Lake Sunapee Bank (LSBG) 10-K 2008 FY Annual report

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	1
Letter to Stockholders	2
Management’s Discussion and Analysis of Financial Condition and Results of Operations	5
Report of Independent Registered Public Accounting Firm	25
Financial Statements	26
Notes to Financial Statements	32
Form 10-K	62
Board of Directors	91
Officers and Managers	91
Board of Advisors	92
Stockholder Information	92
Information on Common Stock	92

Selected Financial Highlights

For the Years Ended December 31,	2008			2007			2006			2005			2004
	(In thousands, except per share data)
Net Income	$	5,725		$	4,516		$	5,040		$	5,524		$	5,098
Per Share Data:
Basic Earnings(1) (2)		1.00			0.93			1.20			1.31			1.23
Diluted Earnings(2)		0.99			0.92			1.17			1.29			1.20
Dividends Paid(2)		0.52			0.52			0.52			0.50			0.45
Dividend Payout Ratio		52.00			55.91			43.33			38.17			36.59
Return on Average Assets		0.69	%		0.61	%		0.75	%		0.89	%		0.87	%
Return on Average Equity		7.84	%		7.98	%		11.04	%		13.10	%		12.17	%
As of December 31,	2008			2007			2006			2005			2004
	(In thousands, except per share data)
Total Assets	$	843,198		$	834,210		$	672,031		$	650,179		$	595,514
Total Deposits		653,353			652,952			465,506			464,637			433,072
Total Securities(3)		86,935			94,343			99,063			119,303			123,421
Loans, Net		636,720			626,274			492,712			463,151			413,808
Federal Home Loan Bank Advances		66,317			63,387			120,000			100,000			75,000
Stockholders’ Equity		74,677			72,667			48,409			46,727			43,835
Book Value per Share	$	12.99		$	12.69		$	11.58		$	11.07		$	10.52
Average Common Equity to Average Assets		8.76	%		7.84	%		6.91	%		6.80	%		7.15	%
Shares Outstanding		5,747,772			5,726,772			4,180,080			4,219,980			4,167,180
Number of Branch Locations		28			29			18			17			15

⁽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 Stockholders

…continued emphasis on our core competencies - gathering deposits and making loans - remains central to what we do…

Dear Stockholder:

New Hampshire Thrift Bancshares, through its wholly owned subsidiary Lake Sunapee Bank, continued to make steady progress strengthening our market position throughout the geographically diverse communities we now support. The dramatic unwinding of the economy and the intense focus that was brought to bear on the financial services industry weighed heavily upon us during this past year. However, the acquisition activity completed in 2007 and fully integrated in 2008 has enabled us to broaden our base of customer relationships and further soften the financial impact of a protracted deterioration in any one market-specific region.

Community banks, on the whole, have tended to fair much better during these challenging times. Local ties to the areas we serve weave something of a patchwork quilt of inter-connected banking relationships that better enable us to weather periods of economic uncertainty. The message should be that the true backbone of the banking industry can be found in the villages…and the towns…and the cities where a local bank is serving the needs of a local community.

Over the past year the Company has sought to concentrate its efforts in the areas of improving overall efficiencies through internal systems and technology, managing the core deposit and general funding capabilities, and identifying the potential growth for streams of non-interest income. Credit quality remains high within our portfolio of loans, despite generally weakened trends over prior periods, and the areas in which we operate have, so far, experienced significantly less erosion than elsewhere.

Continued emphasis on our core competencies - gathering deposits and making loans - remains central to what we do day-after-day and year-after-year to build the value of our banking franchise.

COMPANY EARNINGS

Earnings for 2008 increased by nearly 27.00% over the previous year, with consolidated net income for the year ended December 31, 2008 of $5,725,072, or $0.99 per share of common stock (fully diluted). This compares to net income of $4,515,682, or $0.92 per share of common stock (fully diluted) reported for 2007. The Company saw a significant increase in net interest and dividend income, while also realizing an increase in non-interest income, including gains on the sales of investment securities. Certain non-cash impairment charges for a holding of Fannie Mae Preferred Stock and for an adjustment to the carrying value of our mortgage servicing rights were recognized which somewhat offset income during the year.

While we are certainly pleased with the 2008 results, periodic additions to the allowance for loan loss reserves, margin compression from the narrowing of interest rate spreads, and the across-the-board increases in insurance premiums from the Federal Deposit Insurance Corporation all combine to put more and more pressure on the operating results of community banks during this time of broadening economic weakness. For a more in-depth review, the complete financial details for the year ending December 31, 2008 can be found in the Management’s Discussion and Analysis section immediately following this letter.

STOCKHOLDER VALUE

The rapid breakdown of the financial markets over the last several months and the general malaise that now shrouds the banking industry as a whole has tended to cloud the longer-term strategic outlook for building sustainable stockholder value over time. The daily ups and downs of a company’s stock price has temporarily overshadowed net core operating results as one of the prime measurements for the worth of a company. Yet, for community banking franchises such as ours, true stockholder value must be measured by a combination of its financial success, the fundamental contributions it makes to the various communities and

2

Letter to Stockholders (continued)

customers it serves, its commitment to its employees and its choice of priorities in how it goes about conducting its business. It is in this way that profitability and responsibility blend cooperatively together to motivate employees, build trust among all parties and, as a result, maximize stockholder value by creating a much more healthy organizational structure for future growth and prosperity.

Acknowledging the strain on financial companies over the last year, for 2008 the Company’s stock price closed the year at $7.71 per share, down from $11.75 per share at the start of the year, with daily closing prices having ranged from a high of $13.40 per share in February to a low of $6.25 per share in December. Stockholders’ equity of $74,677,092 at year end resulted in a book value of $12.99 per share at December 31, 2008 based on 5,747,772 shares of common stock outstanding. This represents an increase in book value of $0.30 per share over the year ended December 31, 2007. During this past year, the Company continued to pay a dividend of $0.52 per share on its common stock.

BALANCE SHEET HIGHLIGHTS

Total assets of the Company stood at $843,198,414 at year-end December 31, 2008 as compared to $834,209,842 at year-end December 31, 2007, a modest increase that does not adequately convey the volume of activity nor the strategic shifts that took place during the year. Loans held in portfolio rose from $626,274,462 to $636,720,290 at December 31, 2008. Total deposits remained flat at $653,353,325 and advances from the Federal Home Loan Bank of Boston rose from $63,386,874 to $66,317,485 at year- end 2008.

The Company had its highest level of loan activity in many years, closing just over 700 mortgage loans, including refinances, totaling $163,500,000 and more than 1,500 consumer and commercial loans totaling $77,600,000. Not since 2005 have we experienced such a high level of gross loan production. Declining interest rates over the course of the year clearly outweighed a growing lack of confidence in our economy and contributed significantly to a renewed interest on the part of consumers to take advantage of a return to near-record low rates. We continue to originate longer-term fixed rate mortgage loans for the secondary market and, at close of the year, held servicing for more than 2,700 loans with total outstanding balances slightly in excess of $300,000,000. In addition, the Company partnered with several other local financial institutions to provide more than $65,000,000 in funding for student loans that would not have been otherwise available due to the collapse of the credit markets in early 2008. Our share of the funding is estimated to have helped over 1,000 New Hampshire students attend college.

Asset quality remains high and the areas served by the Company have not yet experienced the same levels of economic decline as has been witnessed in other parts of the country. This is not to say, however, that we are in any way immune from being impacted by the severe deterioration that has taken place in the larger markets beyond our local grasp. In recognition and anticipation of weaknesses now evidencing themselves, we increased our provision for loan losses by more than $1,000,000 in 2008 and will continue to work to ensure that adequate reserves exist to address loan issues that may arise going forward.

In November of 2008, the Company submitted an application to participate in the Treasury Department’s Capital Purchase Program. Your Board of Directors felt that further bolstering our already well-capitalized position by participating in this program and adding $10,000,000 in new capital would be a prudent step to take in light of the possibility of a lengthy and protracted recession. We were approved in early December and closed on the transaction is mid-January, resulting in an immediate increase in Tier 1 capital from just over 8.00% at year end to currently more than 9.00%. This temporary cushion, which can now be re-paid at any time with the prior regulatory approval, will likely provide us with sufficient resources to meet any short-term needs of the Company, but allow us to grow well beyond our current asset size as consumer confidence returns and our economy begins to rebound.

…asset quality remains high and the areas served by the Company have not yet experienced the same levels of economic decline as has been witnessed in other parts of the country…

3

Letter to Stockholders (continued)

…our banking franchise is firmly based in the relationships and services that have been developed around personal banking, business banking and municipal banking…

ON BANKS AND BANKING

It remains quite clear, notwithstanding the current dark cloud that overshadows the banking industry, that community banks - now more than ever - represent the strongest link for the delivery of financial services within our local markets. Community banks stay resolutely focused on the sound operating principals that have sustained us over the course of many years. For us, with a company that was first established in 1868, we continue to be guided by a strong set of beliefs in how business should be conducted, while at the same time embracing change in an effort to enhance our franchise value.

Community banking is not so much based in the price of individual products as it is in the quality its people and depth of customer relationships. To this end, we have developed a wide variety of ongoing efforts to nurture and motivate all of our employees by encouraging personal growth, recognizing initiative and supporting a work environment that provides them with avenues to move beyond what they had thought they could achieve. Our goal, then, is not just to provide products and services, but also to provide solutions for our customers. Whether a customer is saving or borrowing, community banks are here to assist each of them in reaching their goals and attaining their dreams.

The three-legged stool that supports our banking franchise is firmly based in the relationships and services that have been developed around personal banking, business banking and municipal banking. It is in maintaining this focus that provides us the opportunity to develop broader streams of income, while at the same time strengthening our ties to the customers and communities we serve. We test ourselves regularly through the use of an outside resource partner in an effort that strives to better understand…from the perspective of a customer …what it is like to enter our bank and do business with us… and, ultimately, why our customers choose us over the competition.

Ultimately, the goal for every relationship is to become the primary bank for each of our customers, providing them with access to all of the products and services they should expect and, perhaps, some they might not expect to get from their neighborhood bank.

IN CLOSING

With daily news reports filled with words of economic distress, misdeeds by major financial service companies and cautionary tales of troubling unemployment figures, it is both challenging and difficult to easily envision a pathway leading us out of this far-reaching crisis of confidence. It is reassuring to know that our Company is well positioned to meet the challenging times ahead as we work through this period of economic uncertainty by adjusting our short-term goals in a way that continues to remain consistent with our longer-term objectives.

Our strength lies in an unwavering adherence to sound, prudent banking principles which will continue to guide us during this period of financial fragility. While the core business of banking will not change dramatically in the coming years, the financial tensions we all face in the near-term are undeniable…but we are fully prepared to meet these challenges.

I would like to take this opportunity to express our appreciation for the continuing support shown to us by our employees, our customers and our stockholders.

/s/ Stephen W. Ensign

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

• Total assets stood at $843,198,414 at December 31, 2008, an increase of $8,988,572, or 1.08%, from $834,209,842 at December 31, 2007.

• Net loans increased $10,445,828, or 1.67%, to $636,720,290 at December 31, 2008 from $626,274,462 at December 31, 2007.

• In 2008, the Bank originated $241,431,731 in loans, compared to $200,787,883 in 2007.

• The Bank’s loan servicing portfolio increased to $311,228,362 at December 31, 2008 from $305,838,179 at December 31, 2007, an increase of $5,390,183, or 1.76%.

• The Company earned $5,725,072, or $0.99 per common share, assuming dilution, for the year ended December 31, 2008, compared to $4,515,682, or $0.92 per common share, assuming dilution, for the year ended December 31, 2007.

• Net interest and dividend income for the year ended December 31, 2008, increased $5,659,267 or 27.93%, to $25,921,729.

• The Bank’s interest rate spread increased to 3.37% as of December 31, 2008 from 2.91% at December 31, 2007.

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.

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 13-17 of Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

Income Taxes

The Company must estimate income tax expense for each period for which a statement of

5

Management’s Discussion and Analysis(continued)

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, 2008, 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 Floating Capital Securities, adjustable every three months at LIBOR plus 2.79% (“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 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 based on the stated liquidation amount of $10 per capital security. The Company has fully and unconditionally guaranteed all of the obligations of Trust II. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities II, but only to the extent that Trust II 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 6.06%, 5 Year Fixed-Floating Capital Securities (“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 6.06% 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 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 III, but only to the extent that the Trust 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.

Interest Rate Swap

On May 1, 2008, the Company entered into an interest rate swap agreement with PNC Bank, effective on June 17, 2008. The interest rate agreement converts Trust II’s interest rate from a floating rate to a fixed-rate basis. The interest rate swap agreement has a notional amount of $10 million maturing June 17, 2013. Under the swap agreement, the Company is to receive quarterly interest payments at a floating rate based on three month LIBOR plus 2.79% and is obligated to make quarterly interest payments at a fixed-rate of 6.65%.

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 $20.9 million in cash and stock (the “Merger”). Immediately following the closing of the transaction on June 1, 2007, First Brandon’s subsidiary bank, First

6

Management’s Discussion and Analysis(continued)

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 $771.0 million in assets and operated 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, 2008 and 2007

Financial Condition

Total assets increased $8,988,572, or 1.08%, to $843,198,414 as of December 31, 2008 from $834,209,842 as of December 31, 2007. Cash and Federal Home Loan Bank overnight deposits decreased $11,472,850.

Total loans receivable, net, excluding loans held-for-sale, increased $10,445,828, or 1.67% to $636,720,920 as of December 31, 2008. The Bank’s conventional real estate loan portfolio increased $8,318,724, or 2.48%, to $344,101,400. Construction loans decreased $8,188,946, or 37.73%, to $13,515,208. Commercial real estate loans decreased $2,876,868, or 2.02%, to $139,592,335. Additionally, consumer loans increased $3,848,877, or 5.09%, to $79,468,380 and commercial and municipal loans increased $9,976,561, or 19.00%, to $62,491,345. Sold loans totaled $311,228,362 at year-end 2008, compared to $305,838,179, at year-end 2007. 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 80% of the Bank’s real estate mortgage loan portfolio, which is consistent with prior years. Assets remained strong with non-performing assets at 0.83% of total assets as the Bank continued to originate loans using conservative, standardized underwriting. In particular, the Bank does not originate nor purchase “sub-prime” mortgage loans.

The fair value of investment securities available-for-sale decreased $4,821,515, or 5.55%, to $81,988,488 as of December 31, 2008, from $86,810,003 at December 31, 2007. The Bank realized $909,919 in the gain on the sales and calls of securities during 2008, compared to no gains recorded during 2007. The U.S. Treasury’s actions during 2008 to place Fannie Mae under conservatorship resulted in an other-than-temporary impairment to the fair market value of 20,000 shares of Fannie Mae Preferred Stock, Series F, as previously disclosed in our Form 8-K dated October 1, 2008. As a result, the Company recorded a writedown of $879,720 due to the other-than-temporary impairment of Fannie Mae Preferred Stock. As of December 31, 2008, the Bank’s investment portfolio had a net unrealized holding gain of $368,441, compared to a net unrealized holding loss of $1,663,149 at December 31, 2007.The investments in the Bank’s investment portfolio that are temporarily impaired as of December 31, 2008 consist of debt securities issued by U.S. Government corporations or agencies, corporate debt with investment-grade credit ratings and preferred stock issued by corporations and government sponsored agencies. At December 31, 2008, one investment held in the Company’s portfolio as available-for-sale, U.S. Bank Capital Trust Preferred VIII had an unrealized market loss of $722,000. The unrealized loss is primarily attributable to changes in market interest rates. Management does not intend to sell these securities in the near term. As 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.

Real estate owned and property acquired in settlement of loans was at $263,000 at December 31, 2008 compared to $240,802 at December 31, 2008.

Goodwill was unchanged at $27,293,470 as of December 31, 2008, compared to December 31, 2007. 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 three branch offices of New London Trust in 2001.

Core deposit intangible decreased to $2,560,527 as of December 31, 2008, compared to $3,160,303 at December 31, 2007. The Bank amortized $599,776 during 2008, utilizing the sum-of-the-digit method over ten years to amortize the core deposit intangible.

Total deposits increased $401,308, or 0.06%, to $653,353,325 as of December 31, 2008 from $652,952,017 as of December 31, 2007. The Bank was able to retain deposits as customers were attracted by the safety and guarantee of FDIC insurance resulting from uncertain credit markets.

7

Management’s Discussion and Analysis(continued)

Advances from the Federal Home Loan Bank (FHLB) increased $2,930,611, or 4.62%, to $66,317,485 from $63,386,874 at December 31, 2007. The weighted average interest rate for the outstanding FHLB advances was 2.94% as of December 31, 2008, compared to 4.52% as of December 31, 2007.

Liquidity and Capital Resources

The Bank is required to maintain sufficient liquidity for safe and sound operations. At year-end 2008, the Bank’s liquidity was sufficient to cover the Bank’s anticipated needs for funding new loan commitments of approximately $25.0 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, 2008, the Bank had approximately $168.8 million in additional borrowing capacity from the FHLB.

