New Hampshire Thrift Bancshares, Inc. is the parent company of Lake Sunapee Bank,fsb,a federal stock savings bank providing financial services throughout central and western New Hampshire and central Vermont.
The Bank encourages and supports the personal and professional development of its employees, dedicates itself to consistent service of the highest level for all customers, and recognizes its responsibility to be an active participant in, and advocate for, community growth and prosperity.
Table of Contents
Selected Financial Highlights
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For the Years Ended December 31, | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | |
| | | (In thousands, except per share data) | |
Net Income | | $ | 4,516 | | | $ | 5,040 | | | $ | 5,524 | | | $ | 5,098 | | | $ | 5,771 | |
Per Share Data: | | | | | | | | | | | | | | | | | | | | |
Basic Earnings(1) (2) | | | 0.93 | | | | 1.20 | | | | 1.31 | | | | 1.23 | | | | 1.46 | |
Diluted Earnings(2) | | | 0.92 | | | | 1.17 | | | | 1.29 | | | | 1.20 | | | | 1.42 | |
Dividends Paid(2) | | | 0.52 | | | | 0.52 | | | | 0.50 | | | | 0.45 | | | | 0.36 | |
Dividend Payout Ratio | | | 55.91 | | | | 43.33 | | | | 38.17 | | | | 36.59 | | | | 24.66 | |
Return on Average Assets | | | 0.61 | % | | | 0.75 | % | | | 0.89 | % | | | 0.87 | % | | | 1.15 | % |
Return on Average Equity | | | 7.98 | % | | | 11.04 | % | | | 13.10 | % | | | 12.17 | % | | | 15.83 | % |
| | | | | |
As of December 31, | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | |
| | | (In thousands, except per share data) | |
Total Assets | | $ | 834,230 | | | $ | 672,031 | | | $ | 650,179 | | | $ | 595,514 | | | $ | 526,246 | |
Total Deposits | | | 652,972 | | | | 465,506 | | | | 464,637 | | | | 433,072 | | | | 428,477 | |
Total Securities(3) | | | 94,993 | | | | 99,063 | | | | 119,303 | | | | 123,421 | | | | 126,179 | |
Loans, Net | | | 626,274 | | | | 492,712 | | | | 463,151 | | | | 413,808 | | | | 344,573 | |
Federal Home Loan Bank Advances | | | 63,387 | | | | 120,000 | | | | 100,000 | | | | 75,000 | | | | 22,000 | |
Shareholders’ Equity | | | 72,667 | | | | 48,409 | | | | 46,727 | | | | 43,835 | | | | 39,125 | |
Book Value per Share | | $ | 12.69 | | | $ | 11.58 | | | $ | 11.07 | | | $ | 10.52 | | | $ | 9.74 | |
Average Common Equity to Average Assets | | | 6.77 | % | | | 6.77 | % | | | 6.80 | % | | | 7.15 | % | | | 7.28 | % |
Shares Outstanding | | | 5,726,772 | | | | 4,180,080 | | | | 4,219,980 | | | | 4,167,180 | | | | 4,017,380 | |
Number of Branch Locations | | | 29 | | | | 18 | | | | 17 | | | | 15 | | | | 14 | |
| (1) | See Note 1 to Consolidated Financial Statements regarding earnings per share. |
| (2) | Data presented for years prior to 2004 has been restated for the effect of a two-for-one stock split, in the form of a 100% stock dividend, in February 2005. |
| (3) | Includes available-for-sale securities shown at fair value, held-to-maturity securities at cost and Federal Home Loan Bank stock at cost. |
1
Letter to Shareholders
…the Company has positioned itself to be more broadly diversified than ever before…
Growth by expanding existing customer relationships…Growth from the strategic positioning of our newest branch offices…and…Growth through the acquisition of two Vermont-based financial institutions…all contributed to a year of significant change for New Hampshire Thrift Bancshares. The process of developing comprehensive business plans, whether short-term or long-term, embodies a collective effort that envisions both where it is that a company wants to go and what it is that a company wants to be when it gets there. As we take time to review what has happened with the Company over the last few years, we can quite clearly see that the success of our planning process results just as much from its development and design as it does from its implementation and execution.
With the recent acquisition of both the First Brandon National Bank of Brandon, Vermont and the First Community Bank of Woodstock, Vermont, the Company has positioned itself to be more broadly diversified than ever before. While this first has been geographic diversification, as we now serve several different markets in both New Hampshire and Vermont, it has more importantly diversified the balance sheet of the Company in a way that years of normal growth patterns could not have easily achieved. We have taken a major step forward and, in so doing, have acknowledged and accepted the initial short-term challenges of assimilation, transition and integration.
Consistent with our ‘How can we help you today?’ culture, the Company looks to further advance its position of financial services leadership throughout our marketplace segments as we continue to grow our banking franchise. Despite the very real forecasts of economic uncertainty that will surely compromise business expectations in almost all industry sectors in the coming year, we remain well positioned to address the variety of needs in the expanded markets that we now serve.
COMPANY EARNINGS
The Company reported consolidated net income for the year-ended December 31, 2007 of $4,515,682, or $0.92 per share of common stock (fully diluted). This compares to net income of $5,039,859, or $1.17 per share of common stock (fully diluted) that the Company reported in 2006. Margin compression continued to negatively impact most financial institutions during 2007, along with the ongoing downward slide of the housing market. Additionally, net income for the year was adversely affected by several one-time costs totaling approximately $1,000,000 that were directly associated with the two acquisitions. We also continue to recognize the ongoing expenses of the five newer branches as they move through the early years of growing their profitability levels beyond their initial operating overhead. As a result, non-interest income remains an important complement to the balancing of income over expense. And, recent actions by the Federal Reserve have and will continue to impact financial institutions, at times exacerbating the already delicate prospects of increased earnings during a time of broadening economic weakness. For more in-depth analysis, the complete financial details for the year ending December 31, 2007 can be found in the Management’s Discussion and Analysis section that immediately follows this letter.
SHAREHOLDER VALUE
Despite the current lack of investor interest in the financial services sector, the Company remains focused on developing long-term shareholder value by building on our position of market leadership and expanding our efforts to penetrate new markets. The recent fluctuations in the share price of bank stocks overshadows the real growth that continues to build as a company seeks to increase the book value of our common stock. Our continuing commitment to moving the Company forward is central to our strategic planning for the future and our fundamental goals for growth over time have not been too greatly tainted by the prevailing economic climate.
The Company’s stock price closed out the year 2007 at $12.47 per share, above its low for the year, but well below its 2006 year-end price of $16.00 per share. Shareholder’s equity of $72,667,323 at year-end resulted in a book value of $12.69 per share at December 31, 2007, based upon a total of 5,719,772 shares of common stock outstanding. This represented an increase in book value of $1.11 per share, or 9.59%, from a year earlier. Additionally, the Company continued to maintain its uninterrupted history of quarterly cash dividends.
2
Letter to Shareholders (continued)
Over the course of the year ended December 31, 2007, the Company repurchased a total of 330,867 shares of its common stock The decision to continue to use excess capital in this manner is based on the belief that the Company’s stock remains a good investment and its true value is not currently reflected by its market price. As a result of the buy-back of shares, there were 153,088 remaining for purchase at year-end under the Company’s existing repurchase program. Going forward, the Company will continue to purchase shares from-time-to-time when the market is favorable to our general corporate purposes.
In general, the Company is looking to grow its asset base and market presence for the benefit of greater net earnings, an ever-stronger capital position and real growth in the underlying value for the shareholder. As a company, these simple operating principles of our mission have not changed.
THE ROLE OF COMMUNITY BANKS
As the ripple effect of the sub-prime mortgage crisis begins to filter its way into many more segments of the economy than originally envisioned, it is alarming to think how devastating this all may turn out to be to the universal goal of home ownership and the more general ‘American Dream’ of personal financial independence. Community banks, however, having not participated in the lending practices that brought about this untenable situation, now find themselves more deeply involved than ever as we try to find ways to help good-intentioned people out of what they seem to have gotten themselves into. This, interestingly enough, has always been part of the role we play in broadly addressing the various needs of the communities we serve. While the world of cutting-edge products and services…some good, some bad…swirls around us, we simply continue to do what we have always done. Certainly, we don’t do it the way we have always done it, but the underlying premise and focus of what we do has not changed significantly over the years.
For our Company, now operating in its 140th year, we continue to see growing opportunities for community banking. Competition from a variety of external providers remains an inherent risk to our industry, but the Company is now better positioned to meet the needs of our customers in a way that helps them to distinguish the longer-term difference in the fundamental relationship of ‘value’ over price.
While it can be argued that the longer-term relevance of community banks is ever so slowly diminishing as our more traditional customer base ages, the fact is that we are now seeing a new ‘return-to-safety’ trend emerging as the markets, products, and services to which many people have been attracted begin to erode. The traditional customer contact points of deposits and loans, while still a vital part of our business model, are now being expanded for all ages into the areas of wealth management, investment services and retirement plans, as well as a growing need in the area of health savings accounts as employers begin to share more of the burden of medical coverage to their employees.
Our continuing success as a community bank, then, rests in the development and maintenance of relationships. Changes now come quite quickly within the financial services industry and we are, as stewards of the business, obligated to acknowledge and embrace that which is good, while at the same time weeding-out that which may be not so good, for our customers….for our communities…and for our Company.
…we are, as stewards of the business, obligated to acknowledge and embrace that which is good…
BALANCE SHEET HIGHLIGHTS
Total assets of the Company stood at $834,229,842 at year-end December 31, 2007 as compared to $672,031,030 at year-end 2006. This represents an increase of nearly 25%, which is primarily attributable to the acquisition of First Brandon National Bank and First Community Bank. Total deposits increased significantly during the year, providing more than sufficient liquidity to pay down our advances from the Federal Home Loan Bank from $120,000,000 at year-end 2006 to just over $63,000,000 at December 31, 2007. Growth in assets will continue to be an important factor going forward as we identify more ways to lessen the continuing impact of margin compression.
Total loans held in portfolio increased to $626,274,462 and now represent just over 75% of our total asset base. Even though this is a slight percentage increase over last year, it does represent a true net increase in our earning assets. The mortgage market was generally flat year-over-year from 2006 to 2007, with many borrowers looking to
3
Letter to Shareholders (continued)
refinance and lock-in fixed rate loans that the Company continues to sell on a servicing-retained basis into the secondary market. At year-end December 31, 2007, the Company was servicing just over 2,700 fixed-rate mortgage loans with total outstanding balances of roughly $307,000,000. The Company continues to originate loans in a very conservative manner and has not varied from its traditional policies. In particular, the Company has not and does not originate ‘sub-prime’ mortgage loans.
…sharing in the vision of what the Company has become, and can be going forward, is an important factor in contributing to our future success as a community bank…
Despite the current turmoil in the credit markets, the Company has maintained a clear focus on the inter-dependency between asset quality and capital. Capital was deployed during the year to acquire both of the Vermont-based banks, as well as to repurchase stock of the Company in the open market. These uses were seen as further solidifying the underlying strength of the Company by broadening its market positioning and reducing the number of outstanding shares. At year-end, core capital remained strong at 7.84% and asset quality was very strong, with non-performing loans representing just 0.60% of total assets. Maintaining good asset quality is vital to the longer-term stability and growth of the Company, with the most recent Safety and Soundness Examination by the Office of Thrift Supervision confirming that our traditional high quality rating remains in place.
LOOKING AHEAD
It is difficult not to share a serious degree of concern for the financial impact of the current economic uncertainty that now weighs upon the short-term prospects for the years just ahead. The nationwide burdens of margin compression, an inevitable economic slowdown and continuing fallout from the sub-prime mortgage activity of the past are all combining to create a most challenging period ahead for those companies in the financial services sector. For us, the year 2008 will serve as a transitional period for the Company as we seek to embrace and understand the various influences both within and without our expanding markets in New Hampshire and Vermont.
This is also a time to look for opportunities. Customer needs do not go away in times like these. In fact, their needs may actually increase. And, we have been laying the groundwork over the last few years to meet a much broader variety of needs by building and maintaining a responsible pipeline for consumer, mortgage and commercial loans. It is the ‘customer-centric’ approach of our Company’s underlying business philosophy that has seen us crafting new marketing messages, adding new branches and enhancing staff training to meet the needs of our existing and future customers.
We are committed to moving the Company forward. Striving for quality over price, it is our continuing effort to bring ‘added value’ to each relationship. Sustainable growth comes one customer at a time. It is a very simple series of building blocks on which the foundational-strength of this Company continues to be built as we move into the future.
IN CLOSING
It seems appropriate that we take a moment to mention the recent changes in our corporate governance. First, we must mention the untimely death last year of Dennis A. Morrow who had served for many years as a director of both the Company and the Bank. Secondly, both John J. Kiernan and Kenneth D. Weed retired from the board of the Bank at the conclusion of last year’s annual meeting, with Mr. Kiernan’s career with Company and the Bank spanning a period of more than forty-five years. The dedication and commitment of these individuals contributed greatly to the advancement of the Company. Additionally, we would like to welcome two new members to our Board of Directors, Peter D. Terwilliger and Michael J. Putziger. Mr. Terwilliger previously served as Chairman of the Board of First Brandon National Bank and Mr. Putziger served as the Chairman of the First Community Bank of Woodstock.
On behalf of all those who work so diligently together to strengthen the presence of our banking franchise throughout the various communities we serve, I want to take this opportunity to express our appreciation to you, our shareholders, for your continuing confidence in the Company. Sharing in the vision of what the Company has become, and can be going forward, is an important factor in contributing to our future success as a community bank.
4
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
General
New Hampshire Thrift Bancshares, Inc.’s (the “Company” or “NHTB”) 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 and loan transactions supplement these core earnings.
Overview
| | • | | On June 1, 2007, NHTB completed its acquisition of First Brandon National Bank, and on October 1, 2007, NHTB completed its acquisition of First Community Bank, further expanding the Company’s presence in Vermont. |
| | • | | Total assets stood at $834,229,842 at December 31, 2007, an increase of $162,198,812, or 24.14%, from $672,031,030 at December 31, 2006. |
| | • | | Net loans increased $133,562,665, or 27.11%, to $626,274,462 at December 31, 2007 from $492,711,797 at December 31, 2006. |
| | • | | In 2007, the Bank originated $200,787,883 in loans, compared to $185,458,739 in 2006. |
| | • | | The Bank’s loan servicing portfolio increased to $305,838,179 at December 31, 2007 from $300,019,470 at December 31, 2006, an increase of $5,818,709, or 1.94%. |
| | • | | The Company earned $4,515,682, or $0.92 per common share, assuming dilution, for the year ended December 31, 2007, compared to $5,039,859, or $1.17 per common share, assuming dilution, for the year ended December 31, 2006. |
| | • | | Net interest and dividend income for the year ended December 31, 2007, increased by $1,838,589 or 9.98%, to $20,262,462. |
| | • | | The Bank’s interest rate spread stabilized to 2.91% as of December 31, 2007 from 2.87% at December 31, 2006. |
| | • | | The Bank opened one new branch office during 2007, located in Hanover, New Hampshire. |
Forward-looking Statements
Statements included in this discussion and in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect the Company’s actual results, and could cause the Company’s actual financial performance to differ materially from that expressed in any forward-looking statement: (1) the Company’s loan portfolio includes loans with a higher risk of loss; (2) if the Company’s allowance for loan losses is not sufficient to cover actual loan losses, earnings could decrease; (3) changes in interest rates could adversely affect the company’s results of operations and financial condition; the local economy may affect future growth possibilities; (4) the Company depends on its executive officers and key personnel to continue the implementation of its long-term business strategy and could be harmed by the loss of their services; (5) the Company operates in a highly regulated environment, and changes in laws and regulations to which it is subject may adversely affect its results of operations; and (6) competition in the Bank’s primary market area may reduce its ability to attract and retain deposits and originate loans. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events or circumstances.
5
Management’s Discussion and Analysis(continued)
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 15-18 of Management’s Discussion and Analysis.
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 December 31, 2007, 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 nonaccruing 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 March 30, 2004, NHTB Capital Trust II (“Trust II”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of 6.06%, 5 Year Fixed-Floating Capital Securities (“Capital Securities II”). Trust II also issued common securities to the Company and used the net proceeds from the offering to purchase a like amount of 6.06% Junior Subordinated Deferrable Interest Debentures (“Debentures II”) of the Company. Debentures II are the sole assets of Trust II. Total expenses associated with the offering of $160,402 are included in other assets and are being amortized on a straight-line basis over the life of Debentures II.
Capital Securities II accrue and pay distributions quarterly at an annual rate of 6.06% for the first 5 years 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 Capital Securities II, but only to the extent that the Trust has funds necessary to make these payments.
Capital Securities II are mandatorily redeemable upon the maturing of Debentures II on March 30, 2034 or upon earlier redemption as provided in the Indenture. The Company has the right to redeem Debentures II, in whole or in part on or after March 30, 2009 at the liquidation amount plus any accrued but unpaid interest to the redemption date.
On March 30, 2004, NHTB Capital Trust III (“Trust III”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of Floating Capital Securities, adjustable every three months at LIBOR plus 2.79% (“Capital Securities III”). Trust III also issued common securities to the Company and used the net proceeds from the offering to purchase a like amount of Junior Subordinated Deferrable Interest Debentures (“Debentures III”) of the Company. Debentures III are the sole assets of Trust III. Total expenses associated with the offering of $160,402 are included in other assets and are being amortized on a straight-line basis over the life of Debentures III.
Capital Securities III accrue and pay distributions quarterly based on the stated liquidation amount of $10 per capital security. The Company has fully and unconditionally guaranteed all of the obligations of Trust III. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities III, but only to the extent that Trust III has funds necessary to make these payments.
Capital Securities III are mandatorily redeemable upon the maturing of Debentures III on March 30, 2034 or upon earlier redemption as provided in the Indenture. The Company has the right to redeem Debentures III, in whole or in part on or after March 30, 2009 at the liquidation amount plus any accrued but unpaid interest to the redemption date.
6
Management’s Discussion and Analysis(continued)
First Brandon Acquisition
On December 14, 2006, the Company entered into a definitive agreement to acquire First Brandon Financial Corporation, Brandon, Vermont, (“First Brandon”) for approximately $20.8 million in cash and stock (the “Merger”). Immediately following the closing of the transaction on June 1, 2007, First Brandon’s subsidiary bank, First Brandon National Bank, merged with and into the Company’s subsidiary bank, Lake Sunapee Bank, fsb, and operates under the name “First Brandon Bank, a division of Lake Sunapee Bank, fsb”. The combined company had approximately $771 million in assets and operates 24 branches in New Hampshire and Vermont at the time of the merger.
First Community Acquisition
On April 16, 2007, NHTB announced that it had entered into a definitive agreement to acquire First Community Bank (“First Community”) for approximately $14.6 million in cash and stock, which further expanded NHTB’s New Hampshire-based banking franchise into the State of Vermont. First Community merged with and into NHTB’s subsidiary bank, Lake Sunapee Bank, fsb on October 1, 2007. First Community operated 5 branches located in Woodstock, Killington and Rutland, Vermont and had over $83.4 million in assets. The acquisition of First Community created a combined company with approximately $841.0 million in assets and 29 branches in New Hampshire and Vermont.
Comparison of Years Ended December 31, 2007 and 2006
Financial Condition
Total assets increased by $162,198,812, or 24.14%, to $834,229,842 as of December 31, 2007 from $672,031,030 as of December 31, 2006. The increase in assets includes approximately $177 million from the First Brandon and First Community Bank acquisitions.
Total gross loans, excluding loans held-for-sale, increased $133,562,665, or 27.11%, including approximately $129 million from the First Brandon and First Community Bank acquisitions, to $626,274,462 as of December 31, 2007. The Bank’s conventional real estate loan portfolio increased $54,027,375, or 19.18%, to $335,782,676. Construction loans increased $4,595,025, or 26.86%, to $21,704,154. Commercial real estate loans increased $39,222,376, or 37.99%, to $142,469,203, due primarily to new loans acquired from the two acquisitions. Additionally, consumer loans increased $12,342,536, or 19.51%, to $75,619,503 and Commercial and municipal loans increased $22,993,222, or 77.89%, to $52,514,784. These increases were due to the acquired loan portfolios of the acquired two banks. The continued favorable interest rate environment also made the above loan offerings very attractive. Sold loans totaled $305,838,179 at year-end 2007, compared to $300,019,470, at year-end 2006. Sold loans are loans originated by the Bank and sold to the secondary market with the Bank retaining the majority of servicing of these loans. The Bank expects to continue to sell fixed rate loans into the secondary market, retaining the servicing, in order to manage interest rate risk and control growth. Typically, the Bank holds adjustable rate loans in portfolio. Adjustable rate mortgages comprise approximately 82% of the Bank’s real estate mortgage loan portfolio, which is consistent with prior years. Asset remained strong with non-performing assets as a percentage of total assets at 0.60% as the Bank continued to originate loans in a conservative manner. In particular, the Bank does not originate nor purchase “sub-prime” mortgage loans.
The fair value of investment securities available-for-sale decreased $4,062,300, or 4.44%, to $87,460,003, including approximately $21 million from the First Brandon and First Community Bank acquisitions, as of December 31, 2007, from $91,522,303 at December 31, 2006. The Bank used proceeds from maturing securities to pay off maturing Federal Home Loan Bank advances.
The Bank realized no gains on the sales and calls of securities during 2007, as compared $71,069 during 2006. As of December 31, 2007, the Bank’s investment portfolio had a net unrealized holding loss of $1,663,149, as compared to a net unrealized holding loss of $1,762,587 at December 31, 2006.Since the average life of the investment portfolio is less than five years and the liquidity of the Bank remains strong, the Bank does not anticipate the need to prematurely sell any investments and realize a loss. In addition, all securities are rated as investment grade by the leading rating agencies. The investments in the Bank’s investment portfolio that are temporarily impaired as of December 31, 2007 consist of debt securities issued by U.S. Government corporations or agencies, corporate debt with strong credit ratings and preferred stock issued by corporations and government sponsored agencies.
7
Management’s Discussion and Analysis(continued)
Real estate owned and property acquired in settlement of loans was at $240,802 at December 31, 2007 as compared to $0 at December 31, 2006.
Goodwill increased by $15,153,454 to $27,293,470 as of December 31, 2007, from $12,140,016 as of December 31, 2006. Goodwill recognized due to the acquisition of First Brandon amounted to $7,503,046, after acquisition costs of $20,832,293. Goodwill recognized due to the acquisition of First Community amounted to $7,650,408, after acquisition costs of $14,649,648. Goodwill also includes $2,471,560 relating to the acquisition of Landmark Bank in 1998 and $9,668,456 relating to the acquisition of New London Trust in 2001.
Core deposit intangible amounted to $3,160,303 as of December 31, 2007 due to the two acquisitions in 2007. The Bank amortized $307,697 during 2007, utilizing the sum-of-the-digit method over ten years to amortize the core deposit intangible.
Total deposits increased by $187,466,197, (including approximately $152 million from the two acquisitions closed during 2007), or 40.27%, to $652,972,017 as of December 31, 2007 from $465,505,820 as of December 31, 2006. The increase in deposits occurred due to an increase in the Bank’s certificates of deposit as customers were attracted to safety and guarantee of FDIC insurance resulting from uncertain credit markets.
Advances from the Federal Home Loan Bank (FHLB) decreased by $56,613,126, or 47.18%, to $63,386,874, including approximately $3.6 million from the two acquisitions, from $120,000,000 at December 31, 2006. The Bank used proceeds from maturing investment securities, liquidity generated from the two acquisitions, and funds from deposit in-flows to pay-off maturing FHLB advances as part of a de-leveraging strategy used to reduce funding costs. The weighted average interest rate for the outstanding FHLB advances was 4.52% as of December 31, 2007, as compared to 5.06% as of December 31, 2006.
Liquidity and Capital Resources
The Bank is required to maintain sufficient liquidity for safe and sound operations. At year-end 2007, the Bank’s liquidity was sufficient to cover the Bank’s anticipated needs for funding new loan commitments of approximately $23 million. 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, 2007, the Bank had approximately $179 million in additional borrowing capacity from the FHLB.
At December 31, 2007, the Company’s shareholders’ equity totaled $72,667,323, as compared to $48,409,406, at year-end 2006. The increase of $24,257,917 reflects net income of $4,515,682, the payment of $2,475,019 in common stock dividends, the exercise of stock options in the amount of $782,044, a tax benefit on the exercise of stock options in the amount of $47,911, a total increase in total common stock in the amount of $18,885 due to the exercise of stock options, paid-in capital due to the acquisition of First Brandon in the amount of $15,582,350, paid-in capital due to the acquisition of First Community in the amount of $11,138,053, an increase in accumulated other comprehensive loss in the amount of $60,520, and the repurchase of 341,779 shares at a cost of $5,291,469. The change in other comprehensive loss included an after tax loss in the amount of $120,570 due to the Bank’s curtailment of its defined benefit pension plan.
On June 12, 2007, the Company announced that it approved the repurchase of up to an additional 253,776 shares of common stock. As of December 31, 2007, 153,088 shares remained to be repurchased under the July 12, 2007 plan. The Board of Directors of the Company has determined that a share buyback is appropriate to enhance shareholder value because 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 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 December 31, 2007, the Company had funds in the amount of $320,355. Total cash needs for the Company during 2008 will amount to approximately $4.4 million with $3.0 million being used to pay dividends on the Company’s common stock and $1.4 million to pay interest on the Company’s capital securities. The Bank pays dividends to the Company as its sole stockholder, within guidelines set forth by the Office of Thrift Supervision (OTS). Since the Bank is well capitalized and has capital in excess of regulatory requirements, it is anticipated that funds will be available to cover the Company’s cash needs for 2008.
Net cash provided by operating activities decreased by $5,083,179 to $4,428,635 in 2007 from $9,331,814 in 2006. The decrease is primarily attributable to an increase in the amount of $1,230,180 in loans held for sale and an increase in the amount of $4,522,627 in accrued expenses and other liabilities.
8
Management’s Discussion and Analysis(continued)
Net cash flows provided from investing activities totaled 21,681,532 in 2007, as compared to net cash flows used in investing activities of $15,561,289 in 2006, a change of $37,242,821. During 2007, loan originations and principal collections, net, decreased in the amount of $21,244,142, and cash and cash equivalents acquired from First Brandon and First Community, net of expenses paid, amounted to $7,678,405 which accounted for the majority of the change in investing activities.
In 2007, net cash flows used by financing activities totaled $26,822,406, as compared to net cash flows provided from financing activities in the amount of $14,830,821, a change of $41,653,227. Net repayment of FHLB advances in the amount of $60,848,727, coupled with net deposit inflows of $35,366,059 accounted for the change in financing activities.
The Bank expects to be able to fund loan demand and other investing activities during 2008 by continuing to use funds provided by customer deposits, as well as the FHLB’s advance program. On December 31, 2007, approximately $26,000,000 in commitments to fund loans had been made. Management is not aware of any trends, events, or uncertainties that will have or that are reasonably likely to have a material effect on the Bank’s liquidity, capital resources or results of operations.
The following table represents the Company’s contractual obligations at December 31, 2007:
Payments Due by Period (in thousands)
| | | | | | | | | | | | | | | |
| | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Long-term Debt Obligation | | $ | 63,480 | | $ | 52,098 | | $ | 10,382 | | $ | — | | $ | 1,000 |
Operating Lease Obligation | | | 1,361 | | | 373 | | | 501 | | | 302 | | | 185 |
| | | | | | | | | | | | | | | |
Total | | $ | 64,841 | | $ | 52,471 | | $ | 10,883 | | $ | 302 | | $ | 1,185 |
| | | | | | | | | | | | | | | |
The OTS requires that the Bank maintain tangible, core, and total risk-based capital ratios of 1.50%, 4.00%, and 8.00%, respectively. As of December 31, 2007, the Bank’s ratios were 7.84%, 7.84%, and 11.08%, respectively, well in excess of the OTS requirements.
Book value per share was $12.69 at December 31, 2007, as compared to $11.58 per share at December 31, 2006.
Impact of Inflation
The financial statements and related data presented elsewhere herein are prepared in accordance with generally accepted accounting principles (GAAP) ,which require the measurement of the Company’s financial position and operating results generally in terms of historical dollars and current market value, for certain loans and investments, without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations.
Unlike other companies, nearly all of the assets and liabilities of a bank are monetary in nature. As a result, interest rates have a far greater impact on a bank’s performance than the effects of the general level of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services, since such prices are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the Bank’s assets and liabilities are important to the maintenance of acceptable performance levels.
Interest Rate Sensitivity
The principal objective of the Bank’s interest rate management function is to evaluate the interest rate risk inherent in certain balance sheet accounts and determine the appropriate level of risk given the Bank’s business strategies, operating environment, capital and liquidity requirements and performance objectives and
9
Management’s Discussion and Analysis(continued)
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 monthly.
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, 2007, was negative 20.99%, as compared to the December 31, 2006 gap of negative 20.83%. If short-term interest rates were to rise, the Bank’s net interest income would be reduced because the cost to re-finance the FHLB advances and re-pricing deposits would increase prior to any asset re-pricing.
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 to the secondary market in order to minimize interest rate risk.
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 require 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.
