EXHIBIT 99.1
Financial Statements of New Hampshire Thrift Bancshares, Inc.
as of December 31, 1996
Page 5
[LETTERHEAD OF SHATSWELL, MacLEOD & COMPANY, P.C. APPEARS HERE]
The Board of Directors,
New Hampshire Thrift Bancshares, Inc.
Newport, New Hampshire
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying consolidated statement of financial condition
of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31,
1996 and the related consolidated statements of income, changes in shareholders'
equity and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of New
Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 1995 and
1994, were audited by other auditors whose reports dated January 19, 1996 and
January 24, 1995, expressed unqualified opinions of those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 1996
and the consolidated results of their operations and their cash flows for the
year ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation," effective January 1, 1996.
/s/ Shatswell, MacLeod & Company, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 22, 1997
Page 6
[LETTERHEAD OF SMITH, BATCHELDER & RUGG APPEARS HERE]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
New Hampshire Thrift Bancshares, Inc. and subsidiaries:
We have audited the accompanying consolidated statements of financial condition
of New Hampshire Thrift Bancshares, Inc. and subsidiaries as of December 31,
1994 and 1993, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the years ended December 31, 1994, 1993,
and 1992. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of New
Hampshire Thrift Bancshares, Inc. and subsidiaries as of December 31, 1994 and
1993, and the results of their operations and their cash flows for the years
ended December 31, 1994, 1993 and 1992, in conformity with generally accepted
accounting principles.
/s/ Smith, Batchelder & Rugg
Lebanon, New Hampshire
January 24, 1995
Page 7
[LETTERHEAD OF BERRY, DUNN, MCNEIL & PARKER APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
New Hampshire Thrift Bancshares, Inc. and subsidiaries
We have audited the accompanying consolidated statement of financial condition
of New Hampshire Thrift Bancshares, Inc. and subsidiaries as of December 31,
1995, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the year ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The consolidated statement of financial
condition of New Hampshire Thrift Bancshares, Inc. and subsidiaries as of
December 31, 1994 and the consolidated statements of income, changes in
stockholders' equity, and cash flows for the two years then ended were audited
by Smith, Batchelder & Rugg whose report, dated January 24, 1995, expressed an
unqualified opinion on those statements. Included in Notes 3 and 4 to the
financial statements is information included in New Hampshire Thrift Bancshares,
Inc. and subsidiaries financial statements as of December 31, 1993, 1992 and
1991, upon which Smith, Batchelder & Rugg issued their unqualified opinions
dated January 21, 1994 and January 22, 1993.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of New
Hampshire Thrift Bancshares, Inc. and subsidiaries as of December 31, 1995, and
the results of their operations and their cash flows for the year ended December
31, 1995, in conformity with generally accepted accounting principles.
/s/ Berry, Dunn, McNeil & Parker
Lebanon, New Hampshire
January 19, 1996
Page 8
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 5,868,749 $ 7,544,297
Federal funds sold 5,134,000 3,449,000
-----------------------------------------------
Cash and cash equivalents 11,002,749 10,993,297
Securities available for sale 24,950,725 25,718,260
Securities held to maturity 340,276 393,054
Other investments 2,307,557 2,303,285
Loans held for sale 745,650 3,095,971
Loans receivable, net 215,153,819 205,073,080
Nonaccrual loans 848,942 297,172
Accrued interest receivable 1,354,042 1,433,882
Bank premises and equipment, net 5,104,366 5,316,837
Investments in real estate 619,487 638,557
Real estate owned and property acquired in settlement of loans 723,478 984,185
Other assets 1,234,253 1,968,497
-----------------------------------------------
Total assets $ 264,385,344 $ 258,216,077
===============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Demand deposits $ 10,587,757 $ 10,934,512
Savings and NOW accounts 96,630,673 95,825,177
Time deposits 106,740,465 93,211,232
-----------------------------------------------
Total deposits 213,958,895 199,970,921
Securities sold under agreement to repurchase 8,662,736 9,552,825
Advances from Federal Home Loan Bank 20,174,025 26,936,168
Accrued expenses and other liabilities 2,395,998 2,212,158
-----------------------------------------------
Total liabilities 245,191,654 238,672,072
-----------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value per share: 2,500,000 shares authorized, - -
no shares issued or outstanding
Common stock, $.01 par value, per share: 5,000,000 shares authorized,
2,147,282 shares issued and 1,704,982 shares outstanding at
December 31, 1996, 2,147,282 shares issued and 1,689,503 shares
outstanding at December 31, 1995 21,473 21,473
Paid-in capital 13,241,774 13,160,382
Retained earnings 8,437,149 8,673,504
Net unrealized holding gain (loss) on securities available for sale net
of $65,000 of deferred tax benefit in 1996, and $51,000 of
deferred taxes in 1995 (127,179) 97,594
21,573,217 21,952,953
Treasury stock, at cost, 442,300 shares as of December 31, 1996
and 457,779 shares as of December 31, 1995 (2,379,527) (2,408,948)
-----------------------------------------------
Total shareholders' equity 19,193,690 19,544,005
-----------------------------------------------
Total liabilities and shareholders' equity $ 264,385,344 $ 258,216,077
===============================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 9
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest on loans $ 16,775,792 $ 15,846,308 $ 13,250,592
Interest and dividends on investments 1,928,455 1,620,025 1,291,844
-------------------------------------------------
Total interest income 18,704,247 17,466,333 14,542,436
-------------------------------------------------
INTEREST EXPENSE
Interest on deposits 8,686,678 8,096,851 6,454,599
Interest on advances and other borrowed money 1,637,862 1,501,496 591,807
-------------------------------------------------
Total interest expense 10,324,540 9,598,347 7,046,406
-------------------------------------------------
Net interest income 8,379,707 7,867,986 7,496,030
PROVISION FOR LOAN LOSSES 1,660,741 1,163,710 761,555
-------------------------------------------------
Net interest income after provision for loan losses 6,718,966 6,704,276 6,734,475
-------------------------------------------------
OTHER INCOME
Loan origination fees 75,564 89,632 295,173
Customer service fees 1,190,726 1,058,868 856,327
Net gain (loss) on sale of securities and bank property 276,986 (88,827) 35,706
Rental income 223,673 227,885 220,460
Brokerage service income 153,261 110,705 149,566
Other income 3,029 37,293 -
-------------------------------------------------
Total other income 1,923,239 1,435,556 1,557,232
-------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 3,039,929 2,917,180 2,861,435
Occupancy expenses 1,242,216 1,195,834 1,101,198
Advertising and promotion 188,512 162,745 154,382
Depositors' insurance 1,448,801 440,439 406,630
Outside services 364,101 333,361 350,812
Provision for other real estate owned losses 229,970 - -
Other expenses 1,231,802 1,241,450 1,112,000
-------------------------------------------------
Total other expenses 7,745,331 6,291,009 5,986,457
-------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 896,874 1,848,823 2,305,250
PROVISION FOR INCOME TAXES 286,163 604,000 723,000
-------------------------------------------------
NET INCOME $ 610,711 $ 1,244,823 $ 1,582,250
=================================================
Earnings per common share $ .35 $ .73 $ .93
=================================================
Dividends declared per common share $ .50 $ .50 $ .50
=================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 10
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
===================================================================
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance, beginning and end of year $ 21,473 $ 21,473 $ 21,473
------------------------------------------------------
PAID-IN CAPITAL
Balance, beginning of year $ 13,160,382 $ 13,103,404 $ 13,069,785