At December 31, 2008, the Company’s stockholders’ equity totaled $74,677,092, compared to $72,667,323, at year-end 2007. The increase of $2,009,769 reflects net income of $5,725,072, the payout of $2,988,061 in common stock dividends, the exercise of stock options in the amount of $275,417, including a tax benefit, other comprehensive loss in the amount of $941,705, and the repurchase of 5,000 shares at a cost of $60,954. The change in other comprehensive loss included an after tax loss in the amount of $1,356,767 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, 2008, 148,088 shares remained to be repurchased under the plan. The Board of Directors of the Company has determined that a share buyback is appropriate to enhance stockholder 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, 2008, the Company had funds in the amount of $1,073,134. Total cash needs for the Company during 2009 will amount to approximately $4.7 million with $3.0 million projected to be used to pay dividends on the Company’s common stock, $1.4 million to pay interest on the Company’s capital securities and $0.5 million to pay interest dividends on the Company’s Preferred Stock Series A. 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 2009 as long as earnings at the Bank are sufficient to maintain adequate Tier I capital.

Net cash provided by operating activities increased $7,388,764 to $11,637,399 in 2008 from $4,248,635 in 2007. The increase is primarily attributable to an increase in the amount of $978,600 in provision for loan losses and an increase in the amount of $4,229,651 in accrued expenses and other liabilities.

Net cash flows used in investing activities totaled $24,980,367 in 2008, compared to net cash flows used provided by investing activities of $21,681,532 in 2007, a change of $46,661,899. During 2008, loan originations and principal collections, net, increased in the amount of $8,278,988 while cash and cash equivalents acquired from First Brandon and First Community during 2007, net of expenses paid, amounted to $7,678,405 which accounted for the majority of the change in investing activities.

In 2008, net cash flows provided by financing activities totaled $1,870,118, compared to net cash flows used in financing activities in the amount of $26,822,406, a change of $28,692,524. Net repayment of FHLB advances in the amount of $60,231,726 during 2007 compared to additional advances in the amount of $2,901,952 during 2008 accounted for the change in financing activities.

The Bank expects to be able to fund loan demand and other investing activities during 2009 by continuing to use funds provided by customer deposits, as well as the FHLB’s advance program. On December 31, 2008, approximately $25.0 million 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.

On January 16, 2009, as part of the Capital Purchase Program established by the U.S. Department of the Treasury (“Treasury”) under the Emergency Economic Stabilization Act of 2008 (the “EESA”), the Company entered into a Letter Agreement with the Treasury pursuant to which the Company issued and sold to Treasury 10,000 shares of the Company’s Fixed-rate Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, having a liquidation reference of $1,000 per share (the “Series A Preferred Stock”) and a ten-year warrant to purchase up to 184,275 shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), at an initial exercise price of $8.14 per share (the “Warrant”), for an aggregate purchase price of $10.0 million in cash. All of the proceeds from the sale of the Series A Preferred Stock will be treated as Tier 1 capital for regulatory purposes.

8

Management’s Discussion and Analysis(continued)

Cumulative dividends on the Series A Preferred Stock will accrue on the liquidation preference at a rate of 5% per annum for the first five years, and at a rate of 9% per annum thereafter, but will be paid only when declared by the Company’s Board of Directors. The Series A Preferred Stock has no maturity date and ranks senior to the Common Stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company.

The Series A Preferred Stock generally is non-voting, other than class voting on certain matters that could adversely affect the Series A Preferred Stock. Please refer to Note 23 of the Consolidated Financial Statements.

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, 2008, the Bank’s ratios were 8.12%, 8.12%, and 11.36%, respectively, well in excess of the OTS requirements.

Book value per share was $12.99 at December 31, 2008, compared to $12.69 per share at December 31, 2007.

Impact of Inflation

The financial statements and related data presented elsewhere herein are prepared in accordance with generally accepted accounting principles (GAAP), which require the measurement of the Company’s financial position and operating results generally in terms of historical dollars and current market value, for certain loans and investments, without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations.

Unlike other companies, nearly all of the assets and liabilities of a bank are monetary in nature. As a result, interest rates have a far greater impact on a bank’s performance than the effects of the general level of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services, since such prices are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the Bank’s assets and liabilities are important to the maintenance of acceptable performance levels.

Interest Rate Sensitivity

The principal objective of the Bank’s interest rate management function is to evaluate the interest rate risk inherent in certain balance sheet accounts and determine the appropriate level of risk given the Bank’s business strategies, operating environment, capital and liquidity requirements and performance objectives, and to manage the risk consistent with the Board of Director’s approved guidelines. The Bank’s Board of Directors has established an Asset/Liability Committee (ALCO) to review its asset/liability policies and interest rate position. 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, 2008, was positive 9.57%, compared to the December 31, 2007 gap of negative 20.99%. At December 31, 2008, repricing assets over the next twelve months was $69.0 million more than repricing deposits for the same period compared to the reverse position, with a negative $75.6 million, at December 31, 2007. With an asset-sensitive (positive) gap, if rates were to rise, net interest margin would likely increase and if rates were to fall, the net interest margin would likely decrease.

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.

9

Management’s Discussion and Analysis(continued)

The following table shows the Bank’s interest rate sensitivity (gap) table at December 31, 2008:

	0-3 Months			3-6 Months			6 Months- 1 Year			1-3 Years			Beyond 3 Years			Total
	($ in thousands)
Interest-earning assets:
Loans	$	214,538		$	88,874		$	110,072		$	152,465		$	73,219		$	639,168
Investments and FHLB overnight deposit		32,865			4,467			10,043			17,069			17,544			81,988
Total		247,403			93,341			120,115			169,534			90,763			721,156
Interest-bearing liabilities:
Deposits		145,141			81,821			104,438			28,947			247,041			607,388
Repurchase agreements		15,073			—			—			—			—			15,073
Borrowings		35,123			127			10,132			30,000			11,000			86,382
Total		195,337			81,948			114,570			58,947			258,041			708,843
Period sensitivity gap		52,066			11,393			5,545			110,587			(167,278	)	$	12,313
Cumulative sensitivity gap	$	52,066		$	63,459		$	69,004		$	179,591		$	12,313
Cumulative sensitivity gap as a percentage of interest-earning assets		7.22	%		8.80	%		9.57	%		27.12	%		1.71	%		1.71	%

The following table sets forth the Bank’s NPV as of December 31, 2008, as calculated by the OTS for the December 31, 2008 reporting cycle:

Change in Rates	Net Portfolio Value				NPV as % of PV Assets
	$ Amount	$ Change	% Change		NPV Ratio		Change
+300 bp	71,222	-14,180	-17	%	8.70	%	-150bp
+200 bp	79,643	-5,759	-7	%	9.61	%	-59bp
+100 bp	83,642	-1,759	-2	%	10.03	%	-17bp
+50 bp	84,714	-687	-1	%	10.14	%	-6bp
0 bp	85,401	—	—		10.20	%	—
-50 bp	84,896	-505	-1	%	10.13	%	-7bp
-100 bp	83,998	-1,404	-2	%	10.03	%	-17bp

Results of Operations 2008 versus 2007

Net Interest and Dividend Income

Net interest and dividend income for the year ended December 31, 2008 increased $5,659,267, or 27.93%, to $25,921,729. The increase was primarily due to increased interest rate margins and increases in the Bank’s loan portfolio. In addition, the full-year impact of the acquisitions made during 2007 were realized during 2008.Total interest and dividend income increased $2,992,700, or 7.55%, to $42,635,777.Interest and fees on loans increased $3,313,168, or 9.67%, to $37,570,672 in 2008, due primarily to the increase in average loans outstanding.

Interest on taxable investments increased $187,916, or 4.40%, to $4,460,190.Dividends decreased $209,541, or 38.85%, to $329,877.Interest on other investments decreased $298,843, or 52.07%, to $275,038. The yield on the Bank’s investment portfolio declined from 4.93% for the year ended December 31, 2007 to 4.67% the year ended December 31, 2008 due to lower yielding investments purchased to replace maturing and called securities in a falling interest rate environment.

Total interest expense decreased $2,666,567, or 13.76%, to $16,714,048 for the year ended December 31, 2008.Interest on deposits decreased slightly by $2,935, or 0.02%, to $12,937,657, whileinterest on FHLB advances and other borrowed money decreased $2,280,107, or 50.59%, to $2,226,556 for the same period. FHLB advances outstanding increased to $66,317,485 at December 31, 2008 from $63,386,874 at December 31, 2007. The Bank was able to replace maturing advances at substantially lower rates during

10

Management’s Discussion and Analysis(continued)

2008 resulting in overall lower costs due to the falling interest rate environment.

For the year ended December 31, 2008, the Bank’s combined cost of funds decreased to 2.32% as compared to 3.08% for the same period in 2007. The cost of deposits, including repurchase agreements, decreased 52 basis points in 2008 to 2.07% compared to 2.59% in 2007, due primarily to the downward repricing of maturing time 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 to 3.37 % in 2008 from 2.91% in 2007. The Bank’s net interest margin, representing net interest income as a percentage of average interest-earning assets, increased to 3.46% during 2008, from 3.06% during 2007. Both increases are indicative of the Federal Reserve Bank’s easing of the Fed Funds rate and the subsequent steepening of the yield curve. For the year ended December 31, 2008, the Bank’s interest expense decreased 13.76% compared to the increase in interest income of 7.55% compared to the same period in 2007.

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,
	2008		2007		2006		2005		2004
Yield on loans	5.86	%	6.20	%	5.80	%	5.37	%	5.13	%
Yield on investment securities	4.67	%	4.93	%	4.41	%	3.95	%	3.76	%
Combined yield on loans and investments	5.69	%	5.99	%	5.53	%	5.06	%	4.77	%
Cost of deposits, including repurchase agreements	2.07	%	2.59	%	1.77	%	1.09	%	0.82	%
Cost of other borrowed funds	4.19	%	5.37	%	5.22	%	3.94	%	3.37	%
Combined cost of deposits and borrowings	2.32	%	3.08	%	2.66	%	1.66	%	1.29	%
Interest rate spread	3.37	%	2.91	%	2.87	%	3.40	%	3.48	%
Net interest margin	3.46	%	3.06	%	3.02	%	3.49	%	3.54	%

11

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,	2008						2007						2006
	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),	$	641,100	$	37,571	5.86	%	$	552,203	$	34,258	6.20	%	$	489,930	$	28,400	5.80	%
Investment securities and other		108,533		5,065	4.67	%		109,158		5,385	4.93	%		119,472		5,274	4.41	%
Total interest-earning assets		749,633		42,636	5.69	%		661,361		39,643	5.99	%		609,402		33,674	5.53	%
Noninterest-earning assets:
Cash		17,541						16,940						15,738
Other noninterest-earning assets(3)		66,151						43,922						33,096
Total noninterest-earning assets		83,692						60,862						48,834
Total	$	833,325					$	722,223					$	658,236
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Savings, NOW and MMAs	$	331,586	$	2,512	0.76	%	$	280,578	$	2,666	0.95	%	$	266,043	$	1,736	0.65	%
Time deposits		290,648		10,426	3.59	%		226,618		10,275	4.53	%		163,227		6,011	3.68	%
Repurchase agreements		14,184		234	1.65	%		10,420		454	4.35	%		11,247		525	4.67	%
Capital securities and other borrowed funds		84,276		3,542	4.20	%		111,499		5,986	5.37	%		133,899		6,989	5.22	%
Total interest-bearing liabilities		720,694		16,714	2.32	%		629,115		19,381	3.08	%		574,416		15,261	2.66	%
Noninterest-bearing liabilities:
Demand deposits		29,286						30,573						29,452
Other		10,309						5,940						8,880
Total noninterest-bearing liabilities		39,595						36,513						38,332
Stockholders’ equity		73,036						56,595						45,488
Total	$	833,325					$	722,223					$	658,236
Net interest income/Net interest rate spread			$	25,922	3.37	%			$	20,262	2.91	%			$	18,413	2.87	%
Net interest margin					3.46	%					3.06	%					3.02	%
Percentage of interest-earning assets to interest-bearing liabilities					104.02	%					105.13	%					106.09	%

⁽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.

12

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, 2008 vs. 2007 Increase (Decrease) due to
	Volume			Rate			Total
	($ in thousands)
Interest income on loans	$	5,210		$	(1,897	)	$	3,313
Interest income on investments		(29	)		(291	)		(320	)
Total interest income		5,181			(2,188	)		2,993
Interest expense on savings, NOW and MMAs		386			(540	)		(154	)
Interest expense on time deposits		2,297			(2,146	)		151
Interest expense on repurchase agreements		65			(274	)		(209	)
Interest expense on capital securities and other borrowings		(1,141	)		(1,314	)		(2,455	)
Total interest expense		1,607			(4,274	)		(2,667	)
Net interest income	$	3,574		$	2,086		$	5,660
	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

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

13

Management’s Discussion and Analysis(continued)

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 of our notes to 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, 2008, the allowance for loan losses was $5,567,859 compared to $5,160,628 at year-end 2007. The increase is due to provisions of $910,000 and recoveries of $42,635, which were partially offset by loan charge-offs of $545,404. The amounts shown in this paragraph do not include amounts associated with overdrafts.

In addition to the allowance for loan loss, the Bank maintains an allowance for losses associated with the fee for service overdraft privilege program, which was introduced in July 2005. The Bank seeks to maintain an allowance equal to 100% of the aggregate balance of negative balance accounts that have remained negative for 30 days or more. Negative balance accounts are charged-off when the balance has remained negative for 60 consecutive days.

The allowance for overdrafts was $26,453 at December 31, 2008, compared to $20,843 at year-end 2007. The tables in this section show the activity in the accounts for both the allowance for loan losses and the allowance for overdraft losses.

There was no loan loss provision during 2007. The $910,000 provisions made in 2008 reflect both the higher loan loss experience in 2008 and the changes in economic conditions that increase the risk of loss inherent in the loan portfolio. The higher loan loss experience is largely attributable to weaker real estate market conditions. Unlike prior periods, some borrowers experiencing difficulty were not able to sell their property to resolve repayment issues. Management anticipates making additional provisions in 2009 to maintain the allowance at an adequate level as unidentified loan losses are incurred.

Loan charge-offs were $545,404 in 2008 compared to $128,566 in 2007. The increase comes from higher losses in all categories. Recoveries were $42,635 for the period ended December 31, 2008, compared to $34,847 for the same period in 2007. This resulted in net charge-offs for 2008 and 2007 of $502,769 and $93,719, respectively. The increase in the amount of the allowance for loan loss, due to the provisions made during 2008, increased the allowance up from 0.82% to 0.87% of total loans; despite the growth of the loan portfolio.

Total classified loans, excluding special mention loans, as of December 31, 2008 and 2007, were $9,122,365 and $6,172,310 respectively. The increase comes from a $1.8 million increase in loans over 90 days past due and changes in the risk ratings of some performing loans. Special mention loans were $12,153,366 at December 31, 2008, compared to $2,099,598 at year-end 2007. The increase results from changes in loan risk ratings. Those changes are a reflection of current economic conditions with some borrowers experiencing weaker cash flows and diminished capacity to service debt. The special mention loans continue to perform and do not warrant adverse classification at this time.

The classified loans include $4,547,504 of impaired loans at December 31, 2008, compared to $3,795,811 at December 31, 2007. The impaired loans meet the criteria established under SFAS No. 114, although one $2.9 million loan considered impaired at both year-end 2008 and 2007 continues to perform. The increase in impaired loans comes from seven loans that are unlikely to be repaid in accordance with contractual terms. All seven are in the process of collateral liquidation. Those loans are considered collateral dependent and impairment is measured using the fair value of the collateral. The $2.9 million performing impaired loan is not considered collateral dependent at this time, but the appraised value of the commercial real estate suggests no loss of principal and supports the current valuation. The appraisal was done in 2007 and there are plans to obtain an updated appraisal when financial statements pertaining to the collateral property become available. The other impaired loans are all under $200,000, and most are secured with real estate located in New Hampshire or Vermont. At December 31, 2008, the allowance included $209,500 allocated to impaired loans. The portion of the allowance allocated to impaired loans at December 31, 2007 was $45,000.

Loans 30 to 89 days past due were $10,018,803 and $8,291,466 at December 31, 2008 and 2007, respectively. Total non-performing loans amounted to $7,026,992 and $4,744,729 at December 31, 2008 and 2007, respectively. Loans over 90 days past due are placed on nonaccrual status and are included in non-performing loans. Loans over 90 days past due were $3,003,615 at December 31, 2008 compared to $1,230,348 at December 31, 2007. The $1.8 million increase includes two loans over $500,000 and three over $200,000. No loss is expected on those loans as

14

Management’s Discussion and Analysis(continued)

they are well secured with real estate. At year-end 2008, there were 28 loans over 90 days past due compared to 27 at the end of 2007.

