FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended June 30, 2003
Commission File Number 0-17859
NEW HAMPSHIRE THRIFT BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
| State of Delaware | 02-0430695 | |
| (State of Incorporation) | (IRS Employer I.D. Number) | |
| 9 Main St., PO Box 9, Newport, NH | 03773 | |
| (Address of principal executive offices) | (Zip Code) | |
603-863-0886
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of each of the issuer’s classes of common stock, $.01 par value per share, as of August 6, 2003, was 1,977,106.
Transitional small business disclosure format: Yes ¨ No x
NEW HAMPSHIRE THRIFT BANCSHARES, INC.
[SHATSWELL, MACLEOD & COMPANY, P.C. LOGO]
The Board of Directors
New Hampshire Thrift Bancshares, Inc.
Newport, New Hampshire
Independent Accountants’ Report
We have reviewed the accompanying condensed consolidated statement of financial condition of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of June 30, 2003 and the related condensed consolidated statements of income and cash flows for the six-month periods ended June 30, 2003 and 2002 and the related condensed consolidated statements of income for the three-month periods ended June 30, 2003 and 2002. These consolidated financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated statement of financial condition as of December 31, 2002, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated January 10, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the condensed consolidated statement of financial condition as of December 31, 2002, is fairly stated, in all material respects, in relation to the consolidated statement of financial condition from which it has been derived.
/s/ SHATSWELL, MacLEOD & COMPANY, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
August 11, 2003
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2003 and December 31, 2002
June 30, 2003 | December 31, 2002 | |||||||
| (Unaudited) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 18,814,514 | $ | 21,364,567 | ||||
Federal Home Loan Bank overnight deposit | 3,116,484 | 32,022,628 | ||||||
Cash and cash equivalents | 21,930,998 | 53,387,195 | ||||||
Securities available-for-sale | 105,658,447 | 80,453,729 | ||||||
Securities held-to-maturity | 3,001,956 | 3,002,767 | ||||||
Federal Home Loan Bank Stock | 2,167,800 | 2,371,400 | ||||||
Loans held-for-sale | 4,751,050 | 5,556,419 | ||||||
Loans receivable, net | 324,345,486 | 317,143,672 | ||||||
Accrued interest receivable | 1,915,369 | 2,243,968 | ||||||
Bank premises and equipment, net | 9,474,761 | 9,385,618 | ||||||
Investments in real estate | 369,345 | 473,722 | ||||||
Real estate owned and property acquired in settlement of loans | 20,668 | 20,668 | ||||||
Goodwill | 12,140,016 | 12,140,016 | ||||||
Investment in partially owned Charter Holding Corp, at equity | 3,110,133 | 3,043,466 | ||||||
Other assets | 6,931,556 | 7,422,283 | ||||||
Total assets | $ | 495,817,585 | $ | 496,644,923 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES | ||||||||
Deposits: | ||||||||
Checking accounts (noninterest-bearing) | $ | 31,284,455 | $ | 29,860,806 | ||||
Savings and interest-bearing checking accounts | 278,765,871 | 283,020,047 | ||||||
Time deposits | 115,747,723 | 116,447,567 | ||||||
Total deposits | 425,798,049 | 429,328,420 | ||||||
Securities sold under agreements to repurchase | 7,853,480 | 8,592,098 | ||||||
Accrued expenses and other liabilities | 9,019,193 | 8,558,409 | ||||||
Total liabilities | 442,670,722 | 446,478,927 | ||||||
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN JUNIOR SUBORDINATED DEBENTURES | 16,400,000 | 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, 2,507,108 shares issued and 1,975,606 shares outstanding at June 30, 2003, and 2,489,958 shares issued and 1,958,924 shares outstanding at December 31, 2002 | 25,071 | 24,899 | ||||||
Paid-in capital | 18,687,342 | 18,402,577 | ||||||
Retained earnings | 22,057,962 | 20,052,439 | ||||||
Accumulated other comprehensive income | 792,602 | 102,195 | ||||||
| 41,562,977 | 38,582,110 | |||||||
Treasury stock, at cost, 531,502 shares as of June 30, 2003 and 531,034 shares as of December 31, 2002 | (4,816,114 | ) | (4,816,114 | ) | ||||
Total shareholders’ equity | 36,746,863 | 33,765,996 | ||||||
Total liabilities and shareholders’ equity | $ | 495,817,585 | $ | 496,644,923 | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
2
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2003 and 2002
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||
Interest income | ||||||||||||
Interest and fees on loans | $ | 4,354,165 | $ | 5,866,936 | $ | 9,029,185 | $ | 11,682,560 | ||||
Interest and dividends on investments | 945,564 | 1,123,290 | 1,589,731 | 2,207,177 | ||||||||
Total interest income | 5,299,729 | 6,990,226 | 10,618,916 | 13,889,737 | ||||||||
Interest expense | ||||||||||||
Interest on deposits | 997,156 | 2,314,566 | 2,229,455 | 4,905,922 | ||||||||
Interest on advances and other borrowed money | 401,338 | 462,248 | 808,636 | 932,274 | ||||||||
Total interest expense | 1,398,494 | 2,776,814 | 3,038,091 | 5,838,196 | ||||||||
Net interest income | 3,901,235 | 4,213,412 | 7,580,825 | 8,051,541 | ||||||||
Provision for loan losses | 24,999 | 30,000 | 49,998 | 60,000 | ||||||||
Net interest income after provision for loan losses | 3,876,236 | 4,183,412 | 7,530,827 | 7,991,541 | ||||||||
Noninterest income | ||||||||||||
Customer service fees | 663,051 | 646,154 | 1,240,505 | 1,163,848 | ||||||||
Net gain on sales of securities | 252,392 | 21,303 | 223,295 | 33,257 | ||||||||
Gain on sales of property acquired in settlement of loans | — | — | — | 17,725 | ||||||||
Net gain on sales of loans originated for sale | 919,837 | 138,405 | 1,671,359 | 657,449 | ||||||||
Rental income | 113,997 | 102,672 | 230,610 | 217,600 | ||||||||
Undistributed gain in CHC | 41,667 | 28,182 | 66,667 | 52,580 | ||||||||
