Lake Sunapee Bank (LSBG) 10-Q 2011 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarter Ended March 31, 2011

Commission File Number 0-17859

NEW HAMPSHIRE THRIFT

BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

State of Delaware	02-0430695
(State of Incorporation)	(IRS Employer I.D. Number)
9 Main St., PO Box 9, Newport, NH	03773
(Address of principal executive offices)	(Zip Code)

603-863-0886

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant was submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)    Yes  ¨    No  ¨

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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” 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 Exchange Act).    Yes   ¨    No   x

The number of shares outstanding of the issuer’s common stock, $.01 par value per share, as of May 10, 2011, was 5,773,722.

NEW HAMPSHIRE THRIFT BANCSHARES, INC.

INDEX TO FORM 10-Q

		Page
PART I.	FINANCIAL INFORMATION
Item 1	Financial Statements:
	Condensed Consolidated Balance Sheets - March 31, 2011 (unaudited) and December 31, 2010		2
	Condensed Consolidated Statements of Income (unaudited) - For the Three Months Ended March 31, 2011 and 2010		3
	Condensed Consolidated Statements of Cash Flows (unaudited) - For the Three Months Ended March 31, 2011 and 2010		4
	Notes To Condensed Consolidated Financial Statements (unaudited) -		6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3	Quantitative and Qualitative Disclosures about Market Risk		30
Item 4	Controls and Procedures		31
PART II.	OTHER INFORMATION
Item 1	Legal Proceedings		32
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 3	Defaults Upon Senior Securities		32
Item 4	Removed and Reserved.		32
Item 5	Other Information		32
Item 6	Exhibits		32
	Signatures		34

Forward-Looking Statements and Factors that Could Affect Future Results

Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in the Company’s future filings with the Securities and Exchange Commission (“the SEC”), in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or Board of Directors, including those relating to products or services or the impact or expected outcome of any legal proceedings; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

• Local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact.

• Volatility and disruption in national and international financial markets.

• Government intervention in the U.S. financial system.

• Changes in the level of non-performing assets and charge-offs.

• Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.

• Adverse conditions in the securities markets that lead to impairment in the value of securities in the Company’s investment portfolio.

• Inflation, interest rate, securities market and monetary fluctuations.

• The timely development and acceptance of new products and services and perceived overall value of these products and services by users.

• Changes in consumer spending, borrowings and savings habits.

• Technological changes.

• The ability to increase market share and control expenses.

• Changes in the competitive environment among banks, financial holding companies and other financial service providers.

• The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply, including under the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act.

• The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.

• The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews.

• The Company’s success at managing the risks involved in the foregoing items.

Forward-looking statements speak only as of the date on which such statements are made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

1

PART I.

Item  1. Financial Statements

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2011 AND DECEMBER 31, 2010

	March 31, 2011			December 31, 2010
	(Unaudited)
ASSETS
Cash and due from banks	$	17,691,977		$	21,512,894
Overnight deposits		—			11,700,000
Cash and cash equivalents		17,691,977			33,212,894
Securities available-for-sale		206,130,211			195,984,515
Federal Home Loan Bank stock		7,614,600			7,614,600
Loans held-for-sale		850,000			5,887,141
Loans receivable, net		690,611,206			675,513,787
Accrued interest receivable		3,383,341			2,986,348
Premises and equipment, net		16,527,151			16,671,896
Investments in real estate		3,525,661			3,550,427
Other real estate owned		—			75,000
Goodwill and other intangible assets		28,733,264			28,843,609
Investment in partially owned Charter Holding Corp., at equity		5,062,624			4,898,869
Bank owned life insurance		12,959,937			10,358,288
Other assets		8,476,684			9,456,510
Total assets	$	1,001,566,656		$	995,053,884
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing	$	49,070,916		$	53,265,124
Interest-bearing		691,437,026			724,953,993
Total deposits		740,507,942			778,219,117
Securities sold under agreements to repurchase		14,550,214			16,165,074
Federal Home Loan Bank advances		121,661,393			75,959,361
Subordinated debentures		20,620,000			20,620,000
Accrued expenses and other liabilities		10,625,935			11,698,913
Total liabilities		907,965,484			902,662,465
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value per share: 2,500,000 shares authorized, fixed rate cumulative perpetual Series A; 10,000 shares issued and outstanding at March 31, 2011 and December 31, 2010; liquidation value $1,000 per share		100			100
Common stock, $.01 par value per share: 10,000,000 shares authorized, 6,234,051 shares issued and 5,773,772 shares outstanding at March 31, 2011 and December 31, 2010		62,341			62,341
Warrants		85,020			85,020
Paid-in capital		55,924,709			55,920,664
Retained earnings		47,146,082			46,000,732
Accumulated other comprehensive loss		(2,466,357	)		(2,526,715	)
Treasury Stock, 460,279 shares as of March 31, 2011 and December 31, 2010, at cost		(7,150,723	)		(7,150,723	)
Total stockholders’ equity		93,601,172			92,391,419
Total liabilities and stockholders’ equity	$	1,001,566,656		$	995,053,884

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

2

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Three Months Ended March 31, 2011 and 2010

(Unaudited)

	March 31, 2011			March 31, 2010
Interest and dividend income
Interest and fees on loans	$	7,965,117		$	8,092,084
Interest on debt investments:
Taxable		1,233,318			1,925,144
Dividends		9,820			4,883
Other		234,700			5,008
Total interest and dividend income		9,442,955			10,027,119
Interest expense
Interest on deposits		1,502,933			1,709,740
Interest on advances and other borrowed money		737,572			739,554
Total interest expense		2,240,505			2,449,294
Net interest and dividend income		7,202,450			7,577,825
Provision for loan losses		242,500			1,014,000
Net interest and dividend income after provision for loan losses		6,959,950			6,563,825
Noninterest income
Customer service fees		1,177,227			1,295,294
Net gain on sales of loans		319,925			319,056
Gain on sales of securities, net		440,247			216,768
Gain on sales of other real estate and property owned, net		3,837			38,935
Rental income		171,676			171,977
Income from equity interest in Charter Holding Corp.		156,002			55,152
Brokerage service income		580			612
Bank owned life insurance income		94,892			88,660
Total noninterest income		2,364,386			2,186,454
Noninterest expenses
Salaries and employee benefits		3,281,798			3,071,794
Occupancy expenses		1,037,685			1,005,111
Advertising and promotion		111,327			115,021
Depositors’ insurance		316,165			269,988
Outside services		235,070			256,342
Professional services		311,464			186,223
ATM processing fees		126,429			125,163
Supplies		83,929			93,430
Mortgage servicing income, net of amortization of mortgage servicing rights		(7,097	)		(27,940	)
Other expenses		938,574			1,007,110
Total noninterest expenses		6,435,344			6,102,242
Income before provision for income taxes		2,888,992			2,648,037
Provision for income taxes		864,008			926,541
Net income	$	2,024,984		$	1,721,496
Comprehensive income	$	2,085,342		$	2,284,009
Net income available to common stockholders	$	1,895,940		$	1,594,045
Earnings per common share, basic	$	0.33		$	0.28
Average Number of Shares, basic		5,773,772			5,771,772
Earnings per common share, assuming dilution	$	0.33		$	0.28
Average Number of Shares, assuming dilution		5,786,489			5,776,714
Dividends declared per common share	$	0.13		$	0.13

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

3

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2011 and 2010

(Unaudited)