10
Management’s Discussion and Analysis(continued)
The following table shows the Bank’s interest rate sensitivity (gap) table at December 31, 2007:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | 0-3
Months | | | 3-6
Months | | | 6 Months-
1 Year | | | 1-3 Years | | | Beyond
3 Years | | | Total | |
| | | ($ in thousands) | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | $ | 138,751 | | | $ | 63,257 | | | $ | 105,055 | | | $ | 224,465 | | | $ | 100,525 | | | 632,053 | |
Investments and FHLB overnight deposit | | | 35,713 | | | | 7,499 | | | | 10,055 | | | | 30,794 | | | | 24,710 | | | 108,771 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 174,464 | | | | 70,756 | | | | 115,110 | | | | 255,259 | | | | 125,235 | | | 740,824 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | | 172,768 | | | | 72,703 | | | | 113,556 | | | | 23,571 | | | | 242,349 | | | 624,947 | |
Repurchase agreements | | | 15,441 | | | | — | | | | — | | | | — | | | | — | | | 15,441 | |
Borrowings | | | 50,122 | | | | 10,123 | | | | 1,249 | | | | 20,370 | | | | 1,000 | | | 82,864 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 238,331 | | | | 82,826 | | | | 114,805 | | | | 43,941 | | | | 243,349 | | | 723,252 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Period sensitivity gap | | | (63,867 | ) | | | (12,070 | ) | | | 305 | | | | 211,318 | | | | (118,114 | ) | | 17,572 | |
Cumulative sensitivity gap | | $ | (63,867 | ) | | $ | (75,937 | ) | | $ | (75,632 | ) | | $ | 135,686 | | | $ | 17,572 | | | | |
Cumulative sensitivity gap as a percentage of interest-earning assets | | | -36.61 | % | | | -30.97 | % | | | -20.99 | % | | | 22.04 | % | | | 2.37 | % | | 2.37 | % |
The following table sets forth the Bank’s NPV as of December 31, 2007, as calculated by the OTS for the December 31, 2007 reporting cycle:
| | | | | | | | | | | | |
| Change | | Net Portfolio Value | | | NPV as % of PV Assets |
| in Rates | | $ Amount | | $ Change | | % Change | | | NPV Ratio | | | Change |
| +200 bp | | 82,478 | | -11,519 | | -12 | % | | 10.01 | % | | -121bp |
| +100 bp | | 89,668 | | -4,329 | | -5 | % | | 10.77 | % | | -45bp |
| 0 bp | | 93,997 | | 0 | | 0 | | | 0 | | | 0 |
| -100 bp | | 96,286 | | 2,289 | | +2 | % | | 11.44 | % | | +22bp |
| -200 bp | | 97,570 | | 3,573 | | +4 | % | | 11.56 | % | | +34bp |
11
Management’s Discussion and Analysis(continued)
Results of Operations 2007 versus 2006
Net Interest and Dividend Income
Net interest and dividend income for the year ended December 31, 2007 increased by $1,838,589, or 9.98%, to $20,262,462. The increase was due to stabilizing interest rate margins, results from the two bank acquisitions, and increases in the Bank’s loan portfolio.
Total interest and dividend income increased by $5,969,310, or 17.73%.Interest and fees on loans increased by $5,857,064, or 20.62%, to $34,257,504 in 2007, due to the increase in loans outstanding and results from the two bank acquisitions.
Interest on taxable investments increased by $26,660, or 0.63%.Dividends decreased by $78,210, or 14.50%, to $539,418, as the Bank elected to use funds from maturing securities to pay off FHLB advances in lieu of re-investing them.Interest on other investments increased by $163,796, or 39.94%, to $573,881. The yield on the Bank’s investment portfolio improved from 4.41% as of December 31, 2006 to 4.93% as of December 31, 2007 due to several higher yielding investments acquired from the two bank acquisitions.
Total interest expense increased $4,130,721, or 27.09%, for the year ended December 31, 2007.Interest on deposits increased by $5,194,471, or 67.06%, because many of the Bank’s certificates of deposit (CD) matured and re-priced into higher yielding term deposits. In addition, the Bank was unable to lag deposit re-pricing due to competitive pressures.Interest on FHLB advances and other borrowed money decreased by $1,018,404, or 18.43%, to $4,506,663 for the year ended December 31, 2007 from $5,525,067 for the year ended December 31, 2006. FHLB advances outstanding decreased to $63,386,874 at December 31, 2007 from $120,000,000 at December 31, 2006 as the Bank used the proceeds from the maturing investment securities to pay off maturing advances as part of a de-leveraging strategy deployed to reduce the Bank’s cost of funds.
The Bank’s combined cost of funds increased to 3.08% as of December 31, 2007 from 2.66% as of December 31, 2006. The cost of deposits, including repurchase agreements, increased 82 basis points to 2.59% as of December 31, 2007, from 1.77% as of December 31, 2006. The Bank’s higher costing time deposits, in particular, increased during 2007 as customers sought the safety of longer-term bank deposits.
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, increased slightly to 2.91% at December 31, 2007 from 2.87% at December 31, 2006. The Bank’s net interest margin, representing net interest income as a percentage of average interest-earning assets, increased slightly to 3.06% as of December 31, 2007, from 3.02% as of December 31, 2006. Both increases are indicative of the Federal Reserve Bank’s easing of the Fed Funds rates and the subsequent steepenning of the yield curve. Since the Bank is liability sensitive, as interest rates decrease, the Bank’s interest rate spread and margin will increase. Although the Bank experienced a slight stabilizing of its spread and margin, the Bank’s interest expense increased by 27.09% as compared to the increase in interest income of 17.73%.
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:
| | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | |
Yield on loans | | 6.20 | % | | 5.80 | % | | 5.37 | % | | 5.13 | % | | 5.33 | % |
Yield on investment securities | | 4.93 | % | | 4.41 | % | | 3.95 | % | | 3.76 | % | | 3.20 | % |
Combined yield on loans and investments | | 5.99 | % | | 5.53 | % | | 5.06 | % | | 4.77 | % | | 4.78 | % |
Cost of deposits, including repurchase agreements | | 2.59 | % | | 1.77 | % | | 1.09 | % | | 0.82 | % | | 1.02 | % |
Cost of other borrowed funds | | 5.37 | % | | 5.22 | % | | 3.94 | % | | 3.37 | % | | 7.64 | % |
Combined cost of deposits and borrowings | | 3.08 | % | | 2.66 | % | | 1.66 | % | | 1.29 | % | | 1.35 | % |
Interest rate spread | | 2.91 | % | | 2.87 | % | | 3.40 | % | | 3.48 | % | | 3.43 | % |
Net interest margin | | 3.06 | % | | 3.02 | % | | 3.49 | % | | 3.54 | % | | 3.50 | % |
12
Management’s Discussion and Analysis(continued)
The following table presents, for the years 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Years ended December 31, | | 2007 | | | 2006 | | | 2005 | |
| | | Average(1)
Balance | | Interest | | Yield/
Cost | | | Average(1)
Balance | | Interest | | Yield/
Cost | | | Average(1)
Balance | | Interest | | Yield/
Cost | |
| | | ($ in thousands) | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans(2), | | $ | 552,203 | | $ | 34,258 | | 6.20 | % | | $ | 489,930 | | $ | 28,400 | | 5.80 | % | | $ | 442,335 | | $ | 23,772 | | 5.37 | % |
Investment securities and other | | | 109,158 | | | 5,385 | | 4.93 | % | | | 119,472 | | | 5,274 | | 4.41 | % | | | 123,143 | | | 4,859 | | 3.95 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-earning assets | | | 661,361 | | | 39,643 | | 5.99 | % | | | 609,402 | | | 33,674 | | 5.53 | % | | | 565,478 | | | 28,631 | | 5.06 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash | | | 16,940 | | | | | | | | | 15,738 | | | | | | | | | 18,978 | | | | | | |
Other noninterest-earning assets(3) | | | 43,922 | | | | | | | | | 33,096 | | | | | | | | | 35,583 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total noninterest-earning assets | | | 60,862 | | | | | | | | | 48,834 | | | | | | | | | 54,561 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 722,223 | | | | | | | | $ | 658,236 | | | | | | | | $ | 620,039 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders’ Equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Savings, NOW and MMAs | | $ | 280,578 | | $ | 2,666 | | 0.95 | % | | $ | 266,043 | | $ | 1,736 | | 0.65 | % | | $ | 294,073 | | $ | 1,511 | | 0.51 | % |
Time deposits | | | 226,618 | | | 10,275 | | 4.53 | % | | | 163,227 | | | 6,011 | | 3.68 | % | | | 123,224 | | | 2,820 | | 2.29 | % |
Repurchase agreements | | | 10,420 | | | 454 | | 4.35 | % | | | 11,247 | | | 525 | | 4.67 | % | | | 11,325 | | | 344 | | 3.04 | % |
Capital securities and other borrowed funds | | | 111,499 | | | 5,986 | | 5.37 | % | | | 133,899 | | | 6,989 | | 5.22 | % | | | 107,505 | | | 4,241 | | 3.94 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | | 629,115 | | | 19,381 | | 3.08 | % | | | 574,416 | | | 15,261 | | 2.66 | % | | | 536,127 | | | 8,916 | | 1.66 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | | 30,573 | | | | | | | | | 29,452 | | | | | | | | | 32,403 | | | | | | |
Other | | | 5,940 | | | | | | | | | 8,880 | | | | | | | | | 9,331 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total noninterest-bearing liabilities | | | 36,513 | | | | | | | | | 38,332 | | | | | | | | | 41,734 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shareholders’ equity | | | 56,595 | | | | | | | | | 45,488 | | | | | | | | | 42,178 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 722,223 | | | | | | | | $ | 658,236 | | | | | | | | $ | 620,039 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income/Net interest rate spread | | | | | $ | 20,262 | | 2.91 | % | | | | | $ | 18,413 | | 2.87 | % | | | | | $ | 19,715 | | 3.40 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest margin | | | | | | | | 3.06 | % | | | | | | | | 3.02 | % | | | | | | | | 3.49 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Percentage of interest-earning assets to interest-bearing liabilities | | | | | | | | 105.13 | % | | | | | | | | 106.09 | % | | | | | | | | 105.47 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Monthly average balances have been used for all periods. |
(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) | Other noninterest-earning assets include non-earning assets and other real estate owned. |
13
Management’s Discussion and Analysis(continued)
The following table sets forth, for the years 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.
| | | | | | | | | | | | |
| | | Year ended December 31, 2007 vs. 2006 | |
| | | Increase (Decrease) due to | |
| | | Volume | | | Rate | | | Total | |
| | | ($ in thousands) | |
Interest income on loans | | $ | 3,863 | | | $ | 1,995 | | | $ | 5,858 | |
Interest income on investments | | | (366 | ) | | | 477 | | | | 111 | |
| | | | | | | | | | | | |
Total interest income | | | 3,497 | | | | 2,472 | | | | 5,969 | |
| | | | | | | | | | | | |
Interest expense on savings, NOW and MMAs | | | 138 | | | | 792 | | | | 930 | |
Interest expense on time deposits | | | 2,874 | | | | 1,390 | | | | 4,264 | |
Interest expense on repurchase agreements | | | (36 | ) | | | (35 | ) | | | (71 | ) |
Interest expense on capital securities and other borrowings | | | (1,244 | ) | | | 241 | | | | (1,003 | ) |
| | | | | | | | | | | | |
Total interest expense | | | 1,732 | | | | 2,388 | | | | 4,120 | |
| | | | | | | | | | | | |
Net interest income | | $ | 1,765 | | | $ | 84 | | | $ | 1,849 | |
| | | | | | | | | | | | |
| |
| | | Year ended December 31, 2006 vs. 2005 | |
| | | Increase (Decrease) due to | |
| | | Volume | | | Rate | | | Total | |
| | | ($ in thousands) | |
Interest income on loans | | $ | 2,654 | | | $ | 1,974 | | | $ | 4,628 | |
Interest income on investments | | | (107 | ) | | | 522 | | | | 415 | |
Total interest income | | | 2,547 | | | | 2,496 | | | | 5,043 | |
Interest expense on savings, NOW and MMAs | | | (2 | ) | | | 227 | | | | 225 | |
Interest expense on time deposits | | | 1,117 | | | | 2,073 | | | | 3,190 | |
Interest expense on repurchase agreements | | | (1 | ) | | | 182 | | | | 181 | |
Interest expense on capital securities and other borrowings | | | 1,615 | | | | 1,133 | | | | 2,748 | |
| | | | | | | | | | | | |
Total interest expense | | | 2,729 | | | | 3,615 | | | | 6,344 | |
| | | | | | | | | | | | |
Net interest income | | $ | (182 | ) | | $ | (1,119 | ) | | $ | (1,301 | ) |
| | | | | | | | | | | | |
14
Management’s Discussion and Analysis(continued)
Allowance and Provision for Loan Losses
Lake Sunapee Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. Adjustments to the allowance for loan losses are charged to income through the provision for loan losses. The Bank tests the adequacy at least quarterly by preparing a worksheet applying loss factors to outstanding loans by type. The worksheet stratifies the loan portfolio by loan type and assigns a loss factor to each type based on an assessment of the risk associated with each type. In determining the loss factors, the Bank considers historical losses and market conditions. Loss factors may be adjusted for qualitative factors that, in management’s judgment, affect the collectibility of the portfolio.
The allowance for loan losses incorporates the results of measuring impairment for specifically identified non-homogenous problem loans in accordance with Statement of Financial Accounting Standards (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 contractual terms of the loan. Measurement of impairment can be based on the present value of expected cash flows discounted at the loans effective interest rate, the market price of the loan, or the fair value of the collateral if the loan is collateral dependent.
Measurement of impairment does not apply to large groups of smaller balance homogenous loans such as residential mortgage, home equity, or installment loans that are collectively evaluated for impairment. Please refer to Note 4 “Loans Receivable,” in the Consolidated Financial Statements for information regarding SFAS No. 114 and 118.
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 loan review, internal audit, and compliance programs. Results are reported directly to the Audit Committee of the Bank’s Board of Directors.
At December 31, 2007 the allowance for loan losses was $5,181,471 compared to $3,975,122 at year- end 2006. The increase comes from the allowance for loan loss that came with the acquisitions of First Brandon National Bank and First Community Bank. Through those acquisitions in 2007, Lake Sunapee Bank received allowances of $579,304 from First Brandon and $724,057 from First Community. Most of the activity in the allowance accounts in both 2007 and 2006 was attributable to the fee for service overdraft privilege program. Overdraft charge-offs were $273,871 in 2007 compared to $391,821 in 2006. Loan charge-offs, excluding the overdrafts, were $125,567 in 2007 and $75,197 in 2006. Approximately $90,000 of the 2007 loan loss came from residential mortgage loans while the remainder came from automobile and other consumer loans. Net charge-offs were $219,512 in 2007 compared to $277,230 in 2006. The provision for loan loss was $122,500 in 2007 compared to $230,011 in 2006. The lower level of both net charge-offs and provisions in 2007 is due to the decrease in overdraft charge-offs. The allowance for loan losses represented 0.82% of total loans at December 31, 2007 compared to 0.80% at the end of 2006. It remained relatively constant as the acquired allowance kept pace with the portfolio growth from the bank acquisitions. The provision for the overdraft program is driven by a policy to maintain that portion of the allowance at a level sufficient to cover 100% of the aggregate balance of accounts remaining negative for 30 days or more. All of the provisions in 2007, and most of the provisions in 2006 were for overdrafts. Results of the adequacy tests showed the allowance remained at a sufficient level, given current conditions. On-going provisions are anticipated as overdraft charge-offs continue and the Bank adheres to the policy to maintain an overdraft allowance equal to 100% of the aggregate negative balance of accounts remaining negative for 30 days or more.
Loans classified for regulatory purposes as loss, doubtful, substandard or special mention do not result from trends or uncertainties that the Bank reasonably expects will materially impact future operating results, liquidity, or capital resources. Total classified loans, excluding special mention loans, as of December 31, 2007 and 2006, were $6,172,310 and $4,063,615 respectively. The increase comes from the acquisition of some classified loans, the downgrading of some credits, and an increase in the amount of loans over 90 days past due. Special mention loans were $2,099,598 at December 31, 2007 compared to $890,554 at year-end 2006. The increase results from changes in the risk rating of some loans. Those changes are a reflection of weaker cash flows as some borrowers operate with lower revenue and higher expenses.
Loans 30 to 89 days past due were $8,291,466 and $1,511,770 at December 31, 2007 and 2006, respectively. Total non-performing loans amounted to $4,744,729 and $753,992 at December 31, 2007 and 2006, respectively. That increase is largely due to one commercial real estate loan on nonaccrual status. At year-end 2007, $3.8 million was considered impaired. That compares to
15
Management’s Discussion and Analysis(continued)
$305,000 at the end of 2006. Loans over 90 days past due increased from $753,992 to $4,744,729 during 2007. This increase reflects an increased number of past due loans, as the acquisitions increased the total number of loans in the portfolio. As a percent of assets, non-performing loans increased from 0.11% at the year-end 2006 to 0.57% at December 31, 2007. Non-performing loans as a percent of total loans increased from 0.15% to 0.75% at the end of 2007. At December 31, 2007 the Bank held $240,802 of other real estate owned and repossessed assets. The Bank had no other real estate owned or repossessed assets at year-end 2006. If all non-accruing loans had been current in accordance with their terms during the years ended December 31, 2007 and 2006, interest income on such loans would have amounted to approximately $64,200 and $39,600 respectively.
As of December 31, 2007 there were no other loans not included in the tables below or discussed above where known information about 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 and which may result in disclosure of such loans in the future.
At December 31, 2007 the Bank had $53,352 of “troubled debt restructurings” as defined in Statement of Accounting Standards No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructurings.” At December 31, 2006 the Bank’s portfolio did not include any “troubled debt restructurings.”
The following table sets forth the breakdown of non-performing assets at December 31:
| | | | | | | | | | | | | | | |
| | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 |
Nonaccrual loans(1) | | $ | 4,744,729 | | $ | 753,992 | | $ | 278,422 | | $ | 293,203 | | $ | 1,157,957 |
Real estate and chattel property owned | | | | | | — | | | — | | | — | | | — |
| | | | | | | | | | | | | | | |
Total nonperforming assets | | $ | 4,985,531 | | $ | 753,992 | | $ | 278,422 | | $ | 293,203 | | $ | 1,157,957 |
| | | | | | | | | | | | | | | |
(1) | All loans 90 days or more delinquent are placed on a nonaccruing status. |
The following table sets forth nonaccrual(1) loans by category at December 31:
| | | | | | | | | | | | | | | |
| | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 |
Real estate loans - | | | | | | | | | | | | | | | |
Conventional | | $ | 851,201 | | $ | 448,685 | | $ | 254,982 | | $ | 243,809 | | $ | 1,074,096 |
Construction | | | — | | | — | | | — | | | — | | | — |
Consumer loans | | | 97,717 | | | — | | | 7,977 | | | — | | | 1,891 |
Commercial and municipal loans | | | — | | | — | | | 15,463 | | | — | | | 31,036 |
Nonaccrual impaired loans(2) | | | 3,795,811 | | | 305,307 | | | — | | | 49,394 | | | 50,934 |
| | | | | | | | | | | | | | | |
Total | | $ | 4,744,729 | | $ | 753,992 | | $ | 278,422 | | $ | 293,203 | | $ | 1,157,957 |
| | | | | | | | | | | | | | | |
(1) | All loans 90 days or more delinquent are placed on a nonaccruing status. |
(2) | At 12/31/04 $853,064 of impaired loans, not included above, were on accrual status and performing. |
At 12/31/03 $726,698 of impaired loans, not included above, were on accrual status and performing.
16
Management’s Discussion and Analysis(continued)
The following is a summary of activity in the allowance for loan losses account for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | |
Balance, beginning of year | | $ | 3,975,122 | | | $ | 4,022,341 | | | $ | 4,019,450 | | | $ | 3,898,650 | | | $ | 3,875,708 | |
Charge-offs: | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | | 89,872 | | | | — | | | | — | | | | — | | | | — | |
Commercial real estate | | | — | | | | — | | | | — | | | | — | | | | — | |
Construction | | | — | | | | — | | | | — | | | | — | | | | — | |
Consumer loans | | | 33,531 | | | | 18,499 | | | | 36,766 | | | | 14,737 | | | | 28,862 | |
Overdrafts | | | 273,871 | | | | 391,821 | | | | 87,119 | | | | — | | | | — | |
Commercial loans | | | 5,164 | | | | 56,698 | | | | — | | | | — | | | | 57,780 | |
| | | | | | | | | | | | | | | | | | | | |
Total charged-off loans | | | 402,438 | | | | 467,018 | | | | 123,885 | | | | 14,737 | | | | 86,642 | |
Recoveries (2) | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | | 5,317 | | | | — | | | | 2,403 | | | | — | | | | — | |
Commercial real estate | | | — | | | | — | | | | — | | | | 35,000 | | | | — | |
Construction | | | — | | | | — | | | | — | | | | — | | | | — | |
Consumer loans | | | 29,530 | | | | 5,979 | | | | 5,416 | | | | 25,540 | | | | 9,588 | |
Overdrafts | | | 148,079 | | | | 183,809 | | | | 30,457 | | | | — | | | | — | |
Commercial loans | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total recoveries | | | 182,926 | | | | 189,788 | | | | 38,276 | | | | 60,540 | | | | 9,588 | |
Net charge-offs (recoveries) | | | 219,512 | | | | 277,230 | | | | 85,609 | | | | (45,803 | ) | | | 77,054 | |
Allowance from Acquisitions | | | 1,303,361 | | | | — | | | | — | | | | — | | | | — | |
Provision for loan loss charged to income | | | — | | | | 29,700 | | | | — | | | | 74,997 | | | | 99,996 | |
Provision for overdraft losses charged to income | | | 122,500 | | | | 200,311 | | | | 88,500 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Balance, end of year(1) | | $ | 5,181,471 | | | $ | 3.975,122 | | | $ | 4,022,341 | | | $ | 4,019,450 | | | $ | 3,898,650 | |
| | | | | | | | | | | | | | | | | | | | |
Ratio of net charge-offs (recoveries) to average loans | | | 0.04 | % | | | 0.06 | % | | | 0.02 | % | | | (0.01 | )% | | | 0.02 | % |
| | | | | | | | | | | | | | | | | | | | |
(1) | Balance at end of year includes allowance for overdraft privilege losses of $20,843 in 2007, $24,136 in 2006 and $31,838 in 2005. |
The following table sets forth the allocation of the loan loss allowance, the percentage of allowance to the total allowance and the percentage of loans in each category to total loans as of December 31 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
Real estate loans - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Conventional | | $ | 3,023 | | | 58 | % | | 77 | % | | $ | 2,592 | | | 65 | % | | 78 | % | | $ | 2,544 | | | 63 | % | | 77 | % |
Construction | | | 501 | | | 10 | % | | 3 | % | | | 357 | | | 9 | % | | 3 | % | | | 291 | | | 7 | % | | 3 | % |
Collateral and consumer loans & | | | 199 | | | 4 | % | | 12 | % | | | 130 | | | 3 | % | | 13 | % | | | 224 | | | 6 | % | | 14 | % |
Commercial and municipal loans | | | 1,413 | | | 27 | % | | 8 | % | | | 850 | | | 22 | % | | 6 | % | | | 963 | | | 24 | % | | 6 | % |
Impaired loans | | | 45 | | | 1 | % | | | | | | 46 | | | 1 | % | | | | | | — | | | — | | | | |
Unallocated | | | — | | | | | | | | | | — | | | | | | | | | | — | | | — | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance | | $ | 5,181 | | | 100 | % | | 100 | % | | $ | 3,975 | | | 100 | % | | 100 | % | | $ | 4,022 | | | 100 | % | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance as a percentage of total loans | | | 0.82 | % | | | | | | | | | 0.80 | % | | | | | | | | | 0.86 | % | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
17
Management’s Discussion and Analysis(continued)
| | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | |
Real estate loans: | | | | | | | | | | | | | | | | | | | | |
Conventional | | $ | 2,445 | | | 61 | % | | 77 | % | | $ | 2,405 | | | 62 | % | | 78 | % |
Construction | | | 265 | | | 7 | % | | 5 | % | | | 251 | | | 6 | % | | 4 | % |
Collateral and consumer loans | | | 109 | | | 3 | % | | 14 | % | | | 114 | | | 3 | % | | 13 | % |
Commercial and municipal loans | | | 1,058 | | | 26 | % | | 4 | % | | | 1,012 | | | 26 | % | | 5 | % |
Impaired loans | | | 142 | | | 3 | % | | | | | | 117 | | | 3 | % | | | |
Unallocated | | | — | | | — | | | | | | | — | | | — | | | | |
| | | | | | | | | | | | | | | | | | | | |
Allowance | | $ | 4,019 | | | 100 | % | | 100 | % | | $ | 3,899 | | | 100 | % | | 100 | % |
| | | | | | | | | | | | | | | | | | | | |
Allowance as a percentage of total loans | | | 0.97 | % | | | | | | | | | 1.12 | % | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
The Bank believes the current allowance for loan losses is at a level sufficient to cover losses in the loan portfolio, given present conditions. 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.
Noninterest Income and Expense
Total noninterest income increased $1,039,817, or 17.70%, to $6,914,377 as of December 31, 2007.Customer service fees increased $758,697, or 18.85%, due to an increased volume of transations on the Bank’s overdraft protection program, as well as new fees in the amount of approximately $375,000 contributed from the Bank’s two acquired banks.Net gain on sales and calls of securities decreased in the amount of $71,069, but was more than offset byIncome on other investments in the amount of $144,174, which was earned when the Bank exercised stock warrants on one of its subordinated debt investments.Net gain on sale of loans increased by $81,240, or 10.63%, as the Bank’s total of sold loans increased to $49.7 million during 2007 from $38.2 million of sold loans during 2006.Rental income increased in the amount of $96,614, or 17.38%, as the Bank’s investment property purchased in 2005 and located in Hillsborough, NH realized a full year of rental income. In addition, therealized gain in Charter Holding Corp. increased by $34,998, or 18.48%, to $224,376 as of December 31, 2007, from $189,378 as of December 31, 2006.Brokerage service income increased slightly in the amount of $4,673, or 2.63%, to $182,089 for the year ended December 31, 2007.
Total noninterest expenses increased $4,098,975, or 24.80%, to $20,627,617 as of December 31, 2007, from $16,528,642 as of December 31, 2006. One-time costs in the amount of approximately $1 million associated with the two acquisitions are included in the increase of noninterest expense.
| | • | | Salaries and employee benefits increased by $1,727,358, or 19.76%, to $10,469,900 as of December 31, 2007 from $8,742,542 as of December 31, 2006. Gross salaries and benefits paid increased by $1,546,446, or 15.80%, to $11,336,252 as of December 31, 2007, from $9,789,806 as of December 31, 2006. In addition to normal salary and benefit increases, fifty new staff positions were added to the Bank as a result of the opening of a new branch office in Hanover, NH, and the acquisitions of the First Brandon and First Community. Total full time equivalents increased to 238 as of December 31, 2007, as compared to 188 as of December 31, 2006. The deferral of expenses in conjunction with the origination of loans decreased by $180,912, or 17.27%, to $866,852 as of December 31, 2007, from $1,047,264 as of December 31, 2006. This decrease was due to lower costs associated with the origination of residential real estate mortgage loans in 2007 as compared to 2006, which results in a lower amount of deferred expenses associated with origination costs associated with salary and employee benefits. |
| | • | | Occupancy and equipment expenses increased by $717,716, or 27.18%, to $3,358,720 as of December 31, 2007 from$ 2,641,004 as of December 31, 2006 as the Bank absorbed expenses from operating eleven new branch offices as a result of the two acquisitions and the opening of the Hanover, New Hampshire, branch. |
| | • | | Advertising and promotion increased in the amount of $82,339, or 25.64%, to $403,436 as of December 31, 2007 from $321,097 as of December 31, 2006, due to the promotion of the Bank’s eleven new offices and increased media outlets associated with the Bank’s enlarged geographical footprint. |
18
Management’s Discussion and Analysis(continued)
| | • | | Professional fees increased by $60,958, or 11.13% to $608,528 as of December 31, 2007 from $547,570 as of December 31, 2006, due to expanded requirements associated with the Bank’s audit and compliance programs. |
| | • | | Data processing and outside services fees increased by $155,189, or 24.24%, to $795,538 as of December 31, 2007 from $640,349 as of December 31, 2006, due to the increase of transactions associated with the Bank’s two acquisitions. |
| | • | | ATM processing fees increased by $117,818, or 29.52%, to $516,926 as of December 31, 2007 from $399,108 as of December 31, 2006, due to the increase in ATM transactions, which were offset by fees generated from ATM transactions. |
| | • | | Amortization of mortgage servicing rights (MSR) in excess of mortgage servicing income decreased in the amount of $103,131, or 54.47%, to $86,189 as of December 31, 2007 from $189,320 as of December 31, 2006, due to a lower volume of prepayments of sold loans. |
| | • | | Other expenses increased in the amount of $1,254,456, or 46.54%, to $3,949,689 as of December 31, 2007 from $2,684,540 as of December 31, 2006, due in part to increases in postage and telephone usage, as well as new expenses of approximately $460,000 associated with the Vermont franchise tax and the amortization of the core deposit intangible. In addition, one-time expenses in the amount of $222,000 associated with the Bank’s conversion of databases associated with the two acquisitions contributed to the increase in other expenses. |
Impact of New Accounting Standards
In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, “Accounting for Certain Hybrid Instruments” (SFAS 155), which permits, but does not require, fair value accounting for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation in accordance with SFAS 133. The statement also subjects beneficial interests issued by securitization vehicles to the requirements of SFAS No. 133. The statement is effective as of January 1, 2007. The adoption of SFAS 155 is not expected to have a material impact on the Company’s financial condition and results of operations.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets- an amendment of FASB Statement No. 140” (SFAS 156). SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specific situations. Additionally, the servicing asset or servicing liability shall be initially measured at fair value; however, an entity may elect the “amortization method” or “fair value method” for subsequent balance sheet reporting periods. SFAS No. 156 is effective as of an entity’s first fiscal year beginning after September 15, 2006. Early adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The adoption of this statement did not have a material impact on its financial condition, results of operations or cash flows.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.
On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles (GAAP) and enhances disclosures about fair value measurements. SFAS 157 retains the exchange price notion and clarifies that the exchange price is the price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. SFAS 157 is effective for the Company’s consolidated financial statements for the year beginning on January 1, 2008, with earlier adoption permitted. The Company does not expect the adoption of this statement to have a material impact on the Company’s financial condition or results of operations.