Gain on sale of treasury stock, at cost 81,392 56,978 33,619
------------------------------------------------------
Balance, end of year $ 13,241,774 $ 13,160,382 $ 13,103,404
------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year $ 8,673,504 $ 8,268,094 $ 7,516,147
Net income 610,711 1,244,823 1,582,250
Cash dividends paid (847,066) (839,413) (830,303)
------------------------------------------------------
Balance, end of year $ 8,437,149 $ 8,673,504 $ 8,268,094
------------------------------------------------------
NET UNREALIZED HOLDING GAIN (LOSS) ON
SECURITIES AVAILABLE FOR SALE
Balance, beginning of year $ 97,594 $ (728,667) $ 95,857
Adjustment to fair value (340,773) 1,252,661 (1,199,924)
Effect of change in deferred taxes 116,000 (426,400) 375,400
------------------------------------------------------
Balance, end of year $ (127,179) $ 97,594 $ (728,667)
------------------------------------------------------
TREASURY STOCK
Balance, beginning of year $ (2,408,948) $ (2,411,430) $ (2,316,293)
Shares repurchased, (3,251 shares in 1996,
14,968 shares in 1995, and 20,900 shares in 1994) (43,482) (144,015) (193,938)
Exercise of stock options, (18,730 shares in 1996,
33,485 shares in 1995, and 22,583 shares in 1994) 72,903 146,497 98,801
------------------------------------------------------
Balance, end of year $ (2,379,527) $ (2,408,948) $ (2,411,430)
------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 11
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
=======================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 610,711 $ 1,244,823 $ 1,582,250
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 455,910 435,467 435,124
Loans originated for sale (14,233,140) (18,911,177) (7,431,617)
Proceeds from sale of loans 14,166,770 18,874,886 7,355,527
(Gain) loss from sale of loans 66,370 36,291 76,090
(Gain) loss from sale of premises and equipment (251,770) 14,603 (2,955)
(Gain) loss from sale of debt securities available 667 3,957 (1,760)
for sale and writedowns
(Gain) loss from sale of equity securities available 25,833 33,975 (65,499)
for sale
Gain from sale of other real estate owned - - (41,581)
Provision for other real estate owned losses 229,970 - -
Provision for loan losses 1,660,741 1,163,710 761,555
Deferred tax expense (benefit) (120,481) 324,909 75,000
(Increase) decrease in accrued interest and other assets 861,580 (1,718,404) 96,149
Decrease in deferred loan fees (81,550) (138,396) (198,762)
Increase (decrease) in accrued expenses and other 449,399 (121,619) 11,183
liabilities
----------------------------------------------------------------
Net cash provided by operating activities 3,841,010 1,243,025 2,650,704
----------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of premises and equipment 344,387 84,400 31,119
Capital expenditures (316,986) (545,515) (952,379)
Proceeds from sale of debt securities available for sale 2,468,275 3,723,564 999,609
Proceeds from sale of equity securities available for sale 450,642 794,170 713,223
Principal reduction on securities held to maturity 52,778 52,778 51,389
Purchase of securities available for sale (9,063,424) (13,211,517) (9,006,732)
Maturities of securities available for sale 6,498,000 2,665,000 3,725,000
Purchase of other investments (5,000) (385,289) -
Purchase of Federal Home Loan Bank stock - (519,600) (124,900)
Net increase in loans to customers (9,539,579) (15,384,264) (21,539,263)
(Increase) decrease in nonaccrual loans (551,770) 1,395,436 (1,191,200)
Decrease in real estate owned 260,707 520,695 390,748
----------------------------------------------------------------
Net cash used in investing activities (9,401,970) (20,810,142) (26,903,386)
----------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 13,987,974 5,437,855 17,816,769
Net increase (decrease) in repurchase agreements (890,089) 5,954,918 (987,213)
Increase (decrease) in advances from Federal Home (6,762,143) 11,725,374 9,770,015
Loan Bank
Net change in other borrowed money (29,077) (31,368) (31,034)
Payments to acquire treasury stock (43,482) (144,015) (193,938)
Dividends paid (847,066) (839,413) (830,303)
Proceeds from exercise of stock options 154,295 203,475 132,420
----------------------------------------------------------------
Net cash provided by financing activities 5,570,412 22,306,826 25,676,716
----------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,452 2,739,709 1,424,034
CASH AND CASH EQUIVALENTS, beginning of year 10,993,297 8,253,588 6,829,554
----------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 11,002,749 $ 10,993,297 $ 8,253,588
================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 12
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposit accounts $ 8,701,566 $ 8,677,030 $ 6,343,205
Interest on advances and other borrowed money 1,678,133 1,418,043 553,577
------------------------------------------------------------
Total interest paid $ 10,379,699 $ 10,095,073 $ 6,896,782
============================================================
Income taxes $ 331,763 $ 363,879 $ 701,986
============================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Loans originated to facilitate sales of other real estate owned $ 207,500 $ - $ -
============================================================
Transfers from loans to real estate acquired through foreclosure $ 462,302 $ 320,000 $ 305,717
============================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 13
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
=======================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS - New Hampshire Thrift Bancshares, Inc. (Company) is
a savings association holding company headquartered in New London, New
Hampshire. The Company's subsidiary, Lake Sunapee Bank, fsb (Bank), a federal
stock savings bank operates ten branches primarily in Grafton, Sullivan, and
Merrimack Counties in west central New Hampshire. Although the Company has a
diversified portfolio, a substantial portion of its debtors' abilities to honor
their contracts is dependent on the economic health of the region. Its primary
source of revenue is providing loans to customers who are predominately small
and middle-market businesses and middle-income individuals.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company, the Bank, Lake Sunapee Group, Inc. (LSGI),
and Lake Sunapee Financial Services Corp. (LSFSC). LSGI and LSFSC are wholly-
owned subsidiaries of the Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, the
Company considers federal funds sold and due from banks to be cash equivalents.
SECURITIES AVAILABLE FOR SALE - Available for sale securities consist of
bonds, notes, debentures, and certain equity securities. Unrealized holding
gains and losses, net of tax, on available for sale securities are reported as a
net amount in a separate component of shareholders' equity until realized. Gains
and losses on the sale of available for sale securities are determined using the
specific-identification method. Declines that are other than temporary in the
fair value of individual available for sale securities below their cost have
resulted in write-downs of the individual securities to their fair value. The
related write-downs of $728 and $76,590 have been included in earnings as
realized losses for the years ended 1996 and 1995, respectively. There was no
related write-down for the year 1994.
SECURITIES HELD TO MATURITY - Bonds, notes, and debentures which the
Company has the positive intent and ability to hold to maturity are reported at
cost, adjusted for premiums and discounts recognized in interest income using
the interest method over the period to maturity. Declines that are other than
temporary in the fair value of individual held to maturity securities below
their cost result in write-downs of the individual securities to their fair
value. No write-downs have occurred for securities held to maturity.
OTHER INVESTMENTS - Other investments are investments which do not have
readily determinable fair values. These types of investments are reported at
cost and are evaluated for other than a temporary decline in value. Other than
temporary declines in value result in write-downs of the individual security. No
write-downs have occurred for securities which are classified as other
investments.
LOANS HELD FOR SALE - Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated market value
in the aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income. No losses have been recorded.
