 (67) 1,068
---------------------------------------------
Total interest income 125 (248) (123)
---------------------------------------------
Interest expense on savings, NOW and MMAs 448 (201) 247
Interest expense on time deposits (464) 55 (409)
Interest expense on repurchase agreements 326 38 364
Interest expense on other borrowings (565) (58) (623)
---------------------------------------------
Total interest expense (255) (166) (421)
---------------------------------------------
Net interest income $ 380 $ (82) $ 298
=============================================
</TABLE>
12
<PAGE>
Management's Discussion and Analysis (continued)
Provision for Loan Losses
The Bank considers many factors in determining the allowance for loan
losses. These include the risk and size characteristics of loans, the prior
years' loss experience, the levels of delinquencies, the prevailing economic
conditions, the number of foreclosures, unemployment rates, interest rates, and
the value of collateral securing the loans. No changes were made to the Bank's
procedures with respect to maintaining the loan loss allowances as a result of
any regulatory examinations.
Additionally, the Bank's commercial loan officers review the financial
condition of commercial loan customers on a monthly basis and perform visual
inspections of facilities and inventories. The Bank also has an internal audit
and compliance program. Results of the audit and compliance programs are
reported directly to the Audit Committee of the Bank's Board of Directors.
The allowance for loan losses at December 31, 1999 was $4,320,563, compared
to $3,117,068 at year-end 1998. The allowance in 1999 includes $4,111,059 in
general reserves as compared to $2,731,374 in 1998. During 1999, the Bank had
net charge-offs of $338,179 compared to $64,550 in 1998. Net charged-off loans
during 1999 amounted to 0.12% of average loans, as compared to 0.03% in 1998.
Due to the general improvement of the quality of the loan portfolio and a
reduction in risk, the provision for loan losses was maintained at $120,000 in
1999. The allowance represented 1.23% of total loans at year-end 1999 versus
1.30% at year-end 1998. The allowance for loan losses as a percentage of total
non-performing loans was 246.85% at December 31, 1999 compared to 154.22% at
December 31, 1998. Please refer to Note 6 "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, 1999 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, 1999
and 1998 were $2,988,696 and $5,356,046, respectively. Total non-performing
assets amounted to $1,969,305 and $2,691,366 for the respective years. Beginning
in December 31, 1998, non-earning assets were included in impaired loans. At
December 31, 1999, loans classified as 90-day delinquent were $711,149 compared
to $170,999 at December 31, 1998.
__________________________________________________________________
The following table sets forth the breakdown of non-performing assets:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
90 day delinquent loans /(1)/ $ 711,149 $ 170,999 $ 691,567 $ 787,930 $ 1,144,293
Non-earning assets /(2)/ 1,039,156 1,850,214 578,387 848,942 297,172
----------------------------------------------------------------------
Total non-performing loans 1,750,305 2,021,213 1,269,954 1,636,872 1,441,465
Real estate owned 219,000 670,153 516,153 707,026 984,185
----------------------------------------------------------------------
Total non-performing assets $ 1,969,305 $ 2,691,366 $ 1,786,107 $ 2,343,898 $ 2,425,650
======================================================================
Troubled debt restructured $ N/A $ 114,110 $ 297,926 $ N/A $ 445,417
======================================================================
Impaired loans $ 1,039,156 $ 1,850,214 $ 1,942,320 $ 1,188,183 $ 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.
13
<PAGE>
Management's Discussion and Analysis (continued)
The following table sets forth 90 day delinquent loans by category:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate loans -
Conventional $ 282,194 $ 136,699 $ 679,356 $ 723,595 $ 1,132,475
Construction
Consumer loans 8,267 4,300 11,347 64,335 3,983
Commercial and municipal loans 420,688 30,000 636 7,835
Other loans 228
--------------------------------------------------------------
Total $ 711,149 $ 170,999 $ 691,567 $ 787,930 $ 1,144,293
==============================================================
</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>
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans -
Conventional $ 1,952,896 78% $ 1,473,248 79% $ 1,561,632 80% $ 1,603,860 84% $ 687,547 83%
Construction 146,899 2% 122,587 2% 111,604 1% 83,750 201,257
Collateral and
Consumer loans 132,641 11% 68,283 11% 59,225 11% 36,873 12% 8,067 12%
Commercial and
Municipal loans 1,799,514 9% 1,007,256 8% 1,006,335 8% 294,034 4% 276,526 4%
Impaired loans 209,115 385,694 322,655 139,509 654,663 1%
Other 79,498 60,000
---------------------------------------------------------------------------------------------------------
Valuation allowance $ 4,320,563 100% $ 3,117,068 100% $ 3,061,451 100% $ 2,158,026 100% $1,828,060 100%
=========================================================================================================
Valuation allowance
As a percentage of
Total loans 1.23% 1.30% 1.18% .98% .87%
=========================================================================================================
</TABLE>
14
<PAGE>
Management's Discussion and Analysis (continued)
The following sets forth the maturities of the loan portfolio at December 31,
1999:
<TABLE>
<CAPTION>
One year One thru Over
Maturities: or less Five years Five years Total
<S> <C> <C> <C> <C>
Real Estate Loans - $ 13,857,569 $ 41,361,986 $ 224,603,079 $ 279,822,634
--------------------------------------------------------------------
Real Estate Loans with:
Predetermined interest rates 3,487,719 12,415,936 53,449,778 69,353,433
Adjustable interest rates 10,369,850 28,946,050 171,153,301 210,469,201
--------------------------------------------------------------------
13,857,569 41,361,986 224,603,079 279,822,634
--------------------------------------------------------------------
Collateral Loans - 14,455,537 7,725,153 3,812,644 25,993,334
--------------------------------------------------------------------
Collateral Loans with:
Predetermined interest rates 13,511,366 5,481,905 997,358 19,990,629
Adjustable interest rates 944,171 2,243,248 2,815,286 6,002,705
--------------------------------------------------------------------
14,455,537 7,725,153 3,812,644 25,993,334
--------------------------------------------------------------------
Consumer Loans - 11,910,622 50,133 - 11,960,755
--------------------------------------------------------------------
Consumer Loans with:
Predetermined interest rates 247,257 50,133 - 297,390
Adjustable interest rates 11,663,365 - - 11,663,365
--------------------------------------------------------------------
11,910,622 50,133 - 11,960,755
--------------------------------------------------------------------
Commercial/Municipal Loans- 10,997,921 11,694,452 9,524,423 32,216,796
--------------------------------------------------------------------
Commercial/Municipal Loans with:
Predetermined interest rates 3,106,494 5,197,858 1,475,656 9,780,008
Adjustable interest rates 7,891,427 6,496,594 8,048,767 22,436,788
--------------------------------------------------------------------
10,997,921 11,694,452 9,524,423 32,216,796
--------------------------------------------------------------------
Other Loans - 1,496 2,101 - 3,597
--------------------------------------------------------------------
Other Loans with:
Predetermined interest rates 1,496 2,101 - 3,597
Adjustable interest rates - - - -
--------------------------------------------------------------------
1,496 2,101 - 3,597
--------------------------------------------------------------------
--------------------------------------------------------------------
Unamortized adjustment to fair value - - 120,700 120,700
--------------------------------------------------------------------
TOTALS $ 51,223,145 $ 60,833,825 $ 238,060,846 $ 350,117,816
====================================================================
</TABLE>
The preceding schedule includes $1,039,156 of non-earning assets categorized
within the respective loan types.
15
<PAGE>
Management's Discussion and Analysis (continued)
Other Income and Expense
Total non-interest income increased by $264,259, or 10.00% to $2,907,060.
Net gains on the sale of securities, bank property and loans totaled $445,382 at
year-end 1999 compared to $531,946 for the same period in 1998. The change was
primarily attributed to a $164,732, or 107.33% decrease in gains on investment
securities. Gains on the sale of loans were $320,133 in 1999 compared to
$371,991 for 1998, a decrease of 13.94%. As mentioned above, during the second
half of 1999, as rates rose, consumers elected to write adjustable rate loans,
which the Bank holds. Loan origination fees increased 64.37% due to record loan
volume during 1999. The 14.62% increase in customer service fees was primarily
due to an increase in fee-based transaction-type accounts. Rental income
increased by 12.26% as the Bank leased some of its previously unoccupied
property and acquired new rentals from the NLT transaction.
Total operating expenses increased $1,414,014, or 15.92% to $10,293,756.
The increase was due to many factors. Salaries and benefits increased
$1,077,681, or 25.52%. During 1999, as volume and activity increased, fifteen
new positions were added. In addition, salary expenses associated with Y2K and
NLT were realized. Health care and pension costs also increased during 1999, by
approximately 25%. Occupancy costs increased $176,135, or 10.13% as the Bank
realized costs associated with the properties and leases acquired as part of the
NLT transaction. In addition, hardware and software depreciation increased
during 1999 due to purchases that were part of the Bank's Y2K efforts. Outside
services decreased $61,876, or 9.67%. The decrease was primarily attributable to
the discontinuance of loan processing services that were outsourced during 1998.
Advertising and promotion increased 31.38% due to marketing associated with the
NLT acquisition. In addition, goodwill increased 49.13% during 1999 for the same
reason. Other expenses were flat, increasing just 1.37% during 1999.
Financial Modernization
On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act
(the "Act"), which among other things, establishes a comprehensive framework to
permit affiliations among commercial banks, insurance companies and securities
firms. Generally, the Act (i) repeals the historical restrictions and eliminates
many federal and state law barriers to affiliations among banks and securities
firms, insurance companies and other financial service providers, (ii) provides
a uniform framework for the activities of banks, savings institutions and their
holding companies, (iii) broadens the activities that may be conducted by
subsidiaries of national banks and state banks, (iv) provides an enhanced
framework for protecting the privacy of information gathered by financial
institutions regarding their customers and consumers, (v) adopts a number of
provisions related to the capitalization, membership, corporate governance and
other measures designed to modernize the Federal Home Loan Bank System, (vi)
requires public disclosure of certain agreements relating to funds expended in
connection with an institution's compliance with the Community Reinvestment Act,
(vii) addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions,
including the functional regulation of bank securities and insurance activities.