In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue No. 06-4 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-4”). EITF Issue 06-4 requires companies with an endorsement split-dollar life insurance
19
Management’s Discussion and Analysis(continued)
arrangement to recognize a liability for future postretirement benefits. The effective date is for fiscal years beginning after December 15, 2007, with earlier application permitted. Companies should recognize the effects of applying this issue through either (a) a change in accounting principle through a cumulative effect adjustment to retained earnings or (b) a change in accounting principle through retrospective application to all periods. The Company does not expect the adoption of the new Issue to have a material impact on its financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective at the beginning of the Company’s fiscal year beginning January 1, 2008, and early application may be elected in certain circumstances. The Company is currently evaluating and has not yet determined the impact the new standard is expected to have on the Company’s financial position, results of operations or cash flows.
For additional information on the above-referenced new accounting standards, refer to Note 1 of the Consolidated Financial Statements beginning on page 31 of this report.
Accounting for Income Taxes
The provision for income taxes for the years ended December 31, 2007, 2006, and 2005, includes net deferred income tax expense of ($126,437), $187,120, and $91,565, respectively. These amounts were determined by the amounts and liability 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, 2006 and 2005
In 2006, the Company earned $5,039,859, or $1.17 per common share, assuming dilution, compared to $5,524,288 or $1.29 per common share, assuming dilution, in 2005. The decrease in earnings in 2006 was due to continuing interest rate margin compression, which resulted in the Bank’s net interest income falling by $1,290,797.
Financial Condition
Total assets increased by $21,852,349, or 3.36%, from $650,178,681 at December 31, 2005 to $672,031,030 at December 31, 2006. Cash and Federal Home Loan Bank overnight deposit increased $8,601,346.
Total gross loans, excluding loans held-for-sale, increased $29,562,877, or 6.35%, to $494,946,006 at December 31, 2006 from $465,383,129 at December 31, 2005. The increase was attributed to increases of $29,726,976, or 7.98%, in real estate mortgage loans (including conventional and commercial). In particular, the Bank’s conventional real estate loan portfolio increased $22,715,054, or 8.77%, to $281,755,301. Construction loans increased $4,029,102, or 30.80%, to $17,109,129. The continued favorable interest rate environment made the above loan offerings very attractive. Sold loans totaled $300,019,470 at year-end 2006, compared to $304,267,740, at year-end 2005. Sold loans are loans originated by the Bank and sold to Freddie Mac with the Bank retaining the servicing of these loans. The Bank expects to continue to sell fixed rate loans into the secondary market, retaining the servicing, in order to manage interest rate risk and control growth. Typically, the Bank holds adjustable rate loans in portfolio. Adjustable rate mortgages comprise approximately 82% of the Bank’s real estate mortgage loan portfolio, which is consistent with prior years.
The fair value of investment securities available-for-sale decreased $22,072,830, or 19.43%, from $113,595,133 at December 31, 2005, to $91,522,303 at December 31, 2005. The Bank used the proceeds from maturing investment securities to fund loan demand.
The Bank realized gains on the sales and calls of securities in the amount of $71,069 during 2006, as compared to $50,328 in 2005. At December 31, 2006, the Bank’s investment portfolio had a net unrealized holding loss of $1,762,587, as compared to a net unrealized holding loss of $2,114,113 at December 31, 2005.Since the average life of the investment portfolio is less than five years and the liquidity of the Bank remains strong, the Bank does not anticipate the need to prematurely sell any investments and realize a loss. In addition, all securities are rated as investment grade by the leading rating agencies.
20
Management’s Discussion and Analysis(continued)
Real estate owned and property acquired in settlement of loans remained at $0 at December 31, 2006 and 2005.
Investments in real estate increased $1,282,936 from $1,953,848 at December 31, 2005 to $3,236,784 at December 31, 2006. In August of 2005, the Bank purchased commercial real estate property located in Hillsborough, NH, which houses one of the Bank’s branch offices. The Bank improved the property in order to lease it to several large commercial entities.
Total deposits increased by $868,916, or 0.19%, to $465,505,820 as of December 31, 2006, from $464,636,904 as of December 31, 2005. The slight increase in deposits occurred despite competition from several areas, including mutual funds as the stock market improved, and Internet banks offering higher yielding savings accounts.
Net Interest and Dividend Income
Net interest and dividend income for the year ended December 31, 2006 decreased by $1,301,456, or 6.60%, to $18,413,180. The decrease was due to the compressing interest rate margins resulting from a flat yield curve and the sharp increase in the Bank’s cost of funds.
Total interest and dividend income increased by $5,042,741, or 17.61%.Interest and fees on loans increased by $4,628,045, or 19.47%, to $28,400,440 in 2006, due to the increase in loans outstanding and an increase in the average yield on loans to 5.80% from 5.37%.
Interest on taxable investments decreased by $249,306, or 5.55%, as the Bank redeployed the proceeds of maturing securities to fund loan demand.Dividends increased by $354,042, or 134.32%, to $617,628.Interest on other investments increased by $309,960, or 309.57%, to $410,085. The yield on the Bank’s investment portfolio improved from 3.95% to 4.38% during 2006 due the reinvesting of maturing securities in a rising interest rate environment.
Total interest expense increased $6,344,231, or 71.15%, for the year ended December 31, 2006.Interest on deposits increased by $3,415,078, or 78.85%, because many of the Bank’s certificates of deposit (CD) matured and re-priced into higher yielding term deposits. In addition, the Bank was unable to lag deposit re-pricing due to competitive pressures.Interest on FHLB advances and other borrowed money increased by $2,522,961, or 84.04%, to $5,525,067 for the year ended December 31, 2006 from $3,002,106 for the year ended December 31, 2005. FHLB advances outstanding increased to $120,000,000 at December 31, 2006 from $100,000,000 at December 31, 2005 as the Bank used the increased proceeds from the advances to fund loan growth. In addition, maturing advances were re-financed in a rising rate environment.
The Bank’s overall cost of funds increased to 2.53% in 2006 from 1.66% in 2005. The cost of deposits, including repurchase agreements, increased 68 basis points to 1.77% in 2006 from 1.09% in 2005. The Bank’s time deposits, in particular, rolled into time deposits with higher rates as short-term interest rates increased during 2006.
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, decreased to 2.99% at December 31, 2006 from 3.40% at December 31, 2005. The Bank’s net interest margin, representing net interest income as a percentage of average interest-earning assets, decreased to 3.02% from 3.49%. Both decreases are indicative of the increase in short-term interest rates as the yield curve flattened/inverted during 2006. Since the Bank is liability sensitive, as interest rates increase, the Bank’s interest rate spread and margin will decrease. This resulted in the Bank’s interest expense increasing by 71.15% compared to the increase in interest income of 17.61%. Net interest and dividend income for the year ended December 31, 2005 increased by $947,336, or 5.05%, to $19,714,670. The increase was due to the continuing favorable interest rate environment and the increase in loans outstanding.
Allowance and Provision for Loan Losses
At December 31, 2006 the allowance for loan losses was $3,975,122 compared to $4,022,341 at year- end 2005. The Bank introduced a fee for service overdraft privilege program in July 2005 and established a valuation allowance for losses associated with overdraft charge-offs. The allowance for the overdrafts is combined with the allowance for loan losses for financial reporting. At December 31, 2006 the allowance for the overdraft privilege program was $24,136 compared to $31,838 at year-end 2005. Most of the activity in the allowance accounts in both 2006 and 2005 was attributable to the overdraft program. For example, overdraft charge-offs amounted to $391,821 in 2006 and $87,119 in 2005, while loan charge-offs were $75,196 in 2006 and $36,766 in 2005. The higher level of overdraft charge-offs in 2006 is largely due to 12 months activity
21
Management’s Discussion and Analysis(continued)
verses the shorter period in 2005. On an aggregate basis, including the allowance for overdraft losses, net charge-offs were $277,230 in 2006 compared to $85,609 in 2005 and the aggregate provision was $230,011 in 2006 compared to $88,500 in 2005. The allowance for loan losses represented 0.80% of total loans at December 31, 2006 compared to 0.86% at the end of 2005. The decline comes from loan portfolio growth in 2006. The provision for the overdraft program is driven by a policy to maintain that allowance at a level sufficient to cover 100% of the aggregate balance of accounts remaining negative for 30 days or more. Most of the provisions in 2006 were for overdrafts, while all of the provisions in 2005 were for overdrafts. Results of the adequacy tests showed the allowance remained at a sufficient level, given current conditions. On-going provisions are anticipated as overdraft charge-offs continue and the Bank adheres to the 100% of aggregate 30+ days negative policy.
Loans classified for regulatory purposes as loss, doubtful, substandard or special mention do not result from trends or uncertainties that the Bank reasonably expects will materially impact future operating results, liquidity, or capital resources. Total classified loans, excluding special mention loans, as of December 31, 2006 and 2005, were $4,063,615 and $612,223 respectively. The increase comes from the classification of a commercial real estate loan and an increase in the amount of loans over 90 days past due. Special mention loans were $890,554 at December 31, 2006 compared to $2,700,000 million at year-end 2005. The decline is attributable to the classification of the commercial real estate loan.
Loans 30 to 89 days past due were $1,511,770 and $2,278,612 at December 31, 2006 and 2005, respectively. Total non-performing loans amounted to $753,992 and $278,422 at December 31, 2006 and 2005, respectively. At the end of both 2006 and 2005, non-performing loans consisted entirely of loans over 90 days past due. Loans over 90 days past due increased $475,570 to $753,992 due to some larger balance residential mortgage loans. The number of loans past due remained about the same. As a percent of assets, non-performing loans increased from 0.04% at the year-end 2005 to 0.11% at December 31, 2006. Non-performing loans as a percent of total loans increased from 0.06% to 0.15% at the end of 2006. The bank had no other real estate owned or repossessed assets at year-end 2006 or 2005. If all non-accruing loans had been current in accordance with their terms during the years ended December 31, 2006 and 2005, interest income on such loans would have amounted to approximately $39,600 and $6,800 respectively.
As of December 31, 2006 there were no other loans not included in the tables below or discussed above where known information about 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 and which may result in disclosure of such loans in the future.
As of December 31, 2006, the Bank’s portfolio did not include any “troubled debt restructurings” as defined in Statement of Accounting Standards No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructurings.”
Noninterest Income and Expense
Total noninterest income increased $1,766,175, or 42.99%, to $5,874,560 at December 31, 2006.Customer service fees increased $1,436,851, or 55.50%, due to an increase in fees on the Bank’s overdraft protection program.Net gain on sales and calls of securities increased in the amount of $20,741, or 41.21%.Net gain on sale of loans increased by $217,862, or 39.85%, as the Bank increased its gain per loan sold. The Bank sold $38.2 million of loans in 2006 as compared to $59.3 million of sold loans during 2005. The decrease was due in part to a slow down in mortgage refinancings attributable to a slowing housing market.Rental income increased in the amount of $84,564, or 17.88%, as the Bank bought an investment property located in Hillsborough, NH. In addition, therealized gain in Charter Holding Corp. increased by $86,030, or 83.24%, to $189,378 at December 31, 2006, from $103,348 at December 31, 2005.Brokerage service income decreased in the amount of $86,289, or 32.72%, to $177,416 for the year ended December 31, 2006 as compared to $263,705 for the year ended December 31, 2005 due to a reduction in the number of licensed representatives employed by the Bank. Two of the three licensed representatives resigned their positions with the Bank, and the Bank elected not to replace them.
Total noninterest expenses increased $1,566,029, or 10.47%, to $16,517,949 for 2006 from $14,951,920 for 2005.
| | • | | Salaries and employee benefits increased by $776,194, or 9.74%, to $8,742,542 for 2006 from $7,966,348 for 2005. Gross salaries and benefits paid increased by $475,329, or 5.27%, to $9,488,941 for 2006, compared to $9,013,612 for 2005. In addition to normal salary and benefit increases, new staff positions were added to the Bank as a result of the opening of a new branch office in Milford, NH. The deferral of expenses in conjunction with the origination of loans decreased by $300,865, or 28.73%, to $746,399 in 2006 from $1,047,264 for 2005. This change was due to the lower volume of loan originations in 2006 as compared to 2005, which results in a lower amount of deferred expenses associated with origination costs associated with salary and employee benefits. |
22
Management’s Discussion and Analysis(continued)
| | • | | Occupancy and equipment expenses increased by $244,602, or 10.21%, to $ 2,641,004, as the Bank absorbed a full year of operating expenses after the opening of three new branches during 2005. |
| | • | | Advertising and promotion decreased in the amount of $101,799, or 24.07%, to $321,097, due to the absence of expenses associated with promoting the opening of the three new branch offices during 2005. |
| | • | | Professional fees decreased by $13,148, or 2.34% to $547,570. |
| | • | | Data processing and outside services fees increased by $58,969, or 10.14%, to $640,349, due to higher fees charged by the Bank’s software vendor. |
| | • | | ATM processing fees increased by $20,579, or 5.44%, to $399,108 due to the increase in ATM transactions. |
| | • | | Amortization of mortgage servicing rights (MSR) in excess of mortgage servicing income increased in the amount of $143,234, or 310.80%, to $189,320 due to lower mortgage servicing rights resulting from a lower volume of sold loans. |
| | • | | Other expenses increased in the amount of $413,112, or 18.19%, to $2,684,540 for 2006 from $2,271,428 for 2005, due in part to normal increases in postage, telephone usage, and check charge-offs. In addition, expenses associated with the Bank’s overdraft protection program increased as the Bank experienced a full year of operating expenses. |
Off-Balance Sheet Arrangements
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, standby letters of credit and unadvanced funds on loans. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. Further detail on the financial instruments with off-balance sheet risk to which the Company is party is contained in Note 19 to the Consolidated Financial Statements.
23
The Board of Directors
New Hampshire Thrift Bancshares, Inc.
Newport, New Hampshire
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 2007 and 2006 and the related consolidated statements of income, changes in shareholders’ equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2007. 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 the standards of the Public Company Accounting Oversight Board (United States). 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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, 2007 and 2006 and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
March 24, 2008
24
New Hampshire Thrift Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | |
As of December 31, | | 2007 | | | 2006 | |
ASSETS | | | | | | | | |
Cash and due from banks | | $ | 22,530,541 | | | $ | 17,146,780 | |
Federal Home Loan Bank overnight deposit | | | 11,524,000 | | | | 17,800,000 | |
| | | | | | | | |
Total cash and cash equivalents | | | 34,054,541 | | | | 34,946,780 | |
Securities available-for-sale | | | 87,460,003 | | | | 91,522,303 | |
Federal Home Loan Bank stock | | | 7,532,700 | | | | 7,540,600 | |
Loans held-for-sale | | | 2,507,880 | | | | 1,770,500 | |
Loans receivable, net of the allowance for loan losses of $5,181,471 as of December 31, 2007 and $3,975,122 as of December 31, 2006 | | | 626,274,462 | | | | 492,711,797 | |
Accrued interest receivable | | | 2,853,558 | | | | 2,381,693 | |
Premises and equipment, net | | | 17,654,863 | | | | 12,830,316 | |
Investments in real estate | | | 3,512,126 | | | | 3,236,784 | |
Other real estate owned | | | 240,802 | | | | — | |
Goodwill | | | 27,293,470 | | | | 12,140,016 | |
Intangible assets - core deposits | | | 3,160,303 | | | | — | |
Investment in partially owned Charter Holding Corp., at equity | | | 3,152,232 | | | | 3,140,320 | |
Bank owned life insurance | | | 9,141,849 | | | | 495,367 | |
Other assets | | | 9,391,053 | | | | 9,314,554 | |
| | | | | | | | |
Total assets | | $ | 834,229,842 | | | $ | 672,031,030 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
LIABILITIES | | | | | | | | |
Deposits: | | | | | | | | |
Noninterest-bearing | | $ | 48,259,896 | | | $ | 38,663,553 | |
Interest-bearing | | | 604,712,121 | | | | 426,842,267 | |
| | | | | | | | |
Total deposits | | | 652,972,017 | | | | 465,505,820 | |
Federal Home Loan Bank advances | | | 63,386,874 | | | | 120,000,000 | |
Other borrowings | | | 237,500 | | | | — | |
Securities sold under agreements to repurchase | | | 15,440,993 | | | | 8,881,864 | |
Subordinated debentures | | | 20,620,000 | | | | 20,620,000 | |
Accrued expenses and other liabilities | | | 8,905,135 | | | | 8,613,940 | |
| | | | | | | | |
Total liabilities | | | 761,562,519 | | | | 623,621,624 | |
| | | | | | | | |
Commitments and contingencies (Note 13) | | | | | | | | |
SHAREHOLDERS’ EQUITY | | | | | | | | |
Common stock, $.01 par value, per share: 10,000,000 shares authorized, 6,182,051 shares issued and 5,726,772 shares outstanding as of December 31, 2007 and 4,293,580 shares issued and 4,180,080 shares outstanding as of December 31, 2006 | | | 61,821 | | | | 42,936 | |
Paid-in capital | | | 45,480,955 | | | | 17,930,597 | |
Retained earnings | | | 35,982,392 | | | | 33,941,729 | |
Accumulated other comprehensive loss | | | (1,768,076 | ) | | | (1,707,556 | ) |
Treasury stock, 455,279 shares as of December 31, 2007 and 113,500 shares as of December 31, 2006 | | | (7,089,769 | ) | | | (1,798,300 | ) |
| | | | | | | | |
Total shareholders’ equity | | | 72,667,323 | | | | 48,409,406 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 834,229,842 | | | $ | 672,031,030 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
25
New Hampshire Thrift Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
| | | | | | | | | |
For the years ended December 31, | | 2007 | | 2006 | | 2005 |
INTEREST AND DIVIDEND INCOME | | | | | | | | | |
Interest and fees on loans | | $ | 34,257,504 | | $ | 28,400,440 | | $ | 23,772,395 |
Interest on debt investments | | | | | | | | | |
Taxable | | | 4,272,274 | | | 4,245,614 | | | 4,494,920 |
Dividends | | | 539,418 | | | 617,628 | | | 263,586 |
Other | | | 573,881 | | | 410,085 | | | 100,125 |
| | | | | | | | | |
Total interest and dividend income | | | 39,643,077 | | | 33,673,767 | | | 28,631,026 |
| | | | | | | | | |
INTEREST EXPENSE | | | | | | | | | |
Interest on deposits | | | 12,940,592 | | | 7,746,121 | | | 4,331,043 |
Interest on advances and other borrowed money | | | 4,506,663 | | | 5,525,067 | | | 3,002,106 |
Interest on debentures | | | 1,479,622 | | | 1,453,609 | | | 1,239,625 |
Interest on securities sold under agreements to repurchase | | | 453,738 | | | 525,097 | | | 343,582 |
| | | | | | | | | |
Total interest expense | | | 19,380,615 | | | 15,249,894 | | | 8,916,356 |
| | | | | | | | | |
Net interest and dividend income | | | 20,262,462 | | | 18,423,873 | | | 19,714,670 |
PROVISION FOR LOAN LOSSES | | | 122,500 | | | 230,011 | | | 88,500 |
| | | | | | | | | |
Net interest and dividend income after provision for loan losses | | | 20,139,962 | | | 18,193,862 | | | 19,626,170 |
| | | | | | | | | |
NONINTEREST INCOME | | | | | | | | | |
Customer service fees | | | 4,784,625 | | | 4,025,928 | | | 2,589,077 |
Net gain on sales and calls of securities | | | — | | | 71,069 | | | 50,328 |
Income on other investments | | | 144,174 | | | — | | | — |
Net gain on sales of loans | | | 845,832 | | | 764,592 | | | 546,730 |
Gain on sale of investment in real estate | | | — | | | 82,633 | | | — |
Rental income | | | 652,562 | | | 555,948 | | | 471,384 |
Realized gain in Charter Holding Corp. | | | 224,376 | | | 189,378 | | | 103,348 |
Brokerage service income | | | 182,089 | | | 177,416 | | | 263,705 |
Other income | | | 80,719 | | | 7,596 | | | 83,813 |
| | | | | | | | | |
Total noninterest income | | | 6,914,377 | | | 5,874,560 | | | 4,108,385 |
| | | | | | | | | |
NONINTEREST EXPENSES | | | | | | | | | |
Salaries and employee benefits | | | 10,469,900 | | | 8,742,542 | | | 7,966,348 |
Occupancy and equipment expenses | | | 3,358,720 | | | 2,641,004 | | | 2,396,402 |
Advertising and promotion | | | 403,436 | | | 321,097 | | | 422,896 |
Professional services | | | 608,528 | | | 547,570 | | | 560,718 |
Data processing and outside services fees | | | 795,538 | | | 640,349 | | | 581,380 |
ATM processing fees | | | 516,926 | | | 399,108 | | | 378,529 |
Amortization of mortgage servicing rights in excess of mortgage servicing income | | | 86,189 | | | 189,320 | | | 46,086 |
Supplies | | | 438,691 | | | 352,419 | | | 328,133 |
Other expenses | | | 3,949,689 | | | 2,695,233 | | | 2,271,428 |
| | | | | | | | | |
Total noninterest expenses | | | 20,627,617 | | | 16,528,642 | | | 14,951,920 |
| | | | | | | | | |
INCOME BEFORE PROVISION FOR INCOME TAXES | | | 6,426,722 | | | 7,539,780 | | | 8,782,635 |
PROVISION FOR INCOME TAXES | | | 1,911,040 | | | 2,499,921 | | | 3,258,347 |
| | | | | | | | | |
NET INCOME | | $ | 4,515,682 | | $ | 5,039,859 | | $ | 5,524,288 |
| | | | | | | | | |
Earnings per common share | | $ | 0.93 | | $ | 1.20 | | $ | 1.31 |
| | | | | | | | | |
Earnings per common share, assuming dilution | | $ | 0.92 | | $ | 1.17 | | $ | 1.29 |
| | | | | | | | | |
Dividends declared per common share | | $ | 0.52 | | $ | .52 | | $ | .50 |
| | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
26
New Hampshire Thrift Bancshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
| | | | | | | | | | | | |
For the years ended December 31, | | 2007 | | | 2006 | | | 2005 | |
COMMON STOCK | | | | | | | | | | | | |
Balance, beginning of year | | $ | 42,936 | | | $ | 42,280 | | | $ | 41,672 | |
Exercise of stock options 68,758 shares in 2007, 65,600 shares in 2006 and 60,800 shares in 2005) | | | 688 | | | | 656 | | | | 608 | |
Shares issued for acquisitions (1,819,713 shares) | | | 18,197 | | | | — | | | | — | |
| | | | | | | | | | | | |
Balance, end of year | | $ | 61,821 | | | $ | 42,936 | | | $ | 42,280 | |
| | | | | | | | | | | | |
PAID-IN CAPITAL | | | | | | | | | | | | |
Balance, beginning of year | | $ | 17,930,597 | | | $ | 17,025,045 | | | $ | 16,308,031 | |
Increase on issuance of common stock from the exercise of stock options | | | 782,044 | | | | 784,469 | | | | 592,737 | |
Tax benefit for stock options | | | 47,911 | | | | 93,033 | | | | 124,277 | |
Acquisition of First Brandon | | | 15,582,350 | | | | — | | | | — | |
Acquisition of First Community | | | 11,138,053 | | | | — | | | | — | |
Stock-based compensation (SFAS 123R) | | | — | | | | 28,050 | | | | — | |
| | | | | | | | | | | | |
Balance, end of year | | $ | 45,480,955 | | | $ | 17,930,597 | | | $ | 17,025,045 | |
| | | | | | | | | | | | |
RETAINED EARNINGS | | | | | | | | | | | | |
Balance, beginning of year | | $ | 33,941,729 | | | $ | 31,048,903 | | | $ | 27,622,080 | |
Net income | | | 4,515,682 | | | | 5,039,859 | | | | 5,524,288 | |
Cash dividends paid | | | (2,475,019 | ) | | | (2,147,033 | ) | | | (2,097,465 | ) |
| | | | | | | | | | | | |
Balance, end of year | | $ | 35,982,392 | | | $ | 33,941,729 | | | $ | 31,048,903 | |
| | | | | | | | | | | | |
ACCUMULATED OTHER COMPREHENSIVE LOSS | | | | | | | | | | | | |
Balance, beginning of year | | $ | (1,707,556 | ) | | $ | (1,276,713 | ) | | $ | (136,766 | ) |
Net unrealized holding income (loss) on securities available-for-sale, net of tax effect | | | 60,050 | | | | 212,287 | | | | (1,139,947 | ) |
Other comprehensive loss - pension plan | | | (120,570 | ) | | | — | | | | — | |
Adjustment to initially apply FASB Statement No. 158, net of tax | | | — | | | | (643,130 | ) | | | — | |
| | | | | | | | | | | | |
Balance, end of year | | $ | (1,768,076 | ) | | $ | (1,707,556 | ) | | $ | (1,276,713 | ) |
| | | | | | | | | | | | |
TREASURY STOCK | | | | | | | | | | | | |
Balance, beginning of year | | $ | (1,798,300 | ) | | $ | (112,966 | ) | | $ | — | |
Shares repurchased (341,779 shares in 2007, 105,500 shares in 2006, 8,000 shares in 2005) | | | (5,291,469 | ) | | | (1,685,334 | ) | | | (112,966 | ) |
| | | | | | | | | | | | |
Balance, end of year | | $ | (7,089,769 | ) | | $ | (1,798,300 | ) | | $ | (112,966 | ) |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
27
New Hampshire Thrift Bancshares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
| | | | | | | | | | | | |
For the years ended December 31, | | 2007 | | | 2006 | | | 2005 | |
Net income | | $ | 4,515,682 | | | $ | 5,039,859 | | | $ | 5,524,288 | |
Other comprehensive (loss) income, net of tax effect | | | (60,520 | ) | | | 212,287 | | | | (1,139,947 | ) |
| | | | | | | | | | | | |
Comprehensive income | | $ | 4,455,162 | | | $ | 5,252,146 | | | $ | 4,384,341 | |
| | | | | | | | | | | | |
| | | |
Reclassification disclosure for the years ended December 31: | | | | | | | | | | | | |
| | | |
| | | 2007 | | | 2006 | | | 2005 | |
Net unrealized holding gains (losses) on available-for-sale securities | | $ | 99,438 | | | $ | 422,595 | | | $ | (1,837,314 | ) |
Reclassification adjustment for realized gains in net income | | | — | | | | (71,069 | ) | | | (50,328 | ) |
| | | | | | | | | | | | |
Other comprehensive income (loss) before income tax effect | | | 99,438 | | | | 351,526 | | | | (1,887,642 | ) |
Income tax (expense) benefit | | | (39,388 | ) | | | (139,239 | ) | | | 747,695 | |
| | | | | | | | | | | | |
| | | 60,050 | | | | 212,287 | | | | (1,139,947 | ) |
| | | | | | | | | | | | |
Other comprehensive loss - pension plan | | | (199,652 | ) | | | — | | | | — | |
Income tax benefit | | | 79,082 | | | | — | | | | — | |
| | | | | | | | | | | | |
| | | (120,570 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Other comprehensive (loss) income, net of tax | | $ | (60,520 | ) | | $ | (212,287 | ) | | $ | (1,139,947 | ) |
| | | | | | | | | | | | |
| | | |
Accumulated other comprehensive loss consists of the following as of December 31: | | | | | | | | | | | | |
| | | |
| | | 2007 | | | 2006 | | | 2005 | |
Net unrealized holding losses on available-for-sale securities, net of taxes | | $ | (1,004,376 | ) | | $ | (1,064,426 | ) | | $ | (1,276,713 | ) |
Unrecognized net actuarial loss, defined benefit pension plan, net of tax | | | (763,700 | ) | | | (643,130 | ) | | | — | |
| | | | | | | | | | | | |
Accumulated other comprehensive loss | | $ | (1,768,076 | ) | | $ | (1,707,556 | ) | | $ | (1,276,713 | ) |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
28
New Hampshire Thrift Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | |
For the years ended December 31, | | 2007 | | | 2006 | | | 2005 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 4,515,682 | | | $ | 5,039,859 | | | $ | 5,524,288 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 1,671,562 | | | | 1,346,924 | | | | 1,258,117 | |
Net decrease in mortgage servicing rights | | | 227,113 | | | | 234,347 | | | | 145,035 | |
Amortization of securities, net | | | 54,106 | | | | 541,592 | | | | 541,705 | |
Amortization of deferred expenses relating to issuance ofcapital securities and subordinated debentures | | | 10,694 | | | | 10,693 | | | | 10,693 | |
Amortization of fair value adjustments, net (loans, deposits and borrowings) | | | 209,715 | | | | 12,074 | | | | 12,074 | |
Amortization of core deposit intangible | | | 307,697 | | | | — | | | | — | |
Net (increase) decrease in loans held-for-sale | | | (737,380 | ) | | | 492,800 | | | | (968,300 | ) |
Net gain on sales of premises, equipment, investment in real estate, other real estate owned and other assets | | | — | | | | (82,633 | ) | | | (2,500 | ) |
Net gain on sales and calls of debt securities | | | — | | | | (71,069 | ) | | | (50,328 | ) |
Increase in investment in Charter Holding Corp., at equity | | | (11,912 | ) | | | (349 | ) | | | (4,137 | ) |
Provision for loan losses | | | 122,500 | | | | 230,011 | | | | 88,500 | |
Deferred tax (benefit) expense | | | (126,437 | ) | | | 187,120 | | | | 91,565 | |
Change in cash surrender value of life insurance | | | (104,597 | ) | | | — | | | | — | |
Decrease (increase) in accrued interest receivable and other assets | | | 373,777 | | | | (1,073,340 | ) | | | (747,786 | ) |
Change in deferred loan origination costs, net | | | (128,158 | ) | | | 48,835 | | | | (41,734 | ) |
(Decrease) increase in accrued expenses and other liabilities | | | (2,135,727 | ) | | | 2,386,900 | | | | (2,360,875 | ) |
Stock-based compensation expense | | | — | | | | 28,050 | | | | — | |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 4,248,635 | | | | 9,331,814 | | | | 3,496,317 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Proceeds from sale of equipment | | | — | | | | — | | | | 2,500 | |
Proceeds from sale of investment in real estate | | | — | | | | 269,590 | | | | — | |
Capital expenditures - investment in real estate | | | (54,896 | ) | | | (1,528,131 | ) | | | (1,617,496 | ) |
Capital expenditures - software | | | (26,213 | ) | | | (133,458 | ) | | | (96,298 | ) |
Capital expenditures - premises and equipment | | | (1,762,264 | ) | | | (2,437,842 | ) | | | (2,493,973 | ) |
Proceeds from sales of securities available-for-sale | | | — | | | | 5,071,069 | | | | — | |
Purchases of securities available-for-sale | | | (13,017,831 | ) | | | (6,393,630 | ) | | | (35,104,977 | ) |
Proceeds from maturities of securities available-for-sale | | | 37,980,100 | | | | 23,276,394 | | | | 37,672,136 | |
Purchases of Federal Home Loan Bank stock | | | — | | | | (1,833,100 | ) | | | (828,300 | ) |
Redemption of Federal Home Loan Bank stock | | | 759,500 | | | | — | | | | — | |
Redemption of Federal Reserve Bank stock | | | 12,000 | | | | — | | | | — | |
Loan originations and principal collections, net | | | (2,639,139 | ) | | | (23,883,291 | ) | | | (42,442,901 | ) |
Purchases of loans | | | (2,173,433 | ) | | | (6,158,678 | ) | | | (6,996,461 | ) |
Recoveries of loans previously charged off | | | 182,686 | | | | 189,788 | | | | 38,276 | |
Purchases of limited partnerships | | | (246,288 | ) | | | — | | | | — | |
Purchase of other investments | | | — | | | | (2,000,000 | ) | | | — | |
Purchase of bank owned life insurance | | | (5,000,000 | ) | | | — | | | | — | |
Premium paid on life insurance policies | | | (11,095 | ) | | | — | | | | — | |
Cash and cash equivalents acquired from First Brandon and First Community, net of expenses paid of $ 1,320,347 | | | 7,678,405 | | | | — | | | | — | |
| | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 21,681,532 | | | | (15,561,289 | ) | | | (51,867,494 | ) |
| | | | | | | | | | | | |
29
New Hampshire Thrift Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Continued)
| | | | | | | | | | | | |
For the years ended December 31, | | 2007 | | | 2006 | | | 2005 | |
Cash flows from financing activities: | | | | | | | | | | | | |
Net decrease in demand deposits, savings and NOW accounts | | | (11,904,868 | ) | | | (43,261,994 | ) | | | (7,788,484 | ) |
Net increase in time deposits | | | 47,270,927 | | | | 44,130,910 | | | | 39,353,808 | |
Increase (decrease) in short-term advances from Federal Home Loan Bank | | | 617,000 | | | | (25,000,000 | ) | | | (5,000,000 | ) |
Principal advances from Federal Home Loan Bank | | | 10,000,000 | | | | 65,000,000 | | | | 95,000,000 | |
Repayment of advances from Federal Home Loan Bank | | | (70,848,726 | ) | | | (20,000,000 | ) | | | (65,000,000 | ) |
Increase in other borrowed funds | | | 237,500 | | | | — | | | | — | |
Net increase (decrease) in repurchase agreements | | | 4,789,517 | | | | (2,990,853 | ) | | | (1,775,252 | ) |
Repurchase of treasury stock | | | (5,291,469 | ) | | | (1,685,334 | ) | | | (112,966 | ) |
Dividends paid | | | (2,475,019 | ) | | | (2,147,033 | ) | | | (2,097,465 | ) |
Proceeds from exercise of stock options | | | 782,732 | | | | 785,125 | | | | 593,345 | |
| | | | | | | | | | | | |
Net cash (used in) provided by financing activities | | | (26,822,406 | ) | | | 14,830,821 | | | | 53,172,986 | |
| | | | | | | | | | | | |
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | (892,239 | ) | | | 8,601,346 | | | | 4,801,809 | |
CASH AND CASH EQUIVALENTS, beginning of year | | | 34,946,780 | | | | 26,345,434 | | | | 21,543,625 | |
| | | | | | | | | | | | |
CASH AND CASH EQUIVALENTS, end of year | | $ | 34,054,541 | | | $ | 34,946,780 | | | $ | 26,345,434 | |
| | | | | | | | | | | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | | | | | | | | | | |
Interest paid | | $ | 19,392,958 | | | $ | 14,744,455 | | | $ | 8,566,691 | |
| | | | | | | | | | | | |
Income taxes paid | | $ | 2,098,875 | | | $ | 2,340,035 | | | $ | 3,461,426 | |
| | | | | | | | | | | | |
Loans transferred to other real estate owned | | $ | 240,802 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
Investment in real estate transferred to premises and equipment | | $ | 4.425 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
First Brandon Financial Corporation and First Community Bank acquisitions:
| | | |
Cash and cash equivalents acquired | | $ | 16,421,746 |
Available-for-sale securities | | | 20,854,637 |
Federal Home Loan Bank stock | | | 751,600 |
Federal Reserve Bank stock | | | 12,000 |
Net loans acquired | | | 129,230,384 |
Premises and equipment acquired | | | 4,283,792 |
Investment in real estate acquired | | | 309,819 |
Accrued interest receivable | | | 770,286 |
Bank owned life insurance policies | | | 3,530,790 |
Other assets acquired | | | 629,581 |
Core deposit intangible | | | 3,468,000 |
| | | |
| | | 180,262,635 |
| | | |
Deposits assumed | | | 151,964,388 |
Federal Home Loan Bank borrowings assumed | | | 3,607,095 |
Securities sold under agreements to repurchase assumed | | | 1,769,612 |
Other liabilities assumed | | | 2,593,053 |
| | | |
| | | 159,934,148 |
| | | |
Net assets acquired | | | 20,328,487 |
Merger costs | | | 35,481,941 |
| | | |
Goodwill | | $ | 15,153,454 |
| | | |
The accompanying notes are an integral part of these consolidated financial statements.