Brokerage service income | 13,714 | 48,348 | 44,816 | 65,063 | ||||||||
Total noninterest income | 2,004,658 | 985,064 | 3,477,252 | 2,207,522 | ||||||||
Noninterest expenses | ||||||||||||
Salaries and employee benefits | 1,386,520 | 1,775,647 | 2,787,700 | 3,621,576 | ||||||||
Occupancy expenses | 543,624 | 600,668 | 1,126,577 | 1,216,467 | ||||||||
Advertising and promotion | 78,728 | 62,169 | 132,432 | 95,882 | ||||||||
Depositors’ insurance | 17,306 | 18,517 | 34,582 | 37,798 | ||||||||
Outside services | 188,582 | 200,427 | 357,249 | 344,479 | ||||||||
Amortization of mortgage servicing rights | 351,318 | 206,266 | 658,217 | 315,836 | ||||||||
Other expenses | 941,458 | 773,703 | 1,598,681 | 1,308,431 | ||||||||
Total noninterest expenses | 3,507,536 | 3,637,397 | 6,695,438 | 6,940,469 | ||||||||
Income before provision for income taxes | 2,373,358 | 1,531,079 | 4,312,641 | 3,258,594 | ||||||||
Provision for income taxes | 899,386 | 526,224 | 1,601,904 | 1,153,307 | ||||||||
Net income | $ | 1,473,972 | $ | 1,004,855 | $ | 2,710,737 | $ | 2,105,287 | ||||
Comprehensive net income | $ | 2,032,791 | $ | 1,405,773 | $ | 3,401,144 | $ | 2,359,494 | ||||
Earnings per common share, basic | $ | 0.75 | $ | 0.52 | $ | 1.38 | $ | 1.08 | ||||
Number of Shares, basic | 1,965,742 | 1,948,824 | 1,965,742 | 1,948,824 | ||||||||
Earnings per common share, assuming dilution | $ | 0.74 | $ | 0.51 | $ | 1.36 | $ | 1.07 | ||||
Number of Shares, assuming dilution | 1,996,762 | 1,962,721 | 1,996,762 | 1,962,721 | ||||||||
Dividends declared per common share | $ | 0.18 | $ | 0.16 | $ | 0.36 | $ | 0.32 | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
3
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)
June 30, 2003 | June 30, 2002 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 2,710,737 | $ | 2,105,287 | ||||
Depreciation and amortization | 370,151 | 634,174 | ||||||
Amortization of mortgage servicing rights | 658,217 | 315,836 | ||||||
Net decrease in loans held-for-sale | 805,369 | 442,756 | ||||||
Net gain on sales of securities | (223,295 | ) | (33,257 | ) | ||||
Provision for loan losses | 49,998 | 60,000 | ||||||
Gain on sales of property acquired in settlement of loans | — | (17,725 | ) | |||||
Increase in accrued interest receivable and other assets | 161,109 | (1,128,656 | ) | |||||
Undistributed gain in CHC | (66,667 | ) | (52,580 | ) | ||||
Change in deferred loan origination fees and cost, net | (2,334 | ) | (49,845 | ) | ||||
Increase (decrease) in accrued expenses and other liabilities | 64,149 | (1,285,859 | ) | |||||
Net cash provided by operating activities | 4,527,434 | 990,131 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Capital expenditures | (354,917 | ) | (329,719 | ) | ||||
Proceeds from sales of property acquired in settlement of loans | — | 64,225 | ||||||
Proceeds from sales of debt securities available-for-sale | 23,236,694 | 3,028,391 | ||||||
Proceeds from maturities of debt securities available-for-sale | 88,650,800 | 5,000,000 | ||||||
Purchases of securities available-for-sale | (135,781,064 | ) | (39,992,940 | ) | ||||
Proceeds from redemption of Federal Home Loan Bank stock | 203,600 | 60,400 | ||||||
Net (increase) decrease in loans to customers | (7,249,478 | ) | 15,612,397 | |||||
Net cash used in investing activities | (31,294,365 | ) | (16,557,246 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net decrease in deposits | (3,530,371 | ) | (8,946,253 | ) | ||||
Net increase (decrease) in repurchase agreements | (738,618 | ) | 2,900,854 | |||||
Dividends paid | (705,214 | ) | (624,111 | ) | ||||
Payments to acquire treasury stock | — | (82,696 | ) | |||||
Proceeds from exercise of stock options | 284,937 | 242,622 | ||||||
Net cash used in financing activities | (4,689,266 | ) | (6,509,584 | ) | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (31,456,197 | ) | (22,076,699 | ) | ||||
CASH AND CASH EQUIVALENTS, beginning of period | 53,387,195 | 56,304,728 | ||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 21,930,998 | $ | 34,228,029 | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
4
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—(continued)
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)
June 30, 2003 | June 30, 2002 | |||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||
Cash paid during the period for: | ||||||
Interest on deposit accounts | $ | 2,255,716 | $ | 5,154,063 | ||
Interest on advances and other borrowed money | 808,636 | 932,274 | ||||
Total interest paid | $ | 3,064,352 | $ | 6,086,337 | ||
Income taxes, net | $ | 782,500 | $ | 680,000 | ||
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: | ||||||
Transfer from real estate owned to loans | — | $ | 53,500 | |||
Transfer from investment in real estate owned to bank premises and equipment | $ | 100,446 | — | |||
The accompanying notes to consolidated financial statements are an integral part of these statements.
5
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
Note A—Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and, accordingly, do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The December 31, 2002 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of the management of New Hampshire Thrift Bancshares, Inc., all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.
Note B—Accounting Policies
The accounting principles followed by New Hampshire Thrift Bancshares, Inc. and Subsidiaries and the methods of applying these principles which materially affect the determination of financial position, results of operations, or changes in financial position are consistent with those used for the year 2002.
The consolidated financial statements of New Hampshire Thrift Bancshares, Inc. include its wholly owned subsidiaries, NHTB Capital Trust I and Lake Sunapee Bank, fsb, and the Bank’s subsidiaries Lake Sunapee Group, Inc., and Lake Sunapee Financial Services Corp. All significant intercompany balances have been eliminated.