The Act also restricts the powers of new unitary savings and loan
association holding companies. Unitary savings and loan holding companies that
are "grandfathered," i.e., unitary savings and loan holding companies in
existence or with applications filed with the OTS on or before May 4, 1999, such
as the Company, retain their authority under the prior law. All other unitary
savings and loan holding companies are limited to financially related activities
permissible for bank holding companies, as defined under the Act. The Act also
prohibits non-financial companies from acquiring grandfathered unitary savings
and loan association holding companies.
The Act also requires financial institutions to disclose, on ATM machines,
any non-customer fees and to disclose to their customers upon issuance of an ATM
card any fees that may be imposed by the institution on ATM users. For older
ATM's, financial institutions will have until December 31, 2004 to provide such
notices.
The OTS has recently proposed regulations implementing the privacy
protection provisions of the Act. The proposed regulations would require each
financial institution to adopt procedures to protect customers' and consumers'
"nonpublic personal information" by November 13, 2000. The Company would be
required to disclose its privacy policy, including identifying with whom it
shares "nonpublic personal information" to customers at the time of establishing
the customer relationship and annually thereafter. In addition, the Company
would be required to provide customers with the ability to "opt-out" of having
their personal information shared with affiliated third parties. The Company
currently has a privacy protection policy in place and intends to
16
<PAGE>
Management's Discussion and Analysis (continued)
review and amend that policy, if necessary, for compliance with regulations when
they are adopted in final form. The Act also provides for the ability of each
state to enact legislation that is more protective of consumers' personal
information.
The Company does not believe that the Act will have a material adverse
affect upon Bank operations in the near term. However, to the extent the Act
permits banks, securities firms and insurance companies to affiliate, the
financial services industry may experience further consolidation. This could
result in a growing number of larger financial institutions that offer a wider
variety of financial services than we currently offer and that can aggressively
compete in the markets we currently serve.
Impact of New Accounting Standards
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 133 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, 2000. 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, 1999, 1998
and 1997 includes net deferred income tax expense (benefit) of $406,029,
$364,723, and $(575,835), 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, 1998 and 1997
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. As a result, fees from loan
originations, mortgage servicing fees and rights, and gains on the sale of loans
increased 28.44%. 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%.
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 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. 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.
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.
17
<PAGE>
Management's Discussion and Analysis (continued)
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 were 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. The
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.
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.
Net cash provided by operating activities decreased $2,795,207 to $123,466
in 1998 from $2,918,673 in 1997. The change in loans held-for-sale, gains and
losses on other investments and deferred taxes accounted for the majority of the
change.
Net cash flows used in investing activities increased by $4,282,794 from
negative $4,027,081 in 1997 to negative $255,713 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 $23,020,732.
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 is required to maintain tangible, core, and risk-based capital
ratios of 1.50%, 4.00%, 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.
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 0.53%, 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
18
<PAGE>
Management's Discussion and Analysis (continued)
$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, including repurchase
agreements, in 1998 were 4.29% versus 4.46% in 1997. As mentioned above, the
Bank elected not to renew the brokered CD's acquired from Landmark Bank in 1887,
which matured in January of 1998. 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 was 3.43% for both 1998 and 1997. The Bank's net
interest margin increased slightly to 3.69% from 3.67%.
Provision for Loan Losses
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 $64,550 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 loans was
154.22% at December 31, 1998 compared to 241.07% at December 31, 1997.
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 included impaired loans. At December 31,
1998, loans classified as 90-day delinquent were $170,999 compared to $691,567
at December 31, 1997.
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%. Including 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.
19
<PAGE>
[LETTERHEAD OF SHATSWELL, MacLEOD & COMPANY, P.C.]
The Board of Directors
New Hampshire Thrift Bancshares, Inc.
Newport, New Hampshire
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying consolidated statements of financial condition
of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31,
1999 and 1998 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, 1999. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of New
Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 1999 and
1998 and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ Shatswell, MacLeod & Company, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 19, 2000
20
<PAGE>
New Hampshire Thrift Bancshares Inc. and Subsidiaries
-----------------------------------------------------
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
As of December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 22,558,929 $ 8,701,558
Federal funds sold - 7,583,000
---------------------------
Cash and cash equivalents 22,558,929 16,284,558
Securities available-for-sale 47,540,736 52,137,753
Securities held-to-maturity (fair value of $9,625,616) 10,006,952 -
Other investments 2,032,999 2,032,999
Loans held-for-sale - 3,775,802
Loans receivable, net 346,491,828 232,321,171
Accrued interest receivable 2,450,268 1,725,235
Bank premises and equipment, net 10,028,893 8,416,182
Investments in real estate 516,533 531,729
Real estate owned and property acquired in settlement of loans 219,000 670,153
Goodwill 13,850,308 3,213,028
Other assets 5,751,884 2,299,159
---------------------------
Total assets $461,448,330 $323,407,769
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing $ 21,597,464 $ 16,521,820
Interest-bearing 345,040,625 265,527,336
---------------------------
Total deposits 366,638,089 282,049,156
Securities sold under agreements to repurchase 14,038,117 11,849,116
Federal Home Loan Bank Ideal Way advances 12,440,000 -
Federal Home Loan Bank advances, short term 22,000,000 -
Accrued expenses and other liabilities 2,688,977 1,729,891
---------------------------
Total liabilities 417,805,183 295,628,163
---------------------------
GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR
SUBORDINATED DEBENTURES 16,400,000 -
---------------------------
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 2,106,685 shares outstanding
at December 31, 1999 and 2,479,858 shares issued and 2,104,285
shares outstanding at December 31, 1998 24,798 24,798
Paid-in capital 17,895,316 17,874,567
Retained earnings 14,044,427 12,082,784
Accumulated other comprehensive income (loss) (2,271,617) 255,034
---------------------------
29,692,924 30,237,183
Treasury stock, at cost, 373,173 shares as of December 31, 1999 and
375,573 shares as of December 31, 1998 (2,449,777) (2,457,577)
---------------------------
Total shareholders' equity 27,243,147 27,779,606
---------------------------
Total liabilities and shareholders' equity $461,448,330 $323,407,769
===========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
New Hampshire Thrift Bancshares Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
For the years ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest on loans $20,400,308 $20,023,493 $21,214,024
Interest and dividends on investments 3,939,762 3,239,693 2,171,956
--------------------------------------
Total interest income 24,340,070 23,263,186 23,385,980
--------------------------------------
INTEREST EXPENSE
Interest on deposits:
Savings deposits 2,246,962 2,328,817 2,760,153
NOW accounts and MMDA deposits 1,940,958 1,667,438 989,002
Time deposits 6,095,218 7,215,137 7,623,898
--------------------------------------
Total interest on deposits 10,283,138 11,211,392 11,373,053
Interest on advances and other borrowed money 616,403 351,840 974,930
Interest expenses on NHTB Capital Trust I capital securities 599,505 - -
Interest on securities sold under agreements to repurchase 358,439 621,132 256,717
--------------------------------------
Total interest expense 11,857,485 12,184,364 12,604,700
--------------------------------------
Net interest income 12,482,585 11,078,822 10,781,280
PROVISION FOR LOAN LOSSES 120,000 120,167 932,471
--------------------------------------
Net interest income after provision for loan losses 12,362,585 10,958,655 9,848,809
--------------------------------------
OTHER INCOME
Loan origination fees 148,241 90,186 96,510
Customer service fees 1,786,730 1,558,886 1,263,989
Net gain (loss) on sales, calls and writedowns of securities (11,253) 153,479 551,357
Net gain (loss) on sales of premises, equipment and other
real estate owned 136,502 6,476 (68,765)
Net gain on sale of loans 320,133 371,991 267,925
Rental income 376,352 335,255 291,308
Brokerage service income 150,007 126,528 148,341
Other income 348 - 2,209
--------------------------------------
Total other income 2,907,060 2,642,801 2,552,874
--------------------------------------
OTHER EXPENSES
Salaries and employee benefits 5,299,887 4,222,206 4,046,725
Occupancy expenses 1,914,190 1,738,055 1,582,589
Advertising and promotion 333,552 253,883 344,714
Depositors' insurance 137,756 139,214 123,487
Outside services 577,752 639,628 489,254
Amortization of goodwill 368,593 247,156 242,271
Other expenses 1,662,026 1,639,600 1,568,971
--------------------------------------
Total other expenses 10,293,756 8,879,742 8,398,011
--------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,975,889 4,721,714 4,003,672
PROVISION FOR INCOME TAXES 1,667,045 1,602,964 1,232,740
--------------------------------------
NET INCOME $ 3,308,844 $ 3,118,750 $ 2,770,932
======================================
Earnings per common share $ 1.57 $ 1.49 $ 1.36
======================================
Earnings per common share, assuming dilution $ 1.56 $ 1.47 $ 1.33
======================================
Dividends declared per common share $ .64 $ .60 $ .50
======================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
New Hampshire Thrift Bancshares Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
For the years ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK
Balance, beginning of year $ 24,798 $ 24,798 $ 21,473
Shares issued in acquisition of Landmark Bank - - 3,325
-----------------------------------------
Balance, end of year $ 24,798 $ 24,798 $ 24,798
=========================================
PAID-IN CAPITAL
Balance, beginning of year $17,874,567 $17,660,097 $13,241,774
Gain on issuance of treasury stock for the exercise
of stock options 16,500 156,406 489,847
Tax benefit for stock options 4,249 58,064 -
Acquisition of Landmark Bank - - 3,928,476
-----------------------------------------
Balance, end of year $17,895,316 $17,874,567 $17,660,097
=========================================
RETAINED EARNINGS
Balance, beginning of year $12,082,784 $10,221,049 $ 8,437,149
Net income 3,308,844 3,118,750 2,770,932