As a percent of assets, non-performing loans increased from 0.57% at the year-end 2007 to 0.83% at December 31, 2008. Non-performing loans as a percent of total loans increased from 0.75% to 1.10% at the end of 2008. That increase reflects the changes in economic conditions and its adverse impact on borrower repayment capacity. At December 31, 2008, the Bank held $288,305 of other real estate owned and repossessed assets. That represents a slight increase over the $241,346 held at the end of 2007. The increase comes from properties acquired in 2008. During 2008, the Bank wrote down two properties with a charge against earnings in the amount of $53,741 to reduce the book value of those assets. One of those properties remained in OREO at December 31, 2008 with a book value $36,000 less than at year-end 2007. Adjustments to the valuation of OREO are charged against earnings and do not impact the allowance for loan loss. If all non-accruing loans had been current in accordance with their terms during the years ended December 31, 2008 and 2007, interest income on such loans would have amounted to approximately $118,700 and $64,200 respectively.

At December 31, 2008 the Bank had no loans considered to be “troubled debt restructurings” as defined in Statement of Accounting Standards No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructurings.” At December 31, 2007 the Bank had $53,352 of “troubled debt restructured.” The restructuring did not improve performance and the loan was charged off in 2008.

As of December 31, 2008 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.

The following table sets forth the breakdown of non-performing assets at December 31:

	2008		2007		2006		2005		2004
Nonaccrual loans(1)	$	7,026,992	$	4,744,729	$	753,992	$	278,422	$	293,203
Real estate and chattel property owned		288,305		241,346		—		—		—
Total nonperforming assets	$	7,315,297	$	4,986,075	$	753,992	$	278,422	$	293,203

⁽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:

	2008		2007		2006		2005		2004
Real estate loans -
Conventional	$	2,471,866	$	851,201	$	448,685	$	254,982	$	243,809
Construction		—		—		—		—		—
Consumer loans		7,622		97,717		—		7,977		—
Commercial and municipal loans		524,127		—		—		15,463		—
Nonaccrual impaired loans(2)		4,023,377		3,795,811		305,307		—		49,394
Total	$	7,026,992	$	4,744,729	$	753,992	$	278,422	$	293,203

⁽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.

15

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:

	2008			2007			2006			2005			2004
Balance, beginning of year	$	5,160,628		$	3,950,986		$	3,990,503		$	4,019,450		$	3,898,650
Charge-offs:
Residential real estate		243,480			89,872			—			—			—
Commercial real estate		133,447			—			—			—			—
Construction		—			—			—			—			—
Consumer loans		78,812			33,530			18,498			36,766			14,737
Commercial loans		89,665			5,164			56,698			—			—
Total charged-off loans		545,404			128,566			75,196			36,766			14,737
Recoveries (2)
Residential real estate		31,838			5,317			—			2,403			—
Commercial real estate		—			—			—			—			35,000
Construction		—			—			—			—			—
Consumer loans		10,797			29,530			5,979			5,416			25,540
Commercial loans		—			—			—			—			—
Total recoveries		42,635			34,847			5,979			7,819			60,540
Net charge-offs (recoveries)		502,769			93,719			69,217			28,947			(45,803	)
Allowance from Acquisitions					1,303,361			—			—			—
Provision for loan loss charged to income		910,000			—			29,700			—			74,997
Balance, end of year(1)	$	5,567,859			5,160,628			3,950,986			3,990,503		$	4,019,450
Ratio of net charge-offs (recoveries) to average loans		0.08	%		0.02	%		0.01	%		0.01	%		(0.01	)%

The following is a summary of activity in the allowance for overdraft privilege account for the years ended December 31:

	2008		2007		2006		2005		2004
Beginning Balance	$	20,843	$	24,136	$	31,838	$	—	N/A
Overdraft Charge-offs		373,598		273,872		391,821		87,119	N/A
Overdraft Recoveries		188,108		148,079		183,809		30,457	N/A
Net Overdraft Losses		185,490		125,793		208,012		56,662	N/A
Provisions for Overdrafts		191,100		122,500		200,310		88,500	N/A
Ending Balance	$	26,453	$	20,843	$	24,136	$	31,838	N/A

16

Management’s Discussion and Analysis(continued)

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):

	2008						2007						2006
Real estate loans -
Conventional	$	3,448	62	%	76	%	$	3,023	58	%	76	%	$	2,592	65	%	78	%
Construction		421	8	%	2	%		501	10	%	3	%		357	9	%	3	%
Collateral and consumer loans		139	2	%	12	%		199	4	%	12	%		130	3	%	13	%
Commercial and municipal loans		1,376	25	%	9	%		1,413	27	%	8	%		850	22	%	6	%
Impaired loans		210	4	%	1	%		45	1	%	1	%		46	1	%	—
Unallocated		—	—		—			—	—		—			—	—		—
Allowance	$	5,594	100	%	100	%	$	5,181	100	%	100	%	$	3,975	100	%	100	%
Allowance as a percentage of total loans			0.87	%					0.82	%					0.80	%

	2005						2004
Real estate loans -
Conventional	$	2,544	63	%	77	%	$	2,445	61	%	77	%
Construction		291	7	%	3	%		265	7	%	5	%
Collateral and consumer loans		224	6	%	14	%		109	3	%	14	%
Commercial and municipal loans		963	24	%	6	%		1,058	26	%	4	%
Impaired loans		—	—		—			142	3	%	—
Unallocated		—	—		—			—	—		—
Allowance	$	4,022	100	%	100	%	$	4,019	100	%	100	%
Allowance as a percentage of total loans			0.86	%					0.97	%

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 $782,721, or 11.32%, to $7,697,098 for the twelve months ended December 31, 2008.

• Customer service fees increased $708,214, or 14.80%, due in part to additional fees in the amount of approximately $243,000 contributed from a full fiscal year’s impact of the two banks acquired in 2007 as well as increased transaction activity resulting in higher ATM and overdraft protection fee income.

• Net gain on sales and calls of securities increased in the amount of $909,919 and offset the $879,720writedown of securities that recorded the other than temporary impairment of 20,000 shares of Fannie Mae Preferred Stock, Series F.

• Net gain on sales of loans decreased $7,432, or 0.88%, as the Bank’s total of sold loans decreased to $48.3 million during 2008 from $49.7 million of sold loans during 2007.

• Loss on sale of other real estate owned and fixed assets increased $59,878 during 2008 due in part to the recognition of losses on leasehold improvements in the amount of $38,535 as a result of closing the retail branch in Killington, Vermont, in August 2008, as well as net losses on other real estate owned in the amount of $27,644.

• Rental income increased in the amount of $22,694, or 3.48%, as a result of ordinary consumer price index-based increases during 2008.

• Therealized gain in Charter Holding Corp. increased $28,738, or 12.81%, to $253,114 for the twelve months ended December 31, 2008, from $224,376 for the same period in 2007, as a

17

Management’s Discussion and Analysis(continued)

direct reflection of earnings reported by Charter Holding Corp.

• Brokerage service income decreased in the amount of $96,788, or 53.15%, to $85,301 for the year ended December 31, 2008, as commissions received declined during the year.

Total noninterest expenses increased $3,990,712, or 19.35%, to $24,618,329 for the twelve months ended December 31, 2008, from $20,627,617 for the same period in 2007.

• Salaries and employee benefits increased $1,720,564, or 16.43%, to $12,190,464 for the twelve months ended December 31, 2008 from $10,469,900 for the same period in 2007. Gross salaries and benefits paid, which exclude the deferral of expenses associated with the origination of loans, increased $1,854,482, or 16.36%, to $13,190,734 for the twelve months ended December 31, 2008, from $11,336,252 for the same period in 2007. In addition to normal salary and benefit increases, during 2008, the Bank recognized a full twelve months of expenses associated with staffing the branches acquired from First Brandon and First Community. Average full time equivalents increased to 250 for the twelve months ended December 31, 2008, compared to 214 for the same period in 2007 due to the acquisitions during 2007. The deferral of expenses in conjunction with the origination of loans increased $133,918, or 18.46%, to $1,000,270 for the twelve months ended December 31, 2008, from $866,352 for the same period in 2007. This increase was due to higher volume of loan originated in 2008 compared to 2007, which results in a higher amount of deferred expenses associated with origination costs associated with salary and employee benefits.

• Occupancy and equipment expenses increased $630,602, or 18.78%, to $3,989,322 for the twelve months ended December 31, 2008 from $3,358,720 for the same period in 2007 as the Bank recorded a full twelve months of expenses from operating the acquired branch offices of First Brandon and First Community which were recognized for seven and three months, respectively, during 2007.

• Advertising and promotion increased in the amount of $79,993, or 19.83%, to $483,429 for the twelve months ended December 31, 2008 from $403,436 for the same period in 2007, due to increased media outlets associated with the Bank’s two-state geographical footprint.

• Professional fees increased $226,428, or 37.21% to $834,956 for the twelve months ended December 31, 2008 from $608,528 for the same period in 2007, due to expanded requirements associated with the Bank’s audit and compliance programs.

• Data processing and outside services fees increased $186,869, or 23.49%, to $982,407 for the twelve months ended December 31, 2008 from $795,538 for the same period in 2007, as the Bank recorded a full twelve months’ expenses from operating the acquired branch offices of First Brandon and First Community which were recognized for seven and three months, respectively, during 2007.

• ATM processing fees increased $65,941, or 12.76%, to $582,867 for the twelve months ended December 31, 2008 from $516,926 for the same period in 2007, due to the increase in ATM transaction activity, which were offset by fees generated from ATM transaction activity, due in part to additional ATMs in place throughout 2008 compared to 2007, during which additional ATMs were placed into service through the acquisitions.

• Amortization of mortgage servicing rights (MSR) in excess of mortgage servicing income decreased in the amount of $60,346, or 70.02%, to $25,843 for the twelve months ended December 31, 2008 from $86,189 for the same period in 2007, due to a higher volume of prepayments of sold loans during 2008.

• Other expenses increased in the amount of $1,119,612, or 28.35%, to $5,069,301 for the twelve months ended December 31, 2008 from $3,949,689 for the same period in 2007, as the Bank recorded a full twelve months’ expenses from operating the acquired branch offices of First Brandon and First Community which were recognized for seven and three months, respectively, during 2007. In particular, as prepayment of mortgage loan estimates increased substantially and rapidly in the final month of 2008, periodic impairment associated with mortgage servicing rights increased $714,167 to $719,273 for the twelve months ended December 31, 2008 compared to $5,106 for the same period in 2007. In addition to increases in postage and telephone usage of $165,106, the Company recognized an increase of approximately $292,000 in amortization of the core deposit intangible, attributable to the acquired banks, during 2008 compared to 2007, due to a full twelve months of recognition.

18

Management’s Discussion and Analysis(continued)

Impact of New Accounting Standards

In June 2006, the Financial Accounting Standards Board (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, 2007. The Company’s adoption of FIN 48 did not have a material impact on its financial statements.

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 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. The Company 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 adoption of the new issue did not have a material impact on the Company’s financial position, results of operations or cash flows. See Note 13 to the Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. The FASB’s FSP FAS 157-2, “Effective Date of FASB Statement No. 157”, defers until January 1, 2009, the application of SFAS 157 to nonfinancial assets and nonfinancial liabilities not recognized or disclosed at least annually at fair value. This includes nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination or other new basis event, but not measured at fair value in subsequent periods. The Company adopted this statement on January 1, 2008. See Note 15 to the Consolidated Financial Statements.

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, at specified election dates, to choose to measure certain financial instruments at fair value that are not currently required to be measured at fair value. The fair value option is applied on an instrument-by-instrument basis, is irrevocable and can only be applied to an entire instrument and not to specified risks, specific cash flows, or portions of that instrument. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings at each subsequent reporting date and upfront fees and costs related to those items will be recognized in earnings as incurred and not deferred. SFAS No. 159 is effective in fiscal years beginning after November 15, 2007 and may not be applied retrospectively. The adoption of the new standard did not have a material impact on the Company’s financial position, results of operations or cash flows. See Note 15 to the Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements and Amendment of ARB No. 51 (“SFAS No. 160”). The new pronouncement requires all entities to report noncontrolling (minority) interests in subsidiaries as a component of stockholders’ equity. SFAS No. 160 will be effective for fiscal years beginning after December 15, 2008. Early adoption is prohibited. Management does not anticipate that this statement will have a material impact on the Company’s financial condition and results of operations.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (SFAS 141(R)). SFAS 141(R) will significantly change the accounting for business combinations. Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. It also amends the accounting treatment for certain specific items including acquisition costs and non controlling minority interests and includes a substantial number of new disclosure requirements. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The Company does not expect the adoption of this statement to have a material impact on its financial condition and results of operations.

In February 2008, the FASB issued FSP FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” This FSP provides guidance on how the transferor and transferee should separately account for a transfer of a financial asset and a related repurchase financing if certain criteria are met. This guidance will be effective January 1, 2009. The adoption of this new FSP is not expected to have a material effect on the Company’s results of operations or financial position.

19

Management’s Discussion and Analysis(continued)

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The guidance in SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company does not expect the adoption of this statement to have a material impact on its financial condition and results of operations.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP provides guidance as to factors considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets.” This guidance will be effective January 1, 2009. The adoption is not expected to have a material effect on the Company’s results of operations or financial position.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This standard formalizes minor changes in prioritizing accounting principles used in the preparation of financial statements that are presented in conformity with GAAP. This standard became effective November 18, 2008.

For additional information on the above-referenced new accounting standards, refer to Note 1 of the Consolidated Financial Statements beginning on page 32 of this report.

Accounting for Income Taxes

The provision for income taxes for the years ended December 31, 2008, 2007, and 2006, includes net deferred income tax expense of ($681,082), ($126,437), and $187,120, 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, 2007 and 2006

In 2007, the Company earned $4,515,682, or $0.92 per common share, assuming dilution, compared to $5,039,859 or $1.17 per common share, assuming dilution, in 2006.

Financial Condition

Total assets increased $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

20

Management’s Discussion and Analysis(continued)

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, 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.

Real estate owned and property acquired in settlement of loans was at $240,802 at December 31, 2007 compared to $0 at December 31, 2006.

Goodwill increased $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 $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 FHLB decreased $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, compared to 5.06% as of December 31, 2006.

Net Interest and Dividend Income

Net interest and dividend income for the year ended December 31, 2007 increased $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 $5,969,310, or 17.73%.Interest and fees on loans increased $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 $26,660, or 0.63%.Dividends decreased $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 $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 $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 $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.

21

Management’s Discussion and Analysis(continued)

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 27.09% compared to the increase in interest income of 17.73%.

Allowance and Provision for Loan Losses

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 $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.”

22

Management’s Discussion and Analysis(continued)

Noninterest Income and Expense

Total noninterest income increased $1,039,817, or 17.70%, to $6,914,377 for the twelve months ended December 31, 2007.

• Customer service fees increased $758,697, or 18.85%, due to an increased volume of transactions 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 $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.

• Therealized gain in Charter Holding Corp. increased $34,998, or 18.48%, to $224,376 for the twelve months ended December 31, 2007, from $189,378 for the same period in 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 for the twelve months ended December 31, 2007, from $16,528,642 for the same period in 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 $1,727,358, or 19.76%, to $10,469,900 for the twelve months ended December 31, 2007 from $8,742,542 for the same period in 2006. Gross salaries and benefits paid increased $1,546,446, or 15.80%, to $11,336,252 for the twelve months ended December 31, 2007, from $9,789,806 for the same period in 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, New Hampshire, and the acquisitions of the First Brandon and First Community. Total full time equivalents increased to 238 for the twelve months ended December 31, 2007, compared to 188 for the same period in 2006. The deferral of expenses in conjunction with the origination of loans decreased $180,912, or 17.27%, to $866,852 for the twelve months ended December 31, 2007, from $1,047,264 for the same period in 2006. This decrease was due to lower costs associated with the origination of residential real estate mortgage loans in 2007 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 $717,716, or 27.18%, to $3,358,720 for the twelve months ended December 31, 2007 from$ 2,641,004 for the same period in 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 for the twelve months ended December 31, 2007 from $321,097 for the same period in 2006, due to the promotion of the Bank’s eleven new offices and increased media outlets associated with the Bank’s enlarged geographical footprint.

• Professional fees increased $60,958, or 11.13% to $608,528 for the twelve months ended December 31, 2007 from $547,570 for the same period in 2006, due to expanded requirements associated with the Bank’s audit and compliance programs.

• Data processing and outside services fees increased $155,189, or 24.24%, to $795,538 for the twelve months ended December 31, 2007 from $640,349 for the same period in 2006, due to the increase of transactions associated with the Bank’s two acquisitions.

• ATM processing fees increased $117,818, or 29.52%, to $516,926 for the twelve months ended December 31, 2007 from $399,108 for the same period in 2006, due to the increase in ATM transactions, which were offset by fees generated from ATM transactions.

23

Management’s Discussion and Analysis(continued)

• 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 for the twelve months ended December 31, 2007 from $189,320 for the same period in 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 for the twelve months ended December 31, 2007 from $2,684,540 for the same period in 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.

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 20 to the Consolidated Financial Statements.

24

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, 2008 and 2007 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, 2008. 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, 2008 and 2007 and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

SHATSWELL, MacLEOD & COMPANY, P.C.

