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EX-32.1 - EXHIBIT 32.1 - NEW HAMPSHIRE THRIFT BANCSHARES INCdex321.htm
EX-31.1 - EXHIBIT 31.1 - NEW HAMPSHIRE THRIFT BANCSHARES INCdex311.htm
EX-31.2 - EXHIBIT 31.2 - NEW HAMPSHIRE THRIFT BANCSHARES INCdex312.htm
EX-32.2 - EXHIBIT 32.2 - NEW HAMPSHIRE THRIFT BANCSHARES INCdex322.htm
EX-21.1 - EXHIBIT 21.1 - NEW HAMPSHIRE THRIFT BANCSHARES INCdex211.htm
EX-23.1 - EXHIBIT 23.1 - NEW HAMPSHIRE THRIFT BANCSHARES INCdex231.htm
Table of Contents

New Hampshire Thrift Bancshares, Inc. is the parent company of Lake Sunapee Bank,fsb, a federal stock savings bank providing financial services throughout central and western New Hampshire and central Vermont.

The Bank encourages and supports the personal and professional development of its employees, dedicates itself to consistent service of the highest level for all customers, and recognizes its responsibility to be an active participant in, and advocate for, community growth and prosperity.


Table of Contents

 

Table of Contents

 

Selected Financial Highlights

   1

Letter to Stockholders

   2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   5

Report of Independent Registered Public Accounting Firm

   25

Financial Statements

   26

Notes to Financial Statements

   32

Form 10-K

   65

Board of Directors

   91

Officers and Managers

   91

Board of Advisors

   92

Stockholder Information

   92

Information on Common Stock

   92


Table of Contents

 

Selected Financial Highlights

 

For the Years Ended December 31,

   2009     2008     2007     2006     2005  
     (In thousands, except per share data)  

Net Income

   $ 6,598      $ 5,725      $ 4,516      $ 5,040      $ 5,524   

Per Share Data:

          

Basic Earnings (1)

     1.06        1.00        0.93        1.20        1.31   

Diluted Earnings

     1.06        0.99        0.92        1.17        1.29   

Dividends Paid

     0.52        0.52        0.52        0.52        0.50   

Dividend Payout Ratio

     49.06        52.00        55.91        43.33        38.17   

Return on Average Assets

     0.73        0.69     0.61     0.75     0.89

Return on Average Equity

     7.75        7.84     7.98     11.04     13.10

As of December 31,

   2009     2008     2007     2006     2005  
     (In thousands, except per share data)  

Total Assets

   $ 962,601      $ 843,198      $ 834,210      $ 672,031      $ 650,179   

Total Deposits

     734,429        653,353        652,952        465,506        464,637   

Total Securities (2)

     224,469        86,935        94,343        99,063        119,303   

Loans, Net

     620,333        636,720        626,274        492,712        463,151   

Federal Home Loan Bank Advances

     95,962        66,317        63,387        120,000        100,000   

Stockholders’ Equity

     87,776        74,677        72,667        48,409        46,727   

Book Value per Common Share

   $ 13.48      $ 12.99      $ 12.69      $ 11.58      $ 11.07   

Average Common Equity to Average Assets

     9.45     8.76     7.84     6.91     6.80

Shares Outstanding

     5,771,772        5,747,772        5,726,772        4,180,080        4,219,980   

Number of Branch Locations

     28        28        29        18        17   

 

(1) See Note 1 to Consolidated Financial Statements regarding earnings per share.
(2) Includes available-for-sale securities shown at fair value, held-to-maturity securities at cost and Federal Home Loan Bank stock at cost.

 

1


Table of Contents

 

Letter to Stockholders

 

… those who know the industry well understand that the fundamental principles of sound banking practices have not in any way been diminished…   

 

Dear Stockholder:

 

The Company continued to make significant progress in a number of critical areas as we moved through 2009…a year that was filled with severe financial and regulatory uncertainty. Public perceptions of the banking industry as a whole have been shaped by sound-bites and articles depicting the worst of characters as perhaps representative of the larger group. This is, of course, not the case at all. And community bankers across the country…those who know the industry well…understand that the fundamental principles of sound banking practices have not in any way been diminished.