Cash dividends paid (1,347,201) (1,257,015) (987,032)
-----------------------------------------
Balance, end of year $14,044,427 $12,082,784 $10,221,049
=========================================
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Net unrealized holding gain (loss) on securities
available-for-sale
Balance, beginning of year $ 255,034 $ 82,318 $ (127,179)
Net change (2,526,651) 172,716 209,497
-----------------------------------------
Balance, end of year $(2,271,617) $ 255,034 $ 82,318
=========================================
TREASURY STOCK
Balance, beginning of year $(2,457,577) $(2,425,137) $(2,379,527)
Shares repurchased, (0 shares in 1999, 4,650 shares in 1998
and 13,928 shares in 1997) - (73,975) (255,316)
Exercise of stock options, (2,400 shares in 1999, 20,780
shares in 1998 and 64,525 shares in 1997) 7,800 41,535 209,706
-----------------------------------------
Balance, end of year $(2,449,777) $(2,457,577) $(2,425,137)
=========================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
New Hampshire Thrift Bancshares Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
For the years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 3,308,844 $3,118,750 $2,770,932
Other comprehensive income
Net unrealized holding gain (loss) on securities
available-for-sale, net of tax effect (2,526,651) 172,716 209,497
------------------------------------
Comprehensive income $ 782,193 $3,291,466 $2,980,429
====================================
</TABLE>
Reclassification disclosure for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998
------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on available-for-sale securities $(4,055,802) $ 436,429
Reclassification adjustment for realized (gains) losses in net income (60,607) (155,040)
-----------------------
Other comprehensive income (loss) before income tax effect (4,116,409) 281,389
Income tax (expense) benefit 1,589,758 (108,673)
-----------------------
Other comprehensive income (loss), net of tax $(2,526,651) $ 172,716
=======================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
New Hampshire Thrift Bancshares Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,308,844 $ 3,118,750 $ 2,770,932
Depreciation and amortization 746,776 788,529 579,452
Amortization of goodwill 368,593 247,156 242,271
Amortization of deferred expenses relating to issuance of
NHTB Capital Trust I capital securities 5,027 - -
Accretion of fair value adjustments, net (1,583) - -
Net (increase) decrease in loans held-for-sale 3,775,802 (3,101,852) 71,690
(Gain) loss from sales of premises, equipment and other
real estate owned (136,502) (6,476) 68,765
(Gain) loss from sales, calls and writedowns of debt securities
available-for-sale 11,253 (155,040) (62,010)
Loss from sales of equity securities available-for-sale
and writedowns, net - - 10,653
(Gain) loss on sales of other investments - 1,561 (500,000)
Provision for loan losses 120,000 120,167 932,471
Deferred tax expense (benefit) 406,029 364,723 (575,835)
(Increase) decrease in accrued interest and other assets (59,087) (109,696) 178,486
Change in deferred loan origination fees and costs, net (448,611) (199,548) (121,484)
Increase (decrease) in accrued expenses and other liabilities 635,404 (944,808) (676,718)
------------------------------------------
Net cash provided by operating activities 8,731,945 123,466 2,918,673
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of premises and equipment - 9,145 108,149
Proceeds from sales of other real estate owned 236,455 163,076 219,389
Down payment received on other real estate owned 25,000 - -
Capital expenditures - premises and equipment (1,121,551) (890,414) (1,079,184)
Capital expenditures - other real estate owned (26,840) (6,000) (27,043)
Proceeds from sales of debt securities available-for-sale 17,003,624 27,592,324 20,579,199
Proceeds from sales of equity securities available-for-sale - - 1,192,719
Proceeds from sales of other investments - 30,000 820,000
Purchases of securities held-for-maturity (10,006,713) - -
Principal reduction on securities held-to-maturity - 75,000 25,000
Purchases of securities available-for-sale (21,855,026) (50,877,553) (25,726,166)
Maturities of securities available-for-sale 5,288,824 1,560,000 200,000
Purchases of other investments - (77,000) -
Cash and cash equivalents of $7,607,082 received in the
acquistion of assets and assumption of liabilities of
New London Trust, FSB, less cash of $930,486 for costs
relative to the acquisition 6,676,596 - -
Net (increase) decrease in loans (33,555,975) 22,628,959 (391,773)
Recoveries of loans previously charged off 31,284 48,176 52,629
------------------------------------------
Net cash provided by (used in) investing activities (37,304,322) 255,713 (4,027,081)
------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
New Hampshire Thrift Bancshares Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Continued)
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C> <C>
Net increase in demand deposits, savings and NOW accounts 7,654,110 22,822,872 11,487,757
Net decrease in time deposits (20,672,825) (12,000,676) (2,411,055)
Net increase (decrease) in repurchase agreements (744,926) 3,455,924 (453,344)
Proceeds from Federal Home Loan Bank advances 45,000,000 - -
Principal payments of advances from Federal Home Loan Bank (23,000,000) (10,246,318) (9,927,707)
Net increase (decrease) in Federal Home Loan Bank Ideal Way
advance and other borrowed funds 12,440,000 (300,000) 295,000
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)
Dividends paid (1,347,201) (1,257,015) (987,032)
Proceeds from issuance of NHTB Capital Trust I capital
securities, less deferred expense of $906,710 15,493,290 - -
Proceeds from exercise of stock options 24,300 197,941 699,553
-----------------------------------------
Net cash provided by financing activities 34,846,748 2,598,753 3,412,285
-----------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,274,371 2,977,932 2,303,877
CASH AND CASH EQUIVALENTS, beginning of year 16,284,558 13,306,626 11,002,749
-----------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 22,558,929 $ 16,284,558 $13,306,626
=========================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid $ 11,732,389 $ 12,220,262 $12,750,892
=========================================
Income taxes paid $ 1,331,778 $ 1,376,990 $ 1,545,183
=========================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Loans originated for sales of other real estate owned $ 355,950 $ 130,000 $ 318,000
=========================================
Transfers from loans to real estate acquired through
foreclosure $ 50,250 $ 434,600 $ 303,021
=========================================
Other real estate owned transferred to premises $ 33,000 $ - $ -
=========================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
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 fifteen 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, NHTB Capital Trust I, 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. NHTB Capital Trust I was formed to sell capital
securities to the public.
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, $0 and $68,750 have been included in
earnings as realized losses for the years ended 1999, 1998 and 1997,
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>
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.
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.
28
<PAGE>
NOTE 1. Summary of significant accounting policies: (continued)
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.
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.
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 and held-to-maturity securities are based on quoted market
prices.
Other investments - The carrying amounts of other investments, consisting
principally of Federal Home Loan Bank stock, approximate their 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.
Accrued interest receivable - The carrying amounts of accrued interest
receivable approximate their fair 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.
Borrowings - The carrying amounts of securities sold under agreements to
repurchase and federal funds purchased approximate their fair values.
Federal Home Loan Bank Advances - Fair values for Federal Home Loan Bank
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 Federal Home Loan Bank advances.
Junior subordinated debentures - Fair values of the guaranteed preferred
beneficial interests in junior subordinated debentures are estimated using a
discounted cash flow technique using a current interest rate.
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.
29
<PAGE>
NOTE 1. Summary of significant accounting policies: (continued)
Stock based compensation - The Company recognizes stock-based compensation
using the intrinsic value approach set forth in APB Opinion No. 25 rather than
the fair value method introduced in SFAS No. 123. 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 - For loans sold after December 31, 1995 with servicing
retained, the Company recognizes 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 1998 and 1997 consolidated
financial statements have been reclassified to conform to the current year's
presentation.
NOTE 2. Issuance of Capital Securities:
In August, 1999, NHTB Capital Trust I ("the Trust"), a wholly owned
subsidiary of the Company, sold capital securities to the public. The capital
securities sold consisted of 1,640,000 9.25% Capital Securities with a $10.00
liquidation amount for each capital security, for a total of $16,400,000. The
capital securities are fully guaranteed by the Company. Each capital security
pays a cumulative quarterly distribution at the annual rate of 9.25% of the
liquidation amounts. Each capital security represents an undivided preferred
beneficial interest in the assets of the Trust. The Trust used the proceeds of
the above sale and the proceeds of the sale of its common securities to the
Company to buy $16,907,300 of 9.25% subordinated debentures issued by the
Company. These debentures mature on September 20, 2029. The subordinated
debentures have the same financial terms as the capital securities. The Company
makes interest payments and other payments under the subordinated debentures to
the Trust. The Company's obligations under the subordinated debentures are
unsecured and rank junior to all of the Company's other borrowings, except
borrowings that by their terms rank equal or junior to the subordinated
debentures. The Company guaranteed the payment by the Trust of the amounts that
are required to be paid on the capital securities, to the extent that the Trust
has funds available for such payments.
The Company may shorten the maturity date of the subordinated debentures.
The Trust must redeem the capital securities when the subordinated debentures
are paid on the maturity date, or following any earlier redemption of the
subordinated debentures.
Costs relating to the sale of the capital certificates and the issuance of
the subordinated debentures totaled $906,710. Such costs are being amortized to
interest expense over 30 years.
30
<PAGE>
NOTE 3. Acquisition of assets and assumption of liabilities of certain offices
of New London Trust FSB :
As of the close of business on October 29, 1999, the Bank completed its
purchase of certain assets and its assumption of certain liabilities of New
London Trust, FSB. In the transaction, the Bank acquired the following offices
of New London Trust, FSB, all in the state of New Hampshire: the New London
main office, the Andover branch office, and the Newbury branch office. The
loans acquired and deposits assumed with the acquisition of these offices
totaled approximately $81 million and $98 million respectively. The transaction
was accounted for under the purchase method of accounting. The Bank paid
$930,486 in direct acquisition costs and assumed net liabilities of $10,075,387
in the transaction. The results of operations of the three offices from October
30, 1999 to December 31, 1999 are included in the statement of income of the
Company for the year ended December 31, 1999. Goodwill of $11,005,873 arising
from the transaction is being amortized to expense over fifteen years on the
straight-line method.