Note C—Impact of New Accounting Standards
In June 2001, the FASB issued SFAS No. 141, “Business Combinations”. This statement addresses financial accounting and reporting for business combinations and supercedes APB Opinion No. 16, “Business Combinations”, and SFAS No. 38, “Accounting for Preacquisition Contingencies of Purchased Enterprises”. Under Opinion 16, business combinations were accounted for using one of two methods, the pooling-of-interests method or the purchase method. All business combinations in the scope of SFAS No. 141 are to be accounted for using one method—the purchase method. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001 and to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later.
The adoption of SFAS No. 141 had no immediate effect on the Company’s consolidated financial statements since it had no pending business combinations as of June 30, 2001 or as of the date of the issuance of these condensed consolidated financial statements. If the Company consummates business combinations in the future, any such combinations that would have been accounted for by the pooling-of-interests method under Opinion 16, will be accounted for under the purchase method and the difference in accounting could have a substantial impact on the Company’s consolidated financial statements.
In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”. This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supercedes APB Opinion No. 17, “Intangible Assets”. The initial recognition and measurement provisions of SFAS No. 142 apply to intangible assets which are defined as assets (not including financial assets) that lack physical substance. The term “intangible assets” is used in SFAS No. 142 to refer to intangible assets other than goodwill. The accounting for a recognized intangible asset is based on its useful life. An intangible asset with a finite useful life is amortized; an intangible asset with an indefinite useful life is not amortized. An intangible asset that is subject to amortization shall be reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.
SFAS No. 142 provides that goodwill shall not be amortized. Goodwill is defined as the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. SFAS No. 142
6
further provides that goodwill shall be tested for impairment at a level of reporting referred to as a reporting unit. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.
SFAS No. 142 was effective as follows:
All of the provisions of SFAS No. 142 were applied in fiscal years beginning after December 15, 2001, to all goodwill and intangible assets recognized in the Company’s statement of financial position at the beginning of that fiscal year, regardless of when those previously recognized assets were initially recognized.
The Company had an unidentifiable intangible asset as of December 31, 2001 in the amount of $9,668,456 that arose from the Company’s purchase of certain assets and its assumption of certain liabilities of branch offices of New London Trust, FSB in 1999. The fair value of the liabilities assumed exceeded the fair value of the assets acquired. Through December 31, 2001, this intangible asset was amortized to expense over fifteen years on the straight-line method. This accounting was in accordance with SFAS No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions” and did not change because SFAS No. 142 did not change the essential parts of SFAS No. 72. However, the intangible asset was subject to the impairment review requirements of SFAS No. 121.
On October 10, 2001 the Financial Accounting Standards Board (Board) affirmed that paragraph 5 of FASB Statement No. 72,Accounting for Certain Acquisitions of Banking or Thrift Institutions, applies to all acquisitions of financial institutions (or branches thereof) whether “troubled” or not, in which the fair value of the liabilities assumed exceeds the fair value of tangible and intangible assets acquired. The Board decided to reconsider the guidance in paragraphs 5-7 of Statement 72 as part of its consideration of combinations of mutual enterprises within the scope of the project on combinations of not-for-profit organizations.
The Company’s assets as of December 31, 2001 included goodwill of $2,471,560 recognized in the acquisition of Landmark Bank in 1997. This goodwill was being amortized at the rate of $247,156 per year. Under SFAS No. 142 this amortization was discontinued but is subject to the impairment review requirements of SFAS No. 142.
In October 2002, the FASB issued SFAS No. 147 “Acquisitions of Certain Financial Institutions”, an Amendment of SFAS Nos. 72 and 144 and FASB Interpretation No. 9. SFAS No. 72 “Accounting for Certain Acquisitions of Banking or Thrift Institutions” and FASB Interpretation No. 9 “Applying APB Opinions No. 16 and 17”. When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method” provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, SFAS No. 147 removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with SFAS No. 141 “Business Combinations” and SFAS No. 142 “Goodwill and Other Intangible Assets”. Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of SFAS No. 147. In addition, SFAS No. 147 amends SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires for other long-lived assets that are held and used.
Paragraph 5 of SFAS No. 147, which relates to the application of the purchase method of accounting, is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer –relationship intangible assets were effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 were effective on October 1, 2002, with earlier application permitted.
7
In accordance with paragraph 9 of FASB Statement No. 147, the Company, has reclassified, as of September 30, 2002 its recognized unidentifiable intangible asset related to branch acquisition(s). This asset was reclassified as goodwill (reclassified goodwill). The amount reclassified was $9,668,456, the carrying amount as of January 1, 2002. The reclassified goodwill is being accounted for and reported prospectively as goodwill under SFAS No. 142, with no amortization expense.
In August 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supercedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” but retains the basic recognition and measurement model for assets held for use and held for sale. The provisions of SFAS No. 144 were required to be adopted starting with fiscal years beginning after December 15, 2001. This Statement did not have a material impact on the Company’s consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. This Statement did not have any material impact on the Company’s consolidated financial statements.
In May 2003, FASB issued SFAS No. 150Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. (SFAS No. 150). This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 will require the Company to reclassify on its consolidated balance sheet the line item “Guaranteed preferred beneficial interests in junior subordinated debentures” in the amount of $16,400,000. At present, this line item is presented between the liabilities section and the equity section of the Company’s consolidated balance sheet. SFAS No. 150, which is effective for the Company for the quarter ending September 30, 2003, will require that the line item be reclassified as a liability. FASB expects to require additional disclosures in connection with SFAS No. 150, but the disclosure requirements are not yet finalized.
Note D—Stock-based Compensation
At June 30, 2003, the Company has two stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost has been recognized for its fixed stock option plans. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to all outstanding and unvested awards in each period.