	March 31, 2011			March 31, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,024,984		$	1,721,496
Depreciation and amortization		321,079			328,607
Amortization of fair value adjustments, net (loans, deposits and borrowings)		28,266			31,325
Amortization of securities, net		329,342			207,159
Net increase in mortgage servicing rights		(48,236	)		(44,324	)
Net decrease in loans held-for-sale		5,037,141			1,021,000
Increase in cash surrender value of life insurance		(101,649	)		(94,841	)
Amortization of intangible assets		110,345			126,109
Provision for loan losses		235,000			1,014,000
Decrease in accrued interest receivable and other assets		596,568			174,734
Net gain on sales of other real estate owned		(3,837	)		(38,935	)
Net gain on sales and calls of securities		(440,247	)		(216,768	)
Income from equity interest in Charter Holding Corp.		(156,002	)		(55,759	)
Change in deferred loan origination fees and cost, net		5,246			(32,024	)
(Decrease) increase in accrued expenses and other liabilities		(986,424	)		2,280,886
Net cash provided by operating activities		6,951,576			6,422,665
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(151,567	)		(242,827	)
Proceeds from sales and calls of securities available-for-sale		23,616,697			21,779,593
Purchases of securities available-for-sale		(33,650,936	)		(10,567,027	)
Redemptions of Federal Home Loan Bank stock		—			(194,100	)
Loan originations and principal collections, net		(15,365,931	)		(9,513,590	)
Proceeds from sale of other real estate owned		78,837			138,935
Purchase of life insurance policies		(2,500,000	)		—
Net cash (used in) provided by investing activities		(27,972,900	)		1,400,984
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits		(37,711,175	)		(31,556,063	)
Net (decrease) increase in securities sold under agreements to repurchase		(1,614,860	)		1,112,047
Net increase in advances from Federal Home Loan Bank and other borrowings		45,702,032			2,597,355
Dividends paid on preferred stock		(125,000	)		(125,000	)
Dividends paid on common stock		(750,590	)		(750,330	)
Net cash provided by (used in) financing activities		5,500,407			(28,721,991	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(15,520,917	)		(20,898,342	)
CASH AND CASH EQUIVALENTS, beginning of period		33,212,894			38,038,652
CASH AND CASH EQUIVALENTS, end of period	$	17,691,977		$	17,140,310

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

4

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)

For the Three Months Ended March 31, 2011 and 2010

(Unaudited)

	March 31, 2011		March 31, 2010
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposit accounts	$	1,671,781	$	1,724,023
Interest on advances and other borrowed money		737,589		728,073
Total interest paid	$	2,409,370	$	2,452,096
Income taxes paid	$	37,964	$	253,972

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

5

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

Note A - Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. The December 31, 2010 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of the management of New Hampshire Thrift Bancshares, Inc. (the “Company”), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

Note B - Accounting Policies

The accounting principles followed by the Company and its subsidiaries and the methods of applying these principles which materially affect the determination of financial position, results of operations or changes in financial position are consistent with those used for the year 2010.

The consolidated financial statements include the accounts of the Company, Lake Sunapee Bank, fsb (the “Bank”), Lake Sunapee Group, Inc. (“LSGI”), which owns and maintains all buildings, and Lake Sunapee Financial Services Corp. (“LSFSC”), which was formed to manage 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 ASC 810-10, “Consolidation-Overall”, these affiliates have not been included in the consolidated financial statements.

As described in recent accounting pronouncements, in June 2009 ASC 810-10 was amended by SFAS No. 166 and SFAS No. 167, which were effective for the Company in the first interim reporting period of 2010. SFAS No. 167 amended the consolidation guidance in ASC 810-10. These amendments to ASC 810-10 did not have a material impact on the Company’s financial statements.

Note C - Impact of New Accounting Standards

In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements.” The ASU requires disclosing the amounts of significant transfers in and out of Level 1 and 2 of the fair value hierarchy and describing the reasons for the transfers. The disclosures are effective for reporting periods beginning after December 15, 2009. The Company adopted ASU 2010-06 as of January 1, 2010. The required disclosures are included in Note D. Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in the Level 3 of the fair value measurement hierarchy will be required for fiscal years beginning after December 15, 2010.

In March 2010, the FASB issued ASU 2010-11, “Scope Exception Related to Embedded Credit Derivatives.” The ASU clarifies that certain embedded derivatives, such as those contained in certain securitizations, CDOs and structured notes, should be considered embedded credit derivatives subject to potential bifurcation and separate fair value accounting. The ASU allows any beneficial interest issued by a securitization vehicle to be accounted for under the fair value option at transition. At transition, the Company may elect to reclassify various debt securities (on an instrument-by-instrument basis) from held-to-maturity (HTM) or available-for-sale (AFS) to trading. The new rules became effective on July 1, 2010. This ASU did not have significant impact on the Company’s financial condition and results of operations.

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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In April 2010, the FASB issued ASU 2010-18, “Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset.” As a result of this ASU, modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments in this ASU are effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This ASU requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables by disclosing an evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. ASU 2010-20 will be effective for the Company’s consolidated financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period will be required for the Company’s consolidated financial statements that include periods beginning on or after January 1, 2011.

In December 2010, the FASB issued ASU 2010-28, “Intangibles – Goodwill and Other.” This ASU addresses when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For public entities, the amendments in this ASU are effective for fiscal years and interim periods beginning after December 15, 2010. For nonpublic entities, the amendments are effective for fiscal years and interim periods beginning after December 15, 2011.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” This ASU addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. This ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.

In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This ASU provides additional guidance or clarification to help creditors determine whether a restructuring constitutes a troubled debt restructuring. For public entities, the amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired, and should measure impairment on those receivables prospectively for the first interim or annual period beginning on or after June 15, 2011. Additional disclosures are also required under this ASU. The Company is currently evaluating the impact of this ASU. The ASU is expected to cause more loan modifications to be classified as TDRs and the Company is evaluating its modification programs and practices in light of the new ASU.

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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In April 2011, the FASB issued ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” The objective of this ASU is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. This ASU prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. Early adoption is not permitted.

Note D - Fair Value Measurements

In accordance with ASC 820-10, 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 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.

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

8

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis.

Securities Available-for-Sale. The fair value of the Company’s available-for-sale securities portfolio is estimated using Level 1 and Level 2 inputs. The Company obtains fair value measurements from an independent pricing service. For Levels 1 and 2, the fair value measurements consider (i) quoted prices in active markets for identical assets and (ii) observable data that may include dealer quotes, market spreads, cash flows, market consensus prepayment speeds, credit information, and a bond’s terms and conditions, among other factors, respectively.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Impaired Loans.Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from collateral. Collateral values are estimated using Level 2 inputs based on appraisals of similar properties obtained from a third party valuation service. Fair values are estimated using Level 3 inputs based on appraisals of similar properties obtained from a third party valuation service discounted by management based on historical losses for similar collateral.

Other Real Estate Owned.Other Real Estate Owned is reported at the fair value of the underlying collateral. Collateral values are estimated using Level 2 inputs based on appraisals of similar properties obtained from a third party valuation service.

The following summarizes assets measured at fair value at March 31, 2011.