NOTE 4. 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.
31
<PAGE>
Notes to Consolidated Financial Statements
NOTE 5. Securities:
The amortized cost and approximate market value of securities are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
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 $ 5,990,312 $ 82 $ 11,635 $ 6,001,865
U. S. Government, including agencies 15,536,951 - 1,017,579 16,554,530
Mortgage-backed securities 534,203 - - 534,203
Other bonds and debentures 25,190,168 2,250 2,482,475 27,670,393
Equity securities 289,102 - 191,551 480,653
------------------------------------------------
Total available-for-sale $47,540,736 $ 2,332 $3,703,240 $51,241,644
================================================
Held-to-maturity:
Bonds and notes -
U.S. government, including agencies $ 6,807,966 $ - $ 191,764 $ 6,999,730
Other bonds and debentures 2,817,650 428 190,000 3,007,222
------------------------------------------------
Total held-to-maturity $ 9,625,616 $ 428 $ 381,764 $10,006,952
================================================
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
================================================
<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
================================================
</TABLE>
Gross gains of $84,392, $161,193 and $105,627, and gross losses of $23,785,
$6,153 and $36,097, were realized during 1999, 1998 and 1997, respectively, on
sales of available-for-sale debt securities. There were no sales of available-
for-sale equity securities during 1999 and 1998. Gross gains of $63,164 and
gross losses of $10,277 were realized during 1997 on sales of available-for-sale
equity securities. There were no sales of other investments during 1999. 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 5. Securities: (continued)
Maturities of debt securities, excluding mortgage-backed securities,
classified as available-for-sale are as follows as of December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Fair Amortized Average
Value Cost Yield
-------------------------------------
<S> <C> <C> <C>
U.S. Treasury Notes $ 5,990,312 $ 6,001,865 5.76%
Other bonds and debentures 5,722 5,722 8.00
-------------------------
Total due in one year or less 5,996,034 6,007,587 5.76
-------------------------
U.S. Government, including agencies 1,927,187 1,964,958 5.90
Other bonds and debentures 5,846,950 6,049,756 7.34
-------------------------
Total due after one year through five years 7,774,137 8,014,714 6.97
-------------------------
U.S. Government, including agencies 5,158,911 5,400,000 6.70
Other bonds and debentures 1,679,356 1,760,950 6.51
-------------------------
Total due after five years through ten years 6,838,267 7,160,950 6.65
-------------------------
U.S. Government, including agencies 8,450,853 9,189,572 6.61
Other bonds and debentures 17,658,140 19,853,965 6.79
-------------------------
Total due after ten years 26,108,993 29,043,537 6.77
-------------------------
$46,717,431 $50,226,788
=========================
</TABLE>
Maturities of debt securities classified as held-to-maturity are as follows
as of December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Fair Amortized Average
Value Cost Yield
------------------------------------
<S> <C> <C> <C>
Other bonds and debentures $ 1,007,650 $ 1,007,222 7.34%
--------------------------
Total due after one year through five years 1,007,650 1,007,222 7.34
--------------------------
U.S. Government, including agencies 6,807,966 6,999,730 8.10
Other bonds and debentures 1,810,000 2,000,000 8.60
--------------------------
Total due after ten years 8,617,966 8,999,730 8.32
--------------------------
$ 9,625,616 $10,006,952
==========================
</TABLE>
There were no issuers of securities whose aggregate book value exceeded 10%
of shareholders' equity as of December 31, 1999.
Securities, carried at $994,062 and $1,016,562 were pledged to secure the
treasury, tax and loan account as of December 31, 1999 and 1998, respectively.
33
<PAGE>
Notes to Consolidated Financial Statements
NOTE 6. Loans receivable:
Loans receivable consisted of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate loans
Conventional $275,562,941 $188,609,359 $207,311,314 $183,550,150 $175,130,966
Construction 6,544,051 5,461,451 3,540,870 2,702,613 2,456,763
------------------------------------------------------------------------
282,106,992 194,070,810 210,852,184 186,252,763 177,587,729
Less - Unadvanced portion 2,284,358 1,688,868 900,858 1,270,412 1,434,258
------------------------------------------------------------------------
279,822,634 192,381,942 209,951,326 184,982,351 176,153,471
Collateral loans 25,993,334 20,335,430 20,635,457 20,574,710 19,524,706
Consumer loans 11,960,755 7,124,970 7,792,874 4,860,325 5,025,818
Commercial and municipal loans 32,216,796 19,257,740 20,026,574 8,352,789 9,301,028
Other loans 3,597 16,358 654,642 436,754 671,302
Unamortized adjustment to fair value 120,700 - - - -
------------------------------------------------------------------------
Total loans 350,117,816 239,116,440 259,060,873 219,206,929 210,676,325
Less - Loans held for sale - 3,775,802 673,950 745,650 3,095,971
------------------------------------------------------------------------
350,117,816 235,340,638 258,386,923 218,461,279 207,580,354
Allowance for loan losses (4,320,563) (3,117,068) (3,061,451) (2,158,026) (1,828,060)
Deferred loan origination costs
(fees), net 694,575 97,601 (101,947) (300,492) (382,042)
------------------------------------------------------------------------
Loans receivable, net $346,491,828 $232,321,171 $255,223,525 $216,002,761 $205,370,252
========================================================================
</TABLE>
The following is a summary of activity in the allowance for loan loss
account for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, beginning of year $ 3,117,068 $ 3,061,451 $ 2,158,026 $ 1,828,060 $ 2,752,885
------------------------------------------------------------------------
Loans charged-off:
Real estate loans
Conventional 317,917 71,077 291,437 628,107 141,541
Construction - 30,000 85,000 614,355 1,014,670
Collateral and consumer loans 2,737 2,229 226,710 36,721 25,568
Commercial and municipal loans 48,809 9,420 328,822 101,431 913,441
------------------------------------------------------------------------
Total charged-off loans 369,463 112,726 931,969 1,380,614 2,095,220
------------------------------------------------------------------------
Recoveries on loans:
Real estate loans
Conventional 3,951 28,549 6,786 19,063 3,300
Collateral and consumer loans 1,042 2,796 22,257 22,105 2,099
Commercial and municipal loans 26,291 16,831 23,586 8,671 1,286
------------------------------------------------------------------------
Total recoveries 31,284 48,176 52,629 49,839 6,685
------------------------------------------------------------------------
Net charged-off loans: 338,179 64,550 879,340 1,330,775 2,088,535
------------------------------------------------------------------------
Balance relating to acquisition
of Landmark Bank: - - 850,294 - -
------------------------------------------------------------------------
Balance relating to acquisition of
branches of New London Trust FSB: 1,421,674 - - - -
------------------------------------------------------------------------
Provision for loan losses charged
to income: 120,000 120,167 932,471 1,660,741 1,163,710
------------------------------------------------------------------------
BALANCE, end of year $ 4,320,563 $ 3,117,068 $ 3,061,451 $ 2,158,026 $ 1,828,060
========================================================================
Ratios of net charged-off loans during
the period to average loans
outstanding during the period .12% .03% .35% .63% 1.02%
========================================================================
</TABLE>
34
<PAGE>
Notes to Consolidated Financial Statements
NOTE 6. Loans receivable: (continued)
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, 1999 and
1998. Certain directors and executive officers of the Company and companies in
which they have significant ownership interest were customers of the Bank during
1999. Total loans to such persons and their companies amounted to $1,203,197 as
of December 31, 1999. During 1999 advances of $429,469 were made and repayments
totaled $282,621.
<TABLE>
<CAPTION>
Impaired loans as of December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Average recorded investment in impaired loans $1,190,506 $1,925,907
Recorded investment in impaired loans at December 31 $1,039,156 $1,850,214
Portion of valuation allowance allocated to impaired loans $ 298,689 $ 385,694
Net balance of impaired loans $ 740,467 $1,464,520
Interest income recognized on impaired loans $ 93,843 $ 100,683
Interest income on impaired loans on cash basis $ 93,843 $ 100,683
Recorded investment in impaired loans with related allowance for credit losses $1,039,156 $1,676,226
Recorded investment in impaired loans with no related allowance for credit losses $ - $ 173,988
</TABLE>
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>
1999 1998
--------------------------
<S> <C> <C>
Sold loans $154,283,783 $128,115,971
==========================
Participation loans $ 2,380,604 $ 2,788,528
==========================
</TABLE>
The balance of capitalized servicing rights, net of valuation allowances,
included in other assets at December 31, 1999 and 1998 was $1,254,343 and
$896,138, respectively.
Servicing assets of $579,795 and $798,758 were capitalized in 1999 and
1998, respectively. Amortization of servicing assets $251,128 in 1999, $186,841
in 1998 and $63,805 in 1997.
The fair value of servicing assets was $1,586,349 and $995,596 as of
December 31, 1999 and 1998, respectively. Following is an analysis of the
aggregate changes in the valuation allowances for servicing assets:
<TABLE>
<CAPTION>
1999 1998
----------------------
<S> <C> <C>
Balance, beginning of year $129,538 $ 57,422
Additions 19,278 72,116
Reductions (48,816) -
----------------------
Balance, end of year $100,000 $129,538
======================
</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>
1999 1998
-------------------------
<S> <C> <C>
Letters of credit $ 596,748 $ 694,098
=========================
Lines of credit $42,130,014 $21,600,504
=========================
</TABLE>
35
<PAGE>
Notes to Consolidated Financial Statements
NOTE 7. 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:
1999 1998
------------------------
Land $ 1,306,809 $ 1,043,586
Buildings and premises 8,391,273 7,256,000
Furniture, fixtures and equipment 6,363,111 5,462,370
------------------------
16,061,193 13,761,956
Less - Accumulated depreciation 6,032,300 5,345,774
------------------------
$10,028,893 $ 8,416,182
========================
NOTE 8. Real estate owned and property acquired:
As of December 31, 1999 and 1998, the Company owned property acquired by
foreclosure. The balances consisted of the following:
1999 1998
---------------------
Residential real estate $ - $ 72,000
Commercial real estate 219,000 598,153
---------------------
$219,000 $670,153
=====================
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.