LOANS RECEIVABLE - Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off are
reported at their outstanding principal adjusted for any charge-offs, the
allowance for loan losses, and any deferred fees or costs on originated loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment to the yield of the related loan. When the interest
accrual is discontinued, all unpaid accrued interest is reversed. The allowance
for loan losses is increased by charges to income and decreased by charge-offs
(net of recoveries). Management's periodic evaluation of the adequacy of the
allowance is an estimate based on the Company's past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions. This material estimate and the estimate of real
estate acquired in connection with foreclosures are particularly susceptible to
significant change in the near term. In connection with the determination of the
allowance for loan losses and the carrying value of real estate owned,
management obtains independent appraisals for significant properties to arrive
at its evaluation.
Page 14
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan". The FAS as amended SFAS No. 118 requires
that impaired loans be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral, if the loan is collateral dependent. The adoption of the new
accounting standard did not have a material effect on the Company's financial
position or results of operation. Interest income on impaired loans is
recognized on an accrual basis when the impaired loan is less than 90 days past
due and has not been reclassified to non-accrual status. Interest income on
impaired loans over 90 days past due, and on loans placed on non-accrual status,
is recognized using a cash basis accounting method. Cash receipts on impaired
loans are recorded as both interest income and a reduction in the impaired loan
balance consistent with the terms of the underlying contractual agreements.
The balance of impaired loans is determined by aggregating the fair vaLue
or present value of expected cash flows on individual loans identified as
impaired. Homogeneous groups of loans such as consumer installment loans and
residential mortgage loans are not considered impaired.
A loan becomes impaired when it appears probable the Company will be unable
to collect all amounts due, including principal and interest, under the
contractual terms of the loan agreement. A loan is placed on non-accrual status
when it appears likely interest income will not be received. Non-accrual loans
are reviewed for possible impairment.
Impaired loans are written-down or charged-off when it has been determined
the asset has such little value that it no longer warrants remaining on the
books. The decision to charge-off is made on a case-by-case basis.
Factors considered by management in determining impairment include payment
status, net worth and collateral value. An insignificant payment delay or an
insignificant shortfall in payment does not in itself result in the review of a
loan for impairment. The Company applies SFAS No. 114 on a loan-by-loan basis.
The Company does not apply SFAS No. 114 to aggregations of loans that have risk
characteristics in common with other impaired loans. Substantially all of the
Company's loans that have been identified as impaired have been measured by the
fair value of existing collateral.
BANK PREMISES AND EQUIPMENT - Company premises and equipment are stated
at cost, less accumulated depreciation. Depreciation is computed using straight-
line and accelerated methods over the estimated useful lives of the assets.
Expenditures for replacements or major improvements are capitalized;
expenditures for normal maintenance and repairs are charged to expense as
incurred. Upon the sale or retirement of bank premises and equipment, the cost
and accumulated depreciation are removed from the respective accounts and any
gain or loss is included in income.
INVESTMENT IN REAL ESTATE - Investment in real estate is carried at the
lower of cost or estimated fair value. The buildings are being depreciated over
their useful lives. The properties consist of a condominium that the Company
rents to the public and three buildings that the Company rents for commercial
purposes. Rental income is recorded in income when received and expenses for
maintaining these assets are charged to expense as incurred.
REAL ESTATE OWNED AND PROPERTY ACQUIRED IN SETTLEMENT OF LOANS - The Bank
classifies loans as in-substance, repossessed or foreclosed if the Bank receives
physical possession of the debtor's assets regardless of whether formal
foreclosure proceedings take place. At the time of foreclosure or possession,
the Company records the property at the lower of fair value minus estimated
costs to sell or the outstanding balance of the loan. All properties are
periodically reviewed and declines in the value of the property are charged
against income.
EARNINGS PER SHARE - Earnings per share are calculated using the weighted
average number of shares outstanding at the end of the year plus common stock
equivalents, as appropriate, resulting from the granting of incentive stock
options (Notes 10 and 14). Common stock equivalents are determined using the
treasury stock method. Common stock equivalents are not included in the
computation of earnings per share if they have an antidilutive effect. The
number of shares used in computing earnings per share was 1,722,983, 1,699,536,
and 1,693,259, for the years ended December 31, 1996, 1995 and 1994,
respectively.
Page 15
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
INCOME TAXES - Deferred income taxes are provided in amounts sufficient
to give effect to temporary differences between financial and tax reporting for
deferred loan origination fees, unrealized loss on securities available for
sale, provision for loan losses and depreciation.
APPLE COMPUTER PROGRAM - During 1988, the Company offered depositors an
Apple computer as an inducement to open a certificate of deposit. The cost of
acquiring these computers has been treated as a prepayment of interest and is
being amortized over the period to maturity of the deposit accounts. In the
event of early withdrawal, the prorated value of the prepayment will be deducted
from unpaid interest and principal at the time of withdrawal. As of December
31, 1996 and 1995, other assets include $67,019 and $115,431, respectively, of
unamortized computer costs.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The following methods and
assumptions were used by the Company in estimating fair values of financial
instruments as disclosed herein:
Cash and short-term instruments - The carrying amounts of cash and short-
term instruments approximate their fair value.
Available for sale and held to maturity securities - Fair values for
available for sale securities, are based on quoted market prices. The
carrying values of held to maturity and other investments approximate
fair values.
Loans receivable - For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. Fair values for all other loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. Fair values for impaired loans are estimated using discounted
cash flow analyses or underlying collateral values, where applicable.
Deposit liabilities - The fair values disclosed for demand deposits are,
by definition, equal to the amount payable on demand at the reporting
date (that is, their carrying amounts). The carrying amounts of variable-
rate, fixed term money-market accounts and certificates of deposits
(CD's) approximate their fair values at the reporting date. Fair values
for fixed-rate CD's are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Borrowings - The carrying amounts of federal funds purchased, and other
borrowings maturing within 90 days approximate their fair values. Fair
values of other borrowings are estimated using discounted cash flow
analyses based on the Bank's current incremental borrowing rates for
similar types of borrowing arrangements.
Accrued interest - The carrying amounts of accrued interest approximate
their fair values.
Off-balance sheet instruments - Fair values for loan commitments have not
been presented as the future revenue derived from such financial
instruments is not significant.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain amounts in the 1995 and 1994 consolidated
financial statements have been reclassified to conform to the current year's
presentation.
DEFERRED LOAN ORIGINATION FEES - Loan origination, commitment fees and
certain direct origination costs are deferred, and the net amount is being
amortized as an adjustment of the related loan's yield. The Company is
generally amortizing these amounts over the contractual life of the related
loans.
STOCK BASED COMPENSATION - SFAS No. 123, "Accounting for Stock-Based
Compensation," was issued in October 1995 and introduces a fair value method of
accounting for employee stock options, restricted stock grants, stock
appreciation rights or similar equity instruments. In accordance with SFAS No.
123, entities can recognize stock-based compensation expense in the basic
financial statements using either (i) the intrinsic value approach set forth in
APB
Page 16
NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
=======================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
Opinion No. 25 or (ii) the fair value method introduced in SFAS No. 123.
Entities electing to continue to follow the provisions of APB Opinion No. 25
must make pro forma disclosure of net income and earnings per share, as if the
fair value method of accounting defined in SFAS No. 123 had been applied.
Management will continue to measure stock-based compensation costs in accordance
with APB Opinion No. 25 and has made the pro forma disclosure requirements of
SFAS No. 123 for 1996 and 1995.