West Peabody, Massachusetts

March 31, 2009

25

New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

As of December 31,	2008			2007
ASSETS
Cash and due from banks	$	22,561,691		$	22,510,541
Federal Home Loan Bank overnight deposit		—			11,524,000
Total cash and cash equivalents		22,561,691			34,034,541
Securities available-for-sale		81,988,488			86,810,003
Federal Home Loan Bank stock		4,946,300			7,532,700
Loans held-for-sale		1,937,750			2,507,880
Loans receivable, net of the allowance for loan losses of $ 5,594,312 as of December 31, 2008 and $5,181,471 as of December 31, 2007		636,720,290			626,274,462
Accrued interest receivable		2,715,864			2,853,558
Premises and equipment, net		17,649,624			17,654,863
Investments in real estate		3,587,020			3,512,126
Other real estate owned		263,000			240,802
Goodwill		27,293,470			27,293,470
Intangible assets - core deposits		2,560,527			3,160,303
Investment in partially owned Charter Holding Corp., at equity		3,135,895			3,152,232
Bank owned life insurance		9,556,167			9,141,849
Due from broker		20,868,360
Other assets		7,413,968			10,041,053
Total assets	$	843,198,414		$	834,209,842
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing	$	45,968,057		$	48,239,896
Interest-bearing		607,385,268			604,712,121
Total deposits		653,353,325			652,952,017
Federal Home Loan Bank advances		66,317,485			63,386,874
Other borrowings		2,157,500			237,500
Securities sold under agreements to repurchase		15,072,991			15,440,993
Subordinated debentures		20,620,000			20,620,000
Accrued expenses and other liabilities		11,000,021			8,905,135
Total liabilities		768,521,322			761,542,519
Commitments and contingencies (Note 13)
SHAREHOLDERS’ EQUITY
Common stock, $.01 par value, per share: 10,000,000 shares authorized, 6,208,051 shares issued and 5,747,772 shares outstanding as of December 31, 2008 and 6,182,051 shares issued and 5,726,772 shares outstanding as of December 31, 2007		62,081			61,821
Paid-in capital		45,756,112			45,480,955
Retained earnings		38,399,369			35,982,392
Accumulated other comprehensive loss		(2,389,747	)		(1,768,076	)
Treasury stock, 460,279 shares as of December 31, 2008 and 455,279 shares as of December 31, 2007		(7,150,723	)		(7,089,769	)
Total shareholders’ equity		74,677,092			72,667,323
Total liabilities and shareholders’ equity	$	843,198,414		$	834,209,842

The accompanying notes are an integral part of these consolidated financial statements.

26

New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

For the years ended December 31,	2008			2007		2006
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	37,570,672		$	34,257,504	$	28,400,440
Interest on debt investments
Taxable		4,460,190			4,272,274		4,245,614
Dividends		329,877			539,418		617,628
Other		275,038			573,881		410,085
Total interest and dividend income		42,635,777			39,643,077		33,673,767
INTEREST EXPENSE
Interest on deposits		12,937,657			12,940,592		7,746,121
Interest on advances and other borrowed money		2,226,556			4,506,663		5,525,067
Interest on debentures		1,315,365			1,479,622		1,453,609
Interest on securities sold under agreements to repurchase		234,470			453,738		525,097
Total interest expense		16,714,048			19,380,615		15,249,894
Net interest and dividend income		25,921,729			20,262,462		18,423,873
PROVISION FOR LOAN LOSSES		1,101,100			122,500		230,011
Net interest and dividend income after provision for loan losses		24,820,629			20,139,962		18,193,862
NONINTEREST INCOME
Customer service fees		5,492,839			4,784,625		4,025,928
Net gain on sales and calls of securities		909,919			—		71,069
Writedown of securities		(879,720	)		—		—
Income on other investments		—			144,174		—
Net gain on sales of loans		838,400			845,832		764,592
(Loss) gain on sale of other real estate owned and fixed assets		(59,878	)		—		82,633
Rental income		675,256			652,562		555,948
Realized gain in Charter Holding Corp.		253,114			224,376		189,378
Brokerage service income		85,301			182,089		177,416
Bank owned life insurance income		380,195			80,307		—
Other income		1,672			412		7,596
Total noninterest income		7,697,098			6,914,377		5,874,560
NONINTEREST EXPENSES
Salaries and employee benefits		12,190,464			10,469,900		8,742,542
Occupancy and equipment expenses		3,989,322			3,358,720		2,641,004
Advertising and promotion		483,429			403,436		321,097
Professional services		834,956			608,528		547,570
Data processing and outside services fees		982,407			795,538		640,349
ATM processing fees		582,867			516,926		399,108
Amortization of mortgage servicing rights in excess of mortgage servicing income		25,843			86,189		189,320
Supplies		459,740			438,691		352,419
Other expenses		5,069,301			3,949,689		2,695,233
Total noninterest expenses		24,618,329			20,627,617		16,528,642
INCOME BEFORE PROVISION FOR INCOME TAXES		7,899,398			6,426,722		7,539,780
PROVISION FOR INCOME TAXES		2,174,326			1,911,040		2,499,921
NET INCOME	$	5,725,072		$	4,515,682	$	5,039,859
Earnings per common share	$	1.00		$	0.93	$	1.20
Earnings per common share, assuming dilution	$	0.99		$	0.92	$	1.17
Dividends declared per common share	$	0.52		$	0.52	$	0.52

The accompanying notes are an integral part of these consolidated financial statements.

27

New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

For the years ended December 31,	2008			2007			2006
COMMON STOCK
Balance, beginning of year	$	61,821		$	42,936		$	42,280
Exercise of stock options 26,000 shares in 2008, 68,758 shares in 2007, 65,600 shares in 2006)		260			688			656
Shares issued for acquisitions (1,819,713 shares)		—			18,197			—
Balance, end of year	$	62,081		$	61,821		$	42,936
PAID-IN CAPITAL
Balance, beginning of year	$	45,480,955		$	17,930,597		$	17,025,045
Increase on issuance of common stock from the exercise of stock options		248,865			782,044			784,469
Tax benefit for stock options		26,292			47,911			93,033
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	$	45,756,112		$	45,480,955		$	17,930,597
RETAINED EARNINGS
Balance, beginning of year	$	35,982,392		$	33,941,729		$	31,048,903
Net income		5,725,072			4,515,682			5,039,859
Cumulative effect of a change in accounting principle—initial application of EITF Issue No. 06-4		(320,034	)		—			—
Cash dividends paid		(2,988,061	)		(2,475,019	)		(2,147,033	)
Balance, end of year	$	38,399,369		$	35,982,392		$	33,941,729
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of year	$	(1,768,076	)	$	(1,707,556	)	$	(1,276,713	)
Net unrealized holding income on securities available-for-sale, net of tax effect		1,226,878			60,050			212,287
Other comprehensive loss - pension plan		(1,356,767	)		(120,570	)		—
Other comprehensive loss – derivative		(480,741	)		—			—
Other comprehensive loss – equity investment		(11,041	)		—			—
Adjustment to initially apply FASB Statement No. 158, net of tax		—			—			(643,130	)
Balance, end of year	$	(2,389,747	)	$	(1,768,076	)	$	(1,707,556	)
TREASURY STOCK
Balance, beginning of year	$	(7,089,769	)	$	(1,798,300	)	$	(112,966	)
Shares repurchased (5,000 shares in 2008, 341,779 shares in 2007 and 105,500 shares in 2006)		(60,954	)		(5,291,469	)		(1,685,334	)
Balance, end of year	$	(7,150,723	)	$	(7,089,769	)	$	(1,798,300	)

The accompanying notes are an integral part of these consolidated financial statements.

28

New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the years ended December 31,	2008			2007			2006
Net income	$	5,725,072		$	4,515,682		$	5,039,859
Other comprehensive (loss) income, net of tax effect		(621,671	)		(60,520	)		212,287
Comprehensive income	$	5,103,401		$	4,455,162		$	5,252,146
Reclassification disclosure for the years ended December 31:
	2008			2007			2006
Net unrealized holding gains on available-for-sale securities	$	2,061,789		$	99,438		$	422,595
Reclassification adjustment for realized gains in net income		(30,199	)		—			(71,069	)
Other comprehensive income before income tax effect		2,031,590			99,438			351,526
Income tax expense		(804,712	)		(39,388	)		(139,239	)
		1,226,878			60,050			212,287
Other comprehensive loss - pension plan		(2,246,677	)		(199,652	)
Income tax benefit		889,910			79,082			—
		(1,356,767	)		(120,570	)		—
Change in fair value of derivatives used for cash flow hedges		(796,061	)		—
Income tax benefit		315,320			—			—
		(480,741	)		—			—
Other comprehensive loss – equity investment		(18,282	)		—			—
Income tax benefit		7,241			—			—
		(11,041	)		—			—
Other comprehensive (loss) income, net of tax	$	(621,671	)	$	(60,520	)	$	212,287
Accumulated other comprehensive loss consists of the following as of December 31:
	2008			2007			2006
Net unrealized holding gains (losses) on available-for-sale securities, net of taxes	$	222,502		$	(1,004,376	)	$	(1,064,426	)
Unrecognized net actuarial loss, defined benefit pension plan, net of tax		(2,120,467	)		(763,700	)		(643,130	)
Unrecognized net loss, derivative, net of tax		(480,741	)		—			—
Unrecognized net loss, equity investment, net of tax		(11,041	)		—			—
Accumulated other comprehensive loss	$	(2,389,747	)	$	(1,768,076	)	$	(1,707,556	)

The accompanying notes are an integral part of these consolidated financial statements.

29

New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the years ended December 31,	2008			2007			2006
Cash flows from operating activities:
Net income	$	5,725,072		$	4,515,682		$	5,039,859
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,521,290			1,671,562			1,346,924
Net decrease in mortgage servicing rights		953,619			227,113			234,347
Amortization of securities, net		8,541			54,106			541,592
Amortization of deferred expenses relating to issuance of capital securities and subordinated debentures		10,693			10,694			10,693
Amortization of fair value adjustments, net (loans, deposits and borrowings)		273,863			209,715			12,074
Amortization of core deposit intangible		599,776			307,697			—
Net (increase) decrease in loans held-for-sale		570,130			(737,380	)		492,800
Writedown of other real estate		53,741			—			—
Net gain on sales of premises, equipment, investment in real estate, other real estate owned and other assets		59,878			—			(82,633	)
Net gain on sales and calls of securities		(909,919	)		—			(71,069	)
Writedown of securities		879,720			—			—
Increase in investment in Charter Holding Corp., at equity		(1,945	)		(11,912	)		(349	)
Provision for loan losses		1,101,100			122,500			230,011
Deferred tax (benefit) expense		(681,082	)		(126,437	)		187,120
Change in cash surrender value of life insurance		(403,223	)		(104,597	)		—
(Increase) decrease in accrued interest receivable and other assets		(340,816	)		373,777			(1,073,340	)
Change in deferred loan origination costs, net		123,037			(128,158	)		48,835
(Decrease) increase in accrued expenses and other liabilities		2,093,924			(2,135,727	)		2,386,900
Stock-based compensation expense		—			—			28,050
Net cash provided by operating activities		11,637,399			4,248,635			9,331,814
Cash flows from investing activities:
Proceeds from sale of investment in real estate		—			—			269,590
Proceeds from sale of premises and equipment		16,000			—			—
Capital expenditures - investment in real estate		(164,692	)		(54,896	)		(1,528,131	)
Capital expenditures - software		(191,779	)		(26,213	)		(133,458	)
Capital expenditures - premises and equipment		(1,381,003	)		(1,762,264	)		(2,437,842	)
Proceeds from sales of securities available-for-sale		20,191,593			—			5,071,069
Purchases of securities available-for-sale		(76,008,596	)		(13,017,831	)		(6,393,630	)
Proceeds from maturities of securities available-for-sale		41,823,406			37,980,100			23,276,394
Purchases of Federal Home Loan Bank stock		(660,700	)		—			(1,833,100	)
Redemption of Federal Home Loan Bank stock		3,247,100			759,500			—
Redemption of Federal Reserve Bank stock		—			12,000			—
Loan originations and principal collections, net		(10,918,367	)		(2,639,379	)		(23,883,291	)
Purchases of loans		(1,326,296	)		(2,173,433	)		(6,158,678	)
Recoveries of loans previously charged off		230,744			182,926			189,788
Proceeds from sales of other real estate		173,318			—			—
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	)		(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		(24,980,367	)		21,681,532			(15,561,289	)

30

New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Continued)

For the years ended December 31,	2008			2007			2006
Cash flows from financing activities:
Net decrease in demand deposits, savings and NOW accounts		2,700,885			(11,904,868	)		(43,261,994	)
Net increase in time deposits		(2,484,827	)		47,270,927			44,130,910
Increase (decrease) in short-term advances from Federal Home Loan Bank		4,383,000			617,000			(25,000,000	)
Principal advances from Federal Home Loan Bank		60,000,000			10,000,000			65,000,000
Repayment of advances from Federal Home Loan Bank		(61,481,048	)		(70,848,726	)		(20,000,000	)
Increase in other borrowed funds		2,000,000			237,500			—
Repayment of other borrowed funds		(80,000	)		—			—
Net (decrease) increase in repurchase agreements		(368,002	)		4,789,517			(2,990,853	)
Repurchase of treasury stock		(60,954	)		(5,291,469	)		(1,685,334	)
Dividends paid		(2,988,061	)		(2,475,019	)		(2,147,033	)
Proceeds from exercise of stock options		249,125			782,732			785,125
Net cash (used in) provided by financing activities		1,870,118			(26,822,406	)		14,830,821
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(11,472,850	)		(892,239	)		8,601,346
CASH AND CASH EQUIVALENTS, beginning of year		34,034,541			34,926,780			26,325,434
CASH AND CASH EQUIVALENTS, end of year	$	22,561,691		$	34,034,541		$	34,926,780
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	$	17,216,587		$	19,392,958		$	14,744,455
Income taxes paid	$	2,966,932		$	2,098,875		$	2,340,035
Loans transferred to other real estate owned	$	284,000		$	240,802		$	—
Investment in real estate transferred to premises and equipment	$	—		$	4,425		$	—
Increase in due from broker	$	20,868,360		$	—		$	—

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.

31

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 eight 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, 2008 and 2007 includes $7,946,000 and $7,413,000, respectively which is subject to withdrawal and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank and PNC 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.

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.

32

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 eight offices across New Hampshire, as well as one in Biddeford, Maine. 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 Jefferson-Pilot.

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, 2008 and 2007 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.

33

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.

34

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.

Due from broker -The carrying amount of due from broker approximates fair value.

Investment in unconsolidated subsidiaries - Fair value of investment in unconsolidated subsidiary is estimated using discounted cash flow analyses, using interest rates currently being offered for similar investments.

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.

Derivative financial instruments - Fair values for interest rate swap agreements are based upon the amounts required to settle the contracts.

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.

35

NOTE 1. Summary of significant accounting policies:(continued)

Interest rate swap agreement - For asset/liability management purposes, the Company uses interest rate swap agreements to hedge various exposures or to modify interest rate characteristics of various balance sheet accounts. Such derivatives are used as part of the asset/liability management process and are linked to specific assets or liabilities, and have high correlation between the contract and the underlying item being hedged, both at inception and throughout the hedge period.

The Company utilizes interest rate swap agreements to convert a portion of its variable-rate debt to a fixed rate (cash flow hedge). Interest rate swaps are contracts in which a series of interest rate flows are exchanged over a prescribed period. The notional amount on which the interest payments are based is not exchanged.

The effective portion of the gain or loss on a derivative designated and qualifying as a cash flow hedging instrument is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized currently in earnings.

Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a hedge and are expected to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk. Those derivative financial instruments that do not meet the hedging criteria discussed below would be classified as trading activities and would be recorded at fair value with changes in fair value recorded in income. Derivative hedge contracts must meet specific effectiveness tests (i.e., over time the change in their fair values due to the designated hedge risk must be within 80 to 125 percent of the opposite change in the fair values of the hedged assets or liabilities). Changes in fair value of the derivative financial instruments must be effective at offsetting changes in the fair value of the hedged items due to the designated hedge risk during the term of the hedge. Further, if the underlying financial instrument differs from the hedged asset or liability, there must be a clear economic relationship between the prices of the two financial instruments. If periodic assessment indicates derivatives no longer provide an effective hedge, the derivatives contracts would be closed out and settled or classified as a trading activity.

Hedges of variable-rate debt are accounted for as cash flow hedges, with changes in fair value recorded in other assets or liabilities and other comprehensive income. The net settlement (upon close out or termination) that offsets changes in the value of the hedged debt is deferred and amortized into net interest income over the life of the hedged debt. The portion, if any, of the net settlement amount that did not offset changes in the value of the hedged asset or liability is recognized immediately in non-interest income.

Cash flows resulting from the derivative financial instruments that are accounted for as hedges of assets and liabilities are classified in the cash flow statement in the same category as the cash flows of the items being hedged.

Stock based compensation - At December 31, 2008, 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.

Recent accounting pronouncements - In June 2006, the Financial Accounting Standards Board (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, 2007. The Company’s adoption of FIN 48 did not have a material impact on its financial statements.