30
Notes to Consolidated Financial Statements
NOTE 1. Summary of significant accounting policies:
Nature of operations - New Hampshire Thrift Bancshares, Inc. (Company) is a savings and loan holding company headquartered in Newport, New Hampshire. The Company’s subsidiary, Lake Sunapee Bank, fsb (“Bank”), a federal stock savings bank, operates twenty nine branches primarily in Grafton, Hillsborough, Sullivan, and Merrimack Counties in west central New Hampshire and Rutland and Windsor Counties in Vermont. 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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of consolidation - The consolidated financial statements include the accounts of the Company, the Bank, Lake Sunapee Group, Inc. (LSGI), which owns and maintains all buildings, and Lake Sunapee Financial Services Corp. (LSFSC), which was formed to handle the flow of funds from the brokerage 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 II and NHTB Capital Trust III, affiliates of the Company, were formed to sell capital securities to the public through a third party trust pool. In accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (“FIN 46(R)”), the subsidiaries have not been included in the consolidated financial statements.
Cash and cash equivalents - For purposes of reporting cash flows, the Company considers cash and due from banks and Federal Home Loan Bank (FHLB) overnight deposit to be cash equivalents. Cash and due from banks as of December 31, 2007 and 2006 includes $7,413,000 and $4,997,000, respectively which is subject to withdrawal and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank.
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 in the fair value of individual available-for-sale securities below their cost that are deemed to be other than temporary result in write-downs of the individual securities to their fair value. There were no write-downs for the years ended 2007, 2006 and 2005.
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.
Securities held for trading - Trading securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses for trading securities are included in earnings.
31
Notes to Consolidated Financial Statements
NOTE 1. Summary of significant accounting policies:(continued)
Investment in Charter Holding Corp. -As of December 31, 1999, the Company had an investment of $79,999 in the common stock of Charter Holding Corp. (CHC). This investment was included in other investments on the consolidated balance sheet and was accounted for under the cost method of accounting for investments. On October 2, 2000, the Bank and two other New Hampshire banks acquired CHC and Phoenix New England Trust Company (PNET) from the 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, the Bank and each of the other two banks own one-third of CHC at an additional cost of $3,033,337 each. 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. Charter New England Agency, a subsidiary of CHC, provides life insurance, fixed and variable annuities and mutual fund products, in addition to full brokerage services through a broker/dealer affiliation with W.S. Griffith Inc., a wholly owned subsidiary of PM Holdings.
Goodwill resulting from the acquisition was “pushed down” to the financial statements of CHC.
The Bank uses the equity method of accounting to account for its investment in CHC. An investor using the equity method initially records an investment at cost. Subsequently, the carrying amount of the investment is increased to reflect the investor’s share of income of the investee and is reduced to reflect the investor’s share of losses of the investee or dividends received from the investee. The investor’s share of the income or losses of the investee is included in the investor’s net income as the investee reports them. Adjustments similar to those made in preparing consolidated financial statements, such as elimination of intercompany gains and losses, also are applicable to the equity method.
At December 31, 2007 and 2006 the carrying amount of the Company’s investment in CHC equalled the amount of the Bank’s underlying equity in the net assets of CHC.
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.
Nonaccrual loans - Residential real estate loans and consumer loans are placed on nonaccrual status when they become 90 days past due. Commercial loans are placed on nonaccrual status when they become 90 days past due or when it becomes probable that the Bank will be unable to collect all amounts due pursuant to the terms of the loan agreement. When a loan has been placed on nonaccrual status, previously accrued interest is reversed with a charge against interest income on loans. Interest received on nonaccrual loans is generally booked to interest income on a cash basis. Residential real estate loans and consumer loans generally are returned to accrual status when they are no longer over 90 days past due. Commercial loans are generally returned to accrual status when the collectibility of principal and interest is reasonably assured.
Allowance for loan losses -The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
32
Notes to Consolidated Financial Statements
NOTE 1. Summary of significant accounting policies:(continued)
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.
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.
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.
Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. Refinance activities are considered in estimating the period of 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.
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. Estimated lives are 5 to 40 years for buildings and premises and 3 to 15 years for furniture, fixtures and equipment. 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 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.
33
Notes to Consolidated Financial Statements
NOTE 1. Summary of significant accounting policies:(continued)
Real estate owned and property acquired in settlement of loans - The Company classifies loans as in-substance repossessed or foreclosed if the Company receives physical possession of the debtor’s assets regardless of whether formal foreclosure proceedings take place. At the time of foreclosure or possession, the Company records the property at the lower of fair value minus estimated costs to sell or the outstanding balance of the loan. All properties are periodically reviewed and declines in the value of the property are charged against income.
Earnings per share - Basic earnings per share 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 earnings per share, 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.
Advertising - The Company directly expenses costs associated with advertising as they are incurred.
Income taxes - The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled.
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 cash equivalents - The carrying amounts of cash and cash equivalents approximate their fair value.
Available-for-sale securities - Fair values for available-for-sale securities are based on quoted market prices.
Other investments- The carrying amounts of other investments approximate their fair values.
Loans held-for-sale - Fair values of loans held-for-sale are based on estimated market 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.
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.
Federal Home Loan Bank advances - Fair values for FHLB advances are estimated using a discounted cash flow technique that applies interest rates currently being offered on advances to a schedule of aggregated expected monthly maturities on FHLB advances.
Other borrowed funds -The carrying amounts of other borrowed funds approximate their fair values.
Securities sold under agreements to repurchase - The carrying amounts of securities sold under agreements to repurchase approximate their fair values.
Subordinated debentures - Fair values of subordinated debentures are estimated using discounted cash flow analyses, using interest rates currently being offered for debentures with similar terms.
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.
34
Notes to Consolidated Financial Statements
NOTE 1. Summary of significant accounting policies:(continued)
Stock based compensation - At December 31, 2007, the Company has three stock-based employee compensation plans. The Company accounts for those plans under SFAS 123R. $28,050 in stock-based employee compensation cost was recognized for its fixed stock option plans during the year ended December 31, 2006. Prior to January 1, 2006, the Company accounted for the plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees.” No stock-based employee compensation cost had been recognized prior to January 1, 2006, 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. 123R, “Share Based Payment,” to stock-based employee compensation during the year ended December 31, 2005.
| | | |
For the years ended December 31, | | 2005 |
Net income, as reported | | $ | 5,524,288 |
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | 635,490 |
| | | |
Pro forma net income | | $ | 4,888,798 |
| | | |
| |
Earnings per share: | | | |
Basic - as reported | | $ | 1.31 |
Basic - pro forma | | $ | 1.16 |
Diluted - as reported | | $ | 1.29 |
Diluted - pro forma | | $ | 1.14 |
Recent Accounting Pronouncements -In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, “Accounting for Certain Hybrid Instruments” (SFAS 155), which permits, but does not require, fair value accounting for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation in accordance with SFAS 133. The statement also subjects beneficial interests issued by securitization vehicles to the requirements of SFAS No. 133. The statement is effective as of January 1, 2007. The adoption of SFAS 155 is not expected to have a material impact on the Company’s financial condition and results of operations.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets- an amendment of FASB Statement No. 140” (SFAS 156). SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specific situations. Additionally, the servicing asset or servicing liability shall be initially measured at fair value; however, an entity may elect the “amortization method” or “fair value method” for subsequent balance sheet reporting periods. SFAS No. 156 is effective as of an entity’s first fiscal year beginning after September 15, 2006. Early adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The adoption of this statement did not have a material impact on the Company’s financial condition, results of operations or cash flows.
In June 2006 the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.
35
Notes to Consolidated Financial Statements
NOTE 1. Summary of significant accounting policies:(continued)
On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles (GAAP) and enhances disclosures about fair value measurements. SFAS 157 retains the exchange price notion and clarifies that the exchange price is the price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. SFAS 157 is effective for the Company’s consolidated financial statements for the year beginning on January 1, 2008, with earlier adoption permitted. The Company does not expect the adoption of this statement to have a material impact on the Company’s financial condition or results of operations.
In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue No. 06-4 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-4”). EITF Issue 06-4 requires companies with an endorsement split-dollar life insurance arrangement to recognize a liability for future postretirement benefits. The effective date is for fiscal years beginning after December 15, 2007, with earlier application permitted. Companies should recognize the effects of applying this issue through either (a) a change in accounting principle through a cumulative effect adjustment to retained earnings or (b) a change in accounting principle through retrospective application to all periods. The Company does not expect the adoption of the new Issue to have a material impact on its financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective at the beginning of the Company’s fiscal year beginning January 1, 2008, and early application may be elected in certain circumstances. The Company is currently evaluating and has not yet determined the impact the new standard is expected to have on its financial position, results of operations or cash flows.
NOTE 2. Issuance of Capital Securities:
On March 30, 2004, NHTB Capital Trust II (“Trust II”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of 6.06%, 5 Year Fixed-Floating Capital Securities (“Capital Securities II”). Trust II also issued common securities to the Company and used the net proceeds from the offering to purchase a like amount of 6.06% Junior Subordinated Deferrable Interest Debentures (“Debentures II”) of the Company. Debentures II are the sole assets of Trust II. The Company used the proceeds to redeem the securities issued by NHTB Capital Trust I, a wholly owned subsidiary of the Company, which were callable on September 30, 2004. Total expenses associated with the offering of $160,402 are included in other assets and are being amortized on a straight-line basis over the life of Debentures II.
Capital Securities II accrue and pay distributions quarterly at an annual rate of 6.06% for the first 5 years 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 Capital Securities II, but only to the extent that the Trust has funds necessary to make these payments.
Capital Securities II are mandatorily redeemable upon the maturing of Debentures II on March 30, 2034 or upon earlier redemption as provided in the Indenture. The Company has the right to redeem Debentures II, in whole or in part on or after March 30, 2009 at the liquidation amount plus any accrued but unpaid interest to the redemption date.
36
Notes to Consolidated Financial Statements
NOTE 2. Issuance of Capital Securities:(continued)
On March 30, 2004, NHTB Capital Trust III (“Trust III”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of Floating Capital Securities, adjustable every three months at LIBOR plus 2.79% (“Capital Securities III”). Trust III also issued common securities to the Company and used the net proceeds from the offering to purchase a like amount of Junior Subordinated Deferrable Interest Debentures (“Debentures III”) of the Company. Debentures III are the sole assets of Trust III. The Company used a portion of the proceeds to redeem the balance of securities issued by NHTB Capital Trust I, which were callable on September 30, 2004. The balance of the proceeds of Trust III are being used for general corporate purposes. Total expenses associated with the offering of $160,402 are included in other assets and are being amortized on a straight-line basis over the life of Debentures III.
Capital Securities III accrue and pay distributions quarterly based on the stated liquidation amount of $10 per Capital Security. The Company has fully and unconditionally guaranteed all of the obligations of Trust III. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities III, but only to the extent that Trust III has funds necessary to make these payments.
Capital Securities III are mandatorily redeemable upon the maturing of Debentures III on March 30, 2034 or upon earlier redemption as provided in the Indenture. The Company has the right to redeem Debentures III, in whole or in part on or after March 30, 2009 at the liquidation amount plus any accrued but unpaid interest to the redemption date.
NOTE 3. Securities:
Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent.
The amortized cost of securities and their approximate fair values are summarized as follows:
| | | | | | | | | | | | |
| | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value |
Available-for-sale: | | | | | | | | | | | | |
December 31, 2007: | | | | | | | | | | | | |
Bonds and notes - | | | | | | | | | | | | |
U. S. Government, including agencies | | $ | 21,516,957 | | $ | 11,632 | | $ | 13,548 | | $ | 21,515,041 |
Mortgage-backed securities | | | 50,945,486 | | | 130,641 | | | 604,756 | | | 50,471,371 |
Asset-backed securities | | | 1,499,688 | | | 3,403 | | | — | | | 1,503,091 |
Other bonds and debentures | | | 8,786,635 | | | 20,628 | | | 21,963 | | | 8,785,300 |
Preferred stock with maturities | | | 5,000,000 | | | — | | | 950,000 | | | 4,050,000 |
Equity securities | | | 1,374,386 | | | 100,814 | | | 340,000 | | | 1,135,200 |
| | | | | | | | | | | | |
Total available-for-sale | | $ | 89,123,152 | | $ | 267,118 | | $ | 1,930,267 | | $ | 87,460,003 |
| | | | | | | | | | | | |
December 31, 2006: | | | | | | | | | | | | |
Bonds and notes - | | | | | | | | | | | | |
U. S. Government, including agencies | | $ | 23,474,124 | | $ | — | | $ | 350,686 | | $ | 23,123,438 |
Mortgage-backed securities | | | 52,488,507 | | | 13,627 | | | 1,497,177 | | | 51,004,957 |
Asset-backed securities | | | 1,499,645 | | | 2,830 | | | — | | | 1,502,475 |
Other bonds and debentures | | | 9,338,228 | | | 169 | | | 86,633 | | | 9,251,764 |
Preferred stock with maturities | | | 6,000,000 | | | 10,400 | | | 4,001 | | | 6,006,399 |
Equity securities | | | 484,386 | | | 148,884 | | | — | | | 633,270 |
| | | | | | | | | | | | |
Total available-for-sale | | $ | 93,284,890 | | $ | 175,910 | | $ | 1,938,497 | | $ | 91,522,303 |
| | | | | | | | | | | | |
37
Notes to Consolidated Financial Statements
NOTE 3. Securities:(continued)
For the year ended December 31, 2007, there were no sales of debt securities available-for-sale. For the year ended December 31, 2006, proceeds from sales of debt securities available-for-sale amounted to $5,071,069. Gross gains of $71,069 were realized during 2006 on sales of available-for-sale debt securities. The tax provision applicable to these gross realized gains amounted to $28,151. There were no sales of available-for-sale debt securities during 2005. There were no sales of available-for-sale equity securities during 2007, 2006 and 2005.
Maturities of debt securities, excluding mortgage-backed securities and asset-backed securities, classified as available-for-sale are as follows as of December 31, 2007:
| | | |
| | | Fair Value |
U.S. Government, including agencies | | $ | 11,488,281 |
Other bonds and debentures | | | 5,516,681 |
| | | |
Total due in less than one year | | $ | 17,004,962 |
| | | |
U.S. Government, including agencies | | $ | 10,026,760 |
Other bonds and debentures | | | 2,131,923 |
| | | |
Total due after one year through five years | | $ | 12,158,683 |
| | | |
Other bonds and debentures | | $ | 851,696 |
| | | |
Total due after five years through ten years | | $ | 851,696 |
| | | |
Preferred stock with maturities | | $ | 4,050,000 |
Other bonds and debentures | | | 285,000 |
| | | |
Total due after ten years | | $ | 4,335,000 |
| | | |
There were no issuers of securities, other than U.S. government and agency obligations, whose aggregate carrying value exceeded 10% of equity as of December 31, 2007.
Securities, carried at $71,698,643 and $72,369,317 were pledged to secure public deposits, the treasury, tax and loan account and securities sold under agreements to repurchase as of December 31, 2007 and 2006, respectively.
The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized-loss position for less than twelve months and for twelve months or more, and are not other than temporarily impaired, are as follows as of December 31:
| | | | | | | | | | | | | | | | | | |
| | | Less than 12 Months | | 12 Months or Longer | | Total |
| | | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses |
December 31, 2007: | | | | | | | | | | | | | | | | | | |
Bonds and notes - | | | | | | | | | | | | | | | | | | |
Preferred stock with maturities | | $ | — | | $ | — | | $ | 4,050,000 | | $ | 950,000 | | $ | 4,050,000 | | $ | 950,000 |
U.S. Government, including agencies | | | — | | | — | | | 7,985,000 | | | 13,548 | | | 7,985,000 | | | 13,548 |
Mortgage-backed securities | | | 1,136,750 | | | 4,358 | | | 36,696,877 | | | 600,398 | | | 37,833,627 | | | 604,756 |
Other bonds and debentures | | | 201,696 | | | 543 | | | 5,022,397 | | | 21,420 | | | 5,224,093 | | | 21,963 |
Equity securities | | | 550,000 | | | 340,000 | | | — | | | — | | | 550,000 | | | 340,000 |
| | | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | | $ | 1,888,446 | | $ | 344,901 | | $ | 53,754,274 | | $ | 1,585,366 | | $ | 55,642,720 | | $ | 1,930,267 |
| | | | | | | | | | | | | | | | | | |
December 31, 2006: | | | | | | | | | | | | | | | | | | |
Bonds and notes - | | | | | | | | | | | | | | | | | | |
Preferred stock with maturities | | $ | 4,995,999 | | $ | 4,001 | | $ | — | | $ | — | | $ | 4,995,999 | | $ | 4,001 |
U.S. Government, including agencies | | | — | | | — | | | 23,123,438 | | | 350,686 | | | 23,123,438 | | | 350,686 |
Mortgage-backed securities | | | — | | | — | | | 46,215,759 | | | 1,497,177 | | | 46,215,759 | | | 1,497,177 |
Other bonds and debentures | | | — | | | — | | | 8,021,595 | | | 86,633 | | | 8,021,595 | | | 86,633 |
| | | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | | $ | 4,995,999 | | $ | 4,001 | | $ | 77,360,792 | | $ | 1,934,496 | | $ | 82,356,791 | | $ | 1,938,497 |
| | | | | | | | | | | | | | | | | | |
38
Notes to Consolidated Financial Statements
NOTE 3. Securities:(continued)
The investments in the Company’s investment portfolio that are temporarily impaired as of December 31, 2007 consist of debt securities issued by U.S. government corporations and agencies, corporate debt with strong credit ratings and preferred stock issued by corporations and government sponsored enterprises with strong credit ratings and stable credit outlooks. The unrealized losses in the above table are primarily attributable to changes in market interest rates. Company management does not intend to sell these securities in the near term. As company management has the ability to hold debt securities until maturity and equity securities for the foreseeable future, no declines are deemed to be other than temporary.
NOTE 4. Loans receivable:
Loans receivable consisted of the following as of December 31:
| | | | | | | | |
| | | 2007 | | | 2006 | |
Real estate loans | | | | | | | | |
Conventional | | $ | 335,782,676 | | | $ | 281,755,301 | |
Construction | | | 21,704,154 | | | | 17,109,129 | |
Commercial | | | 142,469,203 | | | | 103,246,827 | |
| | | | | | | | |
| | | 499,956,033 | | | | 402,111,257 | |
Consumer loans | | | 75,619,503 | | | | 63,276,967 | |
Commercial and municipal loans | | | 52,514,784 | | | | 29,521,562 | |
Unamortized adjustment to fair value | | | 1,496,542 | | | | 36,220 | |
| | | | | | | | |
Total loans | | | 629,586,862 | | | | 494,946,006 | |
Allowance for loan losses | | | (5,181,471 | ) | | | (3,975,122 | ) |
Deferred loan origination costs, net | | | 1,869,071 | | | | 1,740,913 | |
| | | | | | | | |
Loans receivable, net | | $ | 626,274,462 | | | $ | 492,711,797 | |
| | | | | | | | |
The following is a summary of activity of the allowance for loan losses for the years ended December 31:
| | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
BALANCE, beginning of year | | $ | 3,975,122 | | | $ | 4,022,341 | | | $ | 4,019,450 | |
Charged-off loans | | | (402,438 | ) | | | (467,018 | ) | | | (123,885 | ) |
Recoveries of loans previously charged-off | | | 182,926 | | | | 189,788 | | | | 38,276 | |
Provision for loan losses charged to income | | | 122,500 | | | | 230,011 | | | | 88,500 | |
Increase in allowance for loan losses from acquisitions | | | 1,303,361 | | | | — | | | | — | |
| | | | | | | | | | | | |
BALANCE, end of year | | $ | 5,181,471 | | | $ | 3,975,122 | | | $ | 4,022,341 | |
| | | | | | | | | | | | |
Certain directors and executive officers of the Company and companies in which they have significant ownership interest were customers of the Bank during 2007. Total loans to such persons and their companies amounted to $933,506 as of December 31, 2007. During 2007 principal advances of $210,322 were made and principal payments totaled $422,994.
39
Notes to Consolidated Financial Statements
NOTE 4. Loans receivable:(continued)
The following is a summary of information regarding impaired loans, nonaccrual loans and accruing loans 90 days or more overdue:
| | | | | | |
| | | December 31, |
| | | 2007 | | 2006 |
Total nonaccrual loans | | $ | 4,744,729 | | $ | 753,992 |
| | | | | | |
Accruing loans which are 90 days or more overdue | | $ | — | | $ | — |
| | | | | | |
| | |
Impaired loans as of December 31, | | 2007 | | 2006 |
Recorded investment in impaired loans at December 31 | | $ | 3,795,811 | | $ | 305,307 |
Portion of allowance for loan losses allocated to impaired loans | | | 45,000 | | $ | 45,796 |
Net balance of impaired loans | | | 3,750,811 | | $ | 259,511 |
Recorded investment in impaired loans with a related allowance for credit losses | | | 47,866 | | $ | 305,307 |
| | | | | | | | | |
| | | |
Years Ended December 31, | | 2007 | | 2006 | | 2005 |
Average recorded investment in impaired loans | | $ | 1,805,074 | | $ | 211,849 | | $ | 335,434 |
Interest income recognized on impaired loans | | | 143,452 | | $ | 16,851 | | $ | 22,285 |
Interest income recognized on impaired loans on a cash basis | | | 143,452 | | $ | 16,851 | | $ | 22,285 |
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:
| | | | | | |
| | | 2007 | | 2006 |
Sold loans | | $ | 305,838,179 | | $ | 300,019,470 |
| | | | | | |
Participation loans | | $ | 22,702,702 | | $ | 23,105,301 |
| | | | | | |
The balance of capitalized servicing rights, net of valuation allowances, included in other assets at December 31, 2007 and 2006 was $1,674,814 and $1,901,927, respectively.
Servicing rights of $661,973, $1,321,488 and $617,167 were capitalized in 2007, 2006 and 2005, respectively. Amortization of capitalized servicing rights was $883,980 in 2007, $1,559,508 in 2006 and $781,975 in 2005.
The fair value of capitalized servicing rights was $3,587,490 and $3,863,843 as of December 31, 2007 and 2006, respectively. Following is an analysis of the aggregate changes in the valuation allowances for capitalized servicing rights:
| | | | | | | |
| | | 2007 | | 2006 | |
Balance, beginning of year | | $ | 5,438 | | $ | 9,111 | |
Increase (decrease) | | | 5,106 | | | (3,673 | ) |
| | | | | | | |
Balance, end of year | | $ | 10,544 | | $ | 5,438 | |
| | | | | | | |
40
Notes to Consolidated Financial Statements
NOTE 5. Premises and equipment:
Premises and equipment are shown on the consolidated balance sheets at cost, net of accumulated depreciation, as follows as of December 31:
| | | | | | |
| | | 2007 | | 2006 |
Land and land improvements | | $ | 2,418,499 | | $ | 1,622,126 |
Buildings and premises | | | 17,172,274 | | | 13,346,295 |
Furniture, fixtures and equipment | | | 8,110,325 | | | 6,698,136 |
| | | | | | |
| | | 27,701,098 | | | 21,666,557 |
Less - Accumulated depreciation | | | 10,046,235 | | | 8,836,241 |
| | | | | | |
| | $ | 17,654,863 | | $ | 12,830,316 |
| | | | | | |
Depreciation expense amounted to $1,225,934, $940,486 and $861,490 for the years ending December 31, 2007, 2006 and 2005, respectively.
NOTE 6. Investment in real estate:
The balance in investment in real estate consisted of the following as of December 31:
| | | | | | |
| | | 2007 | | 2006 |
Land and land improvements | | $ | 411,828 | | $ | 411,828 |
Building | | | 3,338,928 | | | 2,978,713 |
| | | | | | |
| | | 3,750,756 | | | 3,390,541 |
Less - Accumulated depreciation | | | 238,630 | | | 153,757 |
| | | | | | |
| | $ | 3,512,126 | | $ | 3,236,784 |
| | | | | | |
Rental income from investment in real estate amounted to $195,056, $129,997 and $48,066 for the years ended December 31, 2007, 2006 and 2005, respectively. Depreciation expense amounted to $84,948, $58,238 and $20,767 for the years ending December 31, 2007, 2006 and 2005, respectively.