LOAN SERVICING - Effective January 1, 1996, the Company adopted Statement
of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65." This statement requires that a
mortgage banking enterprise recognize as separate assets from its related loans
the rights to service mortgage loans for others, either through acquisition of
those rights or from the sale or securitization of loans with the servicing
rights retained on those loans, based on their relative fair values. To
determine the fair value of the servicing rights created, the Company uses the
market prices under comparable servicing sale contracts, when available, or
alternatively uses a valuation model that calculated the present value of future
cash flows to determine the fair value of the servicing rights. In using this
valuation method, the Company incorporates assumptions that market participants
would use in estimating future net servicing income, which includes estimates of
the cost of servicing loans, the discount rate, ancillary income, prepayment
speeds and default rates.
The cost of mortgage servicing rights is amortized on a straight-line basis
which has substantially the same effect as amortizing the rights in proportion
to, and over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those rights.
Fair values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the following interest rate risk characteristics of the underlying
loans. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights for a stratum exceed their fair value.
CONCENTRATION OF CREDIT RISK - Most of the Company's business activity is
with customers located within the state. There are no concentrations of credit
to borrowers that have similar economic characteristics. The majority of the
Company's loan portfolio is comprised of loans collateralized by real estate
located in the state of New Hampshire.
Page 17
==============================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SECURITIES:
The amortized cost and approximate market value of securities are summarized as
follows:
DECEMBER 31, 1996
----------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
FAIR HOLDING HOLDING AMORTIZED
VALUE GAIN LOSS COST
----------------------------------------------------------------------
Held to maturity:
Bonds and notes -
Municipal bonds $ 340,276 $ - $ - $ 340,276
----------------------------------------------------------------------
Total held to maturity 340,276 - - 340,276
----------------------------------------------------------------------
Available for sale:
Bonds and notes -
U. S. Treasury Notes 12,884,840 31,066 94,145 12,947,919
U. S. Government, including agencies 3,269,758 17,393 18,099 3,270,464
Other bonds and debentures 7,641,502 17,692 97,336 7,721,146
----------------------------------------------------------------------
23,796,100 66,151 209,580 23,939,529
Equity securities 1,154,625 45,575 94,325 1,203,375
----------------------------------------------------------------------
Total available for sale 24,950,725 111,726 303,905 25,142,904
----------------------------------------------------------------------
Other investments:
Federal Home Loan Bank stock 1,861,000 - - 1,861,000
Other securities 446,557 - - 446,557
----------------------------------------------------------------------
Total other investments 2,307,557 2,307,557
----------------------------------------------------------------------
Total securities $ 27,598,558 $ 111,726 $ 303,905 27,790,737
======================================================================
DECEMBER 31, 1995
----------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
FAIR HOLDING HOLDING AMORTIZED
VALUE GAIN LOSS COST
----------------------------------------------------------------------
Held to maturity:
Bonds and notes -
Municipal bonds $ 393,054 $ - $ - $ 393,054
----------------------------------------------------------------------
Total held to maturity 393,054 - - 393,054
----------------------------------------------------------------------
Available for sale:
Bonds and notes -
U. S. Treasury Notes 12,139,529 147,900 3,166 11,994,795
U. S. Government, including agencies 2,724,130 33,249 40 2,690,921
Other bonds and debentures 9,352,476 104,119 38,416 9,286,773
----------------------------------------------------------------------
24,216,135 285,268 41,622 23,972,489
Equity securities 1,502,125 11,750 106,800 1,597,175
----------------------------------------------------------------------
Total available for sale 25,718,260 297,018 148,422 25,569,664
----------------------------------------------------------------------
Other investments:
Federal Home Loan Bank stock 1,861,000 - - 1,861,000
Other securities 442,285 - - 442,285
----------------------------------------------------------------------
Total other investments 2,303,285 - - 2,303,285
----------------------------------------------------------------------
Total securities $ 28,414,599 $ 297,018 $ 148,422 $ 28,266,003
======================================================================
Page 18
============================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross gains of $810, $3,425, and $3,536, and gross losses of $807,
$7,382, and $1,776, were realized during 1996, 1995, and 1994, respectively, on
sales of available-for-sale debt securities. Gross losses of $25,833 were
realized during 1996 on sales of available-for-sale equity securities.
Maturities of debt securities are as follows as of December 31, 1996:
WEIGHTED
AMORTIZED FAIR AVERAGE
AVAILABLE FOR SALE: bonds and notes - COST VALUE YIELD
------------------------------------------------------
U. S. Treasury Notes $ 2,024,190 $ 2,024,374 5.78%
U. S. Government, including agencies 1,739,566 1,741,076 7.83%
Other bonds and debentures 2,601,685 2,569,554 6.62%
---------------------------------
Total due in one year or less 6,365,441 6,335,004 6.68%
---------------------------------
U. S. Treasury Notes 10,923,729 10,860,467 5.80%
U. S. Government, including agencies 502,683 497,343 6.51%
Other bonds and debentures 4,845,590 4,799,216 6.29%
---------------------------------
Total due after one year through five years 16,272,002 16,157,026 5.97%
---------------------------------
U. S. Government, including agencies 1,000,000 1,003,124 6.50%
Other bonds and debentures 202,702 201,562 5.33%
---------------------------------
Total due after five years through ten years 1,202,702 1,204,686 6.30%
---------------------------------
Other bonds and debentures 99,384 99,384 6.04%
---------------------------------
Total due after ten years 99,384 99,384 6.04%
---------------------------------
$ 23,939,529 $ 23,796,100 6.17%
=================================
A security which has a call date earlier than the maturity date is considered to
mature at the call date.
HELD TO MATURITY: Included in the caption bonds and notes are two
municipal bonds classified as held to maturity. The securities are New
Hampshire Higher Educational and Health Facilities bonds purchased by the Bank
with coupon rates and maturity dates of 7.35%, 12/16/2003 at an amount of
$240,276 and 6.48%, 6/1/2000 at an amount of $100,000. There is no established
trading market for these securities and accordingly, the carrying amount of
these securities has also been reflected as their fair value. The Bank
anticipates no losses on these securities and expects to hold them until their
maturity.
There were no issuers of securities whose aggregate book value exceeded 10%
of shareholders' equity as of December 31, 1996.
A total par value of $1,000,000 was pledged to secure the treasury, tax,
and loan account as of December 31, 1996.
Page 19
============================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. LOANS RECEIVABLE:
Loans receivable consisted of the following as of December 31:
1996 1995 1994 1993 1992
-----------------------------------------------------------------------------------
Real estate loans -
Conventional $ 183,550,150 $ 175,130,966 $ 161,091,563 $ 139,580,597 $ 135,252,277
Construction 2,702,613 2,456,763 7,793,601 4,301,243 3,478,459
-----------------------------------------------------------------------------------
186,252,763 177,587,729 168,885,164 143,881,840 138,730,736
Less - Unadvanced portion 1,270,412 1,434,258 2,841,500 1,222,932 955,860
-----------------------------------------------------------------------------------
184,982,351 176,153,471 166,043,664 142,658,908 137,774,876
Collateral loans 20,574,710 19,524,706 18,776,523 19,584,411 19,768,631
Consumer loans 4,860,325 5,025,818 5,264,449 5,158,271 5,796,200
Commercial and municipal loans 8,352,789 9,301,028 8,066,390 8,049,016 7,132,313
Other loans 436,754 671,302 625,006 977,633 673,793
-----------------------------------------------------------------------------------
Total loans 219,206,929 210,676,325 198,776,032 176,428,239 171,145,813
Less - Allowance for loan losses 2,158,026 1,828,060 2,752,885 2,374,001 2,094,931
- Deferred loan origination fees 300,492 382,042 520,438 719,200 694,983
- Nonaccrual loans 848,942 297,172 1,692,608 501,408 1,388,864
-----------------------------------------------------------------------------------
Net loans $ 215,899,469 $ 208,169,051 $ 193,810,101 $ 172,833,630 $ 166,967,035
===================================================================================
When, in the opinion of management, a loan becomes delinquent and/or
uncollectible, it is reclassified as a non-earning loan on which interest is not
accrued. These loans are categorized as possible foreclosures. In addition to
non-earning assets, $787,930 and $1,144,293 of delinquent loans were classified
as non-accrual loans as of December 31, 1996 and 1995, respectively.