NOTE 9. Deposits:
Deposits consisted of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------
<S> <C> <C> <C> <C>
Checking accounts (non-interest-bearing) $ 21,597,464 5.9% $ 16,521,820 5.9%
NOW accounts 64,881,922 17.7 40,431,129 14.3
Ever-Ready Money Market 53,640,158 14.6 27,162,129 9.6
Regular savings accounts 16,006,949 4.4 13,146,531 4.7
Treasury savings accounts 74,206,332 20.2 63,608,465 22.6
Club deposits 96,237 .0 82,108 .0
-----------------------------------------
230,429,062 62.8 160,952,182 57.1
-----------------------------------------
Time deposits
2.00% - 2.99% 37,581 .0 41,956 .0
3.00% - 3.99% 8,942,616 2.4 1,912,878 .7
4.00% - 4.99% 89,571,713 24.5 19,668,581 7.0
5.00% - 5.99% 30,020,570 8.2 84,160,709 29.8
6.00% - 6.99% 4,282,483 1.2 6,268,060 2.2
7.00% - 7.99% 3,314,647 .9 9,044,790 3.2
Unamortized adjustment to fair value 39,417 - - -
-----------------------------------------
136,209,027 37.2 121,096,974 42.9
-----------------------------------------
$366,638,089 100.0% $282,049,156 100.0%
=========================================
</TABLE>
36
<PAGE>
Notes to Consolidated Financial Statements
NOTE 9. Deposits:
The following is a summary of maturities of time deposits as of December
31, 1999:
2000 $117,576,462
2001 12,800,757
2002 2,619,261
2003 948,564
2004 2,155,925
Thereafter 68,641
Unamortized adjustment to fair value 39,417
------------
$136,209,027
============
As of December 31, 1999, time deposits include $13,460,636 of certificates
of deposit with a minimum balance of $100,000. Maturities of these certificates
are as follows:
Less than 3 months $ 5,229,846
Over 3 months and less than 6 months 3,300,033
Over 6 months and less than 12 months 4,302,285
Over 12 months 628,472
-----------
$13,460,636
===========
NOTE 10. 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, 2000
to December 14, 2000 on the anniversary date of the repurchase agreement. The
securities are under control of the Bank.
NOTE 11. Advances from Federal Home Loan Bank:
Advances consisted of funds borrowed from the Federal Home Loan Bank of
Boston (FHLB).
Short term advances of $22,000,000 mature during year 2000. Interest on
these advances range from 5.82% to 5.95%.
These advances were secured by Federal Home Loan Bank stock and
unspecified first mortgage loans.
In addition to the above advances, the Company has credit available up to
$15,000,000 under a revolving loan agreement with the FHLB. There was
outstanding a one-day Ideal Way advance of $12,440,000 as of December 31, 1999
and no outstanding balance as of December 31, 1998. Interest is payable monthly
as funds are borrowed.
NOTE 12. Income taxes:
The components of income tax expense are as follows for the years ended
December 31:
1999 1998 1997
----------------------------------
Current tax expense $1,261,016 $1,238,241 $1,808,575
Deferred tax expense (benefit) 406,029 364,723 (575,835)
----------------------------------
Total income tax expense $1,667,045 $1,602,964 $1,232,740
==================================
37
<PAGE>
Notes to Consolidated Financial Statements
NOTE 12. Income taxes: (continued)
The reasons for the differences between the statutory federal income tax
rates and the effective tax rates are summarized as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------
<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) (.2) (.3)
Dividends received deduction (.7) (.2) (.4)
Goodwill amortization 1.7 1.8 2.1
Other, net (1.3) (1.5) (4.6)
-------------------------------------
Effective tax rates 33.5% 33.9% 30.8%
=====================================
</TABLE>
The Company had gross deferred tax assets and gross deferred tax
liabilities as follows as of December 31:
<TABLE>
<CAPTION>
1999 1998
---------------------------
<S> <C> <C>
Deferred tax assets:
Interest on non-performing loans $ 8,176 $ 5,412
Allowance for loan losses 942,546 930,260
Deferred compensation 28,196 20,011
Deferred retirement expense 21,777 10,443
Accrued directors fees 43,026 34,005
Net unrealized holding loss on securities available-for-sale 1,429,291 -
---------------------------
Gross deferred tax assets 2,473,012 1,000,131
---------------------------
Deferred tax liabilities:
Deferred loan costs, net of fees 243,369 37,694
Prepaid pension 207,921 189,762
Accelerated depreciation 358,559 279,392
Mortgage servicing rights 492,706 346,088
Net unrealized holding gain on securities available-for-sale - 160,467
---------------------------
Gross deferred tax liabilities 1,302,555 1,013,403
---------------------------
Net deferred tax asset (liability) $1,170,457 $ (13,272)
===========================
</TABLE>
Deferred tax assets as of December 31, 1999 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, 1999, the Company had no operating loss and tax credit
carryover for tax purposes.
38
<PAGE>
Notes to Consolidated Financial Statements
NOTE 13. Stock compensation plans:
As of December 31, 1999, the Company had two 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:
1999 1998 1997
----------------------------------
Net income As reported $3,308,844 $3,118,750 $2,770,932
Pro forma $3,180,625 $2,876,087 $2,770,932
Earnings per common share As reported $ 1.57 $ 1.49 $ 1.36
Pro forma $ 1.51 $ 1.37 $ 1.36
Earnings per common share, As reported $ 1.56 $ 1.47 $ 1.33
assuming dilution Pro forma $ 1.50 $ 1.36 $ 1.33
Under the 1996 plan, an amount equal to 10% of the issued and outstanding
common stock of the Company was reserved for future issuance. As of December 31,
1999 all such options have been granted. Under the 1998 plan, the Company may
grant options for up to 208,855 shares. As of December 31, 1999 no such options
have been granted. 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.
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:
1999 1998
-----------------------------
Weighted risk-free interest rate 6.03% 5.80%
Weighted expected life 8 years 8 years
Weighted expected volatility 18.82% 23.74
Weighted expected dividend yield 5.0% per year 4.0% per year
No modifications have been made to the terms of the option agreements.
39
<PAGE>
Notes to Consolidated Financial Statements
NOTE 13. Stock compensation plans: (continued)
A summary of the status of the Company's fixed stock option plans as of
December 31, 1999, 1998 and 1997 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------------------
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 114,655 $ 16.27 75,435 $10.99 141,760 $ 10.34
Granted 64,450 14.75 60,000 21.00 0 -
Exercised (2,400) 10.125 (20,780) 10.78 (64,525) 9.58
Forfeited (3,500) 21.00 - (1,800) 10.125
------- ------- -------
Outstanding at
end of year 173,205 15.69 114,655 16.27 75,435 10.99
======= ======= =======
Options exercisable
at year-end 173,205 114,655 75,435
Weighted-average
fair value of
options granted
during the year $2.39 $4.82 N/A
</TABLE>
The following table summarizes information about fixed stock options
outstanding as of December 31, 1999:
Options Outstanding and Exercisable
-----------------------------------------------------------
Number
Outstanding Remaining
Exercise Prices as of 12/31/99 Contractual Life
--------------- -------------- ----------------
$9.00 8,855 5 years
10.125 17,400 6 years
12.50 26,000 7 years
14.75 64,450 9.5 years
21.00 56,500 8 years
-------
$15.69 173,205 8 years
=======
40
<PAGE>
Notes to Consolidated Financial Statements
NOTE 14. 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>
1999 1998
-----------------------
<S> <C> <C>
Change in projected benefit obligation:
Benefit obligation at beginning of year $1,982,136 $1,636,696
Service cost 153,261 148,182
Interest cost 149,478 124,942
Actuarial loss - 253,262
Benefits paid (118,987) (180,946)
-----------------------
Benefit obligation at end of year 2,165,888 1,982,136
-----------------------
Change in plan assets:
Plan assets at estimated fair value at beginning of year 2,075,818 1,852,640
Actual return on plan assets 240,344 179,212
Employer contribution 222,478 224,912
Benefits paid (118,987) (180,946)
-----------------------
Fair value of plan assets at end of year 2,419,653 2,075,818
-----------------------
Funded status 253,765 93,682
Unrecognized net actuarial loss 300,144 424,948
Unrecognized prior service cost (24,579) (27,272)
---------- ----------
Prepaid benefit cost included in other assets $ 529,330 $ 491,358
========== ==========
</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 1999, 7% and 4% for 1998, and 7%
and 3% for 1997, respectively. The weighted-average expected long-term rate of
return on assets was 7% for 1999, 1998 and 1997.
Components of net periodic benefit cost:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------
<S> <C> <C> <C>
Service cost $ 153,261 $ 148,182 $ 91,465
Interest cost on benefit obligation 149,478 124,942 112,553
Expected return on assets (152,735) (135,624) (115,361)
Amortization of prior service cost (2,693) (2,693) (2,693)
Recognized net actuarial cost 37,194 24,083 25,485
----------------------------------
Net periodic benefit cost $ 184,505 $ 158,890 $ 111,449
==================================
</TABLE>
The amounts and types of securities of the Company included in plan assets
as of December 31, 1999 and 1998 consist of 7,500 shares of New Hampshire Thrift
Bancshares, Inc.
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 1999, 1998 and 1997, participating employees' contributions totaled
$192,922, $170,048 and $139,992, respectively. The Bank made a matching
contribution of $10,000 for 1999, $10,000 for 1998 and $14,000 for 1997. 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.