Assets measured at fair value on a recurring basis

	Fair Value Measurements at Reporting Date Using
	March 31, 2011		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	$	206,130,211	$	501,600	$	205,628,611	$	—
	$	206,130,211	$	501,600	$	205,628,611	$	—

Liabilities measured at fair value on a recurring basis

	Fair Value Measurements at Reporting Date Using
	March 31, 2011		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	$	624,781	$	—	$	624,781	$	—
	$	624,781	$	—	$	624,781	$	—

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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Assets measured at fair value on a nonrecurring basis

	Fair Value Measurements at Reporting Date Using
	March 31, 2011		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Impaired loans	$	7,770,189	$	—	$	7,770,189	$	—
	$	7,770,189	$	—	$	7,770,189	$	—

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:

	March 31, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	17,691,977	$	17,691,977	$	33,212,894	$	33,212,894
Securities available-for-sale		206,130,211		206,130,211		195,984,515		195,984,515
Federal Home Loan Bank stock		7,614,600		7,614,600		7,614,600		7,614,600
Loans held-for-sale		850,000		854,569		5,887,141		5,926,801
Loans, net		690,611,206		695,102,000		675,513,787		680,808,000
Investment in unconsolidated subsidiaries		620,000		562,793		620,000		546,332
Accrued interest receivable		3,383,341		3,383,341		2,986,348		2,986,348
Financial liabilities:
Deposits		740,507,942		744,508,000		778,219,117		782,619,000
FHLB advances		110,961,393		123,107,000		75,959,361		76,983,000
Overnight advances		10,700,000		10,700,000
Securities sold under agreements to repurchase		14,550,214		14,550,214		16,165,074		16,165,074
Subordinated debentures		20,620,000		18,717,420		20,620,000		18,170,062
Derivatives		624,781		624,781		711,337		711,337

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 investments which are included in other assets and derivatives which are included in other liabilities.

The Company did not have any significant transfers of assets or liabilities between levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 2011.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note E – 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 at March 31, 2011 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale
Bonds and notes
U. S. Government, including agencies	$	6,000,000		245		223,890	$	5,776,355
Mortgage-backed securities		119,879,062		847,787		136,253		120,590,596
Municipal bonds		34,328,456		85,654		1,151,574		33,262,536
Other bonds and debentures		42,524,277		410,142		170,022		42,764,397
Preferred stock with maturities		3,230,850		3,877		—		3,234,727
Equity securities		484,386		20,239		3,025		501,600
Total available-for-sale	$	206,447,031		1,367,944		1,684,764	$	206,130,211

Maturities of debt securities, excluding mortgage-backed securities, classified as available-for-sale are as follows as of March 31, 2011:

	Fair Value
Municipal bonds	$	3,002,070
Other bonds and debentures		4,048,287
Total due in less than one year	$	7,050,357
Municipal bonds	$	4,460,101
Other bonds and debentures		35,159,881
Total due after one year through five years	$	39,619,982
U.S. Government, including agencies	$	5,776,355
Municipal bonds		9,101,382
Total due after five years through ten years	$	14,877,737
Municipal bonds	$	16,698,983
Other bonds and debentures		3,556,229
Preferred stock with maturities		3,234,727
Total due after ten years	$	23,489,939

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note F – Other-Than-Temporary Impairment Losses

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 March 31, 2011:

	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Bonds and notes
U.S. Government agency bonds	$	4,776,110	$	223,890	$	—	$	—	$	4,776,110	$	223,890
Mortgage-backed securities		51,141,897		136,253		—		—		51,141,897		136,253
Municipal bonds		25,515,898		1,151,574		—		—		25,515,898		1,151,574
Other bonds and debentures		20,019,636		134,677		184,655		35,345		20,204,291		170,022
Equity securities		—		—		145,200		3,025		145,200		3,025
Total temporarily impaired securities	$	101,453,541	$	1,646,394	$	329,855	$	38,370	$	101,783,396	$	1,684,764

The investments in the Company’s investment portfolio that are temporarily impaired as of March 31, 2011 consist of mortgage-backed securities issued by U.S. government sponsored enterprises and agencies, bonds issued by U.S. government sponsored enterprises and agencies, municipal and other bonds, 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, in the Company’s opinion, specific to the issuer of the security. Management has determined that the Company has the intent and the ability to hold debt securities until maturity and equity securities for the foreseeable future, and therefore, no declines are deemed to be other than temporary.

Note G – Loan Portfolio

Loans receivable consisted of the following as of the dates indicated:

	March 31, 2011			December 31, 2010
Real estate loans
Conventional	$	361,592,720		$	347,605,965
Home equity		73,246,849			74,883,507
Construction		16,522,958			19,210,102
Commercial		150,067,923			143,767,814
		601,430,450			585,467,388
Consumer loans		7,644,546			8,078,946
Commercial and municipal loans		89,037,723			89,361,109
Unamortized adjustment to fair value		1,171,207			1,202,491
Total loans		699,283,926			684,109,934
Allowance for loan losses		(9,945,722	)		(9,863,904	)
Deferred loan origination costs, net		1,273,002			1,267,757
Loans receivable, net	$	690,611,206		$	675,513,787

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth information regarding the allowance for loan and lease losses by portfolio segment as of March 31, 2011:

	Real Estate:
	Residential		Commercial		Land and Construction		Commercial		Consumer		Unallocated		Total
Allowance for loan and lease losses:
Ending balance:
Individually evaluated for impairment	$	10,856	$	445,314	$	69,151	$	111,876	$	—	$	—	$	637,197
Ending balance:
Collectively evaluated for impairment		4,176,850		2,825,757		130,349		1,790,447		83,847		19,640		9,308,525
Total allowance for loan and lease losses ending balance	$	4,187,706	$	3,271,071	$	199,500	$	1,902,323	$	83,847	$	19,640	$	9,945,722
Loans:
Ending balance:
Individually evaluated for impairment	$	1,180,152	$	6,319,057	$	140,401	$	767,776	$	—	$	—	$	8,407,386
Ending balance:
Collectively evaluated for impairment		434,830,624		143,748,866		16,382,557		88,269,947		7,644,546		—		690,876,540
Total loans ending balance	$	436,010,776	$	150,067,923	$	16,522,958	$	89,037,723	$	7,644,546	$	—	$	699,283,926

The following table sets forth information regarding nonaccrual loans and past-due loans as of March 31, 2011:

	30-59 Days		60-89 Days		Greater Than 90 Days		Total Past Due		Recorded Investments Nonaccrual Loans
Real estate:
Conventional	$	3,167,749	$	978,733	$	782,445	$	4,928,926	$	2,019,003
Commercial		885,496		—		1,603,893		2,489,389		6,319,057
Home equity		426,021		160,375		—		586,396		—
Land and construction		61,529		—		140,401		201,930		140,401
Commercial		85,099		—		91,261		176,340		767,776
Consumer		64,270		—		—		64,270		—
Total	$	4,690,163	$	1,139,108	$	2,618,000	$	8,447,271	$	9,246,237

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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of March 31, 2011:

	Recorded Investment		Unpaid Principal Balance		Related Allowance For Credit Losses		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate:
Conventional	$	647,345	$	647,345	$	—	$	649,284	$	7,502
Commercial		3,589,685		3,589,685		—		4,951,403		93,978
Commercial		247,173		247,173		—		123,587		2,597
Total impaired with no related allowance:	$	4,484,203	$	4,484,203	$	—	$	5,724,274	$	104,077
With an allowance recorded:
Real estate:
Conventional	$	532,807	$	532,807	$	10,856	$	536,678	$	5,342
Commercial		2,729,372		2,729,372		445,314		2,137,983		23,879
Land		140,401		140,401		69,151		140,401		—
Commercial		520,603		520,603		111,876		644,190		11,394
Total impaired with an allowance recorded:	$	3,923,183	$	3,923,183	$	637,197	$	3,459,252	$	40,615
Total:
Real estate:
Conventional	$	1,180,152	$	1,180,152	$	10,856	$	1,185,962	$	12,844
Commercial		6,319,057		6,319,057		445,314		7,089,386		117,857
Land		140,401		140,401		69,151		140,401		—
Commercial		767,776		767,776		111,876		767,777		13,991
Total impaired loans:	$	8,407,386	$	8,407,386	$	637,197	$	9,183,526	$	144,692