36

NOTE 1. Summary of significant accounting policies:(continued)

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 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. The Company 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 adoption of the new issue did not have a material impact on the Company’s financial position, results of operations or cash flows. See Note 13 - Employee benefit plans.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. The FASB’s FSP FAS 157-2, “Effective Date of FASB Statement No. 157”, defers until January 1, 2009, the application of SFAS 157 to nonfinancial assets and nonfinancial liabilities not recognized or disclosed at least annually at fair value. This includes nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination or other new basis event, but not measured at fair value in subsequent periods. The Company adopted this statement on January 1, 2008. See Note 15 - Fair value measurements for additional information.

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, at specified election dates, to choose to measure certain financial instruments at fair value that are not currently required to be measured at fair value. The fair value option is applied on an instrument-by-instrument basis, is irrevocable and can only be applied to an entire instrument and not to specified risks, specific cash flows, or portions of that instrument. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings at each subsequent reporting date and upfront fees and costs related to those items will be recognized in earnings as incurred and not deferred. SFAS No. 159 is effective in fiscal years beginning after November 15, 2007 and may not be applied retrospectively. The adoption of the new standard did not have a material impact on the Company’s financial position, results of operations or cash flows. See Note 15 - fair value measurements for additional information.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements and Amendment of ARB No. 51 (“SFAS No. 160”). The new pronouncement requires all entities to report noncontrolling (minority) interests in subsidiaries as a component of shareholders’ equity. SFAS No. 160 will be effective for fiscal years beginning after December 15, 2008. Early adoption is prohibited. Management does not anticipate that this statement will have a material impact on the Company’s financial condition and results of operations.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (SFAS 141(R)). SFAS 141(R) will significantly change the accounting for business combinations. Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. It also amends the accounting treatment for certain specific items including acquisition costs and non controlling minority interests and includes a substantial number of new disclosure requirements. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The Company does not expect the adoption of this statement to have a material impact on its financial condition and results of operations.

In February 2008, the FASB issued FSP FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” This FSP provides guidance on how the transferor and transferee should separately account for a transfer of a financial asset and a related repurchase financing if certain criteria are met. This guidance will be effective January 1, 2009. The adoption of this new FSP is not expected to have a material effect on the Company’s results of operations or financial position.

37

NOTE 1. Summary of significant accounting policies:(continued)

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The guidance in SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company does not expect the adoption of this statement to have a material impact on its financial condition and results of operations.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP provides guidance as to factors considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets.” This guidance will be effective January 1, 2009. The adoption is not expected to have a material effect on the Company’s results of operations or financial position.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This standard formalizes minor changes in prioritizing accounting principles used in the preparation of financial statements that are presented in conformity with GAAP. This standard became effective November 18, 2008.

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 Floating Capital Securities, adjustable every three months at LIBOR plus 2.79% (“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 Junior Subordinated Deferrable Interest Debentures (“Debentures II”) of the Company. Debentures II are the sole assets of Trust II. 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 II 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 II.

Capital Securities II 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 II. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities II, but only to the extent that Trust II 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 6.06%, 5 Year Fixed-Floating Capital Securities (“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 6.06% Junior Subordinated Deferrable Interest Debentures (“Debentures III”) of the Company. Debentures III are the sole assets of Trust III. 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 III.

38

NOTE 2. Issuance of Capital Securities:(continued)

Capital Securities III 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 III, but only to the extent that the Trust 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.

On May 1, 2008, the Company entered into an interest rate swap agreement with PNC Bank to convert the floating rate payments on Trust II to fixed rate payments. The terms of the interest rate swap agreement are as follows:

Notional amount:	$10,000,000
Trade date:	May 1, 2008
Effective date:	June 17, 2008
Termination date:	June 17, 2013
Fixed rate payer:	New Hampshire Thrift Bancshares
Payment dates:	Quarterly
Fixed rate:	6.65%
Floating rate payer:	PNC Bank
Payment dates:	Quarterly
Index:	Three month LIBOR

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, 2008:
Bonds and notes -
U. S. Government, including agencies	$	13,015,080	$	157,733	$	—	$	13,172,813
Mortgage-backed securities		59,209,471		1,334,771		40,545		60,503,697
Asset-backed securities		1,499,732		—		305,642		1,194,090
Other bonds and debentures		2,401,098		71,120		—		2,472,218
Preferred stock with maturities		5,000,000		—		722,000		4,278,000
Equity securities		494,666		540		127,536		367,670
Total available-for-sale	$	81,620,047	$	1,564,164	$	1,195,723	$	81,988,488

39

NOTE 3. Securities:(continued)

	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		8,136,635		20,628		21,963		8,135,300
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	$	88,473,152	$	267,118	$	1,930,267	$	86,810,003

For the year ended December 31, 2008, proceeds from sales of securities available-for-sale amounted to $20,191,593. Gross gains of $909,919 were realized during 2008 on sales of available-for-sale securities. The tax provision applicable to these gross realized gains amounted to $360,419. For the year ended December 31, 2007, there were no sales of securities available-for-sale. For the year ended December 31, 2006, proceeds from sales of securities available-for-sale amounted to $5,071,069. Gross gains of $71,069 were realized during 2006 on sales of available-for-sale securities. The tax provision applicable to these gross realized gains amounted to $28,151.

Maturities of debt securities, excluding mortgage-backed securities and asset-backed securities, classified as available-for-sale are as follows as of December 31, 2008:

	Fair Value
U.S. Government, including agencies	$	6,042,500
Total due in less than one year	$	6,042,500
U.S. Government, including agencies	$	7,130,313
Other bonds and debentures		2,197,218
Total due after one year through five years	$	9,327,531
Preferred stock with maturities	$	4,278,000
Other bonds and debentures		275,000
Total due after ten years	$	4,553,000

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, 2008.

Securities, carried at $92,739,149 and $71,698,643 were pledged to secure public deposits, the treasury, tax and loan account and securities sold under agreements to repurchase as of December 31, 2008 and 2007, respectively. The securities pledged at December 31, 2008 includes a security sold on December 19, 2008 that did not settle until January 2009. The fair value of this security was $20,961 as of December 31, 2008.

40

NOTE 3. Securities: (continued)

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, 2008:
Bonds and notes -
Preferred stock with maturities	$	—	$	—	$	4,278,000	$	722,000	$	4,278,000	$	722,000
Mortgage-backed securities		1,176,741		33,269		3,926,061		7,276		5,102,802		40,545
Asset-backed securities		1,194,090		305,642		—		—		1,194,090		305,642
Equity securities		353,115		127,536		—		—		353,115		127,536
Total temporarily impaired securities	$	2,723,946	$	466,447	$	8,204,061	$	729,276	$	10,928,007	$	1,195,723
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

The investments in the Company’s investment portfolio that are temporarily impaired as of December 31, 2008 consist of mortgage-backed securities issued by U.S. Government sponsored enterprises and agencies, an asset-backed security issued by a corporation with a strong credit rating, a trust preferred security issued by a bank, and a common equity position in a local bank. The unrealized losses on debt securities are primarily attributable to changes in market interest rates and current market inefficiencies. The unrealized losses in equity securities are due to general stock market declines and are not specific to the issuer of the security. 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:

	2008			2007
Real estate loans
Conventional	$	344,101,400		$	335,782,676
Construction		13,515,208			21,704,154
Commercial		139,592,335			142,469,203
		497,208,943			499,956,033
Consumer loans		79,468,380			75,619,503
Commercial and municipal loans		62,491,345			52,514,784
Unamortized adjustment to fair value		1,399,900			1,496,542
Total loans		640,568,568			629,586,862
Allowance for loan losses		(5,594,312	)		(5,181,471	)
Deferred loan origination costs, net		1,746,034			1,869,071
Loans receivable, net	$	636,720,290		$	626,274,462

41

NOTE 4. Loans receivable: (continued)

The following is a summary of activity of the allowance for loan losses for the years ended December 31:

	2008			2007			2006
BALANCE, beginning of year	$	5,181,471		$	3,975,122		$	4,022,341
Charged-off loans		(919,003	)		(402,438	)		(467,018	)
Recoveries of loans previously charged-off		230,744			182,926			189,788
Provision for loan losses charged to income		1,101,100			122,500			230,011
Increase in allowance for loan losses from acquisitions		—			1,303,361			—
BALANCE, end of year	$	5,594,312		$	5,181,471		$	3,975,122

Certain directors and executive officers of the Company and companies in which they have significant ownership interest were customers of the Bank during 2008. Total loans to such persons and their companies amounted to $782,991 as of December 31, 2008. During 2008 principal advances of $665,426 were made and principal payments totaled $815,942.

The following is a summary of information regarding impaired loans, nonaccrual loans and accruing loans 90 days or more overdue:

			December 31,
			2008		2007
Total nonaccrual loans			$	7,011,209	$	4,744,729
Accruing loans which are 90 days or more overdue			$	—	$	—
Impaired loans as of December 31,			2008		2007
Recorded investment in impaired loans at December 31			$	4,547,504	$	3,795,811
Portion of allowance for loan losses allocated to impaired loans				209,500		45,000
Net balance of impaired loans				4,338,004		3,750,811
Recorded investment in impaired loans with a related allowance for credit losses				888,441		47,866
Years Ended December 31,	2008		2007		2006
Average recorded investment in impaired loans	$	3,923,353	$	1,805,074	$	211,849
Interest income recognized on impaired loans	$	144,512	$	143,452	$	16,851
Interest income recognized on impaired loans on a cash basis	$	144,512	$	143,452	$	16,851

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:

	2008		2007
Sold loans	$	311,228,362	$	305,838,179
Participation loans	$	15,671,059	$	22,702,702

The balance of capitalized servicing rights, net of valuation allowances, included in other assets at December 31, 2008 and 2007 was $721,195 and 1,674,814, respectively.

Servicing rights of $583,738, $661,973 and $1,321,488 were capitalized in 2008, 2007 and 2006, respectively. Amortization of capitalized servicing rights was $818,084 in 2008, $883,980 in 2007 and $1,559,508 in 2006.

42

NOTE 4. Loans receivable: (continued)

The fair value of capitalized servicing rights was $834,659 and $3,587,490 as of December 31, 2008 and 2007, respectively. Following is an analysis of the aggregate changes in the valuation allowances for capitalized servicing rights:

	2008		2007
Balance, beginning of year	$	10,544	$	5,438
Increase		719,273		5,106
Balance, end of year	$	729,817	$	10,544

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:

	2008		2007
Land and land improvements	$	2,437,784	$	2,418,499
Buildings and premises		18,099,097		17,172,274
Furniture, fixtures and equipment		8,383,434		8,110,325
		28,920,315		27,701,098
Less - Accumulated depreciation		11,270,691		10,046,235
	$	17,649,624	$	17,654,863

Depreciation expense amounted to $1,345,106, $1,225,934 and $940,486 for the years ending December 31, 2008, 2007 and 2006, respectively.

NOTE 6. Investment in real estate:

The balance in investment in real estate consisted of the following as of December 31:

	2008		2007
Land and land improvements	$	411,828	$	411,828
Building		3,503,621		3,338,928
		3,915,449		3,750,756
Less - Accumulated depreciation		328,429		238,630
	$	3,587,020	$	3,512,126

Rental income from investment in real estate amounted to $210,918, $195,056 and $129,997 for the years ended December 31, 2008, 2007 and 2006, respectively. Depreciation expense amounted to $89,798, $84,948 and $58,238 for the years ending December 31, 2008, 2007 and 2006, respectively.

NOTE 7. Deposits:

Deposits are summarized as follows as of December 31:

	2008		2007
Demand deposits	$	45,968,057	$	48,239,896
Savings		118,265,931		116,288,204
N.O.W.		155,661,950		151,866,391
Money market		40,424,476		41,225,038
Time deposits		293,032,911		295,332,488
	$	653,353,325	$	652,952,017

43

NOTE 7. Deposits:(continued)

The following is a summary of maturities of time deposits as of December 31, 2008:

2009	$	261,554,584
2010		21,115,541
2011		8,131,883
2012		603,843
2013		1,627,060
	$	293,032,911

Interest expense by major category of interest-bearing deposits is summarized as follows for the year ended December 31:

	2008		2007		2006
Time deposits	$	10,425,592	$	10,391,841	$	6,002,063
N.O.W.		466,225		980,180		899,643
Money market		572,185		439,538		181,740
Savings		1,473,655		1,129,033		662,675
	$	12,937,657	$	12,940,592	$	7,746,121

Deposits from related parties held by the Bank as of December 31, 2008 and 2007 amounted to $1,316,574 and $1,779,667, respectively.

As of December 31, 2008 and 2007, time deposits include $104,772,792 and $112,447,762, respectively, of certificates of deposit with a minimum balance of $100,000. Generally, deposits in excess of $250,000 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, 2008 are summarized as follows:

2009	$	15,382,246
2010		25,000,000
2011		5,000,000
2013		10,000,000
Thereafter		11,000,000
Fair value adjustment		(64,761	)
	$	66,317,485

As of December 31, 2008, 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	January 29, 2009 and quarterly thereafter	$	10,000,000
January 28, 2010	January 28, 2009		10,000,000
January 28, 2013	January 28, 2011		10,000,000
April 30, 2018	January 28, 2009 and quarterly thereafter		10,000,000
		$	40,000,000

44

NOTE 8. Federal Home Loan Bank Advances:(continued)

As of December 31, 2008, the Company had a $1,000,000 putable advance (Knock-out Advance) from the FHLB which matures on September 1, 2015 and has a fixed interest rate of 4.13%. The FHLB will require that this borrowing become due immediately upon its Strike Date (next strike date is March 2, 2009 and quarterly thereafter) if the three month LIBOR equals or exceeds the Strike Rate of 6.75%. As of December 31, 2008, the three month LIBOR was at 1.425%.

At December 31, 2008, the interest rates on FHLB advances ranged from 1.28% to 4.25%. The weighted average interest rate at December 31, 2008 is 2.94%.

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 $157,500. 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. Other borrowed funds also consists of a line of credit from PNC Bank with an outstanding balance of $2,000,000 at December 31, 2008. The terms of the line of credit are as follows:

ORIGINAL DATE	EXPIRATION DATE	INTEREST RATE	LINE OF CREDIT AMOUNT
March 28, 2008	March 27, 2009	6 month LIBOR	$	2,000,000
		plus 1.50%

Principal is due in full on the expiration date.

NOTE 10. Securities sold under agreements to repurchase:

The securities sold under agreements to repurchase as of December 31, 2008 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:

	2008			2007			2006
Current tax expense	$	3,079,548		$	2,093,512		$	2,312,801
Benefit from net operating loss carryovers		(224,140	)		(56,035	)		—
Deferred tax (benefit) expense		(681,082	)		(126,437	)		187,120
Total income tax expense	$	2,174,326		$	1,911,040		$	2,499,921

45

NOTE 11. Income taxes:(continued)

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:

	2008		2007		2006
Federal income tax at statutory rate	34.0	%	34.0	%	34.0	%
Increase (decrease) in tax resulting from:
Tax-exempt income	(4.5	)	(3.7	)	(1.1	)
Dividends received deduction	(2.1	)	(2.6	)	(2.8	)
Federal tax credits	(1.3	)
Other, net	1.4		2.0		3.1
Effective tax rates	27.5	%	29.7	%	33.2	%

The Company had gross deferred tax assets and gross deferred tax liabilities as follows as of December 31:

	2008			2007
Deferred tax assets:
Interest on non-performing loans	$	83,185		$	25,433
Allowance for loan losses		1,972,372			1,747,081
Deferred compensation		558,980			548,052
Deferred retirement expense		376,560			293,458
Accrued directors fees		49,733			53,339
Accrued group health contingency		23,901			57,113
Writedown of securities		394,040			77,208
Net operating loss carryforwards		292,539			516,679
Net unrealized loss on investment at equity		7,241			—
Net unrealized loss on derivative		315,320			—
Net unrealized holding loss on securities available-for-sale		—			658,773
Unrecognized employee benefits under SFAS No. 158		1,390,822			500,912
Other		42,230			36,055
Gross deferred tax assets		5,506,923			4,514,103
Deferred tax liabilities:
Deferred loan costs, net of fees		(690,458	)		(694,958	)
Prepaid pension		(1,465,847	)		(1,375,884	)
Accelerated depreciation		(450,835	)		(341,578	)
Purchased goodwill		(2,072,506	)		(1,776,433	)
Mortgage servicing rights		(285,665	)		(663,393	)
Core deposit intangibles and other market value adjustments		(1,589,596	)		(1,945,394	)
Net unrealized gain on available-for-sale securities		(145,939	)
Other		(16,180	)		(15,407	)
Gross deferred tax liabilities		(6,717,026	)		(6,813,047	)
Net deferred tax liability	$	(1,210,103	)	$	(2,298,944	)

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, 2008, the Company had federal net operating loss carryovers of approximately $860,411. The carryovers were transferred to the Company upon the acquisition of First Community Bank during 2007. 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.

46

NOTE 12. Stock compensation plans:

At December 31, 2008, the Company has three fixed stock-based employee compensation plans under which options are outstanding. As of December 31, 2008, 240,510 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.