 

Everyday community banks make a real difference by taking the time to understand the financial needs of the retail and commercial customers we are here to serve. Sound relationships are built on trust. We recognize that trust must not be taken for granted, and we work to earn that trust in everything that we do. In today’s world, knowing that similar products and services are so readily available from a wide variety of sources, there is an almost constant need to reinforce the role of community banks as the provider-of-choice for all of a customer’s banking needs.

 

While the worst of the economic downturn may now be passing, it is important to note the underlying strength of the New England region within which the Company does business and to highlight the fact the banks in the three Northern New England states have the lowest level of non-performing assets of anywhere else in the country. Ours is a ‘low-to-the-ground-business’ from community to community where we know our customers and they know us. This is the economic and relationship platform upon which we continue to build the core of our business.

 

COMPANY EARNINGS

 

The Company reported consolidated net income for the year-ended December 31, 2009 of $6,597,706, or $1.06 per share (fully diluted). This compares quite favorably to the $5,725,072, or $0.99 per share (fully diluted) that was reported for the year ended December 31, 2008. While margin compression continues to be of concern for the longer term, the results for 2009 reflect an increase in net interest and dividend income, as well as increases in the net gains on the sales of loans and on the sales of securities.

 

Having participated in the Treasury Department’s Capital Purchase Program (CPP) at the start of 2009, the Company was able to leverage the $10,000,000 in new capital in a way that provided additional benefits to the bottom line by enabling the Company to expand its asset base by investing in low-risk securities and growing that portfolio nearly three-fold to just under $220,000,000 at the end of the year. For a more in depth analysis of the Company’s financials, please refer to the Management’s Discussion and Analysis section immediately following this letter.

 

STOCKHOLDER VALUE

 

As a matter of fundamental practice, the Company continues to focus its energy on managing the core components of our business model that will yield progressive growth in stockholder value over the long term. The inevitability of economic cycles only serves to strengthen our resolve to build a sustainable franchise that can best weather a downturn in the markets and take advantage of the same markets when they are more robust. This means developing and maintaining a corporate strategy that continually assesses the quality of our assets, reviews our products, services and policies, and looks to find areas of opportunity and growth.

 

The Company’s stock price closed out the year 2009 at $9.69, well above the start of the year when it closed at $7.01 at the beginning of January, with daily closing prices having ranged from a low of $6.40 to high of $10.40 over the course of the year. Stockholder’s equity stood at $87,776,253 at December 31, 2009 as compared to $74,677,092 a year earlier. The number of common shares outstanding at the end of the year totaled 5,771,772 and the book value per share stood at $13.48, an increase of $0.49 per share from a year ago. During this past year, the Company continued to pay a regular cash dividend of $0.52 per share on its common stock.

 

2


Table of Contents

 

Letter to Stockholders (continued)

 

 

BALANCE SHEET HIGHLIGHTS

 

Total assets of the Company amounted to $962,601,187 at year-end December 31, 2009 as compared to $843,198,414 at December 31, 2008, a significant increase over the prior year end that is primarily reflective of the leverage strategy undertaken in connection with the Company’s participation in the CPP program as well as in conjunction with the growth in deposits and FHLB advances. Loans held in portfolio decreased from $636,720,290 at year-end 2008 to $620,332,606 at December 31, 2009. This decline was the direct result of the mortgage loan refinance boom that took place during the early part of 2009. The Company saw a large number of portfolio loans transition into the fixed-rate secondary market, with a corresponding growth in our off-balance-sheet servicing portfolio that now stands at just over $350,000,000.

 

With the economy in decline, the Company took a disciplined and dedicated approach to building its loan loss reserves over the course of the year, resulting in an allowance for loan losses that increased by $3,924,320, net, to $9,518,632 at year end, up from $5,594,312 at December 31, 2008. This action further shields the Company from the possibility of loan quality erosion within the residential and commercial loan portfolios. Non-performing loans as a percentage of total loans stood at 0.98% at year-end 2009 as compared to 1.10% at year-end 2008. And the Company remains well-capitalized with a Tier 1 Capital ratio of 8.45% at December 31, 2009.