The following is a summary of activity in the allowance for loan loss
account for the years ended December 31:
1996 1995 1994 1993 1992
-----------------------------------------------------------------------------------
BALANCE, beginning of year $ 1,828,060 $ 2,752,885 $ 2,374,001 $ 2,094,931 $ 2,289,523
-----------------------------------------------------------------------------------
Loans charged-off:
Real estate loans -
Conventional 628,107 141,541 252,258 723,131 475,096
Construction 614,355 1,014,670 2,871 333,581 1,666,932
Collateral and consumer loans 36,721 25,568 612 5,289 5,869
Commercial and municipal loans 101,431 913,441 140,375 57,719 291,695
----------------------------------------------------------------------------------
Total charged-off loans 1,380,614 2,095,220 396,116 1,119,720 2,439,592
----------------------------------------------------------------------------------
Recoveries on loans:
Real estate loans -
Conventional 9,063 3,300 11,666 24,532 63,045
Collateral and consumer loans 22,105 2,099 1,779 1,584 969
Commercial and municipal loans 8,671 1,286 - - 15,551
---------------------------------------------------------------------------------
Total recoveries 49,839 6,685 13,445 26,116 79,565
---------------------------------------------------------------------------------
Net charged-off loans: 1,330,775 2,088,535 382,671 1,093,604 2,360,027
---------------------------------------------------------------------------------
Provision for loan losses charged
to income: 1,660,741 1,163,710 761,555 1,372,674 2,165,435
-----------------------------------------------------------------------------------
BALANCE, end of year $ 2,158,026 $ 1,828,060 $ 2,752,885 $ 2,374,001 $ 2,094,931
==================================================================================
Ratios of net charged-off loans during
the period to average loans
outstanding during the period .63% 1.02% .20% .64% 1.41%
==================================================================================
Page 20
=============================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. LOANS RECEIVABLE: (continued)
The Company had no extensions of credit to related parties in excess of 5%
of shareholders' equity at any time during the year ended December 31, 1996 and
1995. Certain directors and executive officers of the Bank and companies in
which they have significant ownership interest were customers of the Bank during
1996. Total loans to such persons and their companies amounted to $1,066,552 as
of December 31, 1996. During 1996 advances of $319,847 were made and repayments
totaled $255,150.
As of December 31, 1996, all loans restructured in a troubled debt
restructuring were considered to be "Impaired loans" and are included in the
amount shown as the recorded investment in impaired loans. The Company had no
loans restructured in a troubled debt restructuring that are not impaired based
on the terms specified by the restructuring agreement.
During 1996 and 1995, LSB sold properties out of real estate owned.
According to FAS No. 66, "Accounting for Sales of Real Estate," a minimum down
payment must be made by the buyer in order for a sale and a new loan to be
recorded. Until the down payment requirement is met, the loan remains
classified as real estate owned and interest income is not recorded. The effect
of FAS No. 66 would be to reclassify $362,436 and $370,672 from loans to real
estate owned and reduce interest income by $22,602 and $23,063 for the years
ended December 31, 1996 and 1995, respectively.
IMPAIRED LOANS AS OF DECEMBER 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
Average recorded investment in impaired loans $ 837,357 $ 934,829
Recorded investment in impaired loans at December 31 $ 1,188,183 $ 1,452,049
Portion of valuation allowance allocated to impaired loans $ 139,509 $ 654,663
Net balance of impaired loans $ 1,048,674 $ 797,386
Interest income recognized on impaired loans $ 40,006 $ 102,449
Interest income on impaired loans on cash basis $ 37,592 $ 97,401
Recorded investment in impaired loans with related allowance for credit losses $ 814,182 $ 1,452,049
Recorded investment in impaired loans with no related allowance for credit losses $ 374,001 $ 0
In addition to total loans previously shown, the Company services loans for
other financial institutions. Participation loans are loans originated by the
Company for a group of banks. Sold loans are loans originated by the Company and
sold to the secondary market. The Company services these loans and remits the
payments received to the buyer. The Company specifically originates long-term,
fixed-rate loans to sell. The amount of loans sold and participated out which
are serviced by the Company are as follows as of December 31:
1996 1995
-----------------------------
Sold loans $ 52,165,252 $ 43,433,158
=============================
Participation loans $ 2,664,278 $ 2,763,715
=============================
Mortgage servicing rights of $118,086 were capitalized in 1996.
Amortization of mortgage servicing rights was $15,056 in 1996. No valuation
allowance for capitalized servicing rights was required in 1996.
The Company has issued letters of credit and has approved lines of credit
loans to specific individuals and companies. The unused portions as of December
31, are as follows:
1996 1995
----------------------------
Letters of credit $ 468,750 $ 448,150
============================
Lines of credit $ 10,420,574 $ 11,139,725
============================
Page 21
============================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. BANK PREMISES AND EQUIPMENT:
Bank premises and equipment are shown on the consolidated statements of
financial condition at cost, net of accumulated depreciation, as follows as of
December 31:
1996 1995
-------------------------------
Land $ 823,218 $ 679,980
Buildings and premises 4,891,724 4,982,713
Furniture, fixtures and equipment 3,610,607 3,464,598
-------------------------------
9,325,549 9,127,291
Less - Accumulated depreciation 4,221,183 3,810,454
-------------------------------
$ 5,104,366 $ 5,316,837
===============================
NOTE 5. REAL ESTATE OWNED AND PROPERTY ACQUIRED:
As of December 31, 1996 and 1995, the Company owned property acquired by
foreclosure and chattel property. The balances consisted of the following:
1996 1995
-------------------------------
Residential real estate $ 75,000 $ 34,970
Commercial real estate 632,026 949,215
Chattel property 16,452 -
-------------------------------
$ 723,478 $ 984,185
===============================
As of December 31, 1996 and 1995, real estate owned includes $539,026 and
$831,215, respectively, for two real estate development projects. The
properties have been developed and are ready for individual lots to be sold.
One lot was sold during 1996.
It is the policy of the Company, upon the acquisition of real estate by
foreclosure, to evaluate the condition of the property, make any appropriate or
necessary structural and/or cosmetic improvements and place the property as an
open listing with all area real estate agents. Company employees are also
encouraged to participate in the selling of these properties.
For 1996, 1995 and 1994, $179,443, $112,544 and $17,629, respectively, of
net operating cost of other real estate is included in net income.