41
<PAGE>
Notes to Consolidated Financial Statements
NOTE 15. 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, 1999, the Company had entered into commitments to fund loans totaling
$15,075,047.
The following is a schedule, by interest rate, of loan commitments
outstanding as of December 31:
1999 1998
------------------------
5.00% - 5.99% $ 69,000 $ 118,500
6.00% - 6.99% 4,007,522 7,930,600
7.00% - 7.99% 3,425,950 3,459,200
8.00% - 8.99% 5,897,575 662,400
9.00% - 9.99% 1,675,000 -
10.00% - 10.99% - 65,000
------------------------
$15,075,047 $12,235,700
========================
As of December 31, 1999, the Company was obligated under non-cancelable
operating leases for bank premises expiring between 2000 and 2012. The total
minimum rental due in future periods under these existing agreements is as
follows as of December 31, 1999:
2000 $ 189,378
2001 175,974
2002 170,024
2003 168,690
2004 159,657
Years thereafter 289,399
----------
Total minimum lease payments $1,153,122
==========
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 $191,048, $141,456
and $96,481 for the years ended December 31, 1999, 1998 and 1997, respectively.
NOTE 16. 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, 1999.
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.
42
<PAGE>
Notes to Consolidated Financial Statements
NOTE 16. Shareholders' equity: (continued)
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, 1999 includes $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%.
NOTE 17. 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, 1999
Basic EPS
Net income and income available to common stockholders $3,308,844 2,106,685 $1.57
Effect of dilutive securities, options 8,327
--------------------------
Diluted EPS
Income available to common stockholders and assumed
conversions $3,308,844 2,115,012 $1.56
==========================
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
==========================
</TABLE>
NOTE 18. 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.
43
<PAGE>
Notes to Consolidated Financial Statements
NOTE 18. Regulatory matters: (continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total risk-based capital and Tier 1 capital to risk-weighted assets
(as defined in the regulations), Tier 1 capital to adjusted total assets (as
defined) and tangible capital to adjusted total assets (as defined).
Management believes, as of December 31, 1999, that the Bank meets all
capital requirements to which it is subject.
As of December 31, 1999, 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, 1999:
Total Capital (to Risk Weighted Assets) $32,794 11.59% $22,658 *8.0% $28,322 *10.0%
Core Capital (to Adjusted Tangible Assets) 30,357 6.74 17,984 *4.0 22,480 *5.0
Tangible Capital (to Tangible Assets) 30,357 6.74 6,744 *1.5 N/A N/A
Tier 1 Capital (to Risk Weighted Assets) 30,357 10.72 N/A N/A 16,993 *6.0
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
</TABLE>
* - Greater than or equal to
44
<PAGE>
Notes to Consolidated Financial Statements
NOTE 19. Fair value of financial instruments:
The estimated fair values of the Company's financial instruments, all of
which are held or issued for purposes other than trading, were as follows as of
December 31:
<TABLE>
<CAPTION>
1999 1998
-------------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 22,558,929 $ 22,558,929 $ 16,284,558 $ 16,284,558
Securities available-for-sale 47,540,736 47,540,736 52,137,753 52,137,753
Securities held-to-maturity 10,006,952 9,625,616 - -
Other investments 2,032,999 2,032,999 2,032,999 2,032,999
Loans 346,491,828 346,250,000 232,321,171 235,730,000
Loans held-for-sale - - 3,775,802 3,775,802
Accrued interest receivable 2,450,268 2,450,268 1,725,235 1,725,235
Financial liabilities:
Deposits 366,638,089 366,836,000 282,049,156 282,444,182
Securities sold under agreements to
repurchase 14,038,117 14,038,117 11,849,116 11,849,116
Federal Home Loan Bank Ideal Way advances 12,440,000 12,440,000 - -
Federal Home Loan Bank advances,
short term 22,000,000 21,988,000 - -
Guaranteed preferred beneficial interests
in junior subordinated debentures 16,400,000 15,995,000 - -
</TABLE>
The carrying amounts of financial instruments shown in the above table are
included in the consolidated statements of financial condition under the
indicated captions.
The Company has no derivative financial instruments subject to the
provisions of SFAS No. 119 "Disclosure About Derivative Financial Instruments
and Fair Value of Financial Instruments." Accounting policies related to
financial instruments are described in Note 1.
45
<PAGE>
Notes to Consolidated Financial Statements
NOTE 20. 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>
1999 1998
----------------------------------
<S> <C> <C>
ASSETS
Cash in Lake Sunapee Bank $ 1,305,104 $ -
Investment in subsidiary, Lake Sunapee Bank 42,127,287 26,932,719
Investment in subsidiary, NHTB Capital Trust I 507,300 -
Deferred expenses 901,683 -
Advances to Lake Sunapee Bank - 848,778
----------------------------------
Total assets $ 44,841,374 $ 27,781,497
==================================
OTHER LIABILITIES
Due to Lake Sunapee Bank $ 688,433 $ -
Guaranteed preferred beneficial interest in junior subordinated debentures 16,907,300 -
Other liabilities 2,494 1,891
----------------------------------
Total liabilities 17,598,227 1,891
----------------------------------
SHAREHOLDERS' EQUITY 27,243,147 27,779,606
----------------------------------
Total liabilities and shareholders' equity $ 44,841,374 $ 27,781,497
==================================
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiary, Lake Sunapee Bank $ 1,000,000 $ 500,000 $ 3,000,000
Interest expense on NHTB Capital Trust I Capital Securities 593,248 - -
Operating income (expenses) including tax benefit 180,875 (12,377) (4,380)
------------------------------------------------------
Income before equity in earnings of subsidiaries 587,627 487,623 2,995,620
Equity in undistributed earnings (loss) of subsidiaries 2,721,217 2,631,127 (224,688)
------------------------------------------------------
Net income $ 3,308,844 $ 3,118,750 $ 2,770,932
======================================================
</TABLE>
46
<PAGE>
Notes to Consolidated Financial Statements
NOTE 20. Condensed parent company financial statements: (continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,308,844 $ 3,118,750 $ 2,770,932
Increase in taxes payable 601 1,891 -
Amortization of deferred expenses relating to issuance
of NHTB Capital Trust I capital securities 5,027 - -
Equity in undistributed (earnings) loss of subsidiaries (2,721,217) (2,631,127) 224,688
----------------------------------------------------
Net cash provided by operating activities 593,255 489,514 2,995,620
----------------------------------------------------
Cash flows from investing activities:
Additional investment in subsidiary, Lake Sunapee Bank (15,000,000) - (81,547)
Investment in NHTB Capital Trust I (507,300)
Net change in advances to subsidiary, Lake Sunapee Bank 848,778 643,535 (96,278)
----------------------------------------------------
Net cash provided by (used in) investing activities (14,658,522) 643,535 (177,825)
----------------------------------------------------
Cash flows from financing activities:
Net change in payable to subsidiary, Lake Sunapee Bank 692,682 - -
Proceeds from exercise of stock options 24,300 197,941 699,553
Dividends paid (1,347,201) (1,257,015) (987,032)
Proceeds from issuance of capital securities, less deferred
expenses of $906,710 16,000,590 - -
Acquisition of Landmark Bank - - (2,275,000)
Repurchase of treasury stock - (73,975) (255,316)
----------------------------------------------------
Net cash provided by (used in) financing activities 15,370,371 (1,133,049) (2,817,795)
----------------------------------------------------
Net increases in cash 1,305,104 - -
Cash, beginning of year - - -
----------------------------------------------------
Cash, end of year $ 1,305,104 $ - $ -
====================================================
</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, 1999, 1998 and 1997, and therefore are not reprinted here.
47
<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, 1999
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
incorporation or organization) No.)
9 Main Street, PO Box 9
Newport, New Hampshire 03773-0009
(Address)
Registrant's telephone number, including area code: (603) 863-0886
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _______
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
-----
The issuer's revenues for its most recent fiscal year were $27,247,130.
The aggregate market value of the voting stock held by non-affiliates of the
registrant is between $24,701,644 and $23,290,121 based on a $13.125 average bid
and a $12.375 average asked price, respectively, as of December 31, 1999.
Number of shares of Common Stock Outstanding as of February 15, 1999 were
2,106,685
Transitional Small Business Disclosure Format. Yes _____ No X
-----
48
<PAGE>
New Hampshire Thrift Bancshares, Inc.
INDEX
<TABLE>
<CAPTION>
PART I
<S> <C> <C>
Item 1. Business............................................................................ 50
Item 2. Properties.......................................................................... 62
Item 3. Legal Proceedings................................................................... 62
Item 4. Submission of Matters to a Vote of Security Holders................................. 62
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters............ 63
Item 6. Management's Discussion and Analysis of Financial Condition
and Operating Results............................................................... 63
Item 7. Financial Statements and Supplementary Information
Report of Independent Auditors...................................................... 63
Consolidated Statements of Financial Condition...................................... 63
Consolidated Statements of Income................................................... 63
Consolidated Statements of Changes in Shareholders' Equity.......................... 63
Consolidated Statements of Cash Flows............................................... 63
Notes to Consolidated Financial Statements.......................................... 63
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................................ 63
PART III
Item 9. Directors and Executive Officers of the Registrant.................................. 63
Item 10. Executive Compensation.............................................................. 64
Item 11. Security Ownership of Certain Beneficial Owners and Management...................... 64
Item 12. Certain Relationships and Related Transactions...................................... 64
Item 13. Exhibits, Lists and Reports on Form 8-K
Exhibits............................................................................ 64
Reports on Form 8-K................................................................. 65
Signatures.......................................................................... 66
</TABLE>
49
<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, Newbury, New London,
Bradford, Grantham, Guild, Lebanon, West Lebanon, Hillsboro, and Andover, New
Hampshire. The Bank had assets of approximately $461 million as of December 31,
1999.