NOTE 7. Deposits:
Deposits are summarized as follows as of December 31:
| | | | | | |
| | | 2007 | | 2006 |
Demand deposits | | $ | 48,259,896 | | $ | 38,663,553 |
Savings | | | 116,288,204 | | | 87,333,708 |
N.O.W. | | | 151,866,391 | | | 129,163,343 |
Money market | | | 41,225,038 | | | 25,275,784 |
Time deposits | | | 295,332,488 | | | 185,069,432 |
| | | | | | |
| | $ | 652,972,017 | | $ | 465,505,820 |
| | | | | | |
The following is a summary of maturities of time deposits as of December 31, 2007:
| | | |
2008 | | $ | 270,586,369 |
2009 | | | 21,284,147 |
2010 | | | 2,496,235 |
2011 | | | 545,438 |
2012 | | | 420,299 |
| | | |
| | $ | 295,332,488 |
| | | |
41
Notes to Consolidated Financial Statements
NOTE 7. Deposits:(continued)
Interest expense by major category of interest-bearing deposits is summarized as follows for the year ended December 31:
| | | | | | | | | |
| | | 2007 | | 2006 | | 2005 |
Time deposits | | $ | 10,391,841 | | $ | 6,002,063 | | $ | 2,812,614 |
N.O.W. | | | 980,180 | | | 899,643 | | | 714,966 |
Money market | | | 439,538 | | | 181,740 | | | 295,793 |
Savings | | | 1,129,033 | | | 662,675 | | | 507,670 |
| | | | | | | | | |
| | $ | 12,940,592 | | $ | 7,746,121 | | $ | 4,331,043 |
| | | | | | | | | |
Deposits from related parties held by the Bank as of December 31, 2007 and 2006 amounted to $1,779,667 and $2,954,514, respectively.
As of December 31, 2007 and 2006, time deposits include $112,447,762 and $64,612,324, respectively, of certificates of deposit with a minimum balance of $100,000. Generally, deposits in excess of $100,000 are not federally insured.
NOTE 8. Federal Home Loan Bank Advances:
Advances consist of funds borrowed from the FHLB.
Maturities of advances from the FHLB for the years ending after December 31, 2007 are summarized as follows:
| | | | |
2008 | | $ | 52,098,048 | |
2009 | | | 10,382,246 | |
2015 | | | 1,000,000 | |
Fair value adjustment | | | (93,420 | ) |
| | | | |
| | $ | 63,386,874 | |
| | | | |
As of December 31, 2007, the following advances from the FHLB were redeemable at par at the option of the FHLB:
| | | | | |
MATURITY DATE | | OPTIONAL REDEMPTION DATE | | AMOUNT |
October 29, 2009 | | October 29, 2008 and quarterly thereafter | | $ | 10,000,000 |
During 2005, the Bank borrowed $1,000,000 at 4.13% as a Knock-out Advance with a Strike Rate. If the three month LIBOR rate exceeds the Strike Rate of 6.75% on March 3, 2008 and quarterly thereafter, the FHLB will require that this borrowing become due immediately upon the Strike Date as defined in the contract. As of December 31, 2007, the three month LIBOR was 4.70%.
As of December 31, 2007, the Bank had a $10,000,000 floating auction rate advance that matures on March 7, 2008. The interest rate as of December 31, 2007 is 4.34% and is adjustable every thirteen weeks based on the Base Rate, as defined in the advance agreement, plus a spread of 10 basis points.
A $30,000,000 advance maturing on January 31, 2008 has a capped interest rate of 4.48% for the life of the advance. As of December 31, 2007, the advance has reached the maximum interest rate of 4.48%.
At December 31, 2007, the interest rates on FHLB advances ranged from 2.87% to 5.35%. The weighted average interest rate at December 31, 2007 is 4.52%.
42
Notes to Consolidated Financial Statements
NOTE 8. Federal Home Loan Bank Advances:(continued)
Amortizing advances are being repaid in equal monthly payments and are being amortized from the date of the advance to the maturity date on a direct reduction basis.
Borrowings from the FHLB are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain unencumbered investment securities and other qualified assets.
NOTE 9. Other borrowed funds:
Other borrowed funds consist of a promissory note payable to a third party in the amount of $237,500. The note is payable in three installments on June 1, 2008, 2009 and 2010, and bears a variable interest rate equal to the prime rate as disclosed in the Wall Street Journal.
NOTE 10. Securities sold under agreements to repurchase:
The securities sold under agreements to repurchase as of December 31, 2007 are securities sold on a short-term basis by the Bank that have been accounted for not as sales but as borrowings. The securities consisted of U.S. Agencies. The securities were held in the Bank’s safekeeping account at Bank of America under the control of the Bank and pledged to the purchasers of the securities. The purchasers have agreed to sell to the Bank substantially identical securities at the maturity of the agreements.
NOTE 11. Income taxes:
The components of income tax expense are as follows for the years ended December 31:
| | | | | | | | | | |
| | | 2007 | | | 2006 | | 2005 |
Current tax expense | | $ | 2,093,512 | | | $ | 2,312,801 | | $ | 3,166,782 |
Benefit from net operating less carryovers | | | (56,065 | ) | | | — | | | — |
Deferred tax (benefit) expense | | | (126,437 | ) | | | 187,120 | | | 91,565 |
| | | | | | | | | | |
Total income tax expense | | $ | 1,911,040 | | | $ | 2,499,921 | | $ | 3,258,347 |
| | | | | | | | | | |
The reasons for the differences between the tax at the statutory federal income tax rate and the effective tax rates are summarized as follows for the years ended December 31:
| | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
Federal income tax at statutory rate | | 34.0 | % | | 34.0 | % | | 34.0 | % |
Increase (decrease) in tax resulting from: | | | | | | | | | |
Tax-exempt income | | (3.7 | ) | | (1.1 | ) | | (.6 | ) |
Dividends received deduction | | (2.6 | ) | | (2.8 | ) | | (.7 | ) |
Other, net | | 2.0 | | | 3.1 | | | 4.4 | |
| | | | | | | | | |
Effective tax rates | | 29.7 | % | | 33.2 | % | | 37.1 | % |
| | | | | | | | | |
43
Notes to Consolidated Financial Statements
NOTE 11. Income taxes:(continued)
The Company had gross deferred tax assets and gross deferred tax liabilities as follows as of December 31:
| | | | | | | | |
| | | 2007 | | | 2006 | |
Deferred tax assets: | | | | | | | | |
Interest on non-performing loans | | $ | 25,433 | | | $ | 11,527 | |
Allowance for loan losses | | | 1,747,081 | | | | 1,341,796 | |
Deferred compensation | | | 548,052 | | | | 141,814 | |
Deferred retirement expense | | | 293,458 | | | | 228,095 | |
Accrued directors fees | | | 53,339 | | | | 50,679 | |
Accrued group health contingency | | | 57,113 | | | | — | |
Writedown of securities | | | 77,208 | | | | — | |
Net operating loss carryforwards | | | 516,679 | | | | — | |
Net unrealized holding loss on securities available-for-sale | | | 658,773 | | | | 698,161 | |
Unrecognized employee benefits under SFAS No. 158 | | | 500,912 | | | | 421,830 | |
Other | | | 36,055 | | | | 30,287 | |
| | | | | | | | |
Gross deferred tax assets | | | 4,514,103 | | | | 2,924,189 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Deferred loan costs, net of fees | | | (694,958 | ) | | | (689,268 | ) |
Prepaid pension | | | (1,375,884 | ) | | | (1,285,801 | ) |
Accelerated depreciation | | | (341,578 | ) | | | (528,639 | ) |
Purchased goodwill | | | (1,776,433 | ) | | | (1,480,360 | ) |
Mortgage servicing rights | | | (663,393 | ) | | | (753,353 | ) |
Core deposit intangibles and other market value adjustments | | | (1,945,394 | ) | | | — | |
Other | | | (15,407 | ) | | | (10,694 | ) |
| | | | | | | | |
Gross deferred tax liabilities | | | (6,813,047 | ) | | | (4,748,115 | ) |
| | | | | | | | |
Net deferred tax liability | | $ | (2,298,944 | ) | | $ | (1,823,926 | ) |
| | | | | | | | |
During 2007, deferred tax assets were increased due to the acquisition of First Community Bank and First Brandon National Bank by $1,109,957 and $305,157, respectively. The acquisition also resulted in an increase in deferred tax liabilities of $2,056,263 due to market value adjustments and core deposit intangibles recorded as a result of the acquisitions.
As of December 31, 2007, the Company had federal net operating loss carryovers of approximately $1,519,646. The carryovers were transferred to the Company upon the acquisition of First Community Bank during the year. The losses will expire in 2026 and are subject to certain annual limitations. Depending on the future earnings of the Company, up to $659,234 of losses can be used each year until fully utilized.
NOTE 12. Stock compensation plans:
At December 31, 2007, the Company has three fixed stock-based employee compensation plans under which options are outstanding. As of December 31, 2007, 225,510 options are available to be granted. Under the 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.
44
Notes to Consolidated Financial Statements
NOTE 12. Stock compensation plans:(continued)
There were 7,500 options granted in 2006 and 199,500 options granted in 2005. There were no options granted in 2007. The fair value of each option granted in 2006 and 2005 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
| | | | | | |
| | | 2006 | | | 2005 | |
Weighted risk-free interest rate | | 4.60 | % | | 4.60 | % |
Weighted expected life | | 10 years | | | 10 years | |
Weighted expected volatility | | 24.44 | % | | 26.55 | % |
Weighted expected dividend yield | | 3.39 | % per year | | 3.39 | % per year |
No modifications have been made to the terms of the option agreements.
A summary of the status of the Company’s fixed stock option plans as of December 31, 2007, 2006 and 2005 and changes during the years ending on those dates is presented below:
| | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | 2006 | | 2005 |
| | | Shares | | | Weighted
Average
Exercise
Price | | Shares | | | Weighted
Average
Exercise
Price | | Shares | | | Weighted
Average
Exercise
Price |
Outstanding at beginning of year | | 446,800 | | | $ | 11.99 | | | 511,700 | | | $ | 11.95 | | | 373,000 | | | $ | 10.90 |
Granted | | — | | | | | | | 7,500 | | | | 15.30 | | | 199,500 | | | | 13.25 |
Forfeits | | — | | | | | | | (6,800 | ) | | | 13.05 | | | — | | | | |
Exercised | | (68,758 | ) | | | 11.38 | | | (65,600 | ) | | | 11.97 | | | (60,800 | ) | | | 9.76 |
| | | | | | | | | | | | | | | | | | | | |
Outstanding at end of year | | 378,042 | | | $ | 12.10 | | | 446,800 | | | $ | 11.99 | | | 511,700 | | | $ | 11.95 |
| | | | | | | | | | | | | | | | | | | | |
Options exercisable at year-end | | 378,042 | | | | | | | 446,800 | | | | | | | 511,700 | | | | |
Weighted-average fair value of options granted during the year | | — | | | | | | $ | 3.74 | | | | | | $ | 3.45 | | | | |
The following table summarizes information about fixed stock options outstanding as of December 31, 2007:
| | | | | |
| Options Outstanding and Exercisable |
| Exercise Prices | | Number
Outstanding
as of 12/31/07 | | Remaining
Contractual Life |
| $ | 7.375 | | 27,000 | | 1.5 years |
| | 9.125 | | 52,042 | | 4.5 years |
| | 10.50 | | 20,000 | | 0.1 years |
| | 13.05 | | 115,500 | | 5.8 years |
| | 13.25 | | 156,000 | | 7.8 years |
| | 15.30 | | 7,500 | | 8.1 years |
| | | | | |
| | 12.10 | | 378,042 | | 5.9 years |
| | | | | |
NOTE 13. 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. In December 2006, the Company elected to suspend the plan so that employees no longer earn additional benefits for future service under this plan.
45
Notes to Consolidated Financial Statements
NOTE 13. Employee benefit plans:(continued)
The following tables set forth information about the plan, using a measurement date of December 31 for 2007 and 2006 and November 30 for 2005:
| | | | | | | | | | | | |
| | | Year Ended
December 31, | | | Year Ended
November 30, | |
| | | 2007 | | | 2006 | | | 2005 | |
Change in projected benefit obligation: | | | | | | | | | | | | |
Benefit obligation at beginning of year | | $ | 4,879,462 | | | $ | 5,554,781 | | | $ | 5,282,443 | |
Service cost | | | — | | | | 467,458 | | | | 450,044 | |
Interest cost | | | 304,680 | | | | 340,938 | | | | 304,380 | |
Actuarial loss (gain) | | | 57,358 | | | | 431,469 | | | | (33,030 | ) |
Benefits paid | | | (166,924 | ) | | | (532,299 | ) | | | (449,056 | ) |
Curtailment gain | | | — | | | | (1,382,885 | ) | | | — | |
| | | | | | | | | | | | |
Benefit obligation at end of year | | | 5,074,576 | | | | 4,879,462 | | | | 5,554,781 | |
| | | | | | | | | | | | |
Change in plan assets: | | | | | | | | | | | | |
Plan assets at estimated fair value at beginning of year | | | 7,060,652 | | | | 5,752,429 | | | | 5,412,640 | |
Actual return on plan assets | | | 389,814 | | | | 699,864 | | | | 259,557 | |
Employer contribution | | | — | | | | 1,140,658 | | | | 529,288 | |
Benefits paid | | | (166,924 | ) | | | (532,299 | ) | | | (449,056 | ) |
| | | | | | | | | | | | |
Fair value of plan assets at end of year | | | 7,283,542 | | | | 7,060,652 | | | | 5,752,429 | |
| | | | | | | | | | | | |
Funded status | | | 2,208,966 | | | | 2,181,190 | | | | 197,648 | |
Unrecognized net loss | | | N/A | | | | N/A | | | | 2,325,999 | |
Unrecognized prior service cost | | | N/A | | | | N/A | | | | 22,836 | |
| | | | | | | | | | | | |
Funded status or prepaid pension cost recognized | | $ | 2,208,966 | | | $ | 2,181,190 | | | $ | 2,546,483 | |
| | | | | | | | | | | | |
Amounts recognized in accumulated other comprehensive loss, before tax effect, consist of unrecognized net actuarial losses of $1,264,612 and $1,064,960 as of December 31, 2007 and 2006, respectively.
The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 6.25% and 4.00% at December 31, 2007, respectively, 6.25% and 4.00% at December 31, 2006, respectively, and 6.25% and 3.5%, respectively, at December 31, 2005.
The accumulated benefit obligation for the defined benefit pension plan was $5,074,576 and $4,879,462 at December 31, 2007 and 2006, respectively.
Components of net periodic cost:
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
Service cost | | $ | — | | | $ | 467,458 | | | $ | 450,044 | |
Interest cost on benefit obligation | | | 304,680 | | | | 340,938 | | | | 304,380 | |
Expected return on assets | | | (559,795 | ) | | | (500,803 | ) | | | (449,401 | ) |
Amortization of unrecognized prior service cost | | | — | | | | (207 | ) | | | (207 | ) |
Amortization of unrecognized net loss | | | 27,687 | | | | 110,562 | | | | 86,993 | |
Curtailment expense-prior service cost | | | — | | | | 23,043 | | | | — | |
| | | | | | | | | | | | |
Net periodic (benefit) cost | | | (227,428 | ) | | | 440,991 | | | | 391,809 | |
| | | | | | | | | | | | |
Other changes in plan assets and benefit obligations recognized in other comprehensive loss, before tax effect: | | | | | | | | | | | | |
Net actuarial loss | | | 199,652 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total recognized in other comprehensive loss | | | 199,652 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total recognized in net periodic (benefit) cost and other comprehensive loss | | $ | (27,776 | ) | | $ | 440,991 | | | $ | 391,809 | |
| | | | | | | | | | | | |
46
Notes to Consolidated Financial Statements
NOTE 13. Employee benefit plans:(continued)
The estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the year ended December 31, 2008 is $35,561.
For the years ended December 31, 2007, 2006 and 2005, the assumptions used to determine the net period pension cost are as follows:
| | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
Discount rate | | 6.25 | % | | 6.25 | % | | 6.25 | % |
Increase in future compensation levels | | 4.00 | % | | 4.00 | % | | 3.50 | % |
Expected long-term rate of return on plan assets | | 8.00 | % | | 8.00 | % | | 8.00 | % |
The Bank has examined the historical benchmarks for returns in each asset class in its portfolio, and based on the target asset mix has developed a weighted-average expected return for the portfolio as a whole, partly taking into consideration forecasts of long-term expected inflation rates of 2.0% to 3.5%. The long-term rate of return used by the Bank is 8.00%. This rate was determined by adding the expected inflation rates to the weighted sum of the expected long-term return on each asset allocation.
Plan Assets
The Company’s pension plan weighted-average asset allocations by asset category are as follows:
| | | | | | | | | | | | |
| | | Plan Assets at December 31, | |
Asset Category | | 2007 | | Percent | | | 2006 | | Percent | |
Equity securities | | $ | 4,715,678 | | 64.8 | % | | $ | 4,465,944 | | 63.3 | % |
Corporate debt securities | | | 1,036,883 | | 14.2 | | | | 1,144,784 | | 16.2 | |
U.S. Government and agency securities | | | 1,217,637 | | 16.7 | | | | 1,178,693 | | 16.7 | |
Money Market | | | 313,344 | | 4.3 | | | | 271,231 | | 3.8 | |
| | | | | | | | | | | | |
Total | | $ | 7,283,542 | | 100.0 | % | | $ | 7,060,652 | | 100.0 | % |
| | | | | | | | | | | | |
Equity securities include 30,000 shares of the Company’s common stock as of December 31, 2007 and 2006. The fair value of the shares on those dates was $372,000 (5.1% of total plan assets) and $480,000 (6.8% of total plan assets), respectively.
The investment policy for the defined benefit pension plan sponsored by the Bank is based on ERISA standards for prudent investing. The Bank seeks maximum return while limiting risk, through a balanced portfolio of equity and fixed income investments, as well as alternative asset classes. Within each asset class, a diversified mix of individual securities and bonds is selected. Equity allocations are targeted between 40% and 65% of the portfolio, with the remainder in fixed income investments and a small portion in alternative asset classes such as real estate. Asset manager performance is reviewed at least once every six months and benchmarked against the peer universe for the given investment style. The target allocation for the 2008 plan year and for the prior two years follows.
| | | | | | | | | |
| | | Target Percentage of Plan Assets
Years Ended December 31, | |
Asset Category | | 2008 | | | 2007 | | | 2006 | |
Equity securities | | 40-65 | % | | 40-65 | % | | 40-65 | % |
Corporate debt securities | | 10-35 | % | | 10-35 | % | | 10-35 | % |
U.S. Government and agency securities | | 15-25 | % | | 15-25 | % | | 15-25 | % |
Other | | 0-10 | % | | 0-10 | % | | 0-10 | % |
The Bank do not expect to contribute to the defined benefit pension plan in 2008.
47
Notes to Consolidated Financial Statements
NOTE 13. Employee benefit plans:(continued)
Estimated future benefit payments, which reflect expected future service, as appropriate, are as follows:
| | | |
2008 | | $ | 146,796 |
2009 | | | 148,667 |
2010 | | | 155,166 |
2011 | | | 156,042 |
2012 | | | 231,835 |
Years 2013-2017 | | | 1,434,051 |
Defined Contribution Plan
The Bank sponsors a Profit Sharing - Stock Ownership Plan. The Bank may elect, but is not required, to make discretionary and/or matching contributions to the Plan.
For 2007, 2006 and 2005, participating employees’ contributions totaled $419,204, $339,437 and $358,181, respectively. The Bank made contributions totaling $371,692, for 2007, $32,522 for 2006 and $40,377 for 2005. 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.
Effective January 1, 2008, the Bank amended the Profit Sharing—Stock Ownership Plan whereby employees will receive a safe harbor, nonelective contribution equal to 3% of compensation for the plan year, as defined in the plan. In addition, the Bank shall make a matching contribution in an amount equal to employees’ elective deferrals up to a percentage of compensation for the plan year, to be determined annually, not to exceed 4%. Finally, the Bank may make an additional profit sharing contribution, determined annually, to be allocated on a pro rata basis to eligible employees based on their compensation in relation to the compensation of all participants.
The Company and the Bank entered into parallel employment agreements (the “Agreements”) with the President and Chief Executive Officer of the Company and with the Executive Vice President and Chief Financial Officer of the Company. The Agreements are for a period of five years and extend automatically each day unless either the Company or the Executive give contrary written notice in advance. The Agreements provide for a salary and certain benefits.
The Agreements also provide for severance benefits upon termination without cause or following a change in control as defined in the agreements in an amount equal to the present value of the cash compensation and fringe benefits that the Executive(s) would have received if the Executive(s) would have continued working for an additional five years.
NOTE 14. 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, 2007, the Company was obligated under non-cancelable operating leases for bank premises and equipment expiring between June 22, 2008 and December 31, 2016. The total minimum rent commitments due in future periods under these existing agreements is as follows as of December 31, 2007:
| | | |
2008 | | $ | 372,854 |
2009 | | | 313,056 |
2010 | | | 187,546 |
2011 | | | 181,823 |
2012 | | | 120,098 |
Years thereafter | | | 186,070 |
| | | |
Total minimum lease payments | | $ | 1,361,447 |
| | | |
48
Notes to Consolidated Financial Statements
NOTE 14. Commitments and contingencies:(continued)
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 $343,329, $282,932 and $283,374 for the years ended December 31, 2007, 2006 and 2005, respectively.
NOTE 15. 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, 2007.
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.
Special bad debts deduction - In prior years, the Bank, 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 the Bank, as of December 31, 2007 includes $2,069,878 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 four (4) years, subject to a combined federal and state tax rate of approximately 40%.
NOTE 16. 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:
| | | | | | | | |
| | | Income
(Numerator) | | Shares
(Denominator) | | Per-Share
Amount |
Year ended December 31, 2007 | | | | | | | | |
Basic EPS | | | | | | | | |
Net income and income available to common shareholders | | $ | 4,515,682 | | 4,841,538 | | $ | 0.93 |
Effect of dilutive securities, options | | | — | | 74,153 | | | |
| | | | | | | | |
Diluted EPS | | | | | | | | |
Income available to common shareholders and assumed conversions | | $ | 4,515,682 | | 4,915,691 | | $ | 0.92 |
| | | | | | | | |
Year ended December 31, 2006 | | | | | | | | |
Basic EPS | | | | | | | | |
Net income and income available to common shareholders | | $ | 5,039,859 | | 4,207,679 | | $ | 1.20 |
Effect of dilutive securities, options | | | — | | 117,491 | | | |
| | | | | | | | |
Diluted EPS | | | | | | | | |
Income available to common shareholders and assumed conversions | | $ | 5,039,859 | | 4,325,170 | | $ | 1.17 |
| | | | | | | | |
49
Notes to Consolidated Financial Statements
NOTE 16. Earnings per share (EPS): (continued)
| | | | | | | | |
| | | Income
(Numerator) | | Shares
(Denominator) | | Per-Share
Amount |
Year ended December 31, 2005 | | | | | | | | |
Basic EPS | | | | | | | | |
Net income and income available to common shareholders | | $ | 5,524,288 | | 4,202,833 | | $ | 1.31 |
Effect of dilutive securities, options | | | — | | 94,045 | | | |
| | | | | | | | |
Diluted EPS | | | | | | | | |
Income available to common shareholders and assumed conversions | | $ | 5,524,288 | | 4,296,878 | | $ | 1.29 |
| | | | | | | | |
NOTE 17. Regulatory matters:
The Bank is subject to various capital requirements administered by its primary federal regulator, the Office of Thrift Supervision (OTS). Failure to meet minimum regulatory requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators, that if undertaken, could have a direct material effect on the Company’s and the Bank’s consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital to risk-weighted assets (as defined in the regulations), core capital to adjusted tangible assets (as defined) and tangible capital to tangible assets (as defined). Management believes, as of December 31, 2007 and 2006, that the Bank meets all capital requirements to which it is subject.
As of December 31, 2007, the most recent notification from the Office of Thrift Supervision categorized the Bank as well capitalized under the regulatory framework 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.
| | | | | | | | | | | | | | | | | | | | |
| | | Actual | | | For Capital
Adequacy
Purposes | | | To Be Well
Capitalized Under
Prompt Corrective
Action Provisions | |
| | | Amount | | Ratio | | | Amoun | | Ratio | | | Amount | | Ratio | |
| | | | | (Dollar amounts in thousands) | | | |
As of December 31, 2007: | | | | | | | | | | | | | | | | | | | | |
Total Capital (to Risk Weighted Assets) | | $ | 63,660 | | 11.08 | % | | $ | 45,952 | | ³ | 8.0 | % | | $ | 57,440 | | ³ | 10.0 | % |
Core Capital (to Adjusted Tangible Assets) | | | 63,191 | | 7.84 | | | | 32,225 | | ³ | 4.0 | | | | 40,281 | | ³ | 5.0 | |
Tangible Capital (to Tangible Assets) | | | 63,191 | | 7.84 | | | | 12,084 | | ³ | 1.5 | | | | N/A | | | N/A | |
Tier 1 Capital (to Risk Weighted Assets) | | | 63,191 | | 11.00 | | | | N/A | | | N/A | | | | 34,464 | | ³ | 6.0 | |
As of December 31, 2006: | | | | | | | | | | | | | | | | | | | | |
Total Capital (to Risk Weighted Assets) | | | 53,790 | | 11.92 | | | | 35,890 | | ³ | 8.0 | | | | 44,863 | | ³ | 10.0 | |
Core Capital (to Adjusted Tangible Assets) | | | 53,463 | | 8.12 | | | | 26,347 | | ³ | 4.0 | | | | 32,934 | | ³ | 5.0 | |
Tangible Capital (to Tangible Assets) | | | 53,463 | | 8.12 | | | | 9,880 | | ³ | 1.5 | | | | N/A | | | N/A | |
Tier 1 Capital (to Risk Weighted Assets) | | | 53,463 | | 11.99 | | | | N/A | | | N/A | | | | 26,918 | | ³ | 6.0 | |
50
Notes to Consolidated Financial Statements
NOTE 17. Regulatory matters: (continued)
The following is a reconcilement of the Bank’s total equity included in the consolidated balance sheet to the regulatory capital ratios disclosed in the table above:
| | | | | | | | | | | | | | | | |
| | | December 31, 2007 | | | December 31, 2006 | |
| | | Tier 1
Capital | | | Total
Capital | | | Tier 1
Capital | | | Total
Capital | |
Total equity | | $ | 92,044 | | | $ | 92,044 | | | $ | 64,729 | | | $ | 64,729 | |
Accumulated other comprehensive loss | | | 1,768 | | | | 1,768 | | | | 1,064 | | | | 1,064 | |
Allowable allowance for loan losses | | | — | | | | 5,116 | | | | — | | | | 3,951 | |
Goodwill and core deposit intangible | | | (30,454 | ) | | | (30,454 | ) | | | (12,140 | ) | | | (12,140 | ) |
Mortgage servicing asset | | | (167 | ) | | | (167 | ) | | | (190 | ) | | | (190 | ) |
Equity investments and other assets | | | — | | | | (4,647 | ) | | | — | | | | (3,624 | ) |
| | | | | | | | | | | | | | | | |
| | $ | 63,191 | | | $ | 63,660 | | | $ | 53,463 | | | $ | 53,790 | |
| | | | | | | | | | | | | | | | |
NOTE 18. Stock split:
In February 2005, the Company approved a two-for-one stock split, in the form of a 100% stock dividend, of the Company’s common stock. The record date for the stock split was February 14, 2005. All per share amounts, references to common stock, shareholders’ equity amounts and stock option plan data have been restated as if the stock split had occurred as of the earliest period presented.
NOTE 19. Financial instruments:
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, standby letters of credit and unadvanced funds on loans. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include secured interests in mortgages, accounts receivable, inventory, property, plant and equipment and income-producing properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of December 31, 2007 and 2006, the maximum potential amount of the Company’s obligation was $1,995,079 and $1,898,879, respectively, for financial and standby letters of credit. The Company’s outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Company may seek recourse through the customer’s underlying line of credit. If the customer’s line of credit is also in default, the Company may take possession of the collateral, if any, securing the line of credit.
51
Notes to Consolidated Financial Statements
NOTE 19. Financial instruments:(continued)
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:
| | | | | | | | | | | | |
| | | 2007 | | 2006 |
| | | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
Financial assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 34,054,541 | | $ | 34,054,541 | | $ | 34,946,780 | | $ | 34,946,780 |
Securities available-for-sale | | | 87,460,003 | | | 87,460,003 | | | 91,522,303 | | | 91,522,303 |
Federal Home Loan Bank stock | | | 7,532,700 | | | 7,532,700 | | | 7,540,600 | | | 7,540,600 |
Loans held-for-sale | | | 2,507,880 | | | 2,521,711 | | | 1,770,500 | | | 1,774,949 |
Loans, net | | | 626,274,462 | | | 626,826,000 | | | 492,711,797 | | | 489,263,000 |
Accrued interest receivable | | | 2,853,558 | | | 2,853,558 | | | 2,381,693 | | | 2,381,693 |
Financial liabilities: | | | | | | | | | | | | |
Deposits | | | 652,972,017 | | | 652,909,000 | | | 465,505,820 | | | 468,309,000 |
FHLB advances | | | 63,386,874 | | | 63,386,000 | | | 120,000,000 | | | 119,895,000 |
Other borrowings | | | 237,500 | | | 237,500 | | | — | | | — |
Securities sold under agreements to repurchase | | | 15,440,993 | | | 15,440,993 | | | 8,881,864 | | | 8,881,864 |
Subordinated debentures | | | 20,620,000 | | | 20,409,000 | | | 20,620,000 | | | 20,178,000 |
The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets under the indicated captions. Accounting policies related to financial instruments are described in Note 1.