There were no options granted in 2008 and 2007 and 7,500 options granted in 2006. The fair value of each option granted in 2008 and 2006 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

	2008	2007	2006
Weighted risk-free interest rate	—	—	4.60%
Weighted expected life	—	—	10 years
Weighted expected volatility	—	—	24.44%
Weighted expected dividend yield	—	—	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, 2008, 2007 and 2006 and changes during the years ending on those dates is presented below:

	2008				2007				2006
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding at beginning of year	378,042		$	12.10	446,800		$	11.99		511,700		$	11.95
Granted	—				—					7,500			15.30
Forfeits	(15,000	)		12.27	—					(6,800	)		13.05
Exercised	(26,000	)		9.58	(68,758	)		11.38		(65,600	)		11.97
Outstanding at end of year	337,042		$	12.28	378,042		$	12.10		446,800		$	11.99
Options exercisable at year-end	337,042				378,042					446,800
Weighted-average fair value of options granted during the year	—				—				$	3.74

The following table summarizes information about fixed stock options outstanding as of December 31, 2008:

Options Outstanding and Exercisable

Exercise Prices		Number Outstanding as of 12/31/08	Remaining Contractual Life
$	7.375	22,000	0.5 years
	9.125	46,042	3.5 years
	13.05	110,500	4.8 years
	13.25	151,000	6.9 years
	15.30	7,500	7.1 years
$	12.28	337,042	5.3 years

47

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.

The following tables set forth information about the plan, using a measurement date of December 31 for the year ended December 31, 2008 and 2007 and 2006:

	Years Ended December 31,
	2008			2007			2006
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	5,074,576		$	4,879,462		$	5,554,781
Service cost		—			—			467,458
Interest cost		312,584			304,680			340,938
Actuarial (gain) loss		(3,577	)		57,358			431,469
Benefits paid		(150,740	)		(166,924	)		(532,299	)
Curtailment gain		—			—			(1,382,885	)
Benefit obligation at end of year		5,232,843			5,074,576			4,879,462
Change in plan assets:
Plan assets at estimated fair value at beginning of year		7,283,542			7,060,652			5,752,429
Actual return on plan assets		(1,710,548	)		389,814			699,864
Employer contribution		—			—			1,140,658
Benefits paid		(150,740	)		(166,924	)		(532,299	)
Fair value of plan assets at end of year		5,422,254			7,283,542			7,060,652
Funded status	$	189,411		$	2,208,966		$	2,181,190

Amounts recognized in accumulated other comprehensive loss, before tax effect, consist of unrecognized net actuarial losses of $3,511,289 and $1,264,612 as of December 31, 2008 and 2007, 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 0%, respectively, at December 31, 2008, 6.25% and 0% at December 31, 2007, respectively and 6.25% and 4.00% at December 31, 2006, respectively.

The accumulated benefit obligation for the defined benefit pension plan was $5,232,843 and $5,074,576 at December 31, 2008 and 2007, respectively.

48

NOTE 13. Employee benefit plans:(continued)

Components of net periodic cost and other comprehensive loss:

	Years Ended December 31,
	2008			2007			2006
Service cost	$	—		$	—		$	467,458
Interest cost on benefit obligation		312,584			304,680			340,938
Expected return on assets		(576,915	)		(559,795	)		(500,803	)
Amortization of unrecognized prior service cost		—			—			(207	)
Amortization of unrecognized net loss		37,209			27,687			110,562
Curtailment expense-prior service cost		—			—			23,043
Net periodic (benefit) cost		(227,122	)		(227,428	)		440,991
Other changes in plan assets and benefit obligations recognized in other comprehensive loss, before tax effect:
Actuarial loss		2,283,886			227,339			—
Amortization of unrecognized actuarial loss		(37,209	)		(27,687	)		—
Total recognized in other comprehensive loss		2,246,677			199,652			—
Total recognized in net periodic (benefit) cost and other comprehensive loss	$	2,019,555		$	(27,776	)	$	440,991

The estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the year ended December 31, 2009 is $206,185.

For the years ended December 31, 2008, 2007 and 2006, the assumptions used to determine the net period pension cost are as follows:

	Years Ended December 31,
	2008		2007		2006
Discount rate	6.25	%	6.25	%	6.25	%
Increase in future compensation levels	0	%	0	%	4.00	%
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	2008		Percent		2007		Percent
Equity securities	$	2,802,294	51.6	%	$	4,715,678	64.8	%
Corporate debt securities		995,671	18.4			1,036,883	14.2
U.S. Government and agency securities		1,202,334	22.2			1,217,637	16.7
Money Market		421,955	7.8			313,344	4.3
Total	$	5,422,254	100.0	%	$	7,283,542	100.0	%

Equity securities include 30,294 shares of the Company’s common stock as of December 31, 2008 and 30,000 shares of the Company’s stock as of December 31, 2007. The fair value of the shares on those dates was $233,749 (4.3% of total plan assets) and $372,000 (5.1% of total plan assets), respectively.

49

NOTE 13. Employee benefit plans:(continued)

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 2009 plan year and for the prior two years follows.

	Target Percentage of Plan Assets Years Ended December 31,
Asset Category	2009		2008		2007
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 does not expect to contribute to the defined benefit pension plan in 2009.

Estimated future benefit payments, which reflect expected future service, as appropriate, are as follows:

2009	$	149,000
2010		155,000
2011		156,000
2012		233,000
2013		229,000
Years 2014-2018		1,560,000

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 2008, 2007 and 2006, participating employees’ contributions totaled $535,985, $419,204 and $339,437, respectively. The Bank made contributions totaling $468,370 for 2008, $371,692, for 2007 and $32,522 for 2006. 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.

50

NOTE 13. Employee benefit plans: (continued)

In 2008, the Company adopted EITF Issue 06-4 and recognized a liability for the Company’s future postretirement benefit obligations under endorsement split-dollar life insurance arrangements. The Company recognized this change in accounting principles as a cumulative effect adjustment to retained earnings of $320,034. The total liability for the arrangements included in other liabilities was $331,056 at December 31, 2008. Expense under this arrangement was $11,022 for 2008.

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, 2008, the Company was obligated under non-cancelable operating leases for bank premises and equipment expiring between April 30, 2009 and December 20, 2016. The total minimum rent commitments due in future periods under these existing agreements is as follows as of December 31, 2008:

2009	$	393,468
2010		259,515
2011		239,496
2012		128,472
2013		48,370
Years thereafter		130,402
Total minimum lease payments	$	1,199,723

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 $404,704, $343,329 and $282,932 for the years ended December 31, 2008, 2007 and 2006, respectively.

NOTE 15. Fair value measurements:

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157 (“SFAS 157”), Fair Value Measurements, which provides a framework for measuring fair value under generally accepted accounting principles.

The Company also adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115. SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company did not elect fair value treatment for any financial assets or liabilities upon adoption.

In accordance with SFAS 157, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1—Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury, other U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2—Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3—Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or

51

NOTE 15. Fair value measurements: (continued)

broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value for December 31, 2008.

The Company’s cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

The Company’s investment in mortgage-backed securities, asset-backed securities, preferred stock with maturities and other debt securities available-for-sale are generally classified within level 2 of the fair value hierarchy. For these securities, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

The Company’s derivative financial instruments are generally classified within level 2 of the fair value hierarchy. For these financial instruments, the Company obtains fair value measurements from independent pricing services. The fair value measurements utilize a discounted cash flow model that incorporates and considers observable data, that may include publicly available third party market quotes, in developing the curve utilized for discounting future cash flows.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

The Company’s impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using level 2 inputs based upon appraisals of similar properties obtained from a third party.

52

NOTE 15. Fair value measurements: (continued)

The following summarizes assets measured at fair value for the period ending December 31, 2008.

Assets measured at fair value on a recurring basis

	Fair Value Measurements at Reporting Date Using:
	December 31, 2008		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Securities available-for-sale	$	81,988,488	$	367,670	$	81,620,818	$
Impaired loans		678,941				678,941
Totals	$	82,667,429	$	367,670	$	82,299,759	$

Liabilities measured at fair value on a recurring basis

	Fair Value Measurements at Reporting Date Using:
	December 31, 2008		Quoted Prices in Active Markets for Identical Assets Level 1	Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Derivative—interest rate swap	$	796,061	$	$	796,061	$
Totals	$	796,061	$	$	796,061	$

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:

	2008				2007
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	22,561,691	$	22,561,691	$	34,034,541	$	34,034,541
Securities available-for-sale		81,988,488		81,988,488		86,810,003		86,810,003
Federal Home Loan Bank stock		4,946,300		4,946,300		7,532,700		7,532,700
Loans held-for-sale		1,937,750		1,954,036		2,507,880		2,521,711
Loans, net		636,720,290		645,178,000		626,274,462		626,826,000
Other investment		2,000,000		2,000,000		2,000,000		2,000,000
Investment in unconsolidated subsidiaries		620,000		515,545		620,000		613,656
Accrued interest receivable		2,715,864		2,715,864		2,853,558		2,853,558
Due from broker		20,868,360		20,868,360		—		—
Financial liabilities:
Deposits		653,353,325		656,224,000		652,972,017		652,909,000
FHLB advances		66,317,485		67,909,726		63,386,874		63,386,000
Other borrowings		2,157,500		2,157,500		237,500		237,500
Securities sold under agreements to repurchase		15,072,991		15,072,991		15,440,993		15,440,993
Subordinated debentures		20,620,000		17,146,013		20,620,000		20,409,000
Derivatives		796,061		796,061		—		—

The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets under the indicated captions, except for investment in unconsolidated subsidiaries and other investment which are included in other assets and derivatives which are included in other liabilities. Accounting policies related to financial instruments are described in Note 1.

53

NOTE 16. Shareholders’ equity:

Liquidation account—On May 22, 1986, Lake Sunapee Bank, fsb received approval from the Federal Home Loan Bank Board and converted from a federally chartered mutual savings bank to a federally chartered stock savings bank. At the time of conversion, the Bank established a liquidation account in an amount of $4,292,510 (equal to the Bank’s net worth as of the date of the latest financial statement included in the final offering circular used in connection with the conversion). The liquidation account will be maintained for the benefit of eligible account holders who maintain their deposit accounts in the Bank after conversion. In the event of a complete liquidation of the Bank subsequent to conversion (and only in such event), each eligible account holder will be entitled to receive a liquidation distribution from the liquidation account before any liquidation distribution may be made with respect to capital stock. The amount of the liquidation account is reduced to the extent that the balances of eligible deposit accounts are reduced on any year-end closing date subsequent to the conversion. Company management believes the balance in the liquidation account would be immaterial to the consolidated financial statements as of December 31, 2008.

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, 2008 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 17. Earnings per share (EPS):

Reconciliation of the numerators and the denominators of the basic and diluted per share computations for net income are as follows:

	Income (Numerator)		Shares (Denominator)	Per-Share Amount
Year ended December 31, 2008
Basic EPS
Net income and income available to common shareholders	$	5,725,072	5,745,735	$	1.00
Effect of dilutive securities, options		—	12,495
Diluted EPS
Income available to common shareholders and assumed conversions	$	5,725,072	5,758,230	$	0.99
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

54

NOTE 18. 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, 2008 and 2007, that the Bank meets all capital requirements to which it is subject.

As of December 31, 2008, 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		Amount		Ratio		Amount		Ratio
	(Dollar amounts in thousands)
As of December 31, 2008:
Total Capital (to Risk Weighted Assets)	$	67,118	11.36	%	$	47,266	³8.0	%	$	59,083	³10.0	%
Core Capital (to Adjusted Tangible Assets)		65,715	8.12			32,366	³4.0			40,457	³5.0
Tangible Capital (to Tangible Assets)		65,715	8.12			12,137	³1.5			N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		65,715	11.12			N/A	N/A			35,450	³6.0
As of December 31, 2007:
Total Capital (to Risk Weighted Assets)		63,660	11.08			45,952	³8.0			57,440	³10.0
Core Capital (to Adjusted Tangible Assets)		63,191	7.84			32,225	³4.0			40,281	³5.0
Tangible Capital (to Tangible Assets)		63,191	7.84			12,084	³1.5			N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		63,191	11.00			N/A	N/A			34,464	³6.0

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, 2008						December 31, 2007
	Tier 1 Capital			Total Capital			Tier 1 Capital			Total Capital
Total equity	$	93,741		$	93,741		$	92,044		$	92,044
Accumulated other comprehensive loss		1,900			1,900			1,768			1,768
Allowable allowance for loan losses		—			5,358			—			5,116
Goodwill and core deposit intangible		(29,854	)		(29,854	)		(30,454	)		(30,454	)
Mortgage servicing asset		(72	)		(72	)		(167	)		(167	)
Equity investments and other assets		—			(3,955	)		—			(4,647	)
	$	65,715		$	67,118		$	63,191		$	63,660

55

NOTE 19. 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 20. 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, 2008 and 2007, the maximum potential amount of the Company’s obligation was $829,221 and $1,995,079, 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.

Notional amounts of financial liabilities with off-balance sheet credit risk are as follows as of December 31:

	2008		2007
Commitments to extend credit	$	16,700,556	$	14,110,391
Letters of credit	$	829,221	$	1,995,079
Lines of credit	$	87,761,000	$	93,320,895
Unadvanced portion of construction loans	$	23,413,930	$	13,147,870

NOTE 21. 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 deductible 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.

56

NOTE 21. 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 22. Goodwill and intangible assets:

The Company’s assets as of December 31, 2008 include goodwill of $17,713,981 and intangible assets relating to the acquisitions of First Brandon and First Community in 2008. 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, 2008 and 2007 and found no impairment.

57

NOTE 22. Goodwill and intangible assets: (continued)

A summary of acquired amortizing intangible assets is as follows:

	As of December 31, 2008
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Core deposit intangible-First Brandon	$	2,476,000	$	686,527	$	1,789,473
Core deposit intangible-First Community		992,000		220,946		771,054
Total	$	3,468,000	$	907,473	$	2,560,527

Aggregate amortization expense was $599,776 in 2008. 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 2008 is as follows:

2009	$	536,721
2010		473,667
2011		410,612
2012		347,558
2013		284,503

NOTE 23. Subsequent event:

On January 16, 2009, as part of the Capital Purchase Program established by the U.S. Department of the Treasury (“Treasury”) under the Emergency Economic Stabilization Act of 2008 (the “EESA”), the Company entered into a Letter Agreement (including the Securities Purchase Agreement-Standard Terms incorporated by reference therein, the “Purchase Agreement”) with the Treasury pursuant to which the Company issued and sold to Treasury (i) 10,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, having a liquidation preference of $1,000 per share (the “Series A Preferred Stock”) and (ii) a ten-year warrant to purchase up to 184,275 shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), at an initial exercise price of $8.14 per share (the “Warrant”), for an aggregate purchase price of $10 million in cash. All of the proceeds from the sale of the Series A Preferred Stock will be treated as Tier 1 capital for regulatory purposes.

Cumulative dividends on the Series A Preferred Stock will accrue on the liquidation preference at a rate of 5% per annum for the first five years, and at a rate of 9% per annum thereafter, but will be paid only when declared by the Company’s Board of Directors. The Series A Preferred Stock has no maturity date and ranks senior to the Common Stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company. The Series A Preferred Stock generally is non-voting, other than class voting on certain matters that could adversely affect the Series A Preferred Stock.

The Company may redeem the Series A Preferred Stock after February 15, 2012. Prior to this date, the Company may redeem the Series A Preferred Stock if (i) the Company has raised aggregate gross proceeds in one or more Qualified Equity Offerings (as defined in the Purchase Agreement) in excess of $2.5 million and (ii) the aggregate redemption price does not exceed the aggregate net cash proceeds from such Qualified Equity Offerings. Any redemption is subject to the consent of the Office of Thrift Supervision.