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 $350,117,816 at December 31, 1999,
representing approximately 76% of total assets. As of December 31, 1999,
approximately 75% of the mortgage loan portfolio had adjustable rates. As of
December 31, 1999, the Bank had sold $154,283,783 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
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terms agreeable to the Bank. The Bank's management believes that due to
prepayments in connection with refinancing and sales of property, the average
length of the Bank's long-term residential loans is approximately nine years.
Since the middle of the 1960's, the terms of conventional residential
mortgage loans granted by the Bank have contained a "due-on-sale" clause which
permits the Bank to accelerate the indebtedness of a loan upon the sale or other
disposition of the mortgaged property. Due-on-sale clauses are an important
means of increasing the turnover of mortgage loans in the Bank's portfolio.
CONSUMER LOANS. The Bank makes various types of secured and unsecured
consumer loans, including home improvement loans. The Bank offers loans secured
by automobiles, boats and other recreational vehicles. The Bank believes that
the shorter terms and the normally higher interest rates available on various
types of consumer loans is helpful in maintaining a more profitable spread
between the Bank's average loan yield and its cost of funds.
COMMERCIAL LOANS. The Bank offers commercial loans in accordance with
regulatory requirements. Under current regulation the bank is limited to 20% of
total assets. The Bank currently has approximately 9.00% 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.
SUBSIDIARY ACTIVITIES
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, 1999, 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.
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NHTB Capital Trust I
NHTB Capital Trust I (the "Trust") is a statutory business trust formed
under the laws of the State of Delaware and a wholly owned subsidiary of the
Company. On August 5, 1999, the Trust issued $16.4 million of 9.25% capital
securities. See Note 2 of Notes to Consolidated Financial Statements.
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.
The Bank has four outside originators who 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.
Financial Services Modernization Legislation
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Financial Services Modernization Act of 1999 (the GLBA), federal
legislation intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers. Generally, the GLBA:
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(1) repeals the historical restrictions and eliminates many federal
and state law barriers to affiliations among banks, securities
firms, insurance companies and other financial service providers;
(2) provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding
companies;
(3) broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies and their
financial subsidiaries;
(4) provides an enhanced framework for protecting the privacy of
consumer information;
(5) adopts a number of provisions related to the capitalization,
membership, corporate governance and other measures designed to
modernize the Federal Home Loan Bank system;
(6) modifies the laws governing the implementation of the Community
Reinvestment Act; and
(7) addresses a variety of other legal and regulatory issues
affecting both day-to-day operations and long-term activities of
financial institutions.
The GLBA also restricts the powers of new unitary savings and loan
association holding companies. Unitary savings and loan holding companies that
are "grandfathered," i.e., unitary savings and loan holding companies in
existence or with applications filed with the OTS on or before May 4, 1999, such
as the Company, retain their authority under the prior law. All other unitary
savings and loan holding companies are limited to financially related activities
permissible for bank holding companies, as defined under the GLBA. The GLBA also
prohibits non-financial companies from acquiring grandfathered unitary savings
and loan association holding companies.
The GLBA also requires financial institutions to disclose, on ATM machines,
any non-customer fees and to disclose to their customers upon the issuance of an
ATM card any fees that may be imposed by the institutions on ATM users. For
older ATMs, financial institutions will have until December 31, 2004 to provide
such notices.
The OTS has recently proposed regulations implementing the privacy
protection provisions of the GLBA. The proposed regulations would require each
financial institution to adopt procedures to protect customers' and consumers'
"nonpublic personal information" by November 13, 2000. We would be required to
disclose our privacy policy, including identifying with whom we share "nonpublic
personal information," to customers at the time of establishing the customer
relationship and annually thereafter. In addition, we would be required to
provide our customers with the ability to "opt-out" of having us share their
personal information with unaffiliated third parties. The Company currently has
a privacy protection policy in place and intends to review and amend that
policy, if necessary, for compliance with the regulations when they are adopted
in final form. The GLBA also provides for the ability of each state to en
legislation that is more protective of consumers' personal information.
The Company believes that the GLBA will not have a material adverse effect
on our operations in the near-term. However, to the extent that it permits
banks, securities firms and insurance companies to affiliate, the financial
services industry may experience further consolidation. This could result in a
growing number of larger financial institutions that offer a wider variety of
financial services than we currently offer and that can aggressively compete in
the markets the Bank currently serves.
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
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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.
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, 1999, the Bank's
regulatory limit on loans to one borrower was approximately $6.3 million. At
December 31, 1999, the Bank's largest aggregate amount of loans to one borrower
was $3,476,979, and the second largest borrower had an aggregate balance of
$3,281,553. 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, 1999, the Bank maintained 74.87% 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 4%
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
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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" 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 1999,
the Bank paid the semiannual assessment of $35,277.
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
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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 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
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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, 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
57
<PAGE>
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.
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
58
<PAGE>
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).
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications, or
combinations of capital groups and supervisory subgroups, to which different
assessment rates are applied. Assessment rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed. A bank's rate of deposit insurance assessments will depend
upon the category and subcategory to which the bank is assigned by the FDIC.
Any increase in insurance assessments could have an adverse effect on the
earnings of insured institutions, including the Bank.
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. Beginning on January 1, 1999, the rate of assessments for
the payment of interest on the FICO bonds was approximately 1.2 basis points for
BIF assessable deposits and approximately 6.1 basis points for SAIF-assessable
deposits.
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
59
<PAGE>
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.
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, 1999, 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 $126,711, $122,911, and $119,109 during the
years ended December 31, 1999, 1998, and 1997, 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.
Federal Home Loan Bank System Modernization Act of 1999. Title 6 of the
GLBA, entitled the Federal Home Loan Bank System Modernization Act of 1999 (FHLB
Modernization Act), has amended the FHLB Act by allowing for voluntary
membership and modernizing the capital structure and governance of the FHLB
system. The new capital structure established under the FHLB Modernization Act
sets forth new leverage and risk-based capital requirements based on permanence
of capital. It also requires some minimum investment in FHLB stock of all member
entities. Capital will include retained earnings and two forms of stock: Class A
stock redeemable within six months, written notice and Class B stock redeemable
within five years, written notice. The FHLB Modernization Act provides a
transition period to the new capital regime, which will not be effective until
the FHLB enacts implementing regulations. The FHLB Modernization Act also
reduces the period of time in which a member exiting the FHLB system must stay
out of the system.
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, 1999 was 5.23%, which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
Year 2000
Based on a review of the Bank's and the Company's business since January 1,
2000, the Company has not experienced any material effects of the Year 2000
problem. Although the Company has not been informed of any material risks
associated with the Year 2000 problem from third parties, there can be no
assurance that the Company will not be impacted in the future. The Company will
continuously monitor its business applications and maintain contact with its
third party vendors and key business partners to resolve any Year 2000 problems
that may arise in the future.
60
<PAGE>
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 8.00% 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 0.50%. 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 1999, the tax amounted to
$17,955.
At December 31, 1999, LSB had a total of 157 full-time employees and 32
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.
61
<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, 1999:
<TABLE>
<CAPTION>
Year Net Book Value Expiration Lease Renewal
-----------------------
Location Opened Leased Owned Date of Lease Option
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
9 Main Street
Newport, NH 1868 $ 1,400,109
565 Route 11
Sunapee, NH 1965 $ 77,790
115 East Main Street
Bradford, NH 1975 $ 73,949
300 Sunapee Street
Guild, NH 1978 $ 96,076
165 Route 10 South
Grantham, NH 1980 $ 301,385
24 Newport Road
New London, NH 1981 $ 520,622
200 Heater Road
Lebanon, NH 1986 $ 556,133
106 Hanover Street
Lebanon, NH 1997 $ 2,095,038
150 Main Street
New London, NH 1999 $ 668,019
720 Main Street /(1)/
Andover, NH 1987 $ 31,448 -
15 Antrim Road /(1)/
Hillsboro, NH 1994 $ 163,286 2000 4 Years
83 Main Street /(1)/
West Lebanon, NH 1994 $ 121,279 2004 10 Years
12 Centerra Pkwy. /(1)/
Lebanon, NH 1997 $ 175,455 2007 5 Years
6 Lawrence Street /(1)/
Andover, NH 1999 $ 46,156 2002 5 Years
Route 103 /(1)/
Newbury, NH 1999 $ -- 2001 3 Years
</TABLE>
/(1)/ Operating lease, value of improvements.
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.
62
<PAGE>
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>
1999 First Quarter $ 17.500 $ 13.563
Second Quarter 15.000 13.500
Third Quarter 15.750 12.000
Fourth Quarter 14.000 11.938
1998 First Quarter $ 20.500 $ 17.000
Second Quarter 22.000 17.500
Third Quarter 18.750 12.875
Fourth Quarter 19.000 12.000
</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, 1999, New Hampshire Thrift Bancshares, Inc. had
approximately 713 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>
1999 1998
------------------
<S> <C> <C>
First Quarter $ .16 $ .15
Second Quarter .16 .15
Third Quarter .16 .15
Fourth Quarter .16 .15
</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.
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 6, 2000, which proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the close of the fiscal year.
63
<PAGE>
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 6, 2000, 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 6, 2000, 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 6, 2000, 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"))
Acquisition Agreement, dated April 12, 1999, by and among
Sun Life Assurance Company of Canada (U.S.); New London
Trust, FSB, a federally-chartered savings bank in stock
form; PM Trust Holding Company, a Connecticut corporation;
Cargill Bank, a state-chartered savings and loan
association; Mascoma Savings Bank, a federally-chartered
savings bank and Lake Sunapee Bank, fsb. (previously filed
as an Exhibit to the Company's March 31, 1999 Form 10-QSB
filed on May 14, 1999).
Purchases and Assumption Agreement, dated April 12, 1999,
among PM Trust Holding Company, a Connecticut corporation;
PM Trust Holding Company, a Connecticut corporation; Cargill
Bank, a state-chartered savings and loan association;
Mascoma Savings Bank, a federally-chartered savings bank and
Lake Sunapee Bank, fsb. (previously filed as an Exhibit to
the Company's March 31, 1999 Form 10-QSB filed on May 14,
1999).