The following table presents the Company’s loans by risk ratings as of March 31, 2011:

	Real Estate
	Residential		Commercial		Land and Construction		Commercial		Consumer		Total
Grade:
Pass	$	433,991,773	$	125,567,558	$	16,382,557	$	87,456,427	$	7,644,546	$	671,042,861
Special Mention		—		9,456,483		—		1,023,385		—		10,479,868
Substandard		2,019,003		15,043,882		140,401		557,911		—		17,761,197
Total	$	436,010,776	$	150,067,923	$	16,522,958	$	89,037,723	$	7,644,546	$	699,283,926

Credit Quality Information

The Company utilizes a nine grade internal loan rating system for commercial real estate, construction and commercial loans as follows:

Loans rated 10-35: Loans in these categories are considered “pass” rated loans with low to average risk.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Loans rated 40: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 50: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 60: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 70: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans over $250,000.

Note H – Stock-based Compensation

At March 31, 2011, the Company had two stock-based employee compensation plans. The Company accounts for those plans under ASC 718-10, “Compensation-Stock Compensation-Overall.” No stock-based employee compensation cost was recognized for the Company’s fixed stock option plans during the quarters ended March 31, 2011 or March 31, 2010.

Note I - Pension Benefits

The following summarizes the net periodic pension cost for the three months ended March 31:

	2011			2010
Service cost	$	—		$	—
Interest cost		81,803			83,148
Expected return on plan assets		(125,501	)		(121,308	)
Amortization of prior service cost		—			—
Amortization of unrecognized net loss		51,448			44,408
Net periodic pension cost	$	7,750		$	6,248

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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Item 2 Management’s Discussion and Analysis

General

New Hampshire Thrift Bancshares, Inc. (the “Company”), a Delaware holding company organized on July 5, 1989, is the parent company of Lake Sunapee Bank, fsb (the “Bank”), a federally-chartered savings bank organized in 1868. The Bank is a member of the Federal Deposit Insurance Corporation (“FDIC”) and its deposits are insured by the FDIC. The Bank is regulated by the Office of Thrift Supervision (“OTS”).

The Company’s profitability is derived primarily from the Bank. The Bank’s earnings in turn are generated from the net income from the earnings on its loan and investment portfolios less the cost of its deposit accounts and borrowings. These core revenues are supplemented by gains on sales of loans originated for sale, retail banking service fees, gains on the sale of investment securities and brokerage fees. The Bank passes on its earnings to the Company to the extent allowed by OTS regulations.

Overview

• Total assets increased $6,512,772, or 0.65%, to $1,001,566,656 at March 31, 2011 from $995,053,884 at December 31, 2010.

• Net loans increased $15,097,419, or 2.23%, to $690,611,206 at March 31, 2011 from $675,513,787 at December 31, 2010.

• As a percentage of total loans, non-performing loans decreased from 1.46% at December 31, 2010 to 1.22% at March 31, 2011. As a percentage of assets, non-performing loans decreased from 1.01% at December 31, 2010 to 0.86% at March 31, 2011.

• The Bank originated $68,955,726 in loans during the three months ended March 31, 2011, compared to $65,849,984 for the same period in 2010.

• The Bank’s loan servicing portfolio decreased to $369,051,336 at March 31, 2011 from $370,331,523 at December 31, 2010, a decrease of $1,280,187, or 0.35%.

• Total deposits decreased $37,711,175, or 4.85%, to $740,507,942 at March 31, 2011 from $778,219,117 at December 31, 2010.

• Net interest and dividend income for the quarter ended March 31, 2011 decreased $375,375, or 4.95%, to $7,202,450 from $7,577,825 for the same period in 2010.

• The Company earned $2,024,984, or $0.33 per common share, assuming dilution, for the quarter ended March 31, 2011, compared to $1,721,496, or $0.28 per common share, assuming dilution, for the quarter ended March 31, 2010. Net income available to common stockholders was $1,895,940 for the quarter ended March 31, 2011, compared to $1,594,045 for the same period in 2010.

• The Company’s returns on average assets and average equity for the three months ended March 31, 2011 were 0.80% and 8.91%, respectively, compared to 0.71% and 7.74%, respectively, for the same period in 2010.

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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Economic Conditions

The economic outlook remains cautious as the national unemployment rate remains high but is expected to continue to decrease gradually. Overall, economic conditions are expected to improve at a slow pace. Nationally, concerns remain regarding discretionary consumer spending. Consumers may have more of a willingness to spend, but they continue to be encumbered by debt. The impact of higher debt levels and lower incomes is expected to continue to restrict consumer spending. Unemployment affects all lending categories through its impact on consumer spending, commercial cash flows and capacities for debt repayment. In addition, as general market conditions improve, a certain sector of deposits historically returns to the investment market leaving the security of banks behind.

The states of New Hampshire and Vermont benefit from unemployment rates that were within the lowest 10% across the country at March 31, 2011. The seasonally adjusted unemployment rate in New Hampshire was 5.20% in March 2011, remaining well below the 8.80% seasonally adjusted National rate. The March 2011 rate in New Hampshire decreased 18.75% from 6.40% in March 2010, while the National rate decreased 9.28% during the same period. In March 2011, Vermont’s seasonally adjusted unemployment rate was 5.40%, a decrease of 18.18% from the rate of 6.60% in March 2010.

The AP Economic Stress Index (AP-ESI) measures the relative impact of the recession and its recovery by integrating the cumulative effect of three economic indicators: unemployment, foreclosures, and bankruptcy. Higher stress indices indicate a worsening economy; while decreases indicate an improving economy. The March 2011 AP-ESI for New Hampshire was 6.85%, or 169 bps lower than March 2010, a decrease of 24.67%. The March 2011 AP-ESI for Vermont was 6.51%, or 155 bps lower than March 2010, a decrease of 19.23%. Foreclosures and bankruptcies in both states measured through March 2011 were down slightly year-over-year.

On the residential real estate front, New Hampshire home sales statewide were down 3.28% year-to-date for the three months ended March 31, 2011 compared to the same period in 2010 while the median home price decreased 5.03%. There were 15.73% fewer New Hampshire listings on the market during the three months ended March 31, 2011 compared to the same period in 2010, and the time on the market increased 16.92% to 152 days for the same year-to-date period comparison. Vermont home sales statewide were up 3.29% year-to-date for the three months ended March 31, 2011 compared to the same period in 2010 while the median home price increased 2.80% during the same period. There were 21.74% fewer Vermont listings on the market during the three months ended March 31, 2011 compared to the same period in 2010, while the time on the market increased 12.29% to 201 days for the same year-to-date period comparison.

Based on the aforementioned indicators and statistics, the Company expects to continue to have solid performance within the residential mortgage sector of its loan portfolio in 2011 while remaining cautious within the commercial real estate sector and commercial and industrial lending. Additionally, the Company remains watchful of consumer behavior regarding spending, saving and debt-reduction. Management expects these economic factors to continue to impact lending, deposits and net interest income during 2011. Management continually assesses current and changing economic conditions and their impacts on the financial instruments of the institution including, but not limited to, the collectability of loans, delinquencies, asset quality, funding, liquidity, and specific and general earnings impacts.