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||
Net income, as reported | $ | 1,473,972 | $ | 1,004,855 | $ | 2,710,737 | $ | 2,105,287 | ||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | 0 | 81,045 | 0 | 162,090 | ||||||||
Pro forma net income | $ | 1,473,972 | $ | 923,810 | $ | 2,710,737 | $ | 1,943,197 | ||||
Earnings per share: | ||||||||||||
Basic—as reported | $ | 0.75 | $ | 0.52 | $ | 1.38 | $ | 1.08 | ||||
Basic—pro forma | $ | 0.75 | $ | 0.48 | $ | 1.38 | $ | 0.99 | ||||
Diluted—as reported | $ | 0.74 | $ | 0.51 | $ | 1.36 | $ | 1.07 | ||||
Diluted—pro forma | $ | 0.74 | $ | 0.47 | $ | 1.36 | $ | 0.97 | ||||
8
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
New Hampshire Thrift Bancshares, Inc. (The Company), a Delaware holding company organized on July 5, 1989, is the parent company of Lake Sunapee Bank, fsb (The Bank), a federally chartered savings bank. The Bank is a member of the Federal Deposit Insurance Corporation (FDIC) and its deposits are insured through the Savings Association Insurance Fund (SAIF). The Bank is regulated by the Office of Thrift Supervision (OTS).
The Company’s profitability is derived primarily from its subsidiary, Lake Sunapee Bank, fsb. The Bank’s earnings in turn are generated from the net income from the yield on its loan and investment portfolios less the cost of its deposit accounts and borrowings. These core revenues are supplemented by gains on sales of loans originated for sale, retail banking service fees, gains on the sale of investment securities, and brokerage fees. The Bank passes its earnings to the Company to the extent allowed by OTS regulations. As of June 30, 2003, the Company had $2,020,768 available, which it plans to use along with its dividends from the Bank to continue its annual dividend payout of $0.72 per share and pay its capital securities’ interest payments.
Forward-looking Statements
The preceding and following discussion may contain certain forward-looking statements, which are based on management’s current expectations regarding economic, legislative, and regulatory issues that may impact the Company’s earnings in future periods. Factors that could cause future results to vary materially from current management expectations include, but are not limited to: general economic conditions, changes in interest rates, deposit flows, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory and technological factors affecting the Company’s operations, pricing, products and services. In particular, these issues may impact management’s estimates used in evaluating market risk and interest rate risk in its GAP and Net Portfolio Value (NPV) tables, loan loss provisions, classification of assets, accounting estimates and other estimates used throughout this discussion. The Company disclaims any obligation to subsequently revise any forward-looking statements, or to reflect the occurrence of anticipated or unanticipated events.
Critical Accounting Policies
The Company considers the following accounting policies to be most critical in their potential effect on its financial position or results of operations:
Allowance for Loan Losses
The allowance for loan losses is established through a charge to the provision for loan losses. Provisions are made to reserve for estimated losses in outstanding loan balances. The allowance for loan losses is a significant estimate and is regularly reviewed by the Company for adequacy by assessing such factors as changes in the mix and volume of the loan portfolio; trends in portfolio credit quality, including delinquency and charge-off rates; and current economic conditions that may affect a borrower’s ability to repay. The Company’s methodology with respect to the assessment of the adequacy of the allowance for loan losses is more fully discussed on pages 12-14 of this report.
9
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Income Taxes
The Company must estimate income tax expense for each period for which a statement of operations is presented. This involves estimating the Company’s actual current tax exposure as well as assessing temporary differences resulting from differing treatment of items, such as timing of the deduction of expenses, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s consolidated balance sheets. The Company must also assess the likelihood that any deferred tax assets will be recovered from future taxable income and to the extent that recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining income tax expense, and deferred tax assets and liabilities. As of June 30, 2003 there were no valuation allowances set aside against any deferred tax assets.
Interest Income Recognition
Interest on loans is included in income as earned based upon interest rates applied to unpaid principal. Interest is not accrued on loans 90 days or more past due. Interest is not accrued on other loans when management believes collection is doubtful. All loans considered impaired are nonaccruing. Interest on non-accruing loans is recognized as payments are received when the ultimate collectibility of interest is no longer considered doubtful. When a loan is placed on nonaccrual status, all interest previously accrued is reversed against current-period interest income.
Capital Securities
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 in 1999. 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 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 that the Trust has funds necessary to make these payments.
The Capital 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 30, 2004 at the liquidation amount plus any accrued but unpaid interest to the redemption date.
Charter Holding Corp.
On October 2, 2000, the Bank and two other New Hampshire banks acquired Charter Holding Corp. (CHC) and Phoenix New England Trust Company (PNET) from Phoenix Home Life Mutual Insurance Company of Hartford, Connecticut. Contemporaneous with the acquisition, CHC and PNET merged under the continuing name of Charter Holding Corp. with assets of approximately $1.7 billion under management. As a result of the acquisitions and merger, at a cost of $3,003,337 each, the Bank and
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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
each of the other two banks own one-third of CHC. Headquartered in Concord, New Hampshire, CHC provides trust and investment services from more than a dozen offices across New Hampshire, as well as one in Norwich, Vermont. The Bank purchased CHC as a means to provide trust and investments services as well as insurance products to the Bank’s customers. By doing so, the Bank anticipates non-interest income to be enhanced. For the six-month and three-month periods ended June 30, 2003, the Bank realized $66,667 and $41,667, respectively, in an undistributed gain. The Bank has entered into an agreement with Charter New England Agency (CNEA), a subsidiary of CHC, which enables the Bank to sell brokerage, securities, and insurance products. For the six-month and three-month periods ended June 30, 2003, the Bank generated commissions in the amount of $44,816 and $13,714, respectively.
Financial Condition and Results of Operations
Comparison of Financial Condition at June 30, 2003 and December 31, 2002
During the first six months of 2003, total assets decreased slightly by $827,338, or .17%, from $496,644,923 to $495,817,585. Cash and cash equivalents decreased $31,456,197 from December 31, 2002, as the bank used Federal Home Loan Bank overnight deposits to invest in various securities held as available-for-sale. Deposits held in the FHLB overnight account decreased $28,906,144 during the first six months of 2003 from $32,022,628 at December 31, 2002 to $3,116,484 at June 30, 2003.