Notional amounts of financial liabilities with off-balance sheet credit risk are as follows as of December 31:
| | | | | | |
| | | 2007 | | 2006 |
Commitments to extend credit | | $ | 14,110,391 | | $ | 23,456,508 |
| | | | | | |
Letters of credit | | $ | 1,995,079 | | $ | 1,898,879 |
| | | | | | |
Lines of credit | | $ | 93,320,895 | | $ | 82,446,418 |
| | | | | | |
Unadvanced portion of construction loans | | $ | 13,147,870 | | $ | 13,421,303 |
| | | | | | |
NOTE 20. Acquisitions:
On June 1, 2007, the Company acquired First Brandon Financial Corporation (First Brandon). Costs to acquire consisted of cash of $4,403,088, 1,067,650 shares issued ($14.605 market value per share or $15,593,026) and merger costs of $836,179 for a total acquisition cost of $20,832,293. Goodwill recognized amounted to $7,503,046 and of that total amount, $0 is deductable for tax purposes.
On October 1, 2007, the Company acquired First Community Bank (First Community). Costs to acquire consisted of cash of $3,019,906, 752,063 shares issued ($14.82 market value per share or $11,145,574) and merger costs of $484,168 for a total acquisition cost of $14,649,648. Goodwill recognized amounted to $7,650,408 and of that total amount, $0 is deductable for tax purposes.
52
Notes to Consolidated Financial Statements
NOTE 20. Acquisitions:(continued)
A summary of the fair values of assets acquired and liabilities assumed at the date of acquisitions is as follows:
| | | | | | |
| | | First Brandon | | First Community |
Cash and cash equivalents | | $ | 13,658,910 | | $ | 2,762,836 |
Securities available-for-sale | | | 17,309,352 | | | 3,545,285 |
Federal Reserve and Federal Home Loan Bank stock | | | 395,900 | | | 367,700 |
Loans, net | | | 67,524,872 | | | 61,705,512 |
Premises and equipment and investment in real estate | | | 2,488,976 | | | 2,104,635 |
Bank owned life insurance | | | 2,227,260 | | | 1,303,530 |
Other assets and accrued interest receivable | | | 810,063 | | | 589,804 |
| | | | | | |
Total assets acquired | | | 104,415,333 | | | 72,379,302 |
| | | | | | |
Total deposits | | | 89,571,569 | | | 62,392,819 |
Securities sold under agreements to repurchase | | | 1,769,612 | | | — |
FHLB advances | | | 114,220 | | | 3,492,875 |
Accrued expenses and other liabilities | | | 2,106,685 | | | 486,368 |
| | | | | | |
Total liabilities assumed | | | 93,562,086 | | | 66,372,062 |
| | | | | | |
Net assets acquired | | | 10,853,247 | | | 6,007,240 |
| | | | | | |
Goodwill | | | 7,503,046 | | | 7,650,408 |
Core deposit intangible asset | | | 2,476,000 | | | 992,000 |
| | | | | | |
Total purchase price | | $ | 20,832,293 | | $ | 14,649,648 |
| | | | | | |
The results of operations of the acquired entities have been included in the Company’s consolidated financial statements since the respective acquisition dates.
The following proforma information assumes that the acquisitions had occurred at the beginning of each of the periods presented.
| | | | | | |
| | | 2007 | | 2006 |
| | | (unaudited) |
Total revenue | | $ | 53,726,627 | | $ | 51,283,819 |
Net income | | $ | 5,249,009 | | $ | 5,890,788 |
Earnings per share: | | | | | | |
Basic | | $ | 0.90 | | $ | 0.98 |
Diluted | | $ | 0.89 | | $ | 0.96 |
The pro forma information is presented for information purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.
NOTE 21. Goodwill and intangible assets:
The Company’s assets as of December 31, 2007 include goodwill of $15,153,454 and intangible assets relating to the acquisitions of First Brandon and First Community in 2007. Goodwill also includes $2,471,560 relating to the acquisition of Landmark Bank and $9,668,456 relating to the acquisition of New London Trust in prior years.
The Company evaluated its goodwill and intangible assets as of December 31, 2007 and 2006 and found no impairment.
53
Notes to Consolidated Financial Statements
NOTE 21. Goodwill and intangible assets:(continued)
A summary of acquired amortizing intangible assets is as follows:
| | | | | | | | | |
| | | As of December 31, 2007 |
| | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
Core deposit intangible-First Brandon | | $ | 2,476,000 | | $ | 262,606 | | $ | 2,213,394 |
Core deposit intangible-First Community | | | 992,000 | | | 45,091 | | | 946,909 |
| | | | | | | | | |
Total | | $ | 3,468,000 | | $ | 307,697 | | $ | 3,160,303 |
| | | | | | | | | |
Aggregate amortization expense was $307,697 in 2007. Amortization is being calculated on the sum-of-the-years digit method over ten years.
Estimated amortization expense for each of the five years succeeding 2007 is as follows:
| | | |
2008 | | $ | 599,776 |
2009 | | | 536,721 |
2010 | | | 473,667 |
2011 | | | 410,612 |
2012 | | | 347,557 |
| | | |
| | $ | 2,368,333 |
| | | |
NOTE 22. Condensed parent company financial statements:
The following are condensed balance sheets, statements of income and cash flows for New Hampshire Thrift Bancshares, Inc. (“Parent Company”) as of and for the years ended December 31:
CONDENSED BALANCE SHEETS
| | | | | | |
| | | 2007 | | 2006 |
ASSETS | | | | | | |
Cash in Lake Sunapee Bank | | $ | 320,355 | | $ | 1,281,908 |
Investment in subsidiary, Lake Sunapee Bank | | | 92,044,278 | | | 64,728,313 |
Investment in affiliate, NHTB Capital Trust II | | | 310,000 | | | 310,000 |
Investment in affiliate, NHTB Capital Trust III | | | 310,000 | | | 310,000 |
Deferred expenses | | | 283,376 | | | 294,070 |
Advances to Lake Sunapee Bank | | | 53,739 | | | 126,867 |
Other investments | | | — | | | 2,000,000 |
Other assets | | | 21,068 | | | 35,225 |
| | | | | | |
Total assets | | $ | 93,342,816 | | $ | 69,086,383 |
| | | | | | |
LIABILITIES | | | | | | |
Subordinated debentures | | $ | 20,620,000 | | $ | 20,620,000 |
Other liabilities | | | 55,493 | | | 56,977 |
| | | | | | |
Total liabilities | | | 20,675,493 | | | 20,676,977 |
SHAREHOLDERS’ EQUITY | | | 72,667,323 | | | 48,409,406 |
| | | | | | |
Total liabilities and shareholders’ equity | | $ | 93,342,816 | | $ | 69,086,383 |
| | | | | | |
54
Notes to Consolidated Financial Statements
NOTE 22. Condensed parent company financial statements:(continued)
CONDENSED STATEMENTS OF INCOME
| | | | | | | | | | |
| | | 2007 | | | 2006 | | 2005 |
Dividends from subsidiary, Lake Sunapee Bank | | $ | 12,300,000 | | | $ | 1,800,000 | | $ | 2,500,000 |
Dividends from subsidiaries, NHTB Capital Trust II and III | | | 44,534 | | | | 43,373 | | | 29,063 |
Investment interest income | | | 52,667 | | | | 124,417 | | | — |
Interest expense on subordinated debentures | | | 1,479,622 | | | | 1,453,609 | | | 1,257,994 |
Net operating income including tax benefit | | | 383,212 | | | | 259,457 | | | 256,010 |
| | | | | | | | | | |
Income before equity in undistributed earnings of subsidiaries | | | 11,300,791 | | | | 773,638 | | | 1,527,079 |
Equity in undistributed (loss) earnings of subsidiaries | | | (6,785,109 | ) | | | 4,266,221 | | | 3,997,209 |
| | | | | | | | | | |
Net income | | $ | 4,515,682 | | | $ | 5,039,859 | | $ | 5,524,288 |
| | | | | | | | | | |
CONDENSED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 4,515,682 | | | $ | 5,039,859 | | | $ | 5,524,288 | |
Decrease (increase) in accounts receivable | | | 20,000 | | | | (19,675 | ) | | | 2,661 | |
(Decrease) increase in accrued interest payable | | | (1,484 | ) | | | 11,108 | | | | 5,368 | |
Decrease in taxes payable | | | — | | | | — | | | | (13,556 | ) |
Decrease in taxes receivable | | | 55,508 | | | | 96,618 | | | | 109,550 | |
Increase in prepaid expenses | | | (13,440 | ) | | | — | | | | — | |
Amortization of deferred expenses relating to issuance of capital securities and subordinated debentures | | | 10,694 | | | | 10,693 | | | | 10,693 | |
Stock-based compensation expense | | | — | | | | 28,050 | | | | — | |
Equity in undistributed loss (earnings) of subsidiaries | | | 6,785,109 | | | | (4,266,221 | ) | | | (3,997,209 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 11,372,069 | | | | 900,432 | | | | 1,641,795 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Purchase of other investment | | | — | | | | (2,000,000 | ) | | | — | |
Redemption of other investment | | | 2,000,000 | | | | — | | | | — | |
Net change in advances to subsidiary, Lake Sunapee Bank | | | 73,128 | | | | 2,705,911 | | | | (2,413,906 | ) |
Net cash and cash equivalents paid for First Brandon and First Community acquisitions | | | (7,422,994 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Net cash (used in) provided by investing activities | | | (5,349,866 | ) | | | 705,911 | | | | (2,413,906 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Proceeds from exercise of stock options | | | 782,732 | | | | 785,125 | | | | 593,345 | |
Dividends paid | | | (2,475,019 | ) | | | (2,147,033 | ) | | | (2,097,465 | ) |
Repurchase of treasury stock | | | (5,291,469 | ) | | | (1,685,334 | ) | | | (112,966 | ) |
| | | | | | | | | | | | |
Net cash used in financing activities | | | (6,983,756 | ) | | | (3,047,242 | ) | | | (1,617,086 | ) |
| | | | | | | | | | | | |
Net decrease in cash | | | (961,553 | ) | | | (1,440,899 | ) | | | (2,389,197 | ) |
Cash, beginning of year | | | 1,281,908 | | | | 2,722,807 | | | | 5,112,004 | |
| | | | | | | | | | | | |
Cash, end of year | | $ | 320,355 | | | $ | 1,281,908 | | | $ | 2,722,807 | |
| | | | | | | | | | | | |
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, 2007, 2006 and 2005, and therefore are not reprinted here.
55
Notes to Consolidated Financial Statements
NOTE 23. Quarterly Results of Operations (UNAUDITED)
Summarized quarterly financial data for 2007 and 2006 follows:
| | | | | | | | | | | | |
| | | (In thousands, except earnings per share) |
| | | 2007 Quarters Ended |
| | | March 31 | | June 30 | | Sept. 30 | | Dec. 31 |
Interest and dividend income | | $ | 8,811 | | $ | 9,174 | | $ | 10,310 | | $ | 11,349 |
Interest expense | | | 4,337 | | | 4,633 | | | 4,963 | | | 5,448 |
| | | | | | | | | | | | |
Net interest and dividend income | | | 4,474 | | | 4,541 | | | 5,347 | | | 5,901 |
Provision for loan losses | | | 7 | | | 38 | | | 60 | | | 18 |
Noninterest income | | | 1,530 | | | 1,635 | | | 1,769 | | | 1,980 |
Noninterest expense | | | 4,324 | | | 4,681 | | | 5,107 | | | 6,515 |
| | | | | | | | | | | | |
Income before income taxes | | | 1,673 | | | 1,457 | | | 1,979 | | | 1,348 |
Income tax expense | | | 505 | | | 520 | | | 657 | | | 229 |
| | | | | | | | | | | | |
Net income | | $ | 1,168 | | $ | 937 | | $ | 1,292 | | $ | 1,119 |
| | | | | | | | | | | | |
Basic earnings per common share | | $ | .25 | | $ | .24 | | $ | .26 | | $ | .19 |
| | | | | | | | | | | | |
Earnings per common share, assuming dilution | | $ | .24 | | $ | .24 | | $ | .25 | | $ | .20 |
| | | | | | | | | | | | |
| |
| | | (In thousands, except earnings per share) |
| | | 2006 Quarters Ended |
| | | March 31 | | June 30 | | Sept. 30 | | Dec. 31 |
Interest and dividend income | | $ | 7,967 | | $ | 8,215 | | $ | 8,755 | | $ | 8,736 |
Interest expense | | | 2,999 | | | 3,481 | | | 4,274 | | | 4,506 |
| | | | | | | | | | | | |
Net interest and dividend income | | | 4,968 | | | 4,734 | | | 4,481 | | | 4,230 |
Provision for loan losses | | | 40 | | | 69 | | | 51 | | | 70 |
Noninterest income | | | 1,278 | | | 1,444 | | | 1,541 | | | 1,611 |
Noninterest expense | | | 4,116 | | | 4,095 | | | 4,112 | | | 4,194 |
| | | | | | | | | | | | |
Income before income taxes | | | 2,090 | | | 2,014 | | | 1,859 | | | 1,577 |
Income tax expense | | | 719 | | | 627 | | | 641 | | | 513 |
| | | | | | | | | | | | |
Net income | | $ | 1,371 | | $ | 1,387 | | $ | 1,218 | | $ | 1,064 |
| | | | | | | | | | | | |
Basic earnings per common share | | $ | .32 | | $ | .33 | | $ | .29 | | $ | .26 |
| | | | | | | | | | | | |
Earnings per common share, assuming dilution | | $ | .32 | | $ | .32 | | $ | .28 | | $ | .25 |
| | | | | | | | | | | | |
56
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended:
December 31, 2007
SEC Commission File Number 000-17859
NEW HAMPSHIRE THRIFT BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
| | |
| Delaware | | 02-0430695 |
(State or other jurisdiction of
incorporation or organization) | | (IRS Employer
Identification No.) |
9 Main Street, PO Box 9
Newport, New Hampshire 03773-0009
(Address of principal executive offices)
Registrant’s telephone number, including area code: (603) 863-0886
Securities registered pursuant to Section 12(b) of the Act:
| | |
| Common Stock, $.01 par value | | The Nasdaq Stock Market, LLC |
| Title of Class | | Name of Exchange on which Registered |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark is the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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-K 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-K or any amendment to this Form 10-K.¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of March 17, 2008 there were issued and outstanding 5,737,006 shares of the registrant’s common stock.
The common stock is listed for trading on NASDAQ under the symbol “NHTB”. Based on the closing price of June 29, 2007, of $14.60, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $68.7 million.
Documents Incorporated By Reference:
Portions of the proxy statement for the 2008 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.
57
|
| New Hampshire Thrift Bancshares, Inc. |
INDEX
58
PART I.
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 (the Bank), 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. In 1981, the Bank changed its name to “Lake Sunapee Savings Bank, fsb” and in 1994, refined its name to “Lake Sunapee Bank, fsb.” The Bank’s deposits are insured by the Deposit Insurance Fund of the FDIC.
The Bank 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, Peterborough, Andover, Claremont, Enfield, and Milford, New Hampshire, and Brandon, Killington, Pittsford, Rutland, West Rutland, and Woodstock, Vermont. The Company had assets of approximately $834.2 million as of December 31, 2007.
Through its subsidiary, Lake Sunapee Financial Services Corporation, the Bank offers brokerage services to its customers.
Market Area
The Bank’s market area is concentrated in the counties of Merrimack, Sullivan, Hillsborough, Grafton and Cheshire in central and western New Hampshire in, and the counties of Rutland and Windsor in Vermont. These areas are best known for its recreational facilities and its resort/retirement environment.
There are several distinct regions within the Bank’s market area. The Upper Valley region is located in the northwest-central area of New Hampshire, and includes the towns of Lebanon, a commerce and manufacturing center, home to Dartmouth-Hitchcock Medical Center, New Hampshire’s only academic medical center, and Hanover, home of Dartmouth College. The central and south-east portion of the Bank’s market area in New Hampshire is Lake Sunapee, a popular year-round recreation and resort area that includes both Lake Sunapee and Mount Sunapee. Finally, the Monadnock region, in southwestern New Hampshire, is named after Mount Monadnock, the major geographic landmark in the region and consists of Cheshire, southern Sullivan and western Hillsborough counties.
Rutland and Windsor counties are located in south central Vermont. This region is home to many attractions, including Killington Mountain, Okemo Resort, and the city of Rutland. The popular vacation destinations in this region include Woodstock, Brandon, Ludlow and Quechee.
Available Information
The Company files annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, proxy statements or other information filed by the Company at the SEC’s public reference room in Washington, D.C., which is located at the following address: Public Reference Room, 100 F Street N.E., Room 1580, Washington, D.C. 20549.
You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the SEC’s public reference rooms. The Company’s SEC filings are also available to the public from document retrieval services and at the SEC’s Internet website (http://www.sec.gov).
59
LENDING ACTIVITIES
The Bank’s total loan portfolio totaled $626,274,462 at December 31, 2007, representing approximately 75% of total assets. As of December 31, 2007, approximately 76% of the mortgage loan portfolio had adjustable rates. As of December 31, 2007, the Bank had sold $305,838,179 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.
REAL ESTATE LOANS. Conventional loans are solicited by the Bank’s loan origination team which solicits residential mortgage loans in the local real estate marketplace. Residential borrowers are frequently referred to the Bank by its existing customers or real estate agents. Generally, the Bank makes conventional mortgage loans (loans of 80% of value or less that are neither insured nor partially guaranteed by government agencies) on one- to four-family owner occupied dwellings. The Bank also makes residential loans up to 95% of the appraised value if the top 20% of the loan is covered by private mortgage insurance. Residential mortgage loans typically have terms up to 30 years and are amortized on a monthly basis with principal and interest due each month. Currently, the Bank offers one-year, three-year and five-year adjustable-rate mortgage loans and long-term fixed rate loans. Borrowers may prepay loans at their option or refinance their loans on terms agreeable to the 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 seven years.
Since the middle of the 1960’s, the terms of conventional residential mortgage loans originated 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.
Commercial real estate loans are solicited by the Bank’s commercial banking team in the Bank’s local real estate market. In addition, commercial borrowers are frequently referred to the Bank by its existing customers, local accountants, and attorneys. Generally, the Bank makes commercial real estate loans on loans up to 75% of value with terms up to twenty years, amortizing on a monthly basis with principal and interest due each month. Debt service coverage (the amount of cash left over after expenses have been paid) required to cover the Bank’s interest and principal payments generally must equal or exceed 125% of the loan payments.
REAL ESTATE CONSTRUCTION LOANS. The Bank offers construction loan financing on one- to four-family owner occupied dwellings in the Bank’s local real estate market. Generally, the Bank makes construction loans on loans up to 80% of value with terms of up to nine months. During the construction phase, inspections are made to assess construction progress and monitor the disbursement of loan proceeds. The Bank also offers a “one-step” construction loan, which provides construction and permanent financing with one loan closing. The “one-step” is provided under the same terms and conditions of the Bank’s conventional residential program.
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.
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.
COMMERCIAL LOANS. The Bank offers commercial loans in accordance with regulatory requirements. Under current regulation, the Bank’s commercial loan portfolio is limited to 20% of total assets.
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.
60
The following table sets forth the composition of the Bank’s loan portfolio in dollar amounts and as a percentage of the portfolio at December 31:
| | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | 2005 |
| | | Amount | | | % of Total | | | Amount | | | % of Total | | Amount | | % of Total |
| | | ($ in thousands) |
Real estate loans | | | | | | | | | | | | | | | | | | |
Conventional and Commercial | | $ | 478,252 | | | 76.14 | % | | $ | 385,002 | | | 77.79 | % | | $359,304 | | 77.21% |
Construction | | | 21,704 | | | 3.46 | | | | 17,109 | | | 3.45 | | | 13,080 | | 2.81 |
Consumer loans | | | 75,619 | | | 12.04 | | | | 63,277 | | | 12.79 | | | 64,393 | | 13.84 |
Commercial and municipal loans | | | 52,515 | | | 8.36 | | | | 29,522 | | | 5.97 | | | 28,558 | | 6.14 |
| | | | | | | | | | | | | | | | | | |
Total loans | | | 628,090 | | | 100.00 | % | | | 494,910 | | | 100.00 | % | | 465,335 | | 100.00% |
Unamortized adjustment to fair value | | | 1,496 | | | | | | | 36 | | | | | | 48 | | |
Allowance for loan losses | | | (5,181 | ) | | | | | | (3,975 | ) | | | | | (4,022) | | |
Deferred loan origination costs, net | | | 1,869 | | | | | | | 1,741 | | | | | | 1,790 | | |
| | | | | | | | | | | | | | | | | | |
Loans receivable, net | | $ | 626,274 | | | | | | $ | 492,712 | | | | | | $463,151 | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | Amount | | | % of Total | | | Amount | | | % of Total | |
| | | ($ in thousands) | |
Real estate loans | | | | | | | | | | | | | | |
Conventional and Commercial | | $ | 320,089 | | | 76.94 | % | | $ | 271,610 | | | 78.27 | % |
Construction | | | 21,757 | | | 5.23 | | | | 15,241 | | | 4.39 | |
Consumer loans | | | 57,450 | | | 13.81 | | | | 43,881 | | | 12.65 | |
Commercial and municipal loans | | | 16,723 | | | 4.02 | | | | 16,283 | | | 4.69 | |
| | | | | | | | | | | | | | |
Total loans | | | 416,019 | | | 100.00 | % | | | 347,015 | | | 100.00 | % |
Unamortized adjustment to fair value | | | 60 | | | | | | | 72 | | | | |
Allowance for loan losses | | | (4,019 | ) | | | | | | (3,899 | ) | | | |
Deferred loan origination costs, net | | | 1,748 | | | | | | | 1,385 | | | | |
| | | | | | | | | | | | | | |
Loans receivable, net | | $ | 413,808 | | | | | | $ | 344,573 | | | | |
| | | | | | | | | | | | | | |
61
The following table sets forth the maturities of the loan portfolio and whether such loans have fixed or adjustable interest rates at December 31, 2007:
| | | | | | | | | | | | |
Maturities | | One year
or less | | One through
five years | | Over
five years | | Total |
Real Estate Loans with: | | | | | | | | | | | | |
Predetermined interest rates | | $ | 11,592,550 | | $ | 8,091,221 | | $ | 84,248,930 | | $ | 103,932,701 |
Adjustable interest rates | | | 9,590,534 | | | 11,327,693 | | | 375,105,105 | | | 396,023,332 |
| | | | | | | | | | | | |
| | | 21,183,084 | | | 19,418,914 | | | 459,354,035 | | | 499,956,033 |
| | | | | | | | | | | | |
Collateral/Consumer Loans with: | | | | | | | | | | | | |
Predetermined interest rates | | | 1,636,065 | | | 10,687,726 | | | 713,652 | | | 13,037,443 |
Adjustable interest rates | | | 1,289,192 | | | 7,071,413 | | | 54,221,455 | | | 62,582,060 |
| | | | | | | | | | | | |
| | | 2,925,257 | | | 17,759,139 | | | 54,935,107 | | | 75,619,503 |
| | | | | | | | | | | | |
Commercial/Municipal Loans with: | | | | | | | | | | | | |
Predetermined interest rates | | | 4,056,075 | | | 10,590,288 | | | 12,812,065 | | | 27,458,428 |
Adjustable interest rates | | | 7,258,719 | | | 3,608,099 | | | 14,189,538 | | | 25,056,356 |
| | | | | | | | | | | | |
| | | 11,314,794 | | | 14,198,387 | | | 27,001,603 | | | 52,514,784 |
| | | | | | | | | | | | |
Unamortized adjustment to fair value | | | — | | | — | | | 1,496,542 | | | 1,496,542 |
| | | | | | | | | | | | |
Totals | | $ | 35,423,135 | | $ | 51,376,440 | | $ | 542,787,287 | | $ | 629,586,862 |
| | | | | | | | | | | | |
The preceding schedule includes $4,744,729 of non-performing loans categorized within the respective loan types.
Origination, Purchase and Sale of Loans
The primary lending activity of the Bank is the origination of conventional loans (i.e., loans of 80% of value or less that are neither insured nor partially guaranteed by government 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 and Rutland and Windsor counties in Vermont.
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 Loan Review Committee of the Bank reviews 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.
Delinquent Loans, Classified Assets and Other Real Estate Owned
Reports listing delinquent accounts are generated and reviewed by management and the Board of Directors on a monthly basis. The procedures taken by the Bank when a loan becomes delinquent vary depending on the nature of the loan. When a borrower fails to make a required loan payment, the Bank takes a number of steps to ensure that the borrower will cure the delinquency. The Bank generally sends the borrower a notice of non-payment. The Bank then follows-up with telephone and/or written correspondence. When contact is made prior to foreclosure, the Bank attempts to obtain full payment, work out a repayment schedule, or in certain instances obtain a deed in lieu of
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foreclosure. If foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the property securing the loan generally is sold at foreclosure. If the Bank purchases the property, it becomes other real estate owned.
Federal regulations and the Bank’s Assets Classification Policy require that the Bank utilize an internal asset classification system as a means of reporting problem and potential problem assets. The Bank has incorporated the OTS internal asset classifications as part of its credit monitoring system. The Bank currently classifies problem and potential problem assets as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain “some loss” if the deficiency is not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the additional characteristics that the weaknesses present make collection and liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated special mention.
When an insured institution classifies one or more assets or portions thereof as substandard or doubtful, it is required to establish a general valuation allowance for loan losses in an amount deemed prudent by management. General valuation allowances represent loss allowances, which have been established to recognize the inherent risk associated with activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets or portions thereof as loss, it is required to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount.
A savings institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which can order the establishment of additional general or specific loss allowances. The OTS, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management has analyzed all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to it at this time, its allowance for loan losses is adequate, actual losses are dependent upon future events and, as such, further additions to the allowance for loan losses may become necessary.
The Bank classifies assets in accordance with the management guidelines described above. Total classified loans, excluding special mention, as of December 31, 2006 and 2005 were $4,063,615 and $612,223, respectively. For further discussion regarding nonperforming assets, impaired loans and the allowance for loan losses, please see Management’s Discussion and Analysis.
SUBSIDIARY ACTIVITIES
Service Corporations
The Bank has an expanded service corporation authority because of its conversion from a state-chartered mutual savings bank to a federal institution in 1980. This authority, grandfathered in that conversion, permits the Bank to invest 15% of its deposits, plus an amount of approximately $825,000, in service corporation activities permitted by New Hampshire law. However, the first 3% of these activities is subject to federal regulation and the remainder is subject to state law. This permits a 3% investment in activities not permitted by state law.
As of December 31, 2007, 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. The Lake Sunapee Financial Services Corporation sells brokerage, securities, and insurance products.
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NHTB Capital Trust II and III
NHTB Capital Trust II (the Trust II) and NHTB Capital Trust III (the Trust III) are statutory business trusts formed under the laws of the State of Connecticut and are wholly-owned subsidiaries of the Company. On March 30, 2004, the Trust II issued $10.0 million of 6.06%, 5-year Fixed-Floating Capital Securities. On March 30, 2004, the Trust III issued $10.0 million of Floating Capital Securities, adjustable every three months at LIBOR plus 2.79%. 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 as well as credit unions 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 eight loan originators on staff who call on real estate agents, follow leads, and are available seven days a week to service the mortgage loan market.
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest in various types of liquid assets including United States Treasury obligations, securities of various federal agencies, certificates of deposit of insured banks and savings institutions, bankers’ acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment-grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly.
The Bank is required by SFAS No. 115 to categorize its securities as held-to-maturity, available-for-sale, or held-for-trading. Please refer to Note 3, “Securities”, in the Consolidated Financial Statements for certain information regarding amortized costs, fair values and maturities of securities.