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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 under the heading “Allowance and Provision for Loan Losses” starting on page 20 of this report.

Income Taxes

The Company must estimate income tax expense for each period for which a statement of operations is presented. This involves estimating the Company’s actual current tax exposure as well as assessing temporary differences resulting from differing treatment of items, such as timing of the deduction of expenses, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s consolidated balance sheets. The Company must also assess the likelihood that any deferred tax assets will be recovered from future taxable income and to the extent that recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. At March 31, 2011, 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.

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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 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 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%.

Financial Condition and Results of Operations

Comparison of Financial Condition at March 31, 2011 and December 31, 2010

For the quarter ended March 31, 2011, total assets increased $6,512,772, or 0.65%, from $995,053,884 at December 31, 2010 to $1,001,566,656 at March 31, 2011 due primarily to increases in securities available-for-sale and net loans receivable.

Securities available-for-sale increased $10,145,696 to $206,130,211 at March 31, 2011, compared to $195,984,515 as of December 31, 2010. The Bank’s net unrealized loss (after tax) on its investment portfolio was $191,327 at March 31, 2011, compared to an unrealized loss (after tax) of $191,661 at December 31, 2010. The investments in the Bank’s securities portfolio that were temporarily impaired as of March 31, 2011 consisted of debt securities issued by U.S. government corporations and agencies, municipal bonds, corporate debt with strong credit ratings and preferred stock issued by corporations and government sponsored enterprises with strong credit ratings and stable credit outlooks. The unrealized losses were primarily attributable to changes in market interest rates and recent uncertainties in the financial markets. Management does not intend to sell these securities in the near term. Since the Bank 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.

Net loans increased $15,097,419, or 2.23%, from $675,513,787 at December 31, 2010 to $690,611,206, at March 31, 2011. For the quarter ended March 31, 2011, the Bank originated $69.0 million in loans compared

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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

to $65.8 million in loans for the quarter ended March 31, 2010. The increase of loans held in portfolio was primarily due to increases in residential mortgages and commercial real estate loans. At March 31, 2011, the Bank’s mortgage servicing loan portfolio amounted to $369,051,336 compared to $370,331,523 at December 31, 2010. The Bank expects to continue to sell long-term fixed-rate loans into the secondary market in order to manage interest rate risk. Market risk exposure during the production cycle is managed through the use of secondary market forward commitments. At March 31, 2011, adjustable-rate mortgages comprised approximately 68.0% of the Bank’s real estate mortgage loan portfolio. This is consistent with prior periods.

Real estate owned (“OREO”) and property acquired in settlement of loans amounted was zero as of March 31, 2011, compared to $75,000 as of December 31, 2010.

Goodwill and other intangible assets amounted to $28,733,264, or 2.87% of total assets, as of March 31, 2011, compared to $28,843,609, or 2.90% of total assets, as of December 31, 2010, due to normal amortization of core deposit intangible assets.

Deposits decreased $37,711,175 to $740,507,942 at March 31, 2011, from $778,219,117 at year-end December 31, 2010. Non-interest bearing deposit accounts decreased $4,194,208, or 7.87%, and interest-bearing deposit accounts decreased $33,516,967, or 4.62%, over the same period. The Bank’s transaction account balances are influenced by the seasonal migration of account owners and balances in these accounts and typically decrease during the first quarter. The decrease for the quarter ended March 31, 2011 was 4.85%, compared to a decrease of 4.49% for the same period in 2010.

Securities sold under agreements to repurchase decreased $1,614,860, or 9.99%, to $14,550,214 at March 31, 2011 from $16,165,074 at December 31, 2010, due to normal transactional fluctuations. Repurchase agreements are collateralized by some of the Bank’s U.S. government and agency investment securities.

The Bank maintained balances of $121,661,393 in advances from the Federal Home Loan Bank of Boston (“FHLBB”) at March 31, 2011, an increase of $45,702,032 from $75,959,361 at December 31, 2010.

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 of the allowance for loan losses at least quarterly by preparing an analysis applying loss factors to outstanding loans by type. This analysis 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 ASC 310-10-35, “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality-Subsequent Measurement.” In accordance with ASC 310-10-35, 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 is not collectible in accordance with the contractual terms of the loan. Measurement of impairment can be based on the present value of expected cash flows discounted at the loan’s 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.

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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 with results reported directly to the Audit Committee of the Bank’s Board of Directors.

The allowance for loan losses (not including allowance for losses from the overdraft program described below) at March 31, 2011 was $9,931,708, compared to $9,841,030 at December 31, 2010. At approximately $9.9 million, the allowance for loan losses represents 1.42% of total loans, down from 1.44% at December 31, 2010. Total non-performing assets at March 31, 2011 were approximately $8.6 million, representing 86.68% of the allowance for loan losses. Modestly improving economic and market conditions, coupled with internal risk rating changes, resulted in the Bank adding $250,000 to the allowance for loan and lease losses during the three months ended March 31, 2011 compared to $1,000,000 for the same period in 2010. Loan charge-offs (excluding the overdraft program) were $167,214 during the three month period ended March 31, 2011 compared to $130,282 for the same period in 2010. Recoveries were $7,892 during the three month period ended March 31, 2011, compared to $8,211 for the same period in 2010. This activity resulted in net charge-offs of $159,322 for the three month period ended March 31, 2011, compared to $122,071 for the same period in 2010. One-to-four family residential mortgages, home equity loans and consumer loans accounted for 6%, 82%, and 12%, respectively, of the amounts charged-off during the three month period ended March 31, 2011. The overall increase is not specific to any individual credit.

The effects of national economic issues continue to be felt in the Bank’s local communities and the national economic outlook as well as portfolio performance and charge-offs influenced the Bank’s decision to maintain its allowance for loan losses near $10.0 million. The provisions made in 2011 reflect loan loss experience and changes in economic conditions that affect the risk of loss inherent in the loan portfolio. Management anticipates making additional provisions during the remainder of 2011 to maintain the allowance at an adequate level.

In addition to the allowance for loan losses, there is an allowance for losses from the fee for service overdraft program. The Bank’s policy is 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. At March 31, 2011, the overdraft allowance was $14,016, compared to $22,874 at year-end 2010. A benefit to provisions for overdraft losses was recorded in the amount of $7,500 during the three month period ended March 31, 2011, compared to an expense of $14,000 for the same period during 2010. Ongoing provisions are anticipated as overdraft charge-offs continue and the Bank adheres to its policy to maintain an allowance for overdraft losses equal to 100% of the aggregate negative balance of accounts remaining negative for 30 days or more.