Total net loans (including loans held-for-sale) increased $6,396,445 or 1.98% from $322,700,091 at December 31, 2002 to $329,096,536 at June 30, 2003. During the first six months of 2003, the Bank originated $181.6 million in loans, had pay-offs of $125.9 million, had normal amortization of $13.1 million, and sold $56.5 million of loans into the secondary market. With interest rates remaining near historically low levels, many customers sought fixed rate loans. As the Bank originates fixed rate loans, it sells much of this product into the secondary market, retaining the servicing. Selling fixed rate loans into the secondary market helps protect the Bank against interest rate risk and provides the Bank with fee income. The proceeds from the sale of loans are then available to lend back into the Bank’s market area and to purchase investment securities. At June 30, 2003, the Bank had $280,113,525 in its servicing portfolio. The Bank expects to continue to sell fixed rate loans into the secondary market in order to manage interest rate risk. Market risk exposure during the production cycle is managed through the use of secondary market forward commitments. At June 30, 2003, adjustable rate mortgages comprised approximately 77% of the Bank’s real estate mortgage loan portfolio. This is consistent with prior years.
Gross investment securities excluding Federal Home Loan Bank stock increased $24,116,865, or 28.98%, from $83,223,165 at December 31, 2002 to $107,340,030 (at amortized cost) at June 30, 2003. During the first six months of 2003, the Bank used proceeds of loan sales to purchase $135.8 million in securities and had sales and calls of securities totaling $111.9 million. The Bank’s net unrealized gain on securities available-for-sale net of tax was $102,195 at December 31, 2002. This compares to a net unrealized gain net of tax of $792,602 as of June 30, 2003. The change in the net unrealized gains net of tax of $690,407 reflects a decrease in interest rates and the corresponding rise in investment security market values, as well as, the increased amount of investment securities.
Real estate owned and property acquired in settlement of loans remained unchanged at $20,668. There was no activity in the OREO account during the first six months of 2003.
During the first six months of 2003, deposits decreased by $3,530,371, or .82%, to $425,798,049 from $429,328,420 at December 31, 2002. Non-interest bearing checking accounts increased $1,423,649 or 4.77% from December 31, 2002. Savings and interest-bearing checking accounts decreased $4,254,176, or 1.50%. Time deposits decreased $699,844, or 0.60%. The decrease in deposits during the first six months is consistent with past years due to the seasonality of the Bank’s deposit mix. Several
11
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
municipalities and educational institutions experience cash outflows prior to their July billing cycles, which occur during the Bank’s third quarter.
Securities sold under agreement to repurchase decreased by $738,618 to $7,853,480 from $8,592,098. Repurchase agreements are collateralized by some of the Bank’s government and agency investment securities.
The Bank had no long-term advances from the FHLB at year-end or at June 30, 2003.
Accrued expenses and other liabilities increased $460,784 to $9,019,193 at June 30, 2003 from $8,558,409 at December 31, 2002. Secondary market loan payments held in escrow at June 30, 2003 accounted for the majority of the increase.
Allowance for Loan Losses
The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. Adjustments to the allowance are charged to income through the provision for loan losses. The Bank considers many factors in determining the appropriate amount of the allowance and tests the adequacy at least quarterly by preparing a worksheet applying loss factors to outstanding loans by type. In determining the loss factors, the Bank considers historical losses, peer group comparisons, industry data, market conditions, and qualitative factors that, in management’s judgment, affect the collectibility of the portfolio. No changes were made to the Bank’s procedures with respect to maintaining the valuation allowance for loan loss as a result of any regulatory examinations.
The allowance for loan losses consists of a specific allowance for identified problem loans and a general allowance to absorb losses inherent in the loan portfolio but not specifically identified. The specific allowance incorporates the results of measuring impairment for specifically identified non-homogeneous problem loans in accordance with SFAS No. 114 “Accounting by Creditors for Impairment of a Loan,” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures.” In accordance with SFAS No.’s 114 and 118 the specific allowance reduces the carrying amount of the impaired loans to their estimated fair value. A loan is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the loan’s contractual terms. Measurement of impairment is based on the present value of anticipated future cash flows, fair value of collateral, or the loan’s observable market price. Measurement of impairment does not apply to large groups of smaller balance homogeneous loans such as residential mortgages, home equity loans, or consumer loans. As of June 30, 2003 the Bank had impaired loans with an aggregate outstanding balance of $88,497 with a specific allowance of $13,500. At December 31, 2002 the balance of impaired loans was $105,354 with a specific allowance of $28,313.
The Bank’s commercial loan officers review the financial condition of commercial loan customers on a regular basis and perform visual inspections of facilities and inventories. The Bank also has an internal loan review, audit, and compliance program. Results of the internal loan reviews, audit and compliance reviews are reported directly to the Audit Committee of the Bank’s Board of Directors.
The allowance for loan losses at June 30, 2003 was $3,859,743, compared to $3,875,708 on December 31, 2002. As of June 30, 2003, the allowance included $3,846,243 in general reserves compared to $3,847,395 at year-end 2002. The total allowance represented 1.18% of total loans at June 30, 2003 versus 1.21% at December 31, 2002. The total allowance was 236% of non-performing loans on June 30, 2003 compared to 584% at year-end 2002. During the first six months of 2003, the Bank had net charge-offs of $65,963 compared to $10,414 during the first six months of 2002.
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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The following is a summary of activity in the allowance for loan losses account for the periods indicated:
For the Six Months Ended June 30, 2003 | For the years ended December 31, | |||||||||||||||||||||||
| 2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||||||||||
Balance, beginning of period | $ | 3,875,708 | $ | 4,405,385 | $ | 4,432,854 | $ | 4,320,563 | $ | 3,117,068 | $ | 3,061,451 | ||||||||||||
Charged-off/writedowns of loans | (69,099 | ) | (687,899 | ) | (201,456 | ) | (214,850 | ) | (369,463 | ) | (112,726 | ) | ||||||||||||
Recoveries | 3,136 | 38,222 | 83,987 | 267,141 | 31,284 | 48,176 | ||||||||||||||||||
Balance from Acquisition | — | — | — | — | 1,421,674 | — | ||||||||||||||||||
Provision charged to income | 49,998 | 120,000 | 90,000 | 60,000 | 120,000 | 120,167 | ||||||||||||||||||
Balance, end of period | $ | 3,859,743 | $ | 3,875,708 | $ | 4,405,385 | $ | 4,432,854 | $ | 4,320,563 | $ | 3,117,068 | ||||||||||||
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 June 30, 2003, there were no other loans not included in the tables below or discussed where known information about the possible credit problems of the borrowers caused management to have doubts as to the ability of the borrower to comply with present loan repayment terms, or alternatively to repay the loan through liquidation of collateral with sufficient value, which may result in disclosure of such loans in the future.