 

THE BUSINESS MODEL

 

Many articles that appeared during the last year made reference to a ‘new normal’ in both the local and national business environments. The economic reality of the past couple of years has led many to envision an undetermined period of time during which we all will see major changes in the way consumers do business and in what their expectations will be about…and from…the companies they choose to do business with in the future.

 

As we work to clarify the financial services role of the Company within the variety of communities currently served, the underlying theme continues to revolve around the need to nurture and support the ‘service culture’ that has become so embedded within everything that we do here on a daily basis. We remain committed to our choice to focus on a relatively narrow set of operating principles… reinforce them, refine them and adapt them to meet the needs and expectations of an ever-changing business climate. For community banks, it is consistency that matters most, and we must always strive to anticipate our customer’s changing needs.

 

Capitalizing on our network of branch offices, we seek to further delineate the Company as a retailer of financial services by developing a better understanding of our core customers, planning effectively and being flexible and agile enough to make changes to our business model as necessary. The goal has always been to grow the Company by looking for avenues of opportunity to increase market share, enhance revenues and optimize expenses by advancing our relationship presence in the lives of our customers and communities we serve.

 

THE REGULATORY PENDULUM

 

The current trend in regulatory reform that is sweeping its way through Congress remains of great and grave concern to community bankers. The costly burden of ever- increasing layers of new and revised regulations weighs heavily upon financial institutions. However, working within a highly regulated industry, we understand the need for a tighter set of rules in order to provide greater consumer protections.

 

Enterprise risk management embodies a host of new initiatives to identify any and all potential threats and weaknesses throughout all levels of an institution. We are and will continue to be focused on key questions, including, what is the downside of all the different things that we do? What would or could the impact be of rising or falling interest rates? What about asset quality? What about liquidity? What about capital? What about reserves? And the list goes on from there…

 

Looking at ourselves introspectively brings with it a much greater understanding of the complexities of a financial services company like ours and draw attention to areas that will continue to strengthen the core value of the institution over time.

  

….the goal has always been to grow the Company by looking for avenues of opportunity…

 

 

3


Table of Contents

 

Letter to Stockholders (continued)

 

… the recent economic downturn will have long-lasting financial implications…

 

 

  

 

LOOKING FORWARD

 

The role of ‘social networking’ and its place in the context of a bank’s delivery system for both traditional and new products and services is one of the areas next to be investigated by our management team. Many more people are becoming accustomed to communicating with each other…and with people they don’t know…through the use of a widening variety of on-line avenues. Where we should be in this new environment has yet to be determined, but we do recognize that there will be a base of customers that could broaden our traditional scope and territory of operations.

 

Economic shifts are also taking place as the ‘baby boomer’ generation moves toward retirement…or…perhaps stays in the workforce beyond their normal planned retirement date. Determining what their needs will be and how those needs can be best met by companies like ours will be an added challenge as we move into the not to distant future. The recent economic downturn will have long-lasting financial implications for many people and understanding how we can help them will increase the importance of the customer relationships that we have been developing over the years.

 

The operating culture of ‘people helping people’ that has been developed with the Company is ideally suited to meeting the challenges ahead of us. Emphasis continues to be placed on the retention and development of our core employee base by providing them with opportunities for both personal and professional growth and development in a proactive environment. We believe we obtain a beneficial advantage by deepening the relationship between each of our employees and the Company.

 

IN CLOSING

 

Our underlying operating premise is to seek ways to further develop, enhance and build upon the franchise value that has become the backbone of the Company as we move to advance our presence throughout the communities served by our branch offices in New Hampshire and Vermont. We strive to maintain high quality assets within our loan and securities portfolios, while remaining diligent in the pursuit of emerging opportunities that would be beneficial to the longer-term growth of the Company.