Page 22
============================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. DEPOSITS:
Deposits consisted of the following as of December 31:
1996 1995
-----------------------------------------------------------
Checking accounts (non-interest-bearing) $ 10,587,756 4.9% $ 10,934,512 5.5%
NOW accounts 26,030,170 12.2% 26,014,007 13.0%
Ever-Ready Money Market 11,207,455 5.2% 13,971,617 7.0%
Regular savings accounts 9,167,458 4.3% 11,363,366 5.7%
Treasury savings accounts 50,154,503 23.5% 44,388,408 22.2%
Club deposits 71,088 .0% 87,779 .0%
-----------------------------------------------------------
107,218,430 50.1% 106,759,689 53.4%
-----------------------------------------------------------
Time deposits -
2.00% - 2.99% 448,874 .2% 251,318 .1%
3.00% - 3.99% - - - -
4.00% - 4.99% 2,738,534 1.3% 6,140,501 3.1%
5.00% - 5.99% 77,115,922 36.0% 41,959,447 21.0%
6.00% - 6.99% 11,667,942 5.5% 31,152,885 15.6%
7.00% - 7.99% 12,503,732 5.8% 10,889,340 5.4%
8.00% - 8.99% 2,265,461 1.1% 2,817,741 1.4%
-----------------------------------------------------------
106,740,465 49.9% 93,211,232 46.6%
===========================================================
$ 213,958,895 100.0% $ 199,970,921 100.0%
===========================================================
The following is a summary of maturities of time deposits as of December
31, 1996:
1997 $ 71,668,007
1998 21,762,683
1999 10,970,261
2000 2,100,953
2001 236,179
Thereafter 2,382
-----------------------
$ 106,740,465
=======================
As of December 31, 1996, time deposits include $12,884,426 of certificates
of deposit with a minimum balance of $100,000. Maturities of these certificates
are as follows:
Less than 3 months $ 3,730,043
Over 3 months and less than 6 months 4,150,174
Over 6 months and less than 12 months 2,872,478
Over 12 months 2,131,731
-----------------------
$ 12,884,426
=======================
Page 23
============================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
The purchasers of the agreements have agreed to resell to the Company
substantially identical securities at the maturities of the agreements.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
1996 1995
----------------------------------
Average balance during the year $ 5,060,481 $ 4,272,752
Average interest rate during the year 4% 4%
Maximum month-end balance during the year 8,662,736 9,552,825
Securities underlying the agreements at year-end:
Carrying amount 12,947,919 11,994,795
Estimated fair value 12,884,841 12,139,529
As of December 31, 1996, sixteen repurchase agreements were outstanding.
The maturity dates of the repurchase agreements are from January 27, 1997 to
October 25, 1997 on the anniversary date of the repurchase agreement.
Securities are under control of the Bank.
NOTE 8. ADVANCES FROM FEDERAL HOME LOAN BANK:
Advances from the Federal Home Loan Bank consisted of loans, at various
interest rates ranging from 4.87% to 7.32%, maturing as follows at December 31,
1996.
1997 (4.87% - 7.32%) $ 7,927,707
1998 (4.87% - 5.82%) 7,166,033
1999 (5.78%) 56,085
2000 and thereafter (5.41% - 5.82%) 5,024,200
----------------
$ 20,174,025
================
These advances are secured by Federal Home Loan Bank stock (Note 2) and
unspecified first mortgage loans. The Company is able to borrow up to an
additional $50,000,000 of Federal Home Loan Bank advances.
In addition to the above advances, the Company has credit available up to
$5,167,000 under a revolving loan agreement with the Federal Home Loan Bank. No
amounts were borrowed against the line of credit as of December 31, 1996 and
1995. Interest is payable monthly as funds are borrowed.
Page 24
============================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. INCOME TAXES:
The Company, the Bank and its wholly-owned subsidiaries file a consolidated
federal income tax return. Applicable income taxes amounted to $286,163 in 1996
$604,000 in 1995 and $723,000 in 1994. These amounts differ from the amounts
computed by applying the statutory tax rates to income before provision for
income taxes.
The reasons for these differences are as follows:
1996 1995 1994
--------------------------------------------------------------
Tax on income at statutory tax rates $ 304,907 $ 628,600 $ 783,785
Tax effect of dividends received deduction (27,023) (35,714) (39,270)
Tax effect of tax exempt interest, net (14,630) (19,289) (22,246)
Tax effect of unallowable amortization - - 3,292
Other, net 22,909 30,403 (2,561)
--------------------------------------------------------------
Tax at effective rate $ 286,163 $ 604,000 $ 723,000
==============================================================
Income tax expense is made up of the following components:
1996 1995 1994
--------------------------------------------------------------
Current tax expense $ 406,644 $ 279,091 $ 648,000
Deferred tax expense (benefit) (120,481) 324,909 75,000
--------------------------------------------------------------
$ 286,163 $ 604,000 $ 723,000
==============================================================
Deferred taxes result from temporary differences in the recognition of
revenue and expense for tax and financial statement purposes. The source of
these differences were as follows:
1996 1995
------------------------------------------
Difference between book and tax depreciation $ 8,587 $ 11,533
Deferred loan origination fees included in taxable income 31,495 47,055
Bad debts deducted for taxable income not for book income (232,334) 174,852
Unrealized gain (loss) on securities available for sale (116,000) 426,400
Other, net 71,771 91,469
------------------------------------------
$ (236,481) $ 751,309
==========================================
The components of the net deferred tax asset or liability on the
consolidated statements of financial condition are as follows as of December 31:
1996 1995
------------------------------------------
Deferred tax liability $ 478,541 $ 728,422
Deferred tax asset (118,022) (131,422)
------------------------------------------
$ 360,519 $ 597,000
==========================================
Deferred tax assets as of December 31, 1996 have not been reduced by a
valuation allowance because management believes that it is more likely than not
that the full amount of deferred tax assets will be realized.
As of December 31, 1996, the Company had no operating loss and tax credit
carryovers for tax purposes.
Page 25
============================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. STOCK COMPENSATION PLANS:
As of December 31, 1996, the Company had three fixed option, stock-based
compensation plans, which are described below. The Company has adopted the
disclosure only provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation" but applies APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock option plans. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of FASB
Statement 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
1996 1995
-----------------------
Net income As reported $ 610,711 $ 1,244,823
Pro forma $ 500,828 $ 1,216,275
Earnings per share As reported $ .35 $ .73
Pro forma $ .29 $ .72
Under the 1986 plan, the Company may grant options to its employees for up
to 57,880 additional shares of common stock. Under the 1987 plan, the Company
may grant options to its employees for up to 27,666 additional shares of common
stock. Under both plans, the exercise price of each option equals the market
price of the Company's stock on the date of grant and an option's maximum term
is 10 years. Options are exercisable immediately.
On April 10, 1996, the shareholders approved the adoption of the "1996
Stock Option Plan." Under this plan, an amount equal to 10% of the issued and
outstanding common stock of the Company has been reserved for future issuance.
On December 2, 1996 48,000 options were granted from the 1996 stock option plan
at an exercise price of $12.50 per share, the fair market value on that date.
The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
1996 1995
-------------------------------
Weighted risk-free interest rate 6.37% 6.67%
Weighted expected life 9.25 years 9.25 years
Weighted expected volatility 17.33% 17.33%
Weighted expected dividend yield 5.0% per year 5.0% per year
No modifications have been made to the terms of the option agreements.