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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of activity in the allowance for loan losses account for the quarters ended March 31:

	2011			2010
Balance, beginning of year	$	9,841,030		$	9,494,007
Charge-offs and writedowns:
Residential real estate		(147,442	)		(110,071	)
Consumer loans		(19,772	)		(16,317	)
Commercial loans		—			(3,894	)
Total charged-off loans		(167,214	)		(130,282	)
Recoveries
Residential real estate		4,986			5,034
Consumer loans		1,978			721
Commercial loans		928			2,456
Total recoveries		7,892			8,211
Net charge-offs		(159,322	)		(122,071	)
Provision for loan loss charged to income		250,000			1,000,000
Ending Balance	$	9,931,708		$	10,371,936

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

	2011			2010
Beginning Balance	$	22,874		$	24,625
Overdraft Charge-offs		(68,287	)		(75,367	)
Overdraft Recoveries		66,929			61,997
Net Overdraft Losses		(1,360	)		(13,370	)
(Benefit) Provision for Overdrafts		(7,500	)		14,000
Ending Balance	$	14,016		$	25,255

The following table sets forth the allocation of the loan loss allowance (excluding overdraft allowances), the percentage of allowance to the total allowance, and the percentage of loans in each category to total loans as of the dates indicated ($ in thousands):

	March 31, 2011						December 31, 2010
Real estate loans
Residential, 1-4 family and home equity loans	$	4,186	42	%	64	%	$	3,887	40	%	64	%
Residential, 5 or more units		131	1	%	2	%		142	1	%	2	%
Commercial		2,832	29	%	19	%		2,683	27	%	19	%
Land and Construction		282	3	%	3	%		575	6	%	3	%
Collateral and consumer loans		70	1	%	1	%		70	1	%	1	%
Commercial and municipal loans		1,794	18	%	11	%		2,004	20	%	11	%
Impaired loans		637	6	%	—			480	5	%	—
Allowance	$	9,932	100	%	100	%	$	9,841	100	%	100	%
Allowance as a percentage of total loans			1.42	%					1.44	%
Non-performing loans as a percentage of allowance			86.68	%					101.86	%

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Classified loans include non-performing loans and performing loans that have been adversely classified, net of specific reserves. Total classified loans at carrying value (substandard loans less specific allowance) were $18,198,663 at March 31, 2011, compared to $18,998,657 at December 31, 2010. In addition, the Bank had no OREO at March 31, 2011, compared to $75,000 at December 31, 2010. During the three month period ended March 31, 2011, the Bank sold one property which was classified as OREO at December 31, 2010. Losses are incurred in the liquidation process and the Bank’s loss experience suggests it is prudent for the Bank to continue funding provisions to build the allowance for loan losses. While, for the most part, quantifiable loss amounts have not been identified with individual credits, the Bank anticipates more charge-offs as loan issues are resolved. The impaired loans meet the criteria established under ASC 310-10-35. Thirteen loans considered to be impaired loans at March 31, 2011 have specific allowances identified and assigned. The thirteen loans are secured by real estate, business assets or a combination of both. At March 31, 2011, the allowance included $637,197 allocated to impaired loans. The portion of the allowance allocated to impaired loans at December 31, 2010 was $479,960.

Loans over 90 days past due were $2,618,000 at March 31, 2011, compared to $2,106,659 at December 31, 2010. Loans 30 to 89 days past due were $5,829,271 at March 31, 2011, compared to $8,955,612 at December 31, 2010. As a percentage of assets, non-performing loans decreased from 1.00% at December 31, 2010 to 0.86% at March 31, 2011, and, as a percentage of total loans, decreased from 1.46% at December 31, 2010 to 1.22% at March 31, 2011.

Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention do not reflect trends or uncertainties which the Bank reasonably expects will materially impact future operating results, liquidity, or capital resources. For the period ended March 31, 2011, all loans about which management possesses information regarding possible borrower credit problems and doubts as to borrowers’ ability to comply with present loan repayment terms or to repay a loan through liquidation of collateral are included in the tables below or discussed herein.

At March 31, 2011, the Bank had twenty loans with net carrying values of $7,413,182 considered to be “troubled debt restructurings” as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors.” At March 31, 2011, the majority of “troubled debt restructurings” were performing under contractual terms and are included in impaired loans. Of the loans classified as troubled debt restructured, four were more than thirty days past due at March 31, 2011. The balances of these past due loans were $1.9 million and the loans have assigned specific allowances of $303,798. At December 31, 2010, the Bank had twenty-one loans with net carrying values of $7,970,889 considered to be “troubled debt restructurings.”

At March 31, 2011 there were no other loans excluded from the tables below or not discussed above where known information about possible credit problems of the borrowers caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in disclosure of such loans in the future.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table shows the breakdown of the carrying value of non-performing assets and non-performing assets (dollars in thousands) as a percentage of the total allowance and total assets for the periods indicated:

	March 31, 2011								December 31, 2010
	Carrying Value		Percentage of Total Allowance			Percentage of Total Assets			Carrying Value		Percentage of Total Allowance			Percentage of Total Assets
90 day delinquent loans(1)	$	865		8.71	%		0.09	%	$	600		6.10	%		0.06	%
Non-accrual impaired loans		331		3.33	%		0.03	%		1,378		14.00	%		0.14	%
Trouble debt restructured		7,413		74.64	%		0.74	%		7,971		81.00	%		0.80	%
Other real estate owned		—		—			—			75		0.76	%		0.01	%
Total non-performing assets	$	8,609		86.68	%		0.86	%	$	10,024		101.86	%		1.01	%

⁽¹⁾  All loans 90 days or more delinquent are placed on non-accruing status.

The following table sets forth the carrying value breakdown of non-performing assets at the dates indicated:

	March 31, 2011		December 31, 2010
Nonaccrual loans(1)	$	8,609,040	$	9,948,311
Real estate and chattel property owned		—		75,000
Total nonperforming assets	$	8,609,040	$	10,023,311

⁽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 the dates indicated:

	March 31, 2011		December 31, 2010
Real estate loans
Conventional	$	2,019,003	$	1,645,254
Commercial		6,319,057		7,448,570
Home equity		—		119,999
Land and construction		140,401		140,401
Consumer loans		—		18,074
Commercial and municipal loans		767,776		1,047,628
Total	$	9,246,237	$	10,419,926

⁽¹⁾  All loans 90 days or more delinquent are placed on a nonaccruing status.

The Bank believes the allowance for loan losses is at a level sufficient to cover inherent losses, given the current level of risk in the loan portfolio. At the same time, the Bank recognizes that the determination of future loss potential is intrinsically uncertain. Future adjustments to the allowance may be necessary if economic, real estate, and other conditions differ substantially from the current operating environment and result in increased levels of non-performing loans and substantial differences between estimated and actual losses. Adjustments to the allowance are charged to income through the provision for loan losses.

Liquidity and Capital Resources

The Bank is required to maintain sufficient liquidity for safe and sound operations. At March 31, 2011, the Bank’s liquidity was sufficient to cover the Bank’s anticipated needs for funding new loan commitments of approximately $25.9 million. The Bank’s source of funds is derived primarily from net deposit inflows, loan amortizations, principal pay downs from loans, sold loan proceeds, and advances from the FHLB. At March 31, 2011, the Bank had approximately $139.4 million in additional borrowing capacity from the FHLB.

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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

At March 31, 2011, the Company’s stockholders’ equity totaled $93,601,172, compared to $92,391,419 at December 31, 2010. The increase of $1,209,753 reflects net income of $2,024,984, the payout of $750,590 in common stock dividends, the payout of $125,000 in preferred stock dividends, and other comprehensive income in the amount of $60,359.

On June 12, 2007, the Company reactivated a previously adopted but incomplete stock repurchase program to repurchase up to an additional 253,776 shares of common stock. At March 31, 2011, 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 common share, return on average assets and on average equity, which are 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. During the three months ended March 31, 2011, no shares were repurchased. As a participant in the Capital Purchase Program established by the U.S. Department of the Treasury (“Treasury”) under the Emergency Economic Stabilization Act of 2009 (the “EESA”), the Company is prohibited from repurchasing shares of its common stock, except in certain circumstances, prior to January 16, 2012 without the consent of the Treasury.