 

On behalf of those of us who work together to strengthen the financial position of the Company, I want to once again take this opportunity to express our appreciation to you…our stockholders…for the continuing support and confidence that you have shown over the years.

 

 

/s/  Stephen W. Ensign

 

4


Table of Contents

 

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

General

New Hampshire Thrift Bancshares, Inc.’s (the “Company” or “NHTB”) profitability is derived from its subsidiary, Lake Sunapee Bank, fsb (the “Bank”). The Bank’s earnings are primarily generated from the difference between the yield on its loans and investments and the cost of its deposit accounts and borrowings. Loan origination fees, retail-banking service fees, and gains on security and loan transactions supplement these core earnings.

Overview

 

   

Total assets stood at $962,601,187 at December 31, 2009, an increase of $119,402,773, or 14.16%, from $843,198,414 at December 31, 2008.

 

   

Net loans decreased $16,387,684, or 2.57%, to $620,332,606 at December 31, 2009 from $636,720,290 at December 31, 2008.

 

   

In 2009, the Bank originated $309,592,066 in loans, compared to $241,431,731 in 2008.

 

   

The Bank’s loan servicing portfolio increased to $352,066,692 at December 31, 2009 from $311,228,362 at December 31, 2008, an increase of $40,838,330, or 13.12%.

 

   

The Company earned $6,597,706, or $1.06 per common share, assuming dilution, for the year ended December 31, 2009, compared to $5,725,072, or $0.99 per common share, assuming dilution, for the year ended December 31, 2008.

 

   

Net interest and dividend income for the year ended December 31, 2009 increased $1,386,231, or 5.35%, to $27,307,960.

 

   

The Bank’s interest rate spread decreased to 3.32% at December 31, 2009 from 3.37% at December 31, 2008.

Forward-looking Statements

Statements included in this discussion and in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on such forward-looking statements, which speak only at the date made. The following important factors, among others, in some cases have affected and in the future could affect the Company’s actual results, and could cause the Company’s actual financial performance to differ materially from that expressed in any forward-looking statement: (1) the Company’s loan portfolio includes loans with a higher risk of loss; (2) if the Company’s allowance for loan losses is not sufficient to cover actual loan losses, earnings could decrease; (3) changes in interest rates could adversely affect the company’s results of operations and financial condition; the local economy may affect future growth possibilities; (4) the Company depends on its executive officers and key personnel to continue the implementation of its long-term business strategy and could be harmed by the loss of their services; (5) the Company operates in a highly regulated environment, and changes in laws and regulations to which it is subject may adversely affect its results of operations; and (6) competition in the Bank’s primary market area may reduce its ability to attract and retain deposits and originate loans. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events or circumstances.

Critical Accounting Policies

The Company considers the following accounting policies to be most critical in their potential effect on its financial position or results of operations:

Allowance for Loan Losses

The allowance for loan losses is established through a charge to the provision for loan losses. Provisions are made to reserve for estimated losses in outstanding loan balances. The allowance for loan losses is a significant estimate and is regularly reviewed by the Company for adequacy by assessing such factors as changes in the mix and volume of the loan portfolio; trends in portfolio credit quality, including delinquency and charge-off rates; and current economic conditions that may affect a borrower’s ability to repay. The Company’s methodology with respect to the assessment of the adequacy of the allowance for loan losses is more fully discussed on pages 13-17 of Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

Income Taxes

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

 

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Table of Contents
 

 

Management’s Discussion and Analysis (continued)

 

 

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 December 31, 2009, there were no valuation allowances set aside against any deferred tax assets.

Interest Income Recognition

Interest on loans is included in income as earned based upon interest rates applied to unpaid principal. Interest is not accrued on loans 90 days or more past due. Interest is not accrued on other loans when management believes collection is doubtful. All loans considered impaired are nonaccruing. Interest on nonaccruing loans is recognized as payments are received when the ultimate collectibility of interest is no longer considered doubtful. When a loan is placed on nonaccrual status, all interest previously accrued is reversed against current-period interest income.