58

NOTE 24. 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

	2008		2007
ASSETS
Cash in Lake Sunapee Bank	$	1,073,134	$	320,355
Investment in subsidiary, Lake Sunapee Bank		93,732,163		92,044,278
Investment in affiliate, NHTB Capital Trust II		310,000		310,000
Investment in affiliate, NHTB Capital Trust III		310,000		310,000
Investment in DCC		2,000,000		—
Deferred expenses		272,683		283,376
Advances to Lake Sunapee Bank		52,664		53,739
Other assets		117,350		21,068
Total assets	$	97,867,994	$	93,342,816
LIABILITIES
Subordinated debentures	$	20,620,000	$	20,620,000
Loan payable – PNC		2,000,000		—
Other liabilities		570,902		55,493
Total liabilities		23,190,902		20,675,493
SHAREHOLDERS’ EQUITY		74,677,092		72,667,323
Total liabilities and shareholders’ equity	$	97,867,994	$	93,342,816

CONDENSED STATEMENTS OF INCOME

	2008		2007			2006
Dividends from subsidiary, Lake Sunapee Bank	$	4,500,000	$	12,300,000		$	1,800,000
Dividends from subsidiaries, NHTB Capital Trust II and III		38,144		44,534			43,373
Investment interest income		182,000		52,667			124,417
Interest expense on subordinated debentures		1,315,365		1,479,622			1,453,609
Interest expense on other borrowings		71,129		—			—
Net operating income including tax benefit		242,574		383,212			259,457
Income before equity in undistributed earnings of subsidiaries		3,576,224		11,300,791			773,638
Equity in undistributed earnings (loss) of subsidiaries		2,148,848		(6,785,109	)		4,266,221
Net income	$	5,725,072	$	4,515,682		$	5,039,859

59

NOTE 24. Condensed parent company financial statements: (continued)

CONDENSED STATEMENTS OF CASH FLOWS

	2008			2007			2006
Cash flows from operating activities:
Net income	$	5,725,072		$	4,515,682		$	5,039,859
(Increase) decrease in accounts receivable and other assets		(20,000	)		20,000			(19,675	)
Increase (decrease) in accrued interest payable and other liabilities		34,668			(1,484	)		11,108
(Increase) decrease in taxes receivable		(60,160	)		55,508			96,618
Decrease (increase) in prepaid expenses		10,169			(13,440	)		—
Amortization of deferred expenses relating to issuance of capital securities and subordinated debentures		10,693			10,694			10,693
Stock-based compensation expense		—			—			28,050
Equity in undistributed loss (earnings) of subsidiaries		(2,148,848	)		6,785,109			(4,266,221	)
Net cash provided by operating activities		3,551,594			11,372,069			900,432
Cash flows from investing activities:
Purchase of other investment		(2,000,000	)		—			(2,000,000	)
Redemption of other investment		—			2,000,000			—
Net change in advances to subsidiary, Lake Sunapee Bank		1,075			73,128			2,705,911
Net cash and cash equivalents paid for First Brandon and First Community acquisitions		—			(7,422,994	)		—
Net cash (used in) provided by investing activities		(1,998,925	)		(5,349,866	)		705,911
Cash flows from financing activities:
Proceeds from exercise of stock options		249,125			782,732			785,125
Proceeds other borrowed money		2,000,000			—			—
Dividends paid		(2,988,061	)		(2,475,019	)		(2,147,033	)
Repurchase of treasury stock		(60,954	)		(5,291,469	)		(1,685,334	)
Net cash used in financing activities		(799,890	)		(6,983,756	)		(3,047,242	)
Net increase (decrease) in cash		752,779			(961,553	)		(1,440,899	)
Cash, beginning of year		320,355			1,281,908			2,722,807
Cash, end of year	$	1,073,134		$	320,355		$	1,281,908

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, 2008, 2007 and 2006, and therefore are not reprinted here.

60

NOTE 25. Quarterly Results of Operations (UNAUDITED)

Summarized quarterly financial data for 2008 and 2007 follows:

	(In thousands, except earnings per share) 2008 Quarters Ended
	March 31		June 30		Sept. 30		Dec. 31
Interest and dividend income	$	11,068	$	10,506	$	10,512	$	10,550
Interest expense		4,944		4,331		3,902		3,537
Net interest and dividend income		6,124		6,175		6,610		7,013
Provision for loan losses		37		140		184		741
Noninterest income		2,063		1,985		1,103		2,546
Noninterest expense		6,021		5,861		5,841		6,895
Income before income taxes		2,129		2,159		1,688		1,923
Income tax expense		745		753		582		94
Net income	$	1,384	$	1,406	$	1,106	$	1,829
Basic earnings per common share	$	0.24	$	0.24	$	0.19	$	0.32
Earnings per common share, assuming dilution	$	0.24	$	0.24	$	0.19	$	0.32
	(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		1,949		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

61

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

For the fiscal year ended:

December 31, 2008

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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, 2009 there were issued and outstanding 5,747,772 shares of the registrant’s common stock.

The common stock is listed for trading on the NASDAQ Stock Market under the symbol “NHTB”. Based on the closing price of $10.35 on June 30, 2008, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $59.5 million.

Documents Incorporated By Reference:

Portions of the proxy statement for the 2009 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.

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New Hampshire Thrift Bancshares, Inc.

INDEX

PART I
Item 1.	Business	64
Item 2.	Properties	81
Item 3.	Legal Proceedings	82
Item 4.	Submission of Matters to a Vote of Security Holders	82
PART II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	83
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	84
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	84
Item 8.	Financial Statements
	Report of Independent Registered Public Accounting Firm	25
	Consolidated Balance Sheets	26
	Consolidated Statements of Income	27
	Consolidated Statements of Changes in Stockholders’ Equity	28
	Consolidated Statements of Comprehensive Income	29
	Consolidated Statements of Cash Flows	30
	Notes to Consolidated Financial Statements	32
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	84
Item 9A.	Controls and Procedures	84
Item 9B.	Other Information	85
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	85
Item 11.	Executive Compensation	85
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	85
Item 13.	Certain Relationships and Related Transactions, and Director Independence	86
Item 14.	Principal Accountant Fees and Services	86
PART IV
Item 15.	Exhibits and Financial Statement Schedules	86
	Signatures	90

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PART I.

Item 1. Business

GENERAL

Organization

New Hampshire Thrift Bancshares, Inc. (NHTB or the Company), a Delaware holding company organized on July 5, 1989, is the parent company of Lake Sunapee Bank, fsb (the Bank), a federally chartered savings bank. The Bank 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, Pittsford, Rutland, West Rutland, and Woodstock, Vermont. The Company had assets of approximately $843.2 million as of December 31, 2008.

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 and the counties of Rutland and Windsor in Vermont. These areas are best known for their 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

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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).

LENDING ACTIVITIES

The Bank’s total loan portfolio was $636,720,290 at December 31, 2008, representing approximately 75% of total assets. As of December 31, 2008, approximately 78% of the mortgage loan portfolio had adjustable rates. As of December 31, 2008, the Bank had sold $311,228,362 in fixed-rate mortgage loans in an effort to meet customer demands for fixed-rate loans, minimize the Bank’s 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 mid-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 its 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.

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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:

	2008					2007					2006
	Amount			% of Total		Amount			% of Total		Amount			% of Total
	($ in thousands)
Real estate loans
Conventional and Commercial	$	483,694		75.68	%	$	478,252		76.14	%	$	385,002		77.79	%
Construction		13,515		2.11			21,704		3.46			17,109		3.45
Consumer loans		79,468		12.43			75,619		12.04			63,277		12.79
Commercial and municipal loans		62,491		9.78			52,515		8.36			29,522		5.97
Total loans		639,168		100.00	%		628,090		100.00	%		494,910		100.00	%
Unamortized adjustment to fair value		1,400					1,496					36
Allowance for loan losses		(5,594	)				(5,181	)				(3,975	)
Deferred loan origination costs, net		1,746					1,869					1,741
Loans receivable, net	$	636,720				$	626,274				$	492,712
						2005					2004
						Amount			% of Total		Amount			% of Total
						($ in thousands)
Real estate loans
Conventional and Commercial						$	359,304		77.21	%	$	320,089		76.94	%
Construction							13,080		2.81			21,757		5.23
Consumer loans							64,393		13.84			57,450		13.81
Commercial and municipal loans							28,558		6.14			16,723		4.02
Total loans							465,335		100.00	%		416,019		100.00	%
Unamortized adjustment to fair value							48					60
Allowance for loan losses							(4,022	)				(4,019	)
Deferred loan origination costs, net							1,790					1,748
Loans receivable, net						$	463,151				$	413,808

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The following table sets forth the maturities of the loan portfolio at December 31, 2008, and whether such loans have fixed or adjustable interest rates:

Maturities	One year or less		One through five years		Over five years		Total
Real Estate Loans with:
Predetermined interest rates	$	7,605,151	$	8,994,214	$	83,728,340	$	100,327,705
Adjustable interest rates		9,977,248		8,001,476		378,902,515		396,881,239
		17,582,399		16,995,690		462,630,855		497,208,944
Collateral/Consumer Loans with:
Predetermined interest rates		1,972,433		7,649,571		584,326		10,206,330
Adjustable interest rates		1,439,898		11,039,180		56,782,971		69,262,049
		3,412,331		18,688,751		57,367,297		79,468,379
Commercial/Municipal Loans with:
Predetermined interest rates		2,184,552		7,042,399		11,573,031		20,799,982
Adjustable interest rates		7,310,569		14,347,635		20,033,159		41,691,363
		9,495,121		21,390,034		31,606,190		62,491,345
Unamortized adjustment to fair value		—		—		1,399,900		1,399,900
Totals	$	30,489,851	$	57,074,475	$	553,004,242	$	640,568,568

The preceding schedule includes $7,011,209 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 evaluates the security for each new loan made. Appraisals, when required, 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’s Board of Directors 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, the Bank attempts to obtain full

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payment, work out a repayment schedule, or in certain instances obtain a deed in lieu of 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, 2008 and 2007 were $9,122,365 and $6,172,310, respectively. For further discussion regarding nonperforming assets, impaired loans and the allowance for loan losses, please see Management’s Discussion and Analysis of Financial Condition and Results of Operations herein.

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, 2008, the Bank owned 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 to its customers.

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NHTB Capital Trust II and III

NHTB Capital Trust II (Trust II) and NHTB Capital Trust III (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%. On May 1, 2008, the Company entered into an interest rate swap agreement with PNC Bank to convert the floating-rate payments on Trust III to fixed-rate payments. The terms of the interest rate swap agreement are as follows:

Notional amount:	$10,000,000
Trade date:	May 1, 2008
Effective date:	June 17, 2008
Termination date:	June 17, 2013
Fixed-rate payer:	New Hampshire Thrift Bancshares, Inc.
Payment dates:	Quarterly
Fixed-rate:	6.65%
Floating rate payer:	PNC Bank
Payment dates:	Quarterly
Index:	Three-month LIBOR

For more information, see Note 2 of the 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 areas. 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 of 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, 2008:

			Fair Value		Amortized Cost		Weighted Average Yield
Available-for-sale securities
U.S. Government, including agencies			$	6,042,500	$	6,004,084		4.08	%
Total due in less than one year				6,042,500		6,004,084		4.08
U.S. Government, including agencies				7,130,313		7,010,996		3.63
Other bonds and debentures				2,197,218		2,126,098		4.31
Total due after one year through five years				9,327,531		9,137,094		3.79
Preferred stock with maturities				4,278,000		5,000,000		6.39
Other bonds and debentures				275,000		275,000		6.79
Total due after ten years				4,553,000		5,275,000		6.12
			$	19,923,031	$	20,416,178		4.52	%
The amortized cost of securities and their approximate fair values are summarized as follows:
December 31, 2008	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:
Bonds and notes-
U.S. Government, including agencies	$	13,015,080	$	157,733	$	—	$	13,172,813
Mortgage-backed securities		59,209,471		1,334,771		40,545		60,503,697
Asset-backed securities		1,499,732		—		305,642		1,194,090
Other bonds and debentures		2,401,098		71,120		—		2,472,218
Preferred stock with maturities		5,000,000		—		722,000		4,278,000
Equity securities		494,666		540		127,536		367,670
Total available-for-sale securities	$	81,620,047	$	1,564,164	$	1,195,723	$	81,988,488
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		8,136,635		20,628		21,963		8,135,300
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	$	88,473,152	$	267,118	$	1,930,267	$	86,810,003

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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

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 areas. The Bank uses traditional means to advertise its deposit products, including print media, and generally does not solicit deposits from outside its primary market areas. The Bank offers negotiated rates on some of its certificate accounts. At December 31, 2008, time deposits represented approximately 45% of total deposits. Time deposits included $104,772,792 of certificates of deposit in excess of $100,000.

The following table presents deposit activity of the Bank for the years ended December 31:

	2008			2007		2006
	($ in Thousands)
Net deposits (withdrawals)	$	(12,537	)	$	22,561	$	(6,877	)
Acquired deposits		—			151,964		—
Interest credited on deposit accounts		12,938			12,941		7,746
Total increase (decrease) in deposit accounts	$	401		$	187,466	$	869

At December 31, 2008, the Bank had $104.8 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	$	29,251	2.58	%
Over 3 through 6 months		27,885	2.96	%
Over 6 through 12 months		39,015	3.26	%
Over 12 months		8,622	3.43	%
Total	$	104,773	3.00	%

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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:

	2008				2007				2006
	Amount		% of Total		Amount		% of Total		Amount		% of Total
	($ in thousands)
Checking accounts	$	45,968	7.0	%	$	48,260	7.4	%	$	38,664	8.3	%
NOW accounts		155,662	23.9			151,847	23.3			129,163	27.8
Money market accounts		40,424	6.2			41,225	6.3			25,276	5.4
Regular savings accounts		11,063	1.7			12,031	1.8			9,976	2.1
Treasury savings accounts		107,110	16.4			104,163	16.0			77,301	16.6
Club deposits		93	—			94	—			57	—
Total		360,320	55.2			357,620	54.8			280,437	60.2
Time deposits
Less than 12 months		261,556	40.0			270,586	41.5			172,195	37.1
Over 12 through 36 months		29,248	4.5			23,780	3.6			12,676	2.7
Over 36 months		2,229	0.3			966	0.1			198	—
Total time deposits		293,033	44.8			295,332	45.2			185,069	39.8
Total Deposits	$	653,353	100.0	%	$	652,952	100.0	%	$	465,506	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,
	2008				2007				2006
	Average Balance		Average Rate Paid		Average Balance		Average Rate Paid		Average Balance		Average Rate Paid
	($ in thousands)
NOW	$	169,835	0.27	%	$	119,238	0.67	%	$	133,732	0.67	%
Savings deposits		122,516	1.06			104,455	0.64			102,453	0.64
Money market deposits		39,235	1.46			32,252	1.37			29,858	0.54
Time deposits		290,648	3.59			226,618	4.53			163,227	3.68
Demand deposits		29,286	—			30,573	—			29,452	—
Total Deposits	$	651,520			$	513,136			$	458,722

The following table presents, by various rate categories, the amount of time deposits as of December 31:

Time Deposits	2008		2007		2006
	($ in thousands)
0.00% – 0.99%	$	1,117	$	3,447	$	2,765
1.00% – 1.99%		18,563		13,364		11,964
2.00% – 2.99%		118,986		8,229		7,595
3.00% – 3.99%		134,865		15,781		14,616
4.00% – 4.99%		19,256		195,714		93,268
5.00% – 5.99%		246		57,653		54,861
6.00% – 6.99%		—		1,144		—
Total	$	293,033	$	295,332	$	185,069

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 with the policies of the FHLB. At December 31, 2008, the Bank had outstanding advances of $66 million from FHLB and advances outstanding of $63 million from FHLB at December 31, 2007.

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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:

	2008			2007			2006
	($ in thousands)
Balance at year end	$	5,000		$	—		$	20,000
Average amount outstanding		861			32,917			20,833
Maximum amount outstanding at any month-end		5,000			55,000			60,000
Average interest rate for the year		1.28	%		5.31	%		5.16	%
Average interest rate on year-end balance		1.28	%		—			5.12	%

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

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also includes assets that are includable up to 20% of portfolio assets, such as certain consumer loans and loans in “credit-needy” areas.

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, 2008, 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 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; 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, 2008, 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, 2008:

	Bank		Capital Requirements		Excess Capital
	($ in thousands)
Tangible capital	$	65,715	$	12,137	$	53,578
Core capital		65,715		32,366		33,349
Risk-based capital		67,118		47,266		19,852

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

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particular community, 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” rating in its most recent CRA 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 at least 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 stockholders, 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:

• well capitalized;

• adequately capitalized;

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• undercapitalized; or

• critically undercapitalized.

At December 31, 2008, 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 four risk categories using a two-step process based first on capital ratios (the capital group assignment) and then on other relevant information (the supervisory subgroup assignment). Each risk category is assigned an assessment rate.

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As of January 1, 2009, all insured institutions will pay a base rate annual assessment of 12 to 50 basis points (a basis point is $0.01 per $100 of assessable deposits) for the first quarter of 2009 based on the risk of loss to the Depository Insurance Fund posed by the particular institution. This is a substantial increase from the base rate assessment of 2 to 43 basis points that was in effect during 2008. The increase in the base rate assessment from 2008 to 2009 is due to the financial crises affecting the banking system and financial markets. For institutions such as the Bank, which do not have a long-term public debt rating, the individual risk assessment is based on its supervisory ratings and certain financial ratios and other measurements of its financial condition. For institutions that have a long-term public debt rating, the individual risk assessment is based on its supervisory ratings and its debt rating.

On February 27, 2009, the FDIC issued new rules to take effect April 1, 2009 that will change the way the FDIC differentiates risk and appropriate assessment rates. Base assessment rates set to take effect on April 1, 2009 will range from 12 to 45 basis points, but giving effect to certain risk adjustments in the rule issued by the FDIC on February 27, 2009, assessments may range from 7 to 77.5 basis points. In addition, the FDIC also issued an interim rule on February 27, 2009 that will impose an emergency special assessment of 20 basis points in addition to its risk-based assessment. This assessment will be imposed on June 30, 2009 and collected on September 30, 2009. Due to the systemic increase in deposit insurance assessments, and the special emergency assessment the Bank will be subject to increased deposit premium expenses in future periods.