Total classified loans were $3,558,898 on June 30, 2003 compared to $3,313,767 at December 31, 2002. In addition to classified loans, classified assets include $20,668 in other real estate owned at June 30, 2003, unchanged from December 31, 2002. Classified loans include non-performing loans and performing loans that have been adversely classified. Non-performing loans consist of impaired loans and loans over 90 days past due. At June 30, 2003 the aggregate balance of impaired loans was $88,497 compared to $105,354 on December 31, 2002. Loans over 90 days past due as of June 30, 2003 and December 31, 2002 were $1,544,830 and $558,738, respectively. At June 30, 2003, loans 30 to 89 days past due were $2,431,945 compared to $4,542,125 at December 31, 2002.
The following table shows the breakdown of non-performing assets and non-performing assets as a percentage of total assets (dollars in thousands):
At June 30, 2003 | At December 31, 2002 | |||||||||||
90 day delinquent loans (1) | $ | 1,545 | 0.31 | % | $ | 559 | 0.11 | % | ||||
Impaired loans (2) | 88 | 0.02 | % | 105 | 0.02 | % | ||||||
Other real estate owned | 21 | 0.00 | % | 21 | 0.00 | % | ||||||
Total non-performing assets | $ | 1,654 | 0.33 | % | $ | 685 | 0.14 | % | ||||
| (1) | All loans 90 days or more delinquent are placed on non-accruing status. |
| (2) | Impaired loans are on non-accruing status. |
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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The following table sets forth the allocation of the loan loss valuation allowance and the percentage of loans in each category to total loans (dollars in thousands):
At June 30, 2003 | At December 31, 2002 | |||||||||||
Real estate loans— | ||||||||||||
Conventional | $ | 2,618 | 79 | % | $ | 2,763 | 80 | % | ||||
Construction | 208 | 4 | % | 207 | 5 | % | ||||||
Collateral and consumer | 153 | 11 | % | 155 | 10 | % | ||||||
Commercial and municipal | 867 | 6 | % | 723 | 5 | % | ||||||
Impaired Loans | 14 | — | 28 | — | ||||||||
Total valuation allowance | $ | 3,860 | $ | 3,876 | ||||||||
Total valuation allowance as a percentage of total loans | 1.18 | % | 1.21 | % | ||||||||
The amount of the valuation allowance for loan loss declined about $16,000 because the amount charged-off in the second quarter of 2003 was more than the provision for loan losses in that same period while recovery of prior period charge-offs was insignificant. Internal adequacy tests showed the level of the allowance to be sufficient as of June 30, 2003. The increase in non-performing loans comes from an increase in loans over 90 days past due. One residential mortgage loan, in particular, accounts for about 75% of the increase. Management believes the collateral value is sufficient to avoid any significant loss with respect to that loan. The balance of impaired loans decreased $17,000 due to repayment of a loan that was impaired at year-end 2002. The specific allowance for the impaired loans decreased because that loan was paid. The specific allowance had increased when a loan was recognized as impaired during the first quarter, but that loan was charged-off in the second quarter and reduced the specific allowance at that time. The changes in the allocation of the valuation allowance reflect aggregate balance shifts and do not indicate concerns over any particular segment of the loan portfolio.
The Bank believes the current allowance for loan losses is at a level sufficient to cover loses inherent in the loan portfolio, given the current level of risk in the loan portfolio. At the same time, the Bank recognizes the determination of future loss potential is inherently uncertain. Future adjustments to the allowance may be necessary if economic, real estate, and other conditions differ substantially from the current operating environment resulting in increased levels of non-performing loans and substantial differences between estimated and actual losses. Adjustments to the allowance are charged to income through the provision for loan losses.
Comparison of the Operating Results for the Six Months and the Three Months Ended June 30, 2003 and June 30, 2002
Net income for the six months ended June 30, 2003 was $2,710,737, or $1.36 per common share (assuming dilution), compared to $2,105,287 or $1.07 per common share (assuming dilution), for the same period in 2002. Net income for the second quarter in 2003 was $1,473,972 or $0.74 per share (assuming dilution), as compared to $1,004,855 or $0.51 per share (assuming dilution), for the same period in 2002, an increase of $605,450, or 28.76%, and $469,117, or 46.68%, respectively.
Net interest income decreased $470,716, or 5.85%, for the first six months of 2003 and $312,177, or 7.41%, during the second quarter compared to the comparable 2002 periods.The decrease was
14
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
primarily due to the low interest rate environment, which generated lower interest rates on re-investments of maturing securities and loans.
Total interest income for the six months ended June 30, 2003 decreased by $3,270,821, or 23.55%, to $10,618,916 from $13,889,737 for the same period in 2002. For the three months ended June 30, 2003, total interest income decreased by $1,690,497, or 24.18%, to $5,299,729 from $6,990,226 for the same period in 2002. Interest and fees on loans decreased $2,653,375, or 22.71%, and $1,512,771, or 25.78%, for the six and three month periods, respectively. As interest rates fell during the second quarter of 2003, many adjustable rate loan customers refinanced into fixed rate loans, which were subsequently sold into the secondary market. As a result, loans held in portfolio, which replaced the sold loans, carried a lower interest rate, which reduced interest income. Loan fees decreased due to the recognition of previously deferred expenses in accordance with FAS 91. During the six and three months periods, fees on loans in the amount of $1,149,486 and $653,556 were expensed, respectively.
Interest and dividends on investment securities decreased $617,446, or 27.97%, from $2,207,177 at June 30, 2002 to $1,589,731 for the same six-month period in 2003. For the second quarter ended June 30, 2003, interest and dividends on investment securities decreased $177,726, or 15.82%, from $1,123,290 in 2002 to $945,564 for the same period in 2003. During the second quarter, the Bank used proceeds from loan sales to increase its investment portfolio by approximately $25 million by investing in mortgage-backed securities. This enabled the Bank to improve its investment income over the first quarter of 2003.