At March 31, 2011, the Company had funds available in the amount of $3,605,760. Total cash needs for the Company for the remainder of 2011 are estimated to be approximately $3.5 million with $2.3 million projected to be used to pay dividends on the Company’s common stock, $730,000 million to pay interest on the Company’s capital securities, $375,000 to pay dividends on the Company’s Series A Preferred Stock (as defined below), and approximately $100,000 for ordinary operating expense. The Bank pays dividends to the Company as its sole stockholder, within guidelines set forth by the OTS. Since the Bank is well capitalized and has capital in excess of regulatory requirements, it is anticipated that funds will be available to cover additional Company cash requirements for 2011, if needed, as long as earnings at the Bank are sufficient to maintain adequate Tier I capital.

For the three months ended March 31, 2011, net cash provided by operating activities increased $528,911 to $6,951,576, compared to $6,422,665 for the same period in 2010. The change in loans held for sale increased $4,016,141 for the three months ended March 31, 2011, compared to the same period in 2010. Net gain on sales and calls of securities increased $223,479 for the three months ended March 31, 2011 compared to the same period in 2010, as a result of the sale of approximately of $15.4 million of securities during the first quarter of 2011, compared to sales of approximately $10.0 million of securities during the same period in 2010. The provision for loan losses decreased $779,000 for the three months ended March 31, 2011, compared to the same period in 2010. The change in accrued interest receivable and other assets increased $421,834 while the change in accrued expenses and liabilities decreased $3,267,309.

Net cash used in investing activities amounted to $27,972,900 for the three months ended March 31, 2011, compared to net cash provided by investing activities of $1,400,984 for the same period in 2010, a change of $29,373,884. The increase in cash used in net securities activities of $21,052,705 was in addition to a net increase of cash used in loan originations and principal collections, net, of $5,852,341. Additionally, $2,500,000 of cash was used in the purchase of life insurance policies during the quarter ended March 31, 2011, compared to no cash transactions in the same period in 2010.

For the three months ended March 31, 2011, net cash flows provided by financing activities increased $34,222,398 to $5,500,407 compared to net cash used in financing activities of $28,721,991 for the three months ended March 31, 2010. The Bank experienced a net increase of $8,882,019 in cash used in deposits and securities sold under agreements to repurchase and an increase in cash provided by FHLBB advances of $43,104,677.

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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Bank expects to be able to fund loan demand and other investing activities during 2011 by continuing to utilize the FHLB’s advance program and cash flows from securities and loans. On March 31, 2011, approximately $25.9 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, the Company entered into a Letter Agreement with the Treasury pursuant to which the Company issued and sold to the Treasury 10,000 shares of the Company’s Fixed-Rate Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per preferred share, having a liquidation preference of $1,000 per preferred 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 common share (the “Common Stock”), at an initial exercise price of $8.14 per common 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 are treated as Tier 1 capital for regulatory purposes. The Warrant is immediately exercisable.

Cumulative dividends on the Series A Preferred Stock 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.

Banks are required to maintain tangible capital, core leverage capital, and total risk based capital of 1.50%, 4.00%, and 8.00%, respectively. As of March 31, 2011, the Bank’s ratios were 8.45%, 8.45%, and 12.69%, respectively, well in excess of the regulators’ requirements.

Book value per common share was $14.47 at March 31, 2011, compared to $14.26 per common share at December 31, 2010. Tangible book value per common share was $9.50 at March 31, 2011. Tangible book value per common share is a non-GAAP financial measure calculated using GAAP amounts. Tangible book value per common share is calculated by dividing tangible common equity by the total number of shares outstanding at a point in time. Tangible common equity is calculated by excluding the balance of goodwill, other intangible assets and preferred stock from the calculation of shareholder’s equity. The Company believes that tangible book value per common share provides information to investors that is useful in understanding its financial condition. Because not all companies use the same calculation of tangible common equity and tangible book value per common share, this presentation may not be comparable to other similarly titled measures calculated by other companies.

26

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of these non-GAAP financial measures is provided below:

	March 31, 2011		December 31, 2010
Shareholders’ equity	$	93,601,172	$	92,391,419
Less goodwill		27,293,470		27,293,470
Less other intangible assets		1,439,794		1,550,139
Less preferred stock		10,000,000		10,000,000
Tangible common equity	$	54,867,908	$	53,547,810
Ending common shares outstanding		5,773,772		5,773,772
Tangible book value per common share	$	9.50	$	9.27

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 cumulative interest-rate gap at March 31, 2011 was positive 0.99%, compared to the December 31, 2010 gap of positive 0.60%. At March 31, 2011, repricing liabilities over the next twelve months were $8.9 million less than repricing assets, compared to repricing liabilities that were $5.3 million less than repricing assets at December 31, 2010. 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. At 0.99%, the assets and liabilities scheduled to reprice over the twelve months following March 31, 2011 are fairly well-matched.

The Bank continues to offer adjustable-rate mortgages, which reprice at one, three, five and seven-year intervals. In addition, the Bank sells most fixed-rate mortgages into the secondary market in order to minimize interest rate risk and provide liquidity.

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

27

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

models provide an indication of the Bank’s interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market rates on the Bank’s net interest income and will likely differ from actual results.

The following table sets forth the Bank’s NPV at December 31, 2010, as calculated by the OTS:

	Net Portfolio Value							NPV as % of PV Assets
Change in Rates	$ Amount		$ Change		% Change			NPV Ratio			Change
	($ in thousands)
+300 bp	$	69,323	$	–38,808		–36	%		7.28	%		–352bp
+200 bp		85,589		–22,542		–21	%		8.81	%		–199bp
+100 bp		99,434		–8,697		–8	%		10.05	%		–75bp
+50 bp		104,808		–3,323		–3	%		10.52	%		–28bp
0 bp		108,131		—		—			10.80	%		—
–50 bp		110,211		2,080		+2	%		10.96	%		+16bp
–100 bp		115,505		7,374		+7	%		11.41	%		+61bp

Comparison of the Operating Results for the Three Months Ended March 31, 2011 and March 31, 2010

Consolidated net income for the three months ended March 31, 2011 was $2,024,984, or $0.33 per common share (assuming dilution), compared to $1,724,496, or $0.28 per common share (assuming dilution), for the same period in 2010, an increase of $300,488, or 17.42%. The Bank’s net interest margin decreased to 3.18% at March 31, 2011 from 3.53% at March 31, 2010. The Company’s return on average assets and equity for the three months ended March 31, 2011 were 0.80% and 8.91%, respectively, compared to 0.71% and 7.74%, respectively, for the same period in 2010.

Net interest and dividend income decreased $375,375, or 4.95%, to $7,202,450 for the quarter ended March 31, 2011 from $7,577,825 for the quarter ended March 31, 2010 primarily as a result of the overall decline in net interest margins.

Interest and fees on loans decreased $126,967, or 1.57%, for the three-month period ended March 31, 2011 to $7,965,117 from $8,092,084 at March 31, 2010 due primarily to loans repricing. Interest on investments decreased $457,197, or 23.63%, for the three-month period ended March 31, 2011 due primarily to an increased position in tax-exempt investments which generally results in lower yields that are offset by tax benefits.