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Maturities of debt securities, excluding mortgage-backed and asset-backed securities, are as follows as of December 31, 2007:
| | | | | | | | | |
| | | Fair Value | | Amortized Cost | | Weighted
Average
Yield | |
Available-for-sale securities | | | | | | | | | |
U.S. Government, including agencies | | $ | 11,488,281 | | $ | 11,490,873 | | 3.28 | % |
Other bonds and debentures | | | 5,516,681 | | | 5,537,798 | | 5.18 | |
| | | | | | | | | |
Total due in less than one year | | | 17,004,962 | | | 17,028,671 | | 3.90 | |
| | | | | | | | | |
U.S. Government, including agencies | | | 10,026,760 | | | 10,026,084 | | 4.47 | |
Other bonds and debentures | | | 2,131,923 | | | 2,111,598 | | 3.54 | |
| | | | | | | | | |
Total due after one year through five years | | | 12,158,683 | | | 12,137,682 | | 4.30 | |
| | | | | | | | | |
Other bonds and debentures | | | 851,696 | | | 852,239 | | 3.47 | |
| | | | | | | | | |
Total due after five years through ten years | | | 851,696 | | | 852,239 | | 3.47 | |
| | | | | | | | | |
Preferred stock with maturities | | | 4,050,000 | | | 5,000,000 | | 6.30 | |
Other bonds and debentures | | | 285,000 | | | 285,000 | | 6.79 | |
| | | | | | | | | |
Total due after ten years | | | 4,335,000 | | | 5,285,000 | | 6.37 | |
| | | | | | | | | |
| | $ | 34,350,341 | | $ | 35,303,592 | | 4.40 | % |
| | | | | | | | | |
The amortized cost of securities and their approximate fair values are summarized as follows:
| | | | | | | | | | | | |
December 31, 2007 | | Amortized
Cost | | Gross Unrealized
Gains | | Gross Unrealized
Losses | | Fair
Value |
Available-for-sale: | | | | | | | | | | | | |
Bonds and notes- | | | | | | | | | | | | |
U.S. Government, including agencies | | $ | 21,516,957 | | $ | 11,632 | | $ | 13,548 | | $ | 21,515,041 |
Mortgage-backed securities | | | 50,945,486 | | | 130,641 | | | 604,756 | | | 50,471,371 |
Asset-backed securities | | | 1,499,688 | | | 3,403 | | | — | | | 1,503,091 |
Other bonds and debentures | | | 8,786,635 | | | 20,628 | | | 21,963 | | | 8,785,300 |
Preferred stock with maturities | | | 5,000,000 | | | — | | | 950,000 | | | 4,050,000 |
Equity securities | | | 1,374,386 | | | 100,814 | | | 340,000 | | | 1,135,200 |
| | | | | | | | | | | | |
Total available-for-sale securities | | $ | 89,123,152 | | $ | 267,118 | | $ | 1,930,267 | | $ | 87,460,003 |
| | | | | | | | | | | | |
| | | | |
December 31, 2006 | | Amortized
Cost | | Gross Unrealized
Gains | | Gross Unrealized
Losses | | Fair
Value |
Available-for-sale: | | | | | | | | | | | | |
Bonds and notes- | | | | | | | | | | | | |
U.S. Government, including agencies | | $ | 23,474,124 | | $ | — | | $ | 350,686 | | $ | 23,123,438 |
Mortgage-backed securities | | | 52,488,507 | | | 13,627 | | | 1,497,177 | | | 51,004,957 |
Asset-backed securities | | | 1,499,645 | | | 2,830 | | | — | | | 1,502,475 |
Other bonds and debentures | | | 9,338,228 | | | 169 | | | 86,633 | | | 9,251,764 |
Preferred stock with maturities | | | 6,000,000 | | | 10,400 | | | 4,001 | | | 6,006,399 |
Equity securities | | | 484,386 | | | 148,884 | | | — | | | 633,270 |
| | | | | | | | | | | | |
Total available-for-sale securities | | $ | 93,284,890 | | $ | 175,910 | | $ | 1,938,497 | | $ | 91,522,303 |
| | | | | | | | | | | | |
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| | | | | | | | | | | | |
December 31, 2005 | | Amortized Cost | | Gross Unrealized
Gains | | Gross Unrealized
Losses | | Fair
Value |
Available-for-sale: | | | | | | | | | | | | |
Bonds and notes- | | | | | | | | | | | | |
U.S. Government, including agencies | | $ | 29,492,908 | | $ | — | | $ | 591,814 | | $ | 28,901,094 |
Mortgage-backed securities | | | 58,207,406 | | | — | | | 1,554,749 | | | 56,652,657 |
Other bonds and debentures | | | 21,524,546 | | | 24,101 | | | 162,265 | | | 21,386,382 |
Preferred stock with maturities | | | 6,000,000 | | | 28,000 | | | — | | | 6,028,000 |
Equity securities | | | 484,386 | | | 142,614 | | | — | | | 627,000 |
| | | | | | | | | | | | |
Total available-for-sale securities | | $ | 115,709,246 | | $ | 194,715 | | $ | 2,308,828 | | $ | 113,595,133 |
| | | | | | | | | | | | |
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
The Bank offers a variety of deposit accounts with a range of interest rates and terms. The Bank’s deposits consist of business checking, money market accounts, savings, NOW and certificate accounts. The flow of deposits is influenced by general economic conditions, changes in money market rates, prevailing interest rates and competition. The Bank’s deposits are obtained predominately from within the Bank’s primary market area. The Bank uses traditional means of advertising its deposit products, including print media, and generally does not solicit deposits from outside its primary market area. The Bank offers negotiated rates on some of its certificate accounts. At December 31, 2007, time deposits represented approximately 45% of total deposits. Time deposits included $112,447,762 of certificates of deposit in excess of $100,000.
The following table presents deposit activity of the Bank for the years ended December 31:
| | | | | | | | | | | |
| | | 2007 | | 2006 | | 2005 |
| | | (In Thousands) |
Net deposits (withdrawals) | | $ | 22,561 | | $ | (6,877 | ) | | $27,234 |
Acquired deposits | | | 151,964 | | | — | | | — |
Interest credited on deposit accounts | | | 12,941 | | | 7,746 | | | 4,331 |
| | | | | | | | | |
Total increase (decrease) in deposit accounts | | $ | 187,466 | | $ | 869 | | | $31,565 |
| | | | | | | | | |
At December 31, 2006, the Bank had $112.4 million in certificate of deposit accounts in amounts of $100,000 or more maturing as follows:
| | | | | | |
Maturity Period | | Amount | | Weighted Average Rate | |
| | | (In thousands) | |
3 months or less | | $ | 48,362 | | 4.54 | % |
Over 3 through 6 months | | | 21,643 | | 4.43 | % |
Over 6 through 12 months | | | 38,319 | | 4.55 | % |
Over 12 months | | | 4,124 | | 4.35 | % |
| | | | | | |
Total | | $ | 112,448 | | 4.51 | % |
| | | | | | |
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The following table sets forth the distribution of the Bank’s deposit accounts as of December 31 indicated and the percentage to total deposits:
| | | | | | | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | Amount | | % of
Total | | | Amount | | % of
Total | | | Amount | | % of
Total | |
| | | ($ in thousands) | |
Checking accounts | | $ | 48,260 | | 7.4 | % | | $ | 38,664 | | 8.3 | % | | $ | 36,320 | | 7.8 | % |
NOW accounts | | | 151,867 | | 23.3 | | | | 129,163 | | 27.8 | | | | 141,492 | | 30.5 | |
Money market accounts | | | 41,225 | | 6.3 | | | | 25,276 | | 5.4 | | | | 38,441 | | 8.3 | |
Regular savings accounts | | | 12,031 | | 1.8 | | | | 9,976 | | 2.1 | | | | 11,635 | | 2.5 | |
Treasury savings accounts | | | 104,163 | | 16.0 | | | | 77,301 | | 16.6 | | | | 95,749 | | 20.6 | |
Club deposits | | | 94 | | — | | | | 57 | | — | | | | 61 | | — | |
| | | | | | | | | | | | | | | | | | |
Total | | | 357,640 | | 54.8 | | | | 280,437 | | 60.2 | | | | 323,698 | | 69.7 | |
| | | | | | | | | | | | | | | | | | |
Time deposits | | | | | | | | | | | | | | | | | | |
Less than 12 months | | | 270,586 | | 41.5 | | | | 172,195 | | 37.1 | | | | 117,453 | | 25.3 | |
Over 12 through 36 months | | | 23,780 | | 3.6 | | | | 12,676 | | 2.7 | | | | 22,497 | | 4.8 | |
Over 36 months | | | 966 | | 0.1 | | | | 198 | | — | | | | 989 | | 0.2 | |
| | | | | | | | | | | | | | | | | | |
Total time deposits | | | 295,332 | | 45.2 | | | | 185,069 | | 39.8 | | | | 140,939 | | 30.3 | |
| | | | | | | | | | | | | | | | | | |
Total deposits | | $ | 652,972 | | 100.0 | % | | $ | 465,506 | | 100.0 | % | | $ | 464,637 | | 100.0 | % |
| | | | | | | | | | | | | | | | | | |
The following table presents the average balance of each type of deposit and the average rate paid on each type of deposit for the year indicated.
| | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | Average
Balance | | Average
Rate
Paid | | | Average
Balance | | Average
Rate
Paid | | | Average
Balance | | Average
Rate
Paid | |
| | | ($ in thousands) | |
NOW | | $ | 119,238 | | 0.67 | % | | $ | 133,732 | | 0.67 | % | | $ | 134,733 | | 0.38 | % |
Savings deposits | | | 104,455 | | 0.64 | | | | 102,453 | | 0.64 | | | | 113,258 | | 0.55 | |
Money market deposits | | | 32,252 | | 1.37 | | | | 29,858 | | 0.54 | | | | 46,082 | | 0.83 | |
Time deposits | | | 226,618 | | 4.53 | | | | 163,227 | | 3.68 | | | | 123,224 | | 2.29 | |
Demand deposits | | | 24,633 | | — | | | | 29,452 | | — | | | | 32,403 | | — | |
| | | | | | | | | | | | | | | | | | |
Total Deposits | | $ | 507,196 | | | | | $ | 458,722 | | | | | $ | 449,700 | | | |
| | | | | | | | | | | | | | | | | | |
The following table presents, by various rate categories, the amount of time deposits as of December 31:
| | | | | | | | | |
Time Deposits | | 2007 | | 2006 | | 2005 |
| | | (In thousands) |
0.00% – 0.99% | | $ | 3,447 | | $ | 2,765 | | $ | 7,576 |
1.00% – 1.99% | | | 13,364 | | | 11,964 | | | 29,233 |
2.00% – 2.99% | | | 8,229 | | | 7,595 | | | 35,762 |
3.00% – 3.99% | | | 15,781 | | | 14,616 | | | 64,476 |
4.00% – 4.99% | | | 195,714 | | | 93,268 | | | 3,848 |
5.00% – 5.99% | | | 57,653 | | | 54,861 | | | 44 |
6.00% – 6.99% | | | 1,144 | | | — | | | — |
7.00% – 7.99% | | | — | | | — | | | — |
| | | | | | | | | |
Total | | $ | 295,332 | | $ | 185,069 | | $ | 140,939 |
| | | | | | | | | |
Borrowings
The Bank utilizes advances from the Federal Home Loan Bank of Boston (FHLB) as a funding source alternative to retail deposits. By utilizing FHLB advances, the Bank can meet its liquidity needs without otherwise being dependent upon retail deposits. These advances are collateralized primarily by mortgage loans and mortgage-backed securities held by the Bank and secondarily by the Bank’s investment in capital stock of the FHLB. The maximum amount that the FHLB will advance to member institutions fluctuates from time-to-time in accordance
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with the policies of the FHLB. At December 31, 2007, the Bank had outstanding advances of $63 million from FHLB and advances outstanding of $120 million from FHLB at December 31, 2006.
The following table represents the balances, average amount outstanding, maximum outstanding, and average interest rates for short-term borrowings reported in the financial statements for the year indicated:
| | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | ($ in thousands) | |
Balance at year end | | $ | — | | | $ | 20,000 | | | $ | 45,000 | |
Average amount outstanding | | | 32,917 | | | | 20,833 | | | | 48,125 | |
Maximum amount outstanding at any month-end | | | 55,000 | | | | 60,000 | | | | 80,000 | |
Average interest rate for the year | | | 5.31 | % | | | 5.16 | % | | | 2.71 | % |
Average interest rate on year-end balance | | | — | | | | 5.12 | % | | | 4.22 | % |
REGULATION
General. NHTB is regulated as a savings and loan holding company by the OTS. NHTB is required to file reports with and otherwise comply with the rules and regulations of the OTS and the SEC under the federal securities laws. The Bank, as a federal savings bank, is subject to regulation, examination and supervision by the OTS, as its primary regulator, and the Federal Deposit Insurance Corporation (“FDIC”) as its deposit insurer. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition.
The following references to the laws and regulations under which NHTB and the Bank are regulated are brief summaries thereof, do not purport to be complete, and are qualified in their entirety by reference to such laws and regulations. The OTS and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies under the applicable laws and regulations. Any change in such laws, regulations or policies, whether by the OTS, the FDIC, the SEC or the Congress, could have a material adverse impact on NHTB and the Bank, and their operations and stockholders.
Regulation 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. 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. The Bank’s authority to invest in certain types of loans or other investments is limited by federal law and regulation.
Loans to One Borrower. The Bank is generally subject to the same limits on loans to one borrower as a national bank. With specified exceptions, the Bank’s total loans or extensions of credit to a single borrower cannot exceed 15% of the Bank’s unimpaired capital and surplus which does not include accumulated other comprehensive income. The Bank may lend additional amounts up to 10% of its unimpaired capital and surplus which does not include accumulated other comprehensive income, if the loans or extensions of credit are fully-secured by readily-marketable collateral. The Bank currently complies with applicable loans-to-one borrower limitations.
QTL Test. Under federal law, the Bank must comply with the qualified thrift lender, or “QTL” test. Under the QTL test, the Bank 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, the Bank’s total assets less the sum of:
| | • | | specified liquid assets up to 20% of total assets; |
| | • | | goodwill and other intangible assets; and |
| | • | | the value of property used to conduct the Bank’s business. |
“Qualified thrift investments” include certain assets that are includable without limit, such as residential and manufactured housing loans, home equity loans, education loans, small business loans, credit card loans, mortgage backed securities, Federal Home Loan Bank stock and certain U.S. government obligations. The term also includes assets that are includable up to 20% of portfolio assets, such as certain consumer loans and loans in “credit-needy” areas.
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The Bank may also satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986. The Bank met the QTL test at December 31, 2007, and in each of the prior 12 months, and, therefore is a “qualified thrift lender.” If the Bank fails the QTL test, and is unable to correct that failure for a period of time, it must either operate under certain restrictions on its activities or convert to a bank charter.
Capital Requirements. OTS regulations require savings associations to meet three minimum capital standards:
| | (1) | a tangible capital ratio requirement of 1.5% of total assets as adjusted under the OTS regulations; |
| | (2) | a leverage ratio requirement of 3.0% of core capital to such adjusted total assets, if the Bank has been assigned the highest composite rating of 1 under the Uniform Financial Institutions Rating System; the minimum leverage capital ration for any other depository institution that does not have a composite rating of 1 will be 4%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution; and |
| | (3) | a risk-based capital ratio requirement of 8.0% of core and supplementary capital to total risk-based assets, provided that the amount of supplementary capital used to satisfy this requirement shall not exceed the amount of core capital. |
The minimum leverage capital ratio for any other depository institution that does not have a composite rating of 1 will be 4%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution. In determining the amount of risk-weighted assets for purposes of the risk-based capital requirement, a savings association must compute its risk-based 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, commercial loans, home equity and construction loans and certain other assets as assigned by the OTS capital regulations based on the risks found by the OTS to be inherent in the type of asset. The risk-weight for certain positions in eligible rated securities ranges from 20% for the highest or second highest rating category to 200% for one rating category below investment grade.
Tangible capital is defined, generally, as common stockholder’s equity (including retained earnings), certain noncumulative perpetual preferred stock and related earnings, minority interests in equity accounts of fully consolidated subsidiaries, less intangible assets (other than certain servicing rights and nonsecurity financial instruments) and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital (or tier 1 capital) is defined similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital (or tier 2 capital) includes cumulative and other preferred stock, mandatory convertible debt securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses. In addition, up to 45% of unrealized gains on available-for-sale equity securities with a readily determinable fair value may be included in tier 2 capital. The allowance for loan and lease losses includable in tier 2 capital is limited to a maximum of 1.25% of risk-weighted assets.
At December 31, 2007, the Bank met each of its capital requirements.The table below presents the Bank’s regulatory capital as compared to the OTS regulatory capital requirements at December 31, 2007:
| | | | | | | | | |
| | | Bank | | Capital
Requirements | | Excess
Capital |
| | | ($ in thousands) |
Tangible capital | | $ | 63,191 | | $ | 12,084 | | $ | 51,107 |
Core capital | | | 63,191 | | | 32,225 | | | 30,966 |
Risk-based capital | | | 63,191 | | | 45,952 | | | 17,239 |
Community Reinvestment Act. Under the Community Reinvestment Act (CRA), as implemented by OTS regulations, the Bank 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 the Bank nor does it limit the Bank’s discretion to develop the types of products and services that it believes are best suited to its particular community,
69
consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings association, to assess 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 an “Outstanding” CRA rating in its most recent examination, dated January 17, 2007.
The CRA regulations establish an assessment system that bases an association’s rating on its actual performance in meeting community needs. In particular, the assessment system focuses on three tests:
| | • | | a lending test, to evaluate the institution’s record of making loans in its assessment areas; |
| | • | | an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses in its assessment area or a broader area that includes its assessment area; and |
| | • | | a service test, to evaluate the institution’s delivery of services through its retail banking channels and the extent and innovativeness of its community development services. |
Transactions with Affiliates. The Bank’s authority to engage in transactions with its “affiliates” is limited by the OTS regulations, the Federal Reserve Board’s Regulation W and Sections 23A and 23B of the Federal Reserve Act (FRA). In general, these transactions must be on terms which are as favorable to the Bank as comparable transactions with non-affiliates. In addition, certain types of these transactions referred to as “covered transaction” are subject to quantitative limits based on a percentage of the Bank’s capital, thereby restricting the total dollar amount of transactions the Bank may engage in with each individual affiliate and with all affiliates in the aggregate. Affiliates must pledge qualifying collateral in amounts between 100% and 130% of the covered transaction in order to receive loans from the Bank. In addition, applicable regulations prohibit a savings association from lending to any of its affiliates that engage in activities that are not permissible for bank holding companies and from purchasing low-quality (i.e., non-performing) assets from an affiliate or purchasing the securities of any affiliate, other than a subsidiary.
Loans to Insiders. The Bank’s authority to extend credit to its directors, executive officers and principal shareholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders:
| | • | | 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 non-insiders and that do not involve more that the normal risk of repayment or present other features that are unfavorable to the Bank; and |
| | • | | 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 Bank’s capital. |
The regulations allow small discounts on fees on residential mortgages for directors, officers and employees. In addition, extensions for credit to insiders in excess of certain limits must be approved by the Bank’s Board of Directors.
Enforcement. The OTS has primary enforcement responsibility over savings associations, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices.
Prompt Corrective Action Regulations. 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 is placed in one of the following four categories based on the association’s capital:
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| | • | | adequately capitalized; |
| | • | | critically undercapitalized. |
At December 31, 2007, the Bank met the criteria for being considered “well-capitalized”. When appropriate, the OTS can require corrective action by a savings association holding company under the “prompt corrective action” provision of federal law.
Standards for Safety and Soundness. Pursuant to the Federal Deposit Insurance Act, the OTS has adopted a set of guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings standards, compensation, fees and benefits. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.
In addition, the OTS adopted regulations that authorize, but do not require, the OTS to order an institution that has been given notice that it is not satisfying these safety and soundness standards to submit a compliance plan. If, after being notified, an institution fails to submit an acceptable plan or fails in any material respect to implement an accepted plan, the OTS must issue an order directing action to correct the deficiency. Further, the OTS may issue an order directing corrective actions 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 federal law. 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.
Limitations on Capital Distributions. The OTS imposes various restrictions or requirements on the Bank’s ability to make capital distributions, including cash dividends. A savings institution that is the subsidiary of a savings and loan holding company must file a notice with the OTS at least 30 days before making a capital distribution. The Bank must file an application for prior approval if the total amount of its capital distributions, including the proposed distribution, for the applicable calendar year would exceed an amount equal to the Bank’s net income for that year plus the Bank’s retained net income for the previous two years.
The OTS may disapprove a notice or application if:
| | • | | The Bank would be undercapitalized following the distribution; |
| | • | | the proposed capital distribution raises safety and soundness concerns; or |
| | • | | the capital distribution would violate a prohibition contained in any statute, regulation or agreement. |
NHTB’s ability to pay dividends, service debt obligations and repurchase common stock is dependent upon receipt of dividend payments from the Bank.
Liquidity. The Bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.
Insurance of Deposit Accounts. The Bank is a member of the Deposit Insurance Fund maintained by the FDIC, and the Bank pays its deposit insurance assessments to the Deposit Insurance Fund. The Deposit Insurance Fund was formed on March 31, 2006, following the merger of the Bank Insurance Fund and the Savings Association Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005 (“DIF Act”). In addition to merging the insurance funds, the DIF Act established a statutory minimum and maximum designated reserve ratio for the Deposit Insurance Fund and granted the FDIC greater flexibility in establishing the required reserve ratio. In its regulations implementing the DIF Act, the FDIC has set the current annual designated reserve ratio for the Deposit Insurance Fund at 1.25%.
In order to maintain the Deposit Insurance Fund, member institutions are assessed an insurance premium. The amount of each institution’s premium is currently based on the balance of insured deposits and the degree of risk the institution poses to the Deposit Insurance Fund. Under the assessment system, the FDIC assigns an institution to one of nine risk categories using a two-step process based first on capital ratios (the
71
capital group assignment) and then on other relevant information (the supervisory subgroup assignment). Each risk category is assigned an assessment rate. Assessment rates currently range from 0% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.43% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concerns). The FDIC is authorized to raise the assessment rates as necessary to maintain the Deposit Insurance Fund. The Bank’s assessment rate at December 31, 2007 was 0.0023%. Any increase in insurance assessments could have an adverse effect on the earnings of insured institutions, including the Bank.
In addition, all FDIC-insured institutions are required to pay a pro rata portion of the interest due on obligations issued by the Financing Corporation to fund the closing and disposal of failed thrift institutions by the Resolution Trust Corporation. At December 31, 2007, the Federal Deposit Insurance Corporation assessed Deposit Insurance Fund-insured deposits 1.14 basis points per $100 of deposits to cover those obligations. The Financing Corporation rate is adjusted quarterly to reflect changes in assessment bases of the Deposit Insurance Fund. This obligation will continue until the Financing Corporation bonds mature in 2017.
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank (the FHLB) of Boston, which is one of the regional FHLBs composing the FHLB System. Each FHLB 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. While the required percentages of stock ownership are subject to change by the FHLB, the Bank was in compliance with this requirement with an investment in FHLB of Boston stock at December 31, 2007 of $7.6 million. Any advances from a FHLB 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 FHLBs 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 FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, the Bank’s net interest income would be affected.
Federal Reserve System.Under regulations of the FRB, the Bank is required to maintain noninterest-earning reserves against its transaction accounts (primarily NOW and regular checking accounts). The FRB regulations exempt $8.5 million of otherwise reservable balances from the reserve requirements. A 3% reserve is required for transaction account balances over $8.5 million and up to $45.8 million. Transaction account balances over $45.8 million are subject to a reserve requirement of $1,119,000 plus 10% of any amount over $45.8 million. The Bank is in compliance with the foregoing reserve requirements. Because required reserves must be maintained in the form of vault cash, a noninterest-bearing account at a Federal Reserve Bank, or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce the Bank’s interest-earning assets. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS. FHLB System members are also authorized to borrow from the Federal Reserve discount window, but FRB regulations require such institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank.
Prohibitions Against Tying Arrangements. The Bank is subject to prohibitions on certain tying arrangements. A depository institution is prohibited, subject to certain exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional product or service from the institution or its affiliates or not obtain services of a competitor of the institution.
The Bank Secrecy Act. The Bank and NHTB are subject to the Bank Secrecy Act, as amended by the USA PATRIOT Act, which gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance powers, and mandatory transaction reporting obligations. By way of example, the Bank Secrecy Act imposes an affirmative obligation on the Bank to report currency transactions that exceed certain thresholds and to report other transactions determined to be suspicious.
Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among financial institutions, bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers,
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dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, the USA PATRIOT Act imposes the following obligations on financial institutions:
| | • | | financial institutions must establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures, and controls, (ii) specific designation of an anti-money laundering compliance officer, (iii) ongoing employee training programs, and (iv) an independent audit function to test the anti-money laundering program; |
| | • | | financial institutions must establish and meet minimum standards for customer due diligence, identification and verification; |
| | • | | financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) must establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering through those accounts; |
| | • | | financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and are subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks; and |
| | • | | bank regulators are directed to consider a bank’s or holding company’s effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications. |
Office of Foreign Asset Control. The Bank and NHTB, like all United States companies and individuals, are prohibited from transacting business with certain individuals and entities named on the Office of Foreign Asset Control’s list of Specially Designated Nationals and Blocked Persons. Failure to comply may result in fines and other penalties. The Office of Foreign Asset Control issued guidance directed at financial institutions in which it asserted that it may, in its discretion, examine institutions determined to be high-risk or to be lacking in their efforts to comply with these prohibitions.
Holding Company Regulation
NHTB is a savings and loan holding company regulated by the OTS. As such, NHTB is registered with and subject to OTS examination and supervision, as well as certain reporting requirements. In addition, the OTS has enforcement authority over NHTB and any of its non-savings institution subsidiaries. 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 institution. Unlike bank holding companies, federal savings and loan holding companies are not subject to regulatory capital requirements or to supervision by the FRB.
HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring control (as defined under HOLA) of another savings institution without prior OTS approval. In addition, a savings and loan holding company is prohibited from directly or indirectly acquiring (i) through mergers, consolidation or purchase of assets, another savings association or a holding company thereof, or acquiring all or substantially all of the assets of such association or company without prior OTS approval; and (ii) control of any depository institution not insured by the FDIC (except through a merger with and into the holding company’s savings institution association that is approved by the OTS).
A savings and loan holding company may not acquire as a separate subsidiary an insured institution that has a principal office outside of the state where the principal office of its subsidiary institution in located, except, (i) in the case of certain emergency acquisitions approved by the FDIC; (ii) if the holding company controls a savings institution subsidiary that operated a home or branch office in such additional state as of March 5, 1987; or (iii) if the laws of the home state of the savings institution to be acquired specifically authorize a savings institution chartered by that state to be acquired by a savings institution chartered by the state where the acquiring savings institution or savings and loan holding company is located or by a holding company that controls such a state chartered association.
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Laws governing savings and loan holding companies historically have classified such entities based upon the number of thrift institutions which they control. NHTB is classified as a unitary savings and loan holding company because it controls only one thrift, the Bank. Under the Gramm Leach Bliley Act of 1999 (GLB Act), any company which becomes a unitary savings and loan holding company pursuant to a charter application filed with the OTS after May 4, 1999 is prohibited from engaging in non-financial activities or affiliating with non-financial companies. All unitary savings and loan holding companies in existence prior to May 4, 1999, such as NHTB, are “grandfathered” under the GLB Act and may continue to operate as unitary savings and loan holding companies without any limitations in the types of businesses with which they may engage at the holding company level, provided that the thrift subsidiary of the holding company continues to satisfy the QTL test.
Transactions between the Bank and NHTB and its other subsidiaries are subject to various conditions and limitations. See “Regulation of Federal Savings Associations - Transactions with Affiliates” and “Regulation of Federal Savings Associations—Limitation on Capital Distributions.”
The Sarbanes-Oxley Act. As a public company, NHTB is subject to the Sarbanes-Oxley Act. The Sarbanes-Oxley Act’s principal legislation and the derivative regulation and rule making promulgated by the SEC includes:
| | • | | the creation of an independent accounting oversight board; |
| | • | | auditor independence provisions which restrict non-audit services that accountants may provide to their audit clients; |
| | • | | additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer certify financial statements; |
| | • | | a requirement that companies establish and maintain a system of internal control over financial reporting and that a company’s management provide an annual report regarding its assessment of the effectiveness of such internal control over financial reporting to the company’s independent accountants and that such accountants provide an attestation report with respect to management’s assessment of the effectiveness of the company’s internal control over financial reporting; |
| | • | | the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; |
| | • | | an increase in the oversight of, and enhancement of certain requirements relating to audit committees of public companies and how they interact with the company’s independent auditors; |
| | • | | requirement that audit committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer; |
| | • | | requirement that companies disclose whether at least one member of the committee is a “financial expert” (as such term is defined by the Securities and Exchange Commission) and if not, why not; |
| | • | | expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods; |
| | • | | a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions; |
| | • | | disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; |
| | • | | mandatory disclosure by analysts of potential conflicts of interest; and |
| | • | | a range of enhanced penalties for fraud and other violations. |
Section 402 of the Sarbanes-Oxley Act of 2002 prohibits the extension of personal loans to directors and executive officers of issuers (as defined in Sarbanes-Oxley). The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as the Bank, that are subject to the insider lending restrictions of Section 22(h) of the Federal Reserve Act.
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Although NHTB anticipates that it will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on its results of operations or financial condition.
Federal Securities Laws. NHTB’s common stock is registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934, as amended (Exchange Act). NHTB is subject to information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act.
Quotation on Nasdaq. NHTB’s common stock is quoted on The Nasdaq Stock Market. In order to maintain such quotation, NHTB is subject to certain corporate governance requirements, including:
| | • | | a majority of its board must be composed of independent directors; |
| | • | | it is required to have an audit committee composed of at least three directors, each of whom is an independent director, as such term is defined by both the rules of the NASDAQ and by the Exchange Act, as amended, regulations promulgated thereunder; |
| | • | | the nominating committee and compensation committee must also be composed entirely of independent directors; |
| | • | | each of the audit committee, and nominating committee must have a publicly available written charter. |
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 imposed by the State of New Hampshire at the rate of 8.50% 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, 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 2007, the tax amounted to $87,646.
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EMPLOYEES
At December 31, 2007, Lake Sunapee Bank had a total of 223 full-time employees and 25 part-time employees. These employees are not represented by collective bargaining agents. The Bank believes that its relationship with its employees is good.