For the six months ended June 30, 2003, total interest expense decreased by $2,800,105, or 47.96%, to $3,038,091 from $5,838,196 for the same period in 2002. For the three months ended June 30, 2003, total interest expense decreased $1,378,320, or 49.64%, to $1,398,494 from $2,776,814 for the same period in 2002. For the six months and three months ended June 30, 2002, interest on deposits decreased $2,676,467, or 54.56%, and $1,317,410, or 56.92%, respectively. The decrease was attributable to the historically low interest rate environment. The Bank’s cost of funds for the six months ended June 30, 2003 was .90% as compared to 2.03% for the same period of 2002.
For the six months ended June 30, 2003, interest on advances and other borrowed money, including the Debentures, decreased $123,638 to $808,636 from $932,274, or 13.26% for the same period in 2002. For the second quarter of 2003, interest on advances and other borrowed money, including the Debentures, decreased by $60,910, or 13.18%, from $462,248 to $401,338. During 2003, the Bank’s borrowing from the FHLB was zero, which accounted for the change.
The provision for loan losses totaled $24,999 for the three months ended June 30, 2003 and $49,998 for the six months ended June 30, 2003. The total allowance for loan losses represented 1.18% of total loans at June 30, 2003 compared to 1.34% at June 30, 2002. The allowance for loan losses was $3,859,743 on June 30, 2003 compared to $4,454,971 on June 30, 2002. The decline is primarily the result of $604,686 in write-downs of non-performing loans during the third quarter of 2002. The allowance was 236% of non-performing loans on June 30, 2003 compared to 217% on June 30, 2002. The improvement comes from the reduction in non-performing assets.
For the six months ended June 30, 2003, total noninterest income increased by $1,269,730, or 57.52%, from $2,207,522 in 2002 to $3,477,252 for the same period in 2003. For the second quarter, total noninterest income increased by $1,019,594, or 103.51% over the comparable 2002 period. The increase in noninterest income in the six-month period was primarily a result of a $1,013,910, or 154.22%, increase in net gains on the sales of loans originated for sale; $190,038, or 571.42%, increase in net gains on sales of securities; and $76,657, or 6.59% in customer service fees. The Bank originated and sold $56.5 million of fixed rate loans into the secondary market, which generated the gains on loans. In
15
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
addition, the Bank sold approximately $25 million in government securities in order to reposition the Bank’s investment portfolio. The proceeds of these sales generated $223,295 in net gains and were re-invested in longer-term mortgage-backed securities in order to increase the yield on the investment portfolio. For the three months ended June 30, 2003, net gains on sales of loans originated for sale increased by $781,432, or 564.60% and net gain on sales of securities increased by $231,089, or 1,084.77%. These increases were due to the reasons mentioned above.
Total noninterest expenses decreased $245,031, or 3.53%, from $6,940,469 to $6,695,438 and $129,861, or 3.57%, from $3,637,397 to $3,507,536, for the six months and three months ended June 30, 2003, respectively,
For the six-month period ended June 30, 2003:
| • | Salaries and employee benefits decreased by $833,876, or 23.03%, compared to the six months ended June 30, 2002. Gross salaries and benefits paid increased $611,690, or 18.39%. This increase was attributed to normal salary adjustments; commission increases associated with the increased origination of loans; as well as, the costs associated with the Bank’s employee incentive program. Increases in the Bank’s Group Health Insurance and Pension plans accounted for the remaining increases. These increases were offset by the deferral of expenses associated with the origination of mortgage loans. |
| • | Amortization of mortgage servicing rights increased in the amount of $342,381, or 108.40% due to the accelerated amortization costs caused by the increased volume of prepayments on mortgage loans. |
| • | Other expenses increased in the amount of $290,250, or 22.19%, due primarily to an increase to the mortgage servicing rights impairment in the amount of $225,000. This impairment charge was the result of the increased volume of prepayments experienced in the Bank’s loan servicing portfolio, which caused a decrease in mortgage servicing rights values. |
For the three-month period ended June 30, 2003:
| • | Salaries and employee benefits decreased by $389,127, or 21.91%, compared to the three months ended June 30, 2002. Gross salaries and benefits paid increased $451,386, or 28.41%. This increase can be attributed to normal salary adjustments; commission increases associated with the increased origination of loans; as well as, the costs associated with the Bank’s employee incentive program. Increases in the Bank’s Group Health Insurance and Pension plans accounted for the remaining increases. These increases were offset by the recognition of deferred expenses associated with the origination of mortgage loans. |
| • | Amortization of mortgage servicing rights increased in the amount of $145,052, or 70.32% due to the accelerated amortization costs caused by the increased volume of prepayments on mortgage loans. |
| • | Other expenses increased in the amount of $167,755, or 21.69%, due primarily to an increase to the mortgage servicing rights impairment of $225,000 taken during the second quarter. This impairment charge was the result of the increased volume of prepayments experienced in the Bank’s loan servicing portfolio, which caused a decrease in mortgage servicing rights values. During this period of low interest rates, the Bank’s loan servicing portfolio remains vulnerable to early pre-payments as customers re-finance to lower, fixed rate mortgage loans. |
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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Interest Rate Sensitivity
The principal objective of the Bank’s interest rate risk 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 Directors’ 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 June 30, 2003, was –14.10%, compared to the December 31, 2002 gap of –6.02%. The Bank continues to hold in portfolio adjustable rate mortgages, which reprice at one, three, and five-year intervals. The Bank sells certain fixed-rate mortgages into the secondary market in order to minimize interest rate risk. The Bank’s gap, of negative 14.10%, at June 30, 2003, means net interest income would increase if interest rates trended downward. The opposite would occur if interest rates were to rise. The Bank’s negative gap has widened during the first six months of 2003 because of the Bank’s purchase of Mortgage Backed Securities (MBS). Although these securities carry up to a fifteen year final maturity, which tends to exacerbate an already negative gap, management feels projected three to five year run-off of these MBS somewhat mitigates any upward movement in interest rates. In an effort to maintain the gap, 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.
The following table sets forth the Bank’s NPV as of March 31, 2003 (the latest NPV analysis prepared by the OTS), as calculated by the OTS. For the current reporting cycle, the OTS has suppressed all model outputs associated with the –300 and – 200 bps scenarios because of the abnormally low prevailing interest rate environment.