On October 14, 2008, the FDIC announced a new program, the Temporary Liquidity Guarantee Program (“TLGP”) that provides unlimited deposit insurance on funds invested in noninterest-bearing transaction deposit accounts in excess of the existing deposit insurance limit of $250,000. Participating institutions will be assessed a $0.10 surcharge per $100 of deposits above the existing deposit insurance limit. The TLGP also provides that the FDIC, for an additional fee, will guarantee qualifying senior unsecured debt issued prior to October 2009 by participating banks and certain qualifying holding companies. The Bank opted to remain in the transaction account guarantee portion of the TLGP, but opted out of the debt guarantee portion.

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, 2008, the Federal Deposit Insurance Corporation assessed Deposit Insurance Fund-insured deposits 1.10 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 of Boston, which is one of the regional FHLBs comprising 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, 2008 of $4.9 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.

On January 28, 2009, the FHLB of Boston notified its members via a letter from its President of its focus on preserving capital in response to ongoing market volatility. The letter outlined that actions taken by the FHLB of Boston included an excess stock repurchase moratorium, an increased retained earnings target, and quarterly dividend payout restrictions, and indicated that members will likely face quarters where there is little to no dividend payout. The FHLB of Boston also indicated they could not indicate when dividends might edge closer to historical levels.

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 $8,500,000 of otherwise reservable balances from the reserve requirements. A 3% reserve is required for transaction account balances over $9,300,000 and up to $34,600,000. Transaction account balances over $34,600,000 are subject to a reserve requirement of $1,038,000 plus 10% of any amount over $34,600,000.

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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.

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, 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.

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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.

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

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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;

• the requirement that audit committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer;

• the 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.

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 (NASDAQ). 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;

• the requirement 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;

• that the nominating committee and compensation committee must also be composed entirely of independent directors; and

• that the audit committee and nominating committee must each 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

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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. The State of New Hampshire has also 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 2008, the Delaware franchise tax amounted to $40,185.

EMPLOYEES

At December 31, 2008, Lake Sunapee Bank had a total of 226 full-time employees and 23 part-time employees. These employees are not represented by collective bargaining agents. The Bank believes that its relationship with its employees is good.

Item 2. Properties

The following table sets forth the location of the Bank’s offices and certain additional information relating to these offices at December 31, 2008:

	Year Opened	Net Book Value			Expiration Date of Lease	Lease Renewal Option
Location		Leased	Owned
9 Main Street Newport, NH	1868		$	1,552,249
565 Route 11 Sunapee, NH	1965		$	63,897
115 East Main Street Bradford, NH	1975		$	398,844
300 Sunapee Street Newport, NH	1978		$	66,003
165 Route 10 South Grantham, NH	1980		$	282,605
116 Newport Road New London, NH	1981		$	767,686
200 Heater Road Lebanon, NH	1986		$	429,804
106 Hanover Street Lebanon, NH	1997		$	1,685,129
15 Antrim Road Hillsboro, NH	1994		$	744,605
321 Main Street New London, NH	1999		$	1,110,132

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(Continued)

	Year Opened	Net Book Value				Expiration Date of Lease	Lease Renewal Option
Location		Leased		Owned
32 Elm Street Milford, NH	2006			$	1,148,199
2 Park Street Brandon, VT	2007			$	1,088,146
Route 4 and Depot Hill Road. Pittsford, VT	2007			$	330,136
484 Main Street West Rutland, VT	2007			$	386,402
1340 Franklin Street Brandon, VT	2007			$	761,558
No. One Bond Street Woodstock, VT	2007			$	988,522
Route 4 West Woodstock, VT	2007			$	199,099
100 Woodstock Avenue Rutland, VT	2007			$	499,157
2997 Franklin Street(1) Brandon, VT	2007			$	—
83 Main Street(1) West Lebanon, NH	1994	$	112,395			2009	5 Years
12 Centerra Pkwy.(1) Lebanon, NH	1997	$	63,606			2012	10 Years
Route 103(1) Newbury, NH	1999	$	139,508			2011	10 Years
7 Lawrence Street(1) Andover, NH	2003	$	307,742			2012	15 Years
2-4 Main Street(1) Peterborough, NH	2004	$	653,514			2009	30 Years
468 US Route 4(1) Enfield, NH	2005	$	383,878			2009	20 Years
345 Washington Street(1) Claremont, NH	2005	$	297,872			2009	10 Years
12 South Street(1) Hanover, NH	2007	$	178,634			2016	10 Years
104-110 Merchants Row(1) Rutland, VT	2007	$	22,811			2008	24 Years

⁽¹⁾ Operating lease, value of improvements.

Item 3. Legal Proceedings

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 2008.

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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
2008	First Quarter	$	13.400	$	11.450
	Second Quarter		12.490		10.350
	Third Quarter		10.706		8.510
	Fourth Quarter		9.700		6.250
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

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, 2009, the Company had approximately 777 stockholders of record. The number of stockholders does not reflect the number of persons or entities who held their stock in nominee or “street” name through various brokerage firms.

The following table sets forth certain information regarding per share dividends declared on the Company’s common stock:

	2008		2007
First Quarter	$	0.1300	$	0.1300
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 16 of the Consolidated Financial Statements.

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, 2008, 237,500 shares of common stock had been repurchased. During 2008, a total of 5,000 shares were repurchased.

The following table provides information regarding repurchases of our common stock in each month of the quarter ended December 31, 2008:

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, 2008 – October 31, 2008	—	—	—	148,088
November 1, 2008 – November 30, 2008	—	—	—	148,088
December 1, 2008 – December 31, 2008	—	—	—	148,088
Total	—	—	—	148,088

⁽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.

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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 24 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 24 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 25 through 61 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.

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, 2008. 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

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that, as of December 31, 2008, 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 Stockholders to be held on May 14, 2009, 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 14, 2009.

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 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 Stockholders to be held on May 14, 2009, 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 14, 2009.

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 Stockholders to be held on May 14, 2009 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 14, 2009.

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The following table sets forth the aggregate information of our equity compensation plans in effect as of December 31, 2008.

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	337,042	$	12.28	—
Equity compensation plans not approved by security holders	—		—	—
Total	337,042	$	12.28	—

Item 13. Certain Relationships and Related Transactions, and Director Independence

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 Stockholders to be held on May 14, 2009 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 14, 2009.

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 Stockholders to be held on May 14, 2009 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 14, 2009.

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, 2008 and 2007 and the related consolidated statements of income, changes in stockholders’ equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2008, 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 Merger by and between NHTB and First Brandon Financial Corporation dated as of December 14, 2006 (filed as Exhibit 2.5 to NHTB’s Current Report on Form 8-K filed with the Commission on December 15, 2006 and incorporated by reference herein).

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2.2	Agreement and Plan of Merger by and between NHTB and First Community Bank dated as of April 16, 2007 (filed as Exhibit 2.6 to NHTB’s Current Report on Form 8-K filed with Commission on April 16, 2007 and incorporated by reference herein).
3.1.1	Amended and Restated Certificate of Incorporation of NHTB (filed as Exhibit 3.1 to NHTB’s Registration Statement on Form S-4, as amended, filed with the Commission on November 5, 1996 and incorporated herein by reference).
3.1.2	Certificate of Amendment of the Certificate of Incorporation of NHTB (filed as Exhibit 3.1 to NHTB’s Form 10-Q for the quarter ended June 30, 2005 filed with the Commission on August 15, 2005 and incorporated herein by reference).
3.1.3	Certificate of Designations establishing the rights of NHTB’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (filed as Exhibit 3.1 to NHTB’s Current Report on Form 8-K filed with the Commission on January 22, 2009 and incorporated herein by reference).
3.2.1	Amended and Restated Bylaws of NHTB (filed as Exhibit 3.2.3 NHTB’s Annual Report on Form 10-KSB for the year ended December 31, 1997 filed with the Commission on March 5, 1998 and incorporated herein by reference).
3.2.2	Amendment to Bylaws of NHTB (filed as an Exhibit 3.2(a) to NHTB’s Current Report on Form 8-K filed with the Commission on March 11, 2005 and incorporated herein by reference).
3.2.3	Amendment to Bylaws of NHTB (filed as an Exhibit 3.2.2 to NHTB’s Current Report on Form 8-K filed with the Commission on October 1, 2007 and incorporated herein by reference).
4.1	Stock Certificate of NHTB (filed as Exhibit to NHTB’s Registration Statement on Form S-4 filed with the Commission on March 1, 1989 and incorporated herein by reference).
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 (filed as Exhibit 4.2 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Commission on March 29, 2005 and incorporated herein by reference).
4.3	Form of Floating Rate Junior Subordinated Deferrable Interest Debentures issued by NHTB to U.S. Bank National Association dated March 30, 2004 (filed as Exhibit A to Exhibit 4.2 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Commission on March 29, 2004 and incorporated herein by reference).
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 (filed as Exhibit 4.4 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Commission on March 29, 2005 and incorporated herein by reference).
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 (filed as Exhibit A to Exhibit 4.4 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Commission on March 29, 2005 and incorporated herein by reference).
4.6	Form of specimen stock certificate for NHTB’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (filed as Exhibit 4.1 to NHTB’s Current Report on Form 8-K filed with the Commission on January 22, 2009 and incorporated herein by reference).
4.7	Warrant to purchase shares of NHTB common stock (filed as Exhibit 4.2 to NHTB’s Current Report on Form 8-K filed with the Commission on January 22, 2009 and incorporated herein by reference).

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10.1	Profit Sharing-Stock Ownership Plan of Lake Sunapee Bank, fsb (filed as Exhibit 10.1 to NHTB’s Registration Statement on Form S-4, as amended, filed with the Commission on November 5, 1996 and incorporated herein by reference).
10.2	New Hampshire Thrift Bancshares, Inc. 1996 Stock Option Plan (filed as Exhibit 10.2 to NHTB’s Registration Statement on Form S-4, as amended, filed with the Commission on November 5, 1996 and incorporated herein by reference).
10.3	Employment Agreement between NHTB and Stephen W. Ensign (filed as Exhibit 10.5 to NHTB’s Registration Statement on Form S-4, as amended, filed with the Commission on November 5, 1996 and incorporated herein by reference).
10.4	Employment Agreement between Lake Sunapee Bank, fsb and Steven R. Theroux (filed as Exhibit 10.6 to NHTB’s Registration Statement on Form S-4, as amended, filed with the Commission on November 5, 1996 and incorporated herein by reference).
10.5	Guarantee Agreement by and between NHTB and U.S. Bank National Association dated March 30, 2004 (filed as Exhibit 10.7 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Commission on March 29, 2005 and incorporated herein by reference).
10.6	Guarantee Agreement by and between New NHTB and U.S. Bank National Association dated March 30, 2004 (filed as Exhibit 10.8 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Commission on March 29, 2005 and incorporated herein by reference).
10.7	NHTB’s 1998 Stock Option Plan (filed as Appendix A to NHTB’s Definitive Proxy Statement filed with the Commission on March 6, 1998 and incorporated herein by reference).
10.8	NHTB’s 2004 Stock Incentive Plan (filed as Appendix B to NHTB’s Definitive Proxy Statement filed with the Commission on April 8, 2004 and incorporated herein by reference).
10.9	Amended and Restated Supplemental Executive Retirement Plan of New Hampshire Thrift Bancshares, Inc. (filed as Exhibit 10.9 to NHTB’s Current Report on Form 8-K filed with Commission on December 14, 2005 and incorporated herein by reference).
10.10	Amendment to the Supplemental Executive Retirement Plan of New Hampshire Thrift Bancshares, Inc. (filed as Exhibit 10.9 to NHTB’s Current Report on Form 8-K filed with Commission on March 14, 2006 and incorporated herein by reference).
10.11	Amendment to the Supplemental Executive Retirement Plan of New Hampshire Thrift Bancshares, Inc. (filed as Exhibit 10.13 to NHTB’s Current Report on Form 8-K filed with Commission on March 14, 2006 and incorporated herein by reference).
10.12	Forms of Executive Salary Continuation Agreement among NHTB, Lake Sunapee Bank, fsb and Stephen W. Ensign and Stephen R. Theroux (filed as Exhibit 10.14 to NHTB’s Current Report on Form 8-K filed with Commission on March 14, 2006 and incorporated herein by reference).
10.13	Letter Agreement, dated as of January 16, 2009, between New Hampshire Thrift Bancshares, Inc. and the United States Department of the Treasury, and the Securities Purchase Agreement — Standard Terms attached thereto (filed as Exhibit 10.1 to NHTB’s Current Report on Form 8-K filed with the Commission on January 22, 2009 and incorporated herein by reference).
13.1	Annual Report to Stockholders for the year ended December 31, 2008.
14.1	Code of Ethics (filed as Exhibit 14.1 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Commission on March 30, 2004 and incorporated herein by reference).

88

21.1	Subsidiaries of NHTB.
23.1	Consent of Shatswell, MacLeoad & Company, P.C.
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Principal Executive Officer.
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Principal Financial Officer.
32.1	Written statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Principal Executive Officer.
32.2	Written statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Principal Financial Officer.

89

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 31, 2009
	(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	Chairman of the Board and Chief Executive Officer	March 31, 2009
(Stephen W. Ensign)
	(Principal Executive Officer)
/s/ Stephen R. Theroux	Vice Chairman of the Board,	March 31, 2009
(Stephen R. Theroux)	President, Chief Operating Officer, Chief Financial Officer and Secretary (Principal Accounting Officer)
/s/ Leonard R. Cashman	Director	March 31, 2009
(Leonard R. Cashman)
/s/ William C. Horn	Director	March 31, 2009
(William C. Horn)
/s/ Peter R. Lovely	Director	March 31, 2009
(Peter R. Lovely)
/s/ Jack H. Nelson	Director	March 31, 2009
(Jack H. Nelson)
/s/ Michael T. Putziger	Director	March 31, 2009
(Michael T. Putziger)
/s/ Peter D. Terwilliger	Director	March 31, 2009
(Peter D. Terwilliger)
/s/ Joseph B. Willey	Director	March 31, 2009
(Joseph B. Willey)

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New Hampshire Thrift Bancshares, Inc.

Directors	Officers
Stephen W. Ensign,Chairman	Stephen W. Ensign	William J. McIver
Stephen R. Theroux,Vice Chairman Leonard R. Cashman	Chairman of the Board and Chief Executive Officer	Executive Vice President
William C. Horn
Peter R. Lovely	Stephen R. Theroux	Laura Jacobi
Jack H. Nelson	Vice Chairman of the Board	Assistant Secretary
Michael T. Putziger	President, Chief Financial Officer
Peter D. Terwilliger	and Corporate Secretary
Joseph B. Willey

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 Chief Administrative Officer   First Vice Presidents Scott W. Laughinghouse Commercial Lending   Sharon L. Whitaker Mortgage Lending   Senior Vice Presidents 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   Thomas B. Evans Commercial Lending   Paul Faber Commercial Lending   Albert S. Freeman III Commercial Lending   Marlene H. Gardner BSA and Security Officer   David W. Green Retail Banking Debora S. Henderson Retail Banking   Jodi L. Hoyt Human Resources   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   Andrea K. Coppola Retail Banking   Dennis J. Driscoll, Jr. Commercial Lending   Susan Fernald Retail Banking   Vicki M. Lewis Consumer Lending   Donald J. Pasini Loan Origination   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

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Board of Advisors

Benjamin K. Barton	Paul J. Linehan
Douglas S. Baxter	Robert MacNeil
William S. Berger	Elizabeth W. Maiola
William A. Bittinger	Thomas F. McCormick
Phillip C. Camp, Sr.	J. David McCrillis
Paul R. Boucher	John C. McCrillis
Ruth I. Clough	F. Graham McSwiney
J. D. Colcord	Charles Memoe
Jacqueline C. Cote	Kenneth Miller
Ernest G. Dennis, Jr.	Thomas J. Mills
William J. Faccone, Sr.	Linda L. Oldham
John W. Flynn, Jr.	Daniel P. O’Neill
John W. Flynn, Sr.	Betty H. Ramspott
James J. Ford, Jr.	Robert F. Sennott
Sheffield J. Halsey	William J. Simms
Thomas Hayes	Charles Smid
Douglas J. Homan	Fredric M. Smith
Curtis A. Jacques	Earl F. Strout
Sharon J. Jacques	James R. Therrien
Charles S. Jakiela	Stefan Timbrell
Michael D. Johnson	Janis H. Wallace
Edward T. Kerrigan	James P. Wheeler
David H. Kidder	Carolyn B. Whittaker
Janet R. Kidder	John W. Wiggins, Sr.
John J. Kiernan, Jr.	Bruce Williamson
John J. Kiernan, Sr.	Thomas B. Woodger
Victor W. Laro	Michael J. Work

Stockholder 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

Hogan & Hartson, LLP

555 Thirteenth Street, NW

Washington, DC 20004

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 777 stockholders of record on March 17, 2009. The number of stockholders does not reflect the number of persons or entities who held their stock in nominee or “street” name through various brokerage firms.

The following table sets forth the Company’s high and low prices for the common stock as reported by NASDAQ for the periods indicated:

2008	High		Low
First Quarter	$	13.400	$	11.450
Second Quarter		12.490		10.350
Third Quarter		10.706		8.510
Fourth Quarter		9.700		6.250

This Annual Report has been written by the Company’s staff.

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