For the three months ended March 31, 2011, total interest expense decreased $208,789, or 8.52%, to $2,240,505 from $2,449,294 for the same period in 2010. Interest on deposits decreased $206,807, or 12.10%, due to the decline in short-term interest rates. Interest on advances and other borrowed money decreased $1,982, or 0.27%, to $737,572 from $739,554 at March 31, 2010 as the Bank’s cost of funds decreased despite increases in the outstanding balance of these borrowings.

The allowance for loan losses (not including overdraft allowances) was $9,931,708 on March 31, 2011 compared to $10,371,936 on March 31, 2010. The allowance for loan losses represented 1.42% and 1.65% of total loans at March 31, 2011 and March 31, 2010, respectively. The provision for loan losses was $250,000 during the first quarter of 2011 and $1,000,000 during the same period in 2010. The Bank made adjustments to the provisions for overdraft losses in the first quarters of 2011 and 2010, recording a benefit of $7,500 and a provision of $14,000, respectively.

28

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended March 31, 2011, total noninterest income increased $177,932, or 8.14%, to $2,364,386 from $2,186,454 for the three months ended March 31, 2010.

For the three-month period ended March 31, 2011:

• Customer service fees decreased $118,067, or 9.12%, to $1,177,227 from $1,295,294 for the three months ended March 31, 2010. This decrease includes a decrease in fees collected for overdrawn items of $139,860 for the three months ended March 31, 2011, compared the same period in 2010.

• Net gain on sales of loans increased $869, or 0.27%, compared to the same period in 2010.

• Gain on sales of securities, net increased $223,479 from $216,768 for the three months ended March 31, 2010 to $440,247 for the three months ended March 31, 2011. This reflects the recognition of gains on the sale of approximately $15.4 million of securities sold during the three months ended March 31, 2011, compared to gains recognized in connection with the sale of approximately $10.0 million of securities during the same period in 2010.

• Gain on sales of other real estate and property owned, net decreased $35,098 from $38,935 for the three months ended March 31, 2010 to $3,837 for the three months ended March 31, 2011. This reflects the recognition of gains on the sale of one property during the quarter ended March 31, 2011, compared to the recognition of gains on one real estate property and one other property owned sold during the same period in 2010.

• Income from equity interest in Charter Holding Corp. increased $100,850, or 182.86%, to $156,002 from $55,152 for the quarter ended March 31, 2010 due primarily to the Company’s increased investment interest in Charter Holding Corp. as of March 31, 2011, compared to its investment at March 31, 2010.

• Brokerage service income decreased $32 to $580 for the quarter ended March 31, 2011, compared to the same period in 2010.

• Bank owned life insurance income increased $6,232, or 7.03%, to $94,892 from $88,660 for the three months ended March 31, 2010, due to changes in the interest rates earned on the underlying insurance policies and an increase of $2.5 million of Bank owned life insurance during the first quarter of 2011.

Total noninterest expenses increased $333,102, or 5.46%, to $6,435,344 for the three months ended March 31, 2011, compared to $6,102,242 for the three months ended March 31, 2010.

For the three-month period ended March 31, 2011:

• Salaries and employee benefits increased $210,004, or 6.84%, compared to the three months ended March 31, 2010. Gross salaries and benefits paid, which exclude the deferral of expenses associated with the origination of loans, increased $305,687, or 9.16%, from $3,336,186 for the three months ended March 31, 2010 to $3,641,873 for the three months ended March 31, 2011. The deferral of expenses in conjunction with the origination of loans increased $95,683, or 36.19%, to $360,075 from $264,392 for the same period in 2010. This increase was due to increased loan volumes originated during the first three months of 2011 compared to the same period in 2010 coupled with increased costs of origination.

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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

• Occupancy expense increased $32,574, or 3.24%, to $1,037,685 from $1,005,111 for the three months ended March 31, 2010 due primarily to increases in seasonal fuel and snow removal expenses.

• Advertising and promotion decreased $3,694, or 3.21%, to $111,327 from $115,021 for the same period in 2010.

• Depositors’ insurance increased $46,177, or 17.10%, to $316,165 at March 31, 2011, compared to $269,988 at March 31, 2010, due primarily to an increase of deposits subject to assessment year-over-year.

• Outside services decreased $21,272, or 8.30%, to $235,070 compared to $256,342 for the three months ended March 31, 2010, reflecting decreases in expenses associated with overdraft protection programs partially offset by increases in internet banking and core processing.

• Professional services increased $125,241, or 67.25%, to $311,464 compared to $186,223 for the three months ended March 31, 2010. Included in this amount are increases in expenses associated with consulting fees of $82,793 related primarily to consulting reviews of the commercial and residential loan portfolios and legal fees of $26,277.

• ATM processing fees decreased $1,266, or 1.01%, to $126,429, compared to $125,163 for the three months ended March 31, 2010.

• Supplies decreased $9,501, or 10.17%, to $83,929 compared to $93,430 for the three months ended March 31, 2010, due to directed efforts to reduce supply-related expenditures.

• Income in excess of mortgage servicing amortization decreased $20,843 from a benefit of $27,940 for the three months ended March 31, 2010 to a benefit of $7,097 in 2011. This reflects an increase of $14,277 of servicing income offset by an increase of $35,120 amortization expense for the three months ended March 31, 2011, compared to the same period in 2010.

• Other expenses decreased $68,536, or 6.81%, to $938,574 from $1,007,110 for the three months ended March 31, 2010. This includes decreases in Delaware franchise tax, New Hampshire Business Enterprise Tax, and core deposit intangible amortization.

Off Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide the information required by this Item.

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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Item 4.

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, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is (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 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.

31

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Part II.

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

OTHER INFORMATION

Item 1. Legal Proceedings

There is no material litigation pending to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject, other than ordinary routine litigation incidental to business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. [Removed and Reserved]

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.	Description
3.1.1	Certificate of Incorporation of NHTB (as amended) (filed as Exhibit 3.1.1 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Commission on March 25, 2011 and incorporated herein by reference).
3.1.2	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	Amended and Restated Bylaws of NHTB (as amended) (filed as Exhibit 3.2 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Commission on March 25, 2011 and incorporated herein by reference).
4.1	Stock Certificate of NHTB (filed as an 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).

32

Exhibit No.	Description
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).
31.1	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
31.2	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
32.1	Section 1350 Certification of the Chief Executive Officer.
32.2	Section 1350 Certification of the Chief Financial Officer.

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NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		NEW HAMPSHIRE THRIFT BANCSHARES, INC.
		(Registrant)
Date:	May 16, 2011	/s/ Stephen W. Ensign
		Stephen W. Ensign
		Chairman of the Board
		and Chief Executive Officer
Date:	May 16, 2011	/s/ Stephen R. Theroux
		Stephen R. Theroux
		President and Chief Financial Officer
		(Principal Financial Officer)
Date:	May 16, 2011	/s/ Laura Jacobi
		Laura Jacobi
		Senior Vice President and Chief Accounting Officer
		(Principal Accounting Officer)

34

EXHIBIT INDEX

Exhibit No.	Description
3.1.1	Certificate of Incorporation of NHTB (as amended) (filed as Exhibit 3.1.1 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Commission on March 25, 2011 and incorporated herein by reference).
3.1.2	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	Amended and Restated Bylaws of NHTB (as amended) (filed as Exhibit 3.2 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Commission on March 25, 2011 and incorporated herein by reference).
4.1	Stock Certificate of NHTB (filed as an 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).
31.1	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
31.2	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
32.1	Section 1350 Certification of the Chief Executive Officer.
32.2	Section 1350 Certification of the Chief Financial Officer.