Asset and Liability Allocation Agreement, dated April 12,
1999, by and among Cargill Bank, a state-chartered savings
and loan association; Mascoma Savings Bank, a federally-
chartered savings bank and Lake Sunapee Bank, fsb.
(previously filed as an Exhibit to the Company's March 31,
1999 Form 10-QSB filed on May 14, 1999).
64
<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 (previously filed).
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 2000 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.
A Report of Form 8-K was filed on April 27, 1999, reporting the signing of
an agreement for Lake Sunapee Bank to acquire three branch offices of New
London Trust Company.
A Report of Form 8-K was filed on January 14, 2000, reporting the
consummation of Lake Sunapee Bank acquiring three branch offices of New
London Trust Company.
65
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
New Hampshire Thrift Bancshares, Inc.
<TABLE>
<S> <C> <C>
By: /s/ John J. Kiernan Chairman of the Board March 3, 2000
-------------------
(John J. Kiernan)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ John J. Kiernan Chairman of the Board March 3, 2000
-------------------
(John J. Kierman)
/s/ Stephen W. Ensign Vice Chairman of the Board, March 3, 2000
---------------------
(Stephen W. Ensign) President and Chief Executive Officer
/s/ Stephen R. Theroux Director, Executive Vice President March 3, 2000
----------------------
(Stephen R. Theroux) and Chief Operating Officer
/s/ Leonard R. Cashman Director March 3, 2000
----------------------
(Leonard R. Cashman)
/s/ Ralph B. Fifield, Jr. Director March 3, 2000
------------------------
(Ralph B. Fifield, Jr.)
/s/ John A. Kelley, Jr. Director March 3, 2000
----------------------
(John A. Kelley, Jr.)
/s/ Peter R. Lovely Director March 3, 2000
-------------------
(Peter R. Lovely)
/s/ Dennis A. Morrow Director March 3, 2000
--------------------
(Dennis A. Morrow)
/s/ Jack H. Nelson Director March 3, 2000
------------------
(Jack H. Nelson)
/s/ Priscilla W. Ohler Director March 3, 2000
---------------------
(Priscilla W. Ohler)
/s/ Kenneth D. Weed Director March 3, 2000
-------------------
(Kenneth D. Weed)
/s/ Joseph B. Willey Director March 3, 2000
--------------------
(Joseph B. Willey)
/s/ Daryl J. Cady Senior Vice President and March 3, 2000
-----------------
(Daryl J. Cady) Chief Financial Officer
(Principal Accounting Officer)
</TABLE>
66
<PAGE>
- --------------------------------------------------------------------------------
New Hampshire Thrift Bancshares, Inc.
Directors
- ---------
John J. Kiernan, Chairman
Stephen W. Ensign, Vice Chairman
Stephen R. Theroux
Leonard R. Cashman
Ralph B. Fifield, Jr.
John A. Kelley, Jr.
Peter R. Lovely
Dennis A. Morrow
Jack H. Nelson
Priscilla W. Ohler
Kenneth D. Weed
Joseph B. Willey
Officers
- ---------
John J. Kiernan
Chairman of the Board
Stephen W. Ensign
Vice Chairman of the Board,
President and Chief Executive
Officer
Stephen R. Theroux
Executive Vice President and
Chief Operating Officer
Daryl J. Cady, CPA
Senior Vice President and
Chief Financial Officer
Linda L. Oldham
Senior Vice President and
Corporate Secretary
Sandra M. Blackington
Assistant Corporate Secretary
- --------------------------------------------------------------------------------
Lake Sunapee Bank, fsb
Directors
- ---------
John J. Kiernan, Chairman
Stephen W. Ensign, Vice Chairman
Stephen R. Theroux
Leonard R. Cashman
Ralph B. Fifield, Jr.
John E. Johannessen
John A. Kelley, Jr.
Peter R. Lovely
Dennis A. Morrow
Jack H. Nelson
Priscilla W. Ohler
Kenneth D. Weed
Joseph B. Willey
Executive Officers
- ------------------
John J. Kiernan
Chairman of the Board
Stephen W. Ensign
Vice Chairman of the Board,
President and Chief Executive
Officer
Stephen R. Theroux
Executive Vice President and
Chief Operating Officer
Sandra M. Blackington
Assistant Secretary
Senior Vice Presidents
- ----------------------
Daryl J. Cady, CPA
Chief Financial Officer
W. Grant MacEwan
Commercial Lending
William J. McIver
Retail Banking
Robert C. O'Brien
Loan Origination
Linda L. Oldham
Shareholder Services
Vice Presidents
- ---------------
Douglas S. Baxter
Marketing
Richard G. Biron
Branch Administration
Colin S. Campbell
Commercial Lending
H. Bliss Dayton
Compliance and Internal Audit
Dana C. Favor
Loan Review
Scott W. Laughinghouse
Commercial Lending
Theodore M. Thompson
Commercial Lending
Sharon L. Whitaker
Mortgage Lending
Assistant Vice Presidents
- -------------------------
Erik C. Cinquemani
Commercial Lending
Frances E. Clow
Human Resources
Teresa M. Currier
Retail Manager
Stephen B. Ellis
Loan Origination
Gail A. Fraser
Deposit Operations
Peter N. Jennings
Loan Origination
Suzanne Johnson
Loan Servicing
Sandra J. Luckury
Information Technology
Arthur W. Phillips
Loan Review
Francetta Raymond
Loan Operations
Terri G. Spanos
Retail Manager
67
<PAGE>
- --------------------------------------------------------------------------------
Board of Advisors
Philip D. Allen/(1)/
O. Prunella Anastos
Benjamin K. Barton
Kenneth O. Barton
William S. Berger
George O. Binzel
William A. Bittinger
Paul R. Boucher
James F. Briggs
Robert S. Burgess
Walton W. Chadwick
Earle W. Chandler
F. Read Clarke
Jacqueline C. Cote
Robert J. Cricenti
Richard F. Curtis
Ernest G. Dennis, Jr.
William J. Faccone, Sr.
Gordon B. Flint, Sr.
John W. Flynn, Jr.
John W. Flynn, Sr.
Sam N. Hale
Sheffield J. Halsey
Louise K. Hastings
Douglas J. Homan
Rita M. Hurd
Lisa S. Hustis
Alf E. Jacobson
Robert B. Jennings
Michael D. Johnson
Edward T. Kerrigan
John J. Kiernan, Jr.
Victor W. Laro
Paul J. Linehan
Robert MacNeil
Elizabeth W. Maiola
Raymond A. Manning
John J. Marcotte
Jerry N. Mathis
Thomas F. McCormick
J. David McCrillis
John C. McCrillis
F. Graham McSwiney
Paul Olsen
Daniel P. O'Neill
Betty H. Ramspott
David N. Reney
Everett R. Reney
Genelle M. Richards
J. Barrie Sellers
Edwin G. Sielewicz
Fredric M. Smith
Herbert N. Smith
Fred F. Stockwell
Earl F. Strout
James R. Therrien
Janis H. Wallace
James P. Wheeler
Bradford C. White
John W. Wiggins, Sr.
Thomas B. Woodger
Michael J. Work
/(1)/Honorary
- --------------------------------------------------------------------------------
Shareholder Information
Corporate Headquarters
New Hampshire Thrift Bancshares, Inc.
9 Main Street
PO Box 9
Newport, NH 03773-0009
Tel: 1-603-863-0886
Fax: 1-603-863-9571
Transfer Agent
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
Tel: Domestic Holders 1-800-851-9677
Tel: Foreign Holders 1-201-329-8660
Tel: Hearing Impaired 1-800-231-5469
Website: www.chasemellon.com
Independent Auditors
Shatswell, MacLeod & Company, P.C.
83 Pine Street
West Peabody, MA 01960-3635
- --------------------------------------------------------------------------------
Information on Common Stock
The common stock is traded over-the-counter and quoted on the NASDAQ National
Market System under the symbol NHTB. There were approximately 713 shareholders
of record on December 31, 1999.
The following table sets forth the Company's high And low prices for the common
stock as reported by NASDAQ for the periods indicated:
<TABLE>
<CAPTION>
1999 High Low
- ------------------------------------------------------------
<S> <C> <C>
First Quarter $ 17.750 $ 13.563
Second Quarter 15.000 13.500
Third Quarter 15.750 12.000
Fourth Quarter 14.000 11.938
</TABLE>
This Annual Report has been written by the Bank's staff.
68
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 22,558,929
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,540,736
<INVESTMENTS-CARRYING> 10,006,952
<INVESTMENTS-MARKET> 9,625,615
<LOANS> 254,964,105
<ALLOWANCE> 4,320,563
<TOTAL-ASSETS> 461,448,330
<DEPOSITS> 366,638,089
<SHORT-TERM> 34,440,000
<LIABILITIES-OTHER> 33,181,639
<LONG-TERM> 0
0
0
<COMMON> 24,798
<OTHER-SE> 27,163,804
<TOTAL-LIABILITIES-AND-EQUITY> 27,188,602
<INTEREST-LOAN> 6,167,242
<INTEREST-INVEST> 1,174,207
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,341,449
<INTEREST-DEPOSIT> 3,017,803
<INTEREST-EXPENSE> 3,736,521
<INTEREST-INCOME-NET> 3,604,928
<LOAN-LOSSES> 30,000
<SECURITIES-GAINS> 110,079
<EXPENSE-OTHER> 2,699,744
<INCOME-PRETAX> 1,404,726
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 874,482
<EPS-BASIC> 0.44
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 7.42
<LOANS-NON> 1,750,305
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,117,068
<CHARGE-OFFS> 369,463
<RECOVERIES> 31,283
<ALLOWANCE-CLOSE> 4,320,563
<ALLOWANCE-DOMESTIC> 4,320,563
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