A summary of the status of the Company's fixed stock option plans as of
December 31, 1996 and 1995 and changes during the years ending on those dates is
presented below:
1996 1995
---------------------------------------------------------------------------------
Weighted Average Weighted Average
Fixed Options Shares Exercise Price Shares Exercise Price
- ------------- ------ -------------- ------ --------------
Outstanding at beginning of year 62,590 $ 8.22 66,075 $ 6.78
Granted 97,900 11.29 30,000 9.00
Exercised (18,730) 8.24 (33,485) 6.08
Forfeited
------------------- --------------
Outstanding at end of year 141,760 $ 10.34 62,590 $ 8.22
=================== ==============
Options exercisable at year-end 141,760 62,590
Weighted-average fair value of $ 1.84 $ 1.56
options granted during the year
Page 26
==========================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. STOCK COMPENSATION PLANS: (continued):
The following table summarizes information about fixed stock options
outstanding as of December 31, 1996:
Options Outstanding and Exercisable
------------------------------------------------------------
Number
Outstanding Remaining
Exercise Prices as of 12/31/96 Contractual Life
--------------- -------------- ----------------
$ 7.500 21,190 1.2 year
9.000 25,170 8.0 years
10.125 47,400 9.0 years
12.500 48,000 9.9 years
----------------
$ 10.340 141,760 8.0 years
=========================================================
NOTE 11. EMPLOYEE BENEFIT PLANS:
DEFINED BENEFIT PENSION PLAN - The Company has a defined benefit pension
plan covering substantially all full-time employees who have attained age 21 and
have completed one year of service. Annual contributions to the plan are based
on actuarial estimates.
Net pension cost for the Company's defined benefit pension plan consisted
of the following components as of December 31:
1996 1995 1994
----------------------------------------------------
Service cost $ 84,057 $ 88,168 $ 77,370
Interest cost on projected benefit obligation 109,326 104,325 100,515
Actual return on plan assets (143,470) (143,671) 55,611
Net amortization and deferral 72,337 85,790 (125,230)
----------------------------------------------------
$ 122,250 $ 134,612 $ 108,266
====================================================
The following table sets forth the plan's funded status and amounts
recognized in the accompanying consolidated statements of financial position as
of December 31:
1996 1995
---------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $ 1,297,443 $ 1,250,767
=======================================
Accumulated benefit obligation $ 1,350,262 $ 1,273,735
=======================================
Projected benefit obligation $ 1,516,431 $ 1,477,750
Plan assets at fair value, primarily invested in debt and equity securities 1,636,405 1,395,207
---------------------------------------
Projected benefit obligation (in excess of) less than plan assets 119,974 (82,543)
Unrecognized net loss 286,143 374,051
Unrecognized prior service cost (32,658) (35,351)
---------------------------------------
Prepaid expense, included in other assets $ 373,459 $ 256,157
=======================================
Page 27
==========================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. EMPLOYEE BENEFIT PLANS: (continued)
Assumptions used by the Company in the determination of pension plan
information consisted of the following as of December 31:
1996 1995
----------------------
Discount rate 7.00% 7.00%
Rate of increase in compensation levels 3.00% 3.00%
Expected long-term rate of return on plan assets 7.00% 7.00%
PROFIT SHARING - STOCK OWNERSHIP PLAN - Lake Sunapee Bank, fsb, adopted a
Profit Sharing - Stock Ownership Plan which became effective January 1, 1987.
The purpose of the Plan is to reward eligible employees for long and loyal
service by providing them with retirement benefits. The Plan is a qualified
defined contribution plan designed to meet the requirements of ERISA and to
conform to Section 401(k) of the Internal Revenue Code. All employees of Lake
Sunapee Bank, fsb, and its subsidiaries who have attained age 21 and have
completed one year of service are eligible to participate in the Plan.
Participation is not required. Eligible employees electing to participate may
contribute between 2% and 15% of their salary to the Plan up to $9,500 for 1996.
Participants will not be subject to federal income taxation on such
contributions which constitute salary reductions at the time such contributions
are made. Lake Sunapee Bank, fsb may elect, but is not required, to make
discretionary and/or matching contributions to the Plan.
Discretionary and matching contributions to the Plan will be invested
primarily in company stock. Benefits under the Profit Sharing - Stock Ownership
Plan will be payable upon retirement, death or other separation from service.
The assets of the Profit Sharing - Stock Ownership Plan are held pursuant
to an Investment Management Agreement with Charter Trust Company as Agent. The
assets are invested as directed by participating employees and the Bank.
For 1996, 1995 and 1994, participating employees' contributions totaled
$118,346, $96,452, and $88,682 respectively. The Bank made a matching
contribution of $10,000 for 1996 and $9,500 for 1995. No matching contribution
was made for 1994. A participant's retirement benefit will depend on the amount
of the contributions to the Plan together with the gains or losses on the
investments.
NOTE 12. COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Company has outstanding various
commitments and contingent liabilities, such as legal claims, which are not
reflected in the consolidated financial statements. Management does not
anticipate any material loss as a result of these transactions. As of December
31, 1996, the Company had entered into commitments to fund loans totaling
$4,195,156. The majority of these loans will have adjustable rates.
The following is a schedule, by interest rate, of loan commitments
outstanding as of December 31:
1996 1995
----------------------------------
6.00% - 6.99% $ 2,439,825 $ 594,250
7.00% - 7.99% 1,500,194 3,070,875
8.00% - 8.99% 210,137 445,118
9.00% - 9.99% 20,000 264,750
10.00% - 10.99% 25,000 35,000
----------------------------------
$ 4,195,156 $ 4,409,993
==================================
Page 28
============================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. SHAREHOLDERS' EQUITY:
LIQUIDATION ACCOUNT - On May 22, 1986, Lake Sunapee Bank, fsb received
approval from the Federal Home Loan Bank Board and converted from a federally-
chartered mutual savings bank to a federally-chartered stock savings bank. At
the time of conversion, the Bank established a liquidation account in an amount
of $4,292,510 (equal to the Bank's net worth as of the date of the latest
financial statement included in the final offering circular used in connection
with the conversion). The liquidation account will be maintained for the
benefit of eligible account holders who maintain their deposit accounts in the
Bank after conversion. In the event of a complete liquidation of the Bank
subsequent to conversion (and only in such event), each eligible account holder
will be entitled to receive a liquidation distribution from the liquidation
account before any liquidation distribution may be made with respect to capital
stock. The amount of the liquidation account is reduced to the extent that the
balances of eligible deposit accounts are reduced on any year-end closing date
subsequent to the conversion. Company management believes the balance in the
liquidation account would be immaterial to the consolidated financial statements
as of December 31, 1996.
DIVIDENDS - The Bank may not declare or pay a cash dividend on or purchase
any of its stock if the effect would be to reduce the net worth of the Bank
below either the amount of the liquidation account or the net worth requirements
of the banking regulators.
TREASURY STOCK - On July 15, 1993, the Company announced a buy back program
whereby the Company intends to repurchase, on the open market, 10% of its
currently outstanding common stock. As of December 31, 1996, 117,782 shares
remained to be purchased from the 1993 buy back program.
Treasury stock is recorded at cost, as purchased. Treasury stock sold is
accounted for on a first-in, first-out basis.
SPECIAL BAD DEBTS DEDUCTION - In prior years, Lake Sunapee Savings Bank,
fsb, a wholly-owned subsidiary of the Company, was allowed a special tax-basis
under certain provisions of the Internal Revenue Code. As a result, retained
income of Lake Sunapee Bank, fsb, as of December 31, 1996 includes approximately
$1,896,000 for which federal and state income taxes have not been provided. If
the Bank no longer qualifies as a bank as defined in certain provisions of the
Internal Revenue Code, this amount will be subject to recapture in taxable
income ratably over six (6) years, subject to a combined federal and state tax
rate of approximately 39%.