The following table sets forth the location of the Bank’s offices and certain additional information relating to these offices at December 31, 2007:
| | | | | | | | | | | | |
| | | Year | | Net Book Value | | Expiration | | Lease
Renewal |
Location | | Opened | | Leased | | Owned | | Date of Lease | | Option |
9 Main Street | | | | | | | | | | | | |
Newport, NH | | 1868 | | | | | $ | 1,554,152 | | | | |
565 Route 11 | | | | | | | | | | | | |
Sunapee, NH | | 1965 | | | | | $ | 74,745 | | | | |
115 East Main Street | | | | | | | | | | | | |
Bradford, NH | | 1975 | | | | | $ | 412,720 | | | | |
300 Sunapee Street | | | | | | | | | | | | |
Newport, NH | | 1978 | | | | | $ | 70,500 | | | | |
165 Route 10 South | | | | | | | | | | | | |
Grantham, NH | | 1980 | | | | | $ | 290,671 | | | | |
116 Newport Road | | | | | | | | | | | | |
New London, NH | | 1981 | | | | | $ | 804,694 | | | | |
200 Heater Road | | | | | | | | | | | | |
Lebanon, NH | | 1986 | | | | | $ | 447,319 | | | | |
106 Hanover Street | | | | | | | | | | | | |
Lebanon, NH | | 1997 | | | | | $ | 1,721,503 | | | | |
15 Antrim Road | | | | | | | | | | | | |
Hillsboro, NH | | 1994 | | | | | $ | 672,903 | | | | |
321 Main Street | | | | | | | | | | | | |
New London, NH | | 1999 | | | | | $ | 1,122,842 | | | | |
32 Elm Street | | | | | | | | | | | | |
Milford, NH | | 2006 | | | | | $ | 1,169,494 | | | | |
2 Park Street | | | | | | | | | | | | |
Brandon, VT | | 2007 | | | | | $ | 639,918 | | | | |
Route 4 and Depot Hill Road. | | | | | | | | | | | | |
Pittsford, VT | | 2007 | | | | | $ | 303,973 | | | | |
484 Main Street | | | | | | | | | | | | |
West Rutland, VT | | 2007 | | | | | $ | 394,990 | | | | |
1340 Franklin Street | | | | | | | | | | | | |
Brandon, VT | | 2007 | | | | | $ | 763,884 | | | | |
No. One Bond Street | | | | | | | | | | | | |
Woodstock, VT | | 2007 | | | | | $ | 1,017,140 | | | | |
Route 4 West | | | | | | | | | | | | |
Woodstock, VT | | 2007 | | | | | $ | 201,385 | | | | |
100 Woodstock Avenue | | | | | | | | | | | | |
Rutland, VT | | 2007 | | | | | $ | 452,026 | | | | |
83 Main Street(1) | | | | | | | | | | | | |
West Lebanon, NH | | 1994 | | $ | 108,181 | | | | | 2009 | | 5 Years |
12 Centerra Pkwy.(1) | | | | | | | | | | | | |
Lebanon, NH | | 1997 | | $ | 67,500 | | | | | 2012 | | 10 Years |
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| | | | | | | | | | | |
(Continued) Location | | Year
Opened | | Net Book Value | | Expiration
Date of Lease | | Lease Renewal
Option |
| | | Leased | | Owned | | |
Route 103(1) | | | | | | | | | | | |
Newbury, NH | | 1999 | | $ | 150,104 | | | | 2008 | | 5 Years |
7 Lawrence Street(1) | | | | | | | | | | | |
Andover, NH | | 2003 | | $ | 318,950 | | | | 2012 | | 15 Years |
2-4 Main Street(1) | | | | | | | | | | | |
Peterborough, NH | | 2004 | | $ | 685,110 | | | | 2009 | | 30 Years |
468 US Route 4(1) | | | | | | | | | | | |
Enfield, NH | | 2005 | | $ | 402,173 | | | | 2009 | | 20 Years |
345 Washington Street(1) | | | | | | | | | | | |
Claremont, NH | | 2005 | | $ | 324,713 | | | | 2009 | | 10 Years |
12 South Street(1) | | | | | | | | | | | |
Hanover, NH | | 2007 | | $ | 188,423 | | | | 2016 | | 10 Years |
104-110 Merchants Row(1) | | | | | | | | | | | |
Rutland, VT | | 2007 | | $ | 24,947 | | | | 2008 | | 24 Years |
1995 Route 4(1) | | | | | | | | | | | |
Killington, VT | | 2007 | | $ | 42,927 | | | | 2016 | | |
2997 Franklin Street(1) | | | | | | | | | | | |
Brandon, VT | | 2007 | | $ | — | | | | | | |
(1) | Operating lease, value of improvements. |
There is no material litigation pending in which the Company is a party or to which the property of the Company is subject, other than ordinary routine litigation incidental to the Company’s business.
| 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 of 2007.
PART II.
| Item 5. | Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The following table shows the market range for the Company’s common stock based on reported sales prices on the NASDAQ Global Market. New Hampshire Thrift Bancshares, Inc. is traded under the symbol “NHTB”.
| | | | | | | | |
| | | Period | | High | | Low |
2007 | | First Quarter | | $ | 16.330 | | $ | 15.500 |
| | Second Quarter | | | 15.500 | | | 14.170 |
| | Third Quarter | | | 16.200 | | | 13.980 |
| | Fourth Quarter | | | 15.270 | | | 10.430 |
2006 | | First Quarter | | $ | 16.190 | | $ | 14.300 |
| | Second Quarter | | | 16.500 | | | 15.190 |
| | Third Quarter | | | 16.990 | | | 14.990 |
| | Fourth Quarter | | | 16.960 | | | 14.640 |
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 March 17, 2008, the Company had approximately 786 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.
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The following table sets forth certain information regarding per share dividends declared on the Company’s common stock:
| | | | | | |
| | | 2007 | | 2006 |
First Quarter | | $ | 0.1300 | | $ | 0.1250 |
Second Quarter | | | 0.1300 | | | 0.1300 |
Third Quarter | | | 0.1300 | | | 0.1300 |
Fourth Quarter | | | 0.1300 | | | 0.1300 |
For information regarding limitations on the declaration and payment of dividends by New Hampshire Thrift Bancshares, Inc., see Note 15 of the Notes to Consolidated Financial Statements and “Regulations-Limitations on Capital Distributions” on page 72.
The following table provides information regarding repurchases of our common stock in each month of the quarter ended December 31, 2007:
| | | | | | | | | |
Period | | Total number
of shares
repurchased | | Average price
paid per share | | Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(1) | | Maximum
Number of Shares
that may yet be
Purchased under
the Plans or
Programs(1) |
October 1, 2007 – October 31, 2007 | | — | | | | | — | | 169,288 |
November 1, 2007 – November 30, 2007 | | 16,200 | | $ | 13.11 | | 16,200 | | 153,088 |
December 1, 2007 – December 31, 2007 | | — | | | | | — | | 153,088 |
Total | | 16,200 | | $ | 13.11 | | 16,200 | | 153,088 |
| (1) | The Company announced a stock repurchase program on June 20, 2007. The program will continue until the repurchase of 253,776 shares is complete. |
Performance Graph
The following graph compares New Hampshire Thrift Bancshares’ total cumulative stockholder return by an investor who invested $100 on December 31, 2002, including re-investment of dividends and giving effect to stock splits, in each of the following:
| | • | | The Russell 2000 Index; |
| | • | | A hypothetical fund with investments in the stock of peer corporations (the “peer group”); and |
| | • | | New Hampshire Thrift Bancshares. |
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The peer group consists of New England financial institutions with assets totaling between $200 million and $600 million. The members of the peer group are:
| | | | |
| Bar Harbor Bankshares, Inc. | | Legacy Bancorp, Inc. | | Northeast Bancorp, Inc. |
| Central Bancorp, Inc. | | MASSBANK Corp. | | |
| | | | | | | | | | | | |
| | | Cumulative Total Return |
| | | 12/02 | | 12/03 | | 12/04 | | 12/05 | | 12/06 | | 12/07 |
New Hampshire Thrift Bancshares, Inc. | | 100.00 | | 187.65 | | 188.33 | | 174.15 | | 195.14 | | 156.47 |
Russell 2000 | | 100.00 | | 147.25 | | 174.24 | | 182.18 | | 215.64 | | 212.26 |
Peer Group | | 100.00 | | 144.47 | | 139.82 | | 132.85 | | 146.39 | | 136.64 |
On January 11, 2007, the Company reactivated a previously adopted but uncompleted stock repurchase program. Repurchases will be made from time to time at the discretion of management. The stock repurchase program continued until 214,679 shares were repurchased. On June 20, 2007, the Company reactivated a previously adopted but uncompleted stock repurchase program. Repurchases were made from time to time at the discretion of management. The stock repurchase program will continue until 253,776 shares are repurchased. As of December 31, 2007, 232,500 shares of common stock had been repurchased. During 2007, a total of 330,867 shares were repurchased.
79
| Item 6. | Selected Financial Data |
| | | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 |
| | | (In thousands, except per share data) |
Selected Balance Sheet Data: | | | | | | | | | | | | | | | |
Total assets | | $ | 834,230 | | $ | 672,031 | | $ | 650,179 | | $ | 595,514 | | $ | 526,246 |
Securities | | | 94,993 | | | 99,063 | | | 119,303 | | | 123,421 | | | 126,179 |
Loans, net | | | 626,274 | | | 492,712 | | | 463,151 | | | 413,808 | | | 344,573 |
Loans held-for-sale | | | 2,508 | | | 1,771 | | | 2,263 | | | 1,295 | | | 870 |
Deposits | | | 652,972 | | | 465,506 | | | 464,637 | | | 433,072 | | | 428,477 |
FHLB advances | | | 63,387 | | | 120,000 | | | 100,000 | | | 75,000 | | | 22,000 |
Shareholders’ equity | | | 72,667 | | | 48,409 | | | 46,727 | | | 43,835 | | | 39,125 |
Allowance for loan losses | | | 5,181 | | | 3,975 | | | 4,022 | | | 4,019 | | | 3,899 |
Nonperforming loans | | | 4,745 | | | 754 | | | 278 | | | 293 | | | 1,158 |
Nonperforming assets | | | 4,745 | | | 754 | | | 278 | | | 293 | | | 1,158 |
Book value per share | | $ | 12.51 | | $ | 11.58 | | $ | 11.07 | | $ | 10.52 | | $ | 9.74 |
| |
| | | For years ended December 31, |
| | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 |
| | | (In thousands, except per share data) |
Selected Operating Data: | | | | | | | | | | | | | | | |
Interest and dividend income | | $ | 39,643 | | $ | 33,674 | | $ | 28,631 | | $ | 25,284 | | $ | 21,494 |
Interest expense | | | 19,381 | | | 15,250 | | | 8,916 | | | 6,517 | | | 5,736 |
| | | | | | | | | | | | | | | |
Net interest and dividend income | | | 20,262 | | | 18,424 | | | 19,715 | | | 18,767 | | | 15,758 |
Provision for loan losses | | | 122 | | | 230 | | | 89 | | | 75 | | | 100 |
| | | | | | | | | | | | | | | |
Net interest and dividend income after provision for loan losses | | | 20,140 | | | 18,194 | | | 19,626 | | | 18,692 | | | 15,658 |
Total noninterest income | | | 6,914 | | | 5,875 | | | 4,108 | | | 4,075 | | | 6,331 |
Total noninterest expense | | | 20,627 | | | 16,529 | | | 14,952 | | | 14,505 | | | 12,711 |
| | | | | | | | | | | | | | | |
Income before income taxes | | | 6,427 | | | 7,540 | | | 8,782 | | | 8,262 | | | 9,278 |
Income taxes | | | 1,911 | | | 2,500 | | | 3,258 | | | 3,164 | | | 3,507 |
| | | | | | | | | | | | | | | |
Net income | | $ | 4,516 | | $ | 5,040 | | $ | 5,524 | | $ | 5,098 | | $ | 5,771 |
| | | | | | | | | | | | | | | |
Per Share Data: | | | | | | | | | | | | | | | |
Basic earnings | | $ | 0.93 | | $ | 1.20 | | $ | 1.31 | | $ | 1.23 | | $ | 1.46 |
Diluted earnings | | $ | 0.92 | | $ | 1.17 | | $ | 1.29 | | $ | 1.20 | | $ | 1.42 |
Dividends paid | | $ | 0.52 | | $ | 0.52 | | $ | 0.50 | | $ | 0.45 | | $ | 0.36 |
80
| | | | | | | | | | | | | | | |
| | | For years ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | |
Performance Ratios: | | | | | | | | | | | | | | | |
Return on average assets | | 0.61 | % | | 0.76 | % | | 0.89 | % | | 0.87 | % | | 1.15 | % |
Return on average equity | | 7.98 | | | 11.08 | | | 13.10 | | | 12.17 | | | 15.83 | |
Average equity as a percent of average assets | | 7.63 | | | 6.91 | | | 6.80 | | | 7.15 | | | 7.28 | |
Interest rate spread | | 2.91 | | | 2.87 | | | 3.40 | | | 3.48 | | | 3.43 | |
Net interest margin | | 3.06 | | | 3.02 | | | 3.49 | | | 3.54 | | | 3.50 | |
Average interest-earning assets to average interest-bearing liabilities | | 105.13 | | | 106.09 | | | 105.47 | | | 105.10 | | | 105.94 | |
Operating expense as a percent of average total assets | | 2.78 | | | 2.51 | | | 2.41 | | | 2.48 | | | 2.54 | |
Dividend payout ratio | | 55.91 | | | 43.33 | | | 38.17 | | | 36.59 | | | 24.66 | |
Capital Ratios: | | | | | | | | | | | | | | | |
Tier 1 leverage capital ratio | | 7.84 | | | 8.12 | | | 7.80 | | | 7.87 | | | 7.56 | |
Total risk-based capital ratio | | 11.08 | | | 11.92 | | | 11.31 | | | 12.04 | | | 11.88 | |
Asset Quality Ratios: | | | | | | | | | | | | | | | |
Nonperforming loans as a percent of loans, net | | 0.75 | | | 0.15 | | | 0.06 | | | 0.07 | | | 0.34 | |
Nonperforming assets as a percent of total assets | | 0.57 | | | 0.11 | | | 0.04 | | | 0.05 | | | 0.22 | |
Allowance for loan losses as a percent of loans before allowance for loan losses | | 0.82 | | | 0.80 | | | 0.86 | | | 0.97 | | | 1.12 | |
Allowance for loan losses as a percent of nonperforming loans | | 109.21 | % | | 527.21 | % | | 1,446.76 | % | | 1,371.67 | % | | 336.70 | % |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The information called for by this item is contained on pages 5 through 23 of this document.
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
The information called for by this item is contained on pages 5 through 23 of this document.
| Item 8. | Financial Statements |
The report of independent registered public accounting firm and the financial information called for by this item are contained on pages 24 through 56 of this document.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure 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(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Company’s President and Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is (i) recorded, processed, summarized and reported as and when required, and (ii) accumulated and communicated to the Company’s management, including the Company’s President and Chief Executive Officer and the Company’s Chief Financial Officer , as appropriate to allow timely decisions regarding required disclosure.
81
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.
Management Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) of the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on our assessment we believe that, as of December 31, 2007, the Company’s internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission.
| Item 9B. | Other Information |
None.
PART III.
| Item 10. | Directors, Executive Officers and Corporate Governance |
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 May 8, 2008 which definitive proxy statement will be filed with the Securities and Exchange Commission as part of the proxy statement to be filed on or about April 4, 2008.
Code of Ethics. The Company has adopted a Code of Ethics Policy, which applies to all employees, directors and officers of the Company and Lake Sunapee Bank. The Company has also adopted a Code of Ethics for Senior Financial Officers of the Company, which applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller or person performing similar functions for the Company and Lake Sunapee Bank, and which requires compliance with the Conflict of Interest Policy and Code of Conduct. The Code of Ethics for Senior Financial Officers of the Company meets the requirements of a “code of ethics” as
82
defined by Item 406 of Regulation S-K. The Code of Ethics for Senior Financial Officers was filed as Exhibit 14.1 to the Form 10-K for the year ended December 31, 2003.
You may obtain a copy of the Code of Ethics for Senior Financial Officers, free of charge, by sending a request in writing to Stephen R. Theroux at the following address:
Stephen R. Theroux
Corporate Secretary
New Hampshire Thrift Bancshares, Inc.
9 Main Street
P.O. Box 9
Newport, New Hampshire 03773-0009
| Item 11. | 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 May 8, 2008 which definitive proxy statement will be filed with the Securities and Exchange Commission as part of the proxy statement to be filed on or about April 4, 2008.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters |
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 May 8, 2008 which definitive proxy statement will be filed with the Securities and Exchange Commission as part of the proxy statement to be filed on or about April 4, 2008.
The following table sets forth the aggregate information of our equity compensation plans in effect as of December 31, 2007.
| | | | | | | |
Plan category | | Number of securities
to be issued
upon exercise of
outstanding options,
warrants and rights | | Weighted-average
exercise price of
outstanding options,
warrants and rights | | Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)) |
| | | (a) | | (b) | | (c) |
Equity compensation plans approved by security holders | | 378,042 | | $ | 12.10 | | — |
Equity compensation plans not approved by security holders | | — | | | — | | — |
| | | | | | | |
Total | | 378,042 | | $ | 12.10 | | — |
| | | | | | | |
| Item 13. | 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 May 8, 2008 which definitive proxy statement will be filed with the Securities and Exchange Commission as part of the proxy statement to be filed on or about April 4, 2008.
83
| Item 14. | Principal Accountant Fees and Services |
Information regarding the aggregate fees billed for each of the last two fiscal years by NHTB’s principal accountant is incorporated by reference herein from NHTB’s definitive proxy statement in connection with its Annual Meeting of Shareholders to be held on May 8, 2008 which definitive proxy statement will be filed with the Securities and Exchange Commission as part of the proxy statement to be filed on or about April 4, 2008.
PART IV.
| Item 15. | Exhibits and Financial Statement Schedules |
The exhibits filed as a part of this Registration Statement are as follows:
| | (a) | Listed below are all financial statements filed as part of this report: |
| | (1) | The consolidated balance sheets of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 2007 and 2006 and the related consolidated statements of income, changes in shareholders’ equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007, together with the related notes and the report of independent registered public accounting firm of Shatswell, MacLeod & Company, P.C. independent public accountants. |
| | (2) | Schedules omitted as they are not applicable. |
| | (b) | List of Exhibits. (Filed herewith unless otherwise noted.) |
| | |
Exhibit No. | | Description |
| |
| 2.1 | | Agreement and 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 NHTB’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”)) |
| |
| 2.2 | | 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 NHTB’s March 31, 1999 Form 10-QSB filed on May 14, 1999). |
| |
| 2.3 | | Purchase 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 NHTB’s March 31, 1999 Form 10-QSB filed on May 14, 1999). |
| |
| 2.4 | | 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 NHTB’s March 31, 1999 Form 10-QSB filed on May 14, 1999). |
| |
| 2.5 | | Agreement and Plan of Merger by and between NHTB and First Brandon Financial Corporation dated as of December 14, 2006 (previously filed as an Exhibit to NHTB’s Form 8-K filed with the Commission on December 15, 2006). |
| |
| 2.6 | | Agreement and Plan of Merger by and between NHTB and First Community Bank dated as of April 16, 2007 (previously filed as an Exhibit to NHTB’s 8-K filed with Commission on April 16, 2007). |
| |
| 3.1.1 | | Amended and Restated Certificate of Incorporation of NHTB (previously filed as an exhibit to the November 5, 1996 S-4). |
84
| | |
| |
| 3.1.2 | | Certificate of Amendment of the Certificate of Incorporation of NHTB (previously filed as an Exhibit to NHTB’s June 30, 2005 Form 10-Q filed with the Commission on August 15, 2005). |
| |
| 3.2.1 | | Amended and Restated Bylaws of NHTB (previously filed as an Exhibit to NHTB’s Form 10-KSB filed with the Commission on March 5, 1998). |
| |
| 3.2.2 | | Amendment to Bylaws of NHTB (previously filed as an Exhibit to NHTB’s Form 8-K filed with the Commission on March 11, 2004). |
| |
| 3.2.3 | | Amendment to Bylaws of NHTB (previously filed as an Exhibit to NHTB’s Form 8-K filed with the Commission on October 1, 2007). |
| |
| 4.1 | | Stock Certificate of NHTB (previously filed as an Exhibit to NHTB’s Form S-4 (file No. 33-27192) filed with the Commission on March 1, 1989). |
| |
| 4.2 | | Indenture by and between NHTB, as Issuer and U.S. Bank National Association, as Trustee, dated March 30, 2004 for Floating Rate Junior Subordinated Deferrable Interest Debentures (previously filed as an Exhibit to NHTB’s December 31, 2005 Form 10-K filed with the commission on March 29, 2005). |
| |
| 4.3 | | Form of Floating Rate Junior Subordinated Deferrable Interest Debentures issued by NHTB to U.S. Bank National Association dated March 30, 2004 (see Exhibit A to Exhibit 4.2). |
| |
| 4.4 | | Indenture by and between New NHTB, as Issuer, and U.S. Bank National Association, as Trustee, dated March 30, 2004 for Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (previously filed as an Exhibit to NHTB’s December 31, 2005 Form 10-K filed with the commission on March 29, 2005). |
| |
| 4.5 | | Form of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures issued by NHTB to U.S. Bank National Association dated March 30, 2004 (see Exhibit A to Exhibit 4.4). |
| |
| 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 to the November 5, 1996 S-4). |
| |
| 10.3 | | Lake Sunapee Bank, fsb 1987 Incentive Stock Option Plan (previously filed as an Exhibit to NHTB’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 | | Guarantee Agreement by and between NHTB and U.S. Bank National Association dated March 30, 2004 (previously filed as an Exhibit to NHTB’s December 31, 2004 Form 10-K filed with the Commission on March 29, 2005). |
| |
| 10.8 | | Guarantee Agreement by and between New NHTB and U.S. Bank National Association dated March 30, 2004 (previously filed as an Exhibit to the Company’s December 31, 2004 Form 10-K filed with the Commissionon March 29, 2005). |
85
| | |
| |
| 10.9 | | NHTB’s 1998 Stock Option Plan (previously file as Appendix A to NHTB’s Proxy Statement filed with the Commission on March 6, 1998). |
| |
| 10.10 | | NHTB’s 2004 Stock Incentive Plan (previously file as Appendix B to NHTB’s Proxy Statement filed with the Commission on April 8, 2004). |
| |
| 10.11 | | Amended and Restated Supplemental Executive Retirement Plan of New Hampshire Thrift Bancshares, Inc. (previously filed as an Exhibit to NHTB’s Form 8-K filed with the Commission on December 14, 2005). |
| |
| 10.12 | | Amendment to the Supplemental Executive Retirement Plan of New Hampshire Thrift Bancshares, Inc. (previously filed as an Exhibit to NHTB’s Form 8-K filed with the Commission on March 14, 2006). |
| |
| 10.13 | | Amendment to the Supplemental Executive Retirement Plan of New Hampshire Thrift Bancshares, Inc. (previously filed as an Exhibit to NHTB’s Form 8-K filed with the Commission on April 2, 2007). |
| |
| 10.14 | | Form of Executive Salary Continuation Agreement among NHTB, the Bank and certain officers (previously filed as an Exhibit to NHTB’s Form 8-K filed with the Commission on February 21, 2008). |
| |
| 11.1 | | Computation of Per Share Earnings (see Note 1 to Consolidated Financial Statements). |
| |
| 13.1 | | Annual Report to Shareholders for the year ended December 31, 2007 (filed herein). |
| |
| 14.1 | | Code of Ethics (previously filed as Exhibit 14.1 to NHTB’s December 31, 2004 Form 10-K filed with the Commission on March 30, 2004). |
| |
| 21.1 | | Subsidiaries of the Company |
| |
| 23.1 | | Consent of Shatswell, MacLeod & Company, P.C. |
| |
| 31.1 | | Rule 13a-14(a)/15d-14(a) Certifications |
| |
| 32.1 | | Section 1350 Certifications |
86
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
New Hampshire Thrift Bancshares, Inc.
| | | | | | |
| By: | | /s/ Stephen W. Ensign | | Chairman of the Board | | March 24, 2008 |
| | (Stephen W. Ensign) | | President and Chief Executive Officer (Principal Executive Officer) | | |
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.
| | | | |
Name | | Title | | Date |
| | |
/s/ Stephen W. Ensign (Stephen W. Ensign) | | Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) | | March 24, 2008 |
| | |
/s/ Stephen R. Theroux (Stephen R. Theroux) | | Vice Chairman of the Board, Executive Vice President, Chief Operating Officer, Chief Financial Officer and Secretary (Principal Accounting Officer) | | March 24, 2008 |
| | |
/s/ Leonard R. Cashman (Leonard R. Cashman) | | Director | | March 24, 2008 |
| | |
/s/ William C. Horn (William C. Horn) | | Director | | March 24, 2008 |
| | |
/s/ Peter R. Lovely (Peter R. Lovely) | | Director | | March 24, 2008 |
| | |
/s/ Jack H. Nelson (Jack H. Nelson) | | Director | | March 24, 2008 |
| | |
/s/ Michael T. Putziger (Michael T. Putziger) | | Director | | March 24, 2008 |
| | |
/s/ Peter D. Terwilliger (Peter D. Terwilliger) | | Director | | March 24, 2008 |
| | |
/s/ Joseph B. Willey (Joseph B. Willey) | | Director | | March 24, 2008 |
87
New Hampshire Thrift Bancshares, Inc.
Directors
Stephen W. Ensign,Chairman
Stephen R. Theroux,Vice Chairman
Leonard R. Cashman
William C. Horn
Peter R. Lovely
Jack H. Nelson
Michael T. Putziger
Peter D. Terwilliger
Joseph B. Willey
Officers
Stephen W. Ensign
Chairman of the Board,
President and Chief Executive
Officer
Stephen R. Theroux
Vice Chairman of the Board
Executive Vice President, Chief
Financial Officer and Corporate Secretary
Sherry A. Morin
Assistant Secretary
Lake Sunapee Bank, fsb
Directors
Stephen W. Ensign,Chairman
Stephen R. Theroux
Leonard R. Cashman
William C. Horn
John A. Kelley, Jr.
Peter R. Lovely
Jack H. Nelson
Michael T. Putziger
Peter D. Terwilliger
Joseph B. Willey
Executive Officers
Stephen W. Ensign
Chairman of the Board
and Chief Executive Officer
Stephen R. Theroux
President, Chief Operating Officer,
and Chief Financial Officer
William J. McIver
Executive Vice President,
Chief Information Officer and
Retail Banking Director
First Vice Presidents
Scott W. Laughinghouse
Commercial Lending
Sharon L. Whitaker
Mortgage Lending
Senior Vice Presidents
Frances E. Clow
Human Resources
H. Bliss Dayton
Chief Risk Officer
Kenneth E. Howe
Commercial Lending
Karen D. Lynch
Commercial Lending
Robert C. O’Brien
Business Development
Vice Presidents
Arlene F. Adams
Commercial Lending
Colin S. Campbell
Commercial Lending
Erik C. Cinquemani
Loan Review
Stephen DeClue
Commercial Lending
Angie L. Deschenes
Retail Banking
Juanita A. Dupont
Loan Processing
Stephen B. Ellis
Loan Origination
Thomas B. Evans
Commercial Lending
Paul Faber
Commercial Lending
Albert S. Freeman III
Commercial Lending
Marlene H. Gardner
BSA and Security Officer
Karen F. Garrow
Commercial Lending
David W. Green
Retail Banking
Debora S. Henderson
Retail Banking
Laura Jacobi
Accounting and Finance
Peter N. Jennings
Loan Origination
Suzanne Johnson
Loan Servicing
James H. Miller
Control Officer
Dianne E. Nicol
Retail Banking
Marie A. Pelletier
Retail Operations
Francetta Raymond
Loan Operations
Dorisann D. Ross
Retail Banking
Sue G. Shaw
Commercial Lending
Paul W. St. Martin
Information Technology
Janet L. Zutell
Consumer Lending
Assistant Vice Presidents
Brandy L. Blackinton
Retail Banking
Sue L. Bryan
Retail Banking
Mary C. Campe
Business Banking
Christopher J. Carpenter
Business Banking
Andrea K. Coppola
Retail Banking
Dennis J. Driscoll, Jr.
Commercial Lending
Susan Fernald
Retail Banking
Cheryl A. Fisher
Loan Origination
Christopher H. Head
Financial Services
Catherine R. Lekberg
Retail Banking
Vicki M. Lewis
Consumer Lending
Sherry A. Morin
Human Resources
Donald J. Pasini
Loan Origination
Alison Pearsons
Commercial Banking
Maryanne E. Petrin
Accounting and Finance
Pellegrino A. Rossi
Lake Sunapee Group
Dena L. Sclafani
Loan Origination
Roxanne M. Shedd
Retail Banking
Terri G. Spanos
Retail Banking
88
Board of Advisors
Benjamin K. Barton
Douglas S. Baxter
William S. Berger
William A. Bittinger
Paul R. Boucher
Ruth I. Clough
J. D. Colcord
Jacqueline C. Cote
Ernest G. Dennis, Jr.
Harry G. Dorman III
William J. Faccone, Sr.
John W. Flynn, Jr.
John W. Flynn, Sr.
Sheffield J. Halsey
Douglas J. Homan
Curtis A. Jacques
Sharon J. Jacques
Charles S. Jakiela
Michael D. Johnson
Edward T. Kerrigan
David H. Kidder
Janet R. Kidder
John J. Kiernan, Jr.
John J. Kiernan, Sr.
Victor W. Laro
Paul J. Linehan
Robert MacNeil
Elizabeth W. Maiola
John J. Marcotte
Thomas F. McCormick
J. David McCrillis
John C. McCrillis
F. Graham McSwiney
Charles Memoe
Kenneth Miller
Thomas J. Mills
Linda L. Oldham
Daniel P. O’Neill
Betty H. Ramspott
Chris Scott
William J. Simms
Charles Smid
Fredric M. Smith
Earl F. Strout
James R. Therrien
Stefan Timbrell
Janis H. Wallace
James P. Wheeler
Bradford C. White
Carolyn B. Whittaker
John W. Wiggins, Sr.
Bruce Williamson
Thomas B. Woodger
Michael J. Work
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
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Tel: Investor Relations 1-800-368-5948
Website: www.rtco.com
Independent Auditors
Shatswell, MacLeod & Company, P.C.
83 Pine Street
West Peabody, MA 01960-3635
Legal Counsel
Thacher Proffitt & Wood LLP
1700 Pennsylvania Avenue, NW
Washington, DC 20006
Information on Common Stock
The common stock is traded over-the-counter and quoted on the NASDAQ Global Market under the symbol “NHTB”. There were approximately 786 shareholders of record on March 17, 2008.
The following table sets forth the Company’s high and low prices for the common stock as reported by NASDAQ for the periods indicated:
| | | | | | |
2007 | | High | | Low |
First Quarter | | $ | 16.330 | | $ | 15.500 |
Second Quarter | | | 15.500 | | | 14.170 |
Third Quarter | | | 16.200 | | | 13.980 |
Fourth Quarter | | | 15.270 | | | 10.430 |
This Annual Report has been written by the Company’s staff.
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