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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Change In Rates | Net Portfolio Value | NPV as % of PV Assets | ||||||||||||
| $ Amount | $ Change | % Change | NPV Ratio | Change | ||||||||||
+300 | bp | 56,219 | -11,650 | -17 | % | 11.29 | % | -211 | bp | |||||
+200 | bp | 61,255 | -6,614 | - 10 | % | 12.20 | % | -150 | bp | |||||
+100 | bp | 65,072 | -3,392 | -4 | % | 12.89 | % | -51 | bp | |||||
0 | bp | 67,869 | — | — | 13.40 | % | — | |||||||
-100 | bp | 70,100 | 2,232 | +3 | % | 13.80 | % | +40 | bp | |||||
Liquidity and Capital Resources
The Bank is required to maintain sufficient liquidity for safe and sound operations. 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 June 30, 2003, the Bank had approximately $130,000,000 in additional borrowing capacity from the FHLB.
At June 30, 2003, the Company’s shareholders’ equity totaled $36,746,863, or 7.41% of total assets, compared to $33,765,996 or 6.80% of total assets at year-end 2002. The Company’s Tier I core capital was 7.72% at June 30, 2003 compared to 7.02% at year-end. The increase in shareholders’ equity of $2,980,867 reflects net income of $2,710,737, the payment of $705,214 in common stock dividends, proceeds of $284,937 for the exercise of stock options, and an increase of $690,407 in accumulated other comprehensive income. The change in other comprehensive income reflects a decrease in interest rates during the first six months of 2003 and the corresponding rise in investment security market values.
On February 22, 2001, the Company announced a stock repurchase program. Repurchases will be made from time to time at the discretion of management. The stock repurchase program will continue until the repurchase of 124,000 shares is complete. As of June 30, 2003, 59,500 shares of common stock had been repurchased. During the second quarter of 2003, no shares were repurchased. The Board has determined that a share buyback is appropriate to enhance shareholder value as such repurchases generally increase earnings per share, return on average assets and on average equity, three performing benchmarks against which bank and thrift holding companies are often measured. The Company buys stock in the open market whenever the price of the stock is deemed reasonable and the Company has funds available for the purchase.
As of June 30, 2003, the Company had $2,020,768 in cash available, which it plans to use to continue its annual dividend payout of $.72 per share and pay the interest on its capital securities interest. These payments are approximately $2.9 million per year. Thus, the Company will need to receive dividends from the Bank to fulfill its obligations. The Bank pays dividends to the Company as its sole stockholder within guidelines set forth by the OTS. Since the Bank is well-capitalized and has capital in excess of regulatory requirements, funds will be available to cover the Company’s future dividend, interest, and stock re-purchase needs. The Bank anticipates that it will pay to the Company a dividend during the fourth quarter of 2003.
For the six months ended June 30, 2003, net cash provided by operating activities was $4,527,434 versus $990,131 for the same period in 2002. An increase in accrued expenses and other liabilities in the amount of $1,350,008 resulting from the high volume of prepayments of loans serviced for the secondary market accounted for 40% of the increase. When secondary market mortgage loans prepay, the proceeds are held in escrow awaiting disbursement to Freddie Mac, which results in higher cash balances. Net cash used in investing activities amounted to $31,294,365 for the six months ended June 30, 2003, compared to net cash used in investing activities of $16,557,246 for the same period in 2002, a change of
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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
$14,737,119. The proceeds from the sale and maturities of debt securities available-for-sale were re-invested in other securities available-for-sale and the Bank invested portions of beginning cash balances. A net increase in loans held in portfolio used cash flows of $7,249,478 compared to providing cash flows of $15,612,397 for the same period in 2002. For the six months ended June 30, 2003, net cash flows used in financing activities amounted to $4,689,266 compared to net cash used in financing activities of $6,509,584 for the same period in 2002, a change of $1,820,318. During the six months ended June 30, 2003, the Bank experienced deposit outflows in the amount of $3,530,371, compared to $8,946,253 for the same period in 2002. The decrease in deposits during the first six months is consistent with past years due to the seasonality of the Bank’s deposit mix. Several municipalities and educational institutions experience cash outflows prior to their billing cycles, which occur during the Bank’s third quarter.
The Bank expects to be able to fund loan demand and other investing during 2003 by continuing to use funds provided from customer deposits, loan prepayments, and, if needed, 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.
Banks are required to maintain tangible capital, core leverage capital, and total risk based capital of 1.50%, 4.00%, and 8.00%, respectively. As of June 30, 2003, the Bank’s ratios were 7.72%, 7.72%, and 12.00%, respectively, well in excess of the regulators’ capital requirements.
Book value per share was $18.60 at June 30, 2003, compared to $15.84 per share at June 30, 2002. The increase in paid-in capital, retained earnings, the accumulated other comprehensive income, and an increase in treasury stock accounted for the change in book value per share.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In management’s opinion, there has been no material change in market risk since disclosure in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
CONTROLS AND PROCEDURES
Management, including the Company’s President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting.
19
Part II.
NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
OTHER INFORMATION
There is no material litigation pending to which the Company or its subsidiaries are a party or to which the property of the Company or its subsidiaries are subject.
None
Item 3.Defaults Upon Senior Securities
None
Item 4.Submission of Matters to a Vote of Common Shareholders
None
None
Item 6.Exhibits and Reports on Form 8-K
A.) Exhibits:
| 11.0 | Computation of per share earnings |
| 31.1 | Certification 6 pursuant to Section 302 of the Sarbanes-Oxley Act |
| 32.1 | Certification 6 pursuant to Section 906 of the Sarbanes-Oxley Act |
B.) Reports on Form 8-K:
On July 15, 2003, the Company filed a current report on Form 8-K announcing earnings for the quarter ended June 30, 2003.
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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NEW HAMPSHIRE THRIFT BANCSHARES, INC. | ||||
(Registrant) | ||||
Date: August 13, 2003 | /s/ Stephen W. Ensign | |||
Stephen W. Ensign | ||||
Vice Chairman of the Board, President and Chief Executive Officer | ||||
Date: August 13, 2003 | /s/ Stephen R. Theroux | |||
Stephen R. Theroux | ||||
Executive Vice President, Chief Operating Officer and Chief Financial Officer (Principal Accounting Officer) | ||||
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