The following is a reconciliation of shareholders' equity and net income as
reported in the accompanying consolidated financial statements and as reflected
in reports filed with the Office of Thrift Supervision (OTS):
SHAREHOLDERS' EQUITY NET INCOME
1996 1995 1996 1995 1994
--------------------------------------------------------------------------
Balance reported to OTS $ 17,856,000 $ 18,456,000 $ 625,000 $ 1,258,000 $ 1,605,000
Parent company -
Loss before equity in earnings
of subsidiary (13,874) (12,830) (13,874) (12,830) (20,960)
Dividends from LSB to NHTB 1,000,000 1,000,000 - - -
Stock options exercised 725,120 570,825 - - -
Cash dividends paid to - - -
shareholders of NHTB (847,066) (839,413)
Retained earnings 3,347,321 3,199,564 - - -
Treasury stock purchased (2,873,530) (2,830,048) - - -
Other, net (281) (93) (415) (347) (1,790)
---------------------------------------------------------------------------
Balance per consolidated
financial statements $ 19,193,690 $ 19,544,005 $ 610,711 $ 1,244,823 $ 1,582,250
===========================================================================
Page 29
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. REGULATORY MATTERS:
The Company and the Bank are subject to various capital requirements
administered by their primary federal regulators, the Office of Thrift
Supervision (OTS) . Failure to meet minimum regulatory requirements can
initiate mandatory, and possible additional discretionary actions by regulators,
that if undertaken, could have a direct material effect on the Company's and the
consolidated financial statements. Under the regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines involving quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications under the prompt corrective action guidelines are also subject
to qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total risk-based capital and Tier I capital to risk-weighted assets
(as defined in the regulations), Tier I capital to adjusted total assets (as
defined) and tangible capital to adjusted total assets (as defined).
Management believes, as of December 31, 1996, that the Bank meets all
capital requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the regulatory
frame work for prompt corrective action. To be categorized as well capitalized
Bank must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
The table below presents the Bank's regulatory capital as compared to OTS
and FDIC requirements as of December 31, 1996. There was no deduction from
capital for interest-rate risk.
Bank OTS FDIC
------------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Tangible capital $17,862 6.76% $ 3,966 1.50% N/A N/A
Core leverage capital $17,862 6.76% $ 7,932 3.00% $13,220 5.00%
Tier I risk-based capital $17,862 11.81% N/A N/A $ 9,072 6.00%
Total risk-based capital $18,146 12.00% $12,097 8.00% $15,121 10.00%
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values of the Company's financial instruments , all of
which are held or issued for purposes other than trading, were as follows as of
December 31:
1996 1995
----------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------------------------- -----------------------------
Financial assets:
Cash and cash equivalents $ 11,002,749 11,002,749 $ 10,993,297 $ 10,993,297
Securities available for sale 24,950,725 24,950,725 25,569,664 25,718,260
Securities held to maturity 340,276 340,276 393,054 393,054
Other investments 2,307,557 2,307,557 2,303,285 2,303,285
Loans 216,002,761 216,136,350 209,032,402 209,043,415
Loans held for sale 745,650 745,650 3,095,971 3,095,971
Accrued interest receivable 1,354,042 1,354,032 1,433,882 1,433,882
Financial liabilities:
Regular savings, NOW, demand and
money market deposits 107,218,430 107,218,430 106,759,689 106,759,689
Time deposits 106,740,465 107,416,000 93,211,231 93,677,261
Repurchase agreements 8,662,736 8,662,736 9,552,825 9,552,825
Advances from Federal Home Loan Bank 20,174,025 20,162,000 26,936,168 27,016,696
Page 30
==========================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS: (continued):
The carrying amounts of financial instruments shown in the above table are
included in the consolidated statements of financial condition under the
indicated captions.
The Company has no derivative financial instruments subject to the
provisions of SFAS No. 119 "Disclosure About Derivative Financial Instruments
and Fair Value of Financial Instruments". Accounting policies related to
financial instruments are described in Note 1.
NOTE 16. HOLDING COMPANY OPERATIONS:
The following are condensed statements of financial condition, income,
retained earnings and cash flows for NHTB for the years ended December 31:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
1996 1995
------------------------------
ASSETS
Investment in subsidiary $ 17,855,719 $ 18,455,908
Advances to affiliates (LSB) 1,337,971 1,088,097
------------------------------
Total assets $ 19,193,690 $ 19,544,005
==============================
------------------------------
SHAREHOLDERS' EQUITY $ 19,193,690 $ 19,544,005
==============================
CONDENSED STATEMENTS OF INCOME
1996 1995 1994
------------------------------------------
Operating expenses $ 13,874 $ 12,830 $ 20,960
------------------------------------------
Loss before equity in earnings of subsidiary (13,874) (12,830) (20,960)
Equity in earnings of subsidiary 624,585 1,257,653 1,603,210
------------------------------------------
Net income $ 610,711 $ 1,244,823 $ 1,582,250
==========================================
Page 31
==========================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. HOLDING COMPANY OPERATIONS: (continued)
CONDENSED STATEMENTS OF CASH FLOWS
1996 1995 1994
-------------------------------------------------------
Cash flows from operating activities:
Net income $ 610,711 $ 1,244,823 $ 1,582,250
Adjustments to reconcile net income to net
cash
used in operating activities -
Equity in earnings of subsidiary (LSB) (624,585) (1,257,653) (1,603,210)
Amortization - - 13,752
-------------------------------------------------------
Net cash used in operating activities (13,874) (12,830) (7,208)
-------------------------------------------------------
Cash flows from investing activities:
Dividends received from subsidiary (LSB) 1,000,000 1,000,000 500,000
Advances from subsidiary, net (249,873) (207,217) 399,029
-------------------------------------------------------
Net cash provided by investing activities 750,127 792,783 899,029
-------------------------------------------------------
Cash flows from financing activities:
Proceeds from stock options exercised 154,295 203,475 132,420
Dividends paid (847,066) (839,413) (830,303)
Acquisition of treasury stock (43,482) (144,015) (193,938)
-------------------------------------------------------
Net cash used in financing activities (736,253) (779,953) (891,821)
-------------------------------------------------------
Net increase in cash - - -
Cash, beginning of year - - -
-------------------------------------------------------
Cash, end of year $ - $ - $ -
-------------------------------------------------------
The Parent Only Statements of Changes in Shareholders' Equity are identical
to the Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1996, 1995, and 1994, and therefore are not reprinted here.
NOTE 17. MERGER WITH LANDMARK BANK:
On July 26, 1996, the Company entered into an agreement and plan of
reorganization (the "Merger Agreement") with Landmark Bank. Pursuant to the
Merger Agreement, the Company will acquire all of the outstanding shares of
Landmark Bank for total consideration of approximately $6 million. The Merger
Agreement was subject to the approval of the shareholders of the Company,
shareholders of Landmark Bank, and various regulatory agencies. On January 22,
1997, the Company completed the acquisition of Landmark Bank.
Under the terms of the merger agreement, holders of Landmark Bank's stock
may elect to receive $12.00 in cash per share, or exchange their stock for stock
in the Company at a ratio of 1.1707 shares of the common stock of the Company
per Landmark share, subject to 60% of Landmark's stock being converted to stock
and 40% to cash. Allocation of the merger consideration is expected to take
place in February, 1997.
Page 32