Capital Securities

On March 30, 2004, NHTB Capital Trust II (“Trust II”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of Floating Capital Securities, adjustable every three months at LIBOR plus 2.79% (“Capital Securities II”). Trust II also issued common securities to the Company and used the net proceeds from the offering to purchase a like amount of Junior Subordinated Deferrable Interest Debentures (“Debentures II”) of the Company. Debentures II are the sole assets of Trust II. Total expenses associated with the offering of $160,402 are included in other assets and are being amortized on a straight-line basis over the life of Debentures II.

Capital Securities II accrue and pay distributions quarterly based on the stated liquidation amount of $10 per capital security. The Company has fully and unconditionally guaranteed all of the obligations of Trust II. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities II, but only to the extent that Trust II has funds necessary to make these payments.

Capital Securities II are mandatorily redeemable upon the maturing of Debentures II on March 30, 2034 or upon earlier redemption as provided in the Indenture. The Company has the right to redeem Debentures II, in whole or in part on or after March 30, 2009 at the liquidation amount plus any accrued but unpaid interest to the redemption date.

On March 30, 2004, NHTB Capital Trust III (“Trust III”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of 6.06%, 5 Year Fixed-Floating Capital Securities (“Capital Securities III”). Trust III also issued common securities to the Company and used the net proceeds from the offering to purchase a like amount of 6.06% Junior Subordinated Deferrable Interest Debentures (“Debentures III”) of the Company. Debentures III are the sole assets of Trust III. Total expenses associated with the offering of $160,402 are included in other assets and are being amortized on a straight-line basis over the life of Debentures III.

Capital Securities III accrue and pay distributions quarterly at an annual rate of 6.06% for the first 5 years of the stated liquidation amount of $10 per capital security. The Company has fully and unconditionally guaranteed all of the obligations of the Trust. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities III, but only to the extent that the Trust has funds necessary to make these payments.

Capital Securities III are mandatorily redeemable upon the maturing of Debentures III on March 30, 2034 or upon earlier redemption as provided in the Indenture. The Company has the right to redeem Debentures III, in whole or in part on or after March 30, 2009 at the liquidation amount plus any accrued but unpaid interest to the redemption date.

Interest Rate Swap

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

Comparison of Years Ended December 31, 2009 and 2008

Financial Condition

Total assets increased $119,402,773, or 14.16%, to $962,601,187 at December 31, 2009 from $843,198,414 at December 31, 2008. Cash and Federal Home Loan Bank overnight deposits increased $15,476,961.

Total net loans receivable excluding loans held-for-sale decreased $16,387,684, or 2.57% to $620,332,606 at December 31, 2009. The Bank’s conventional real estate loan portfolio decreased $10,469,964, or 3.04%, to $333,531,436. Construction loans decreased $1,047,422, or 7.75%, to $12,467,786. Commercial real estate loans decreased $3,753,796, or 2.69%, to $135,838,539. Additionally, consumer loans increased $3,513,309, or 4.42%, to $82,981,689 and commercial and municipal loans decreased $104,519, or 0.17%, to $62,386,826. Sold loans totaled $352,066,692 at year-end 2009, compared to $311,228,362, at year-end 2008. Sold loans are loans originated by the Bank and sold to the secondary market with the Bank retaining the majority of servicing of these loans. The Bank expects to continue to sell fixed-rate loans into the secondary market,

 

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Table of Contents
 

 

Management’s Discussion and Analysis (continued)

 

 

retaining the servicing, in order to manage interest rate risk and control growth. Typically, the Bank holds adjustable-rate loans in portfolio. At December 31, 2009, adjustable-rate mortgages comprised approximately 80% of the Bank’s real estate mortgage loan portfolio, which is consistent with prior years. Non-performing assets were 0.29% of total assets and 0.98% of total loans at December 31, 2009, compared to 0.83% and 1.10%, respectively, at December 31, 2008, as the Bank continued to originate loans using conservative, standardized underwriting.

The fair value of investment securities available-for-sale increased $136,304,613, or 166.25%, to $218,293,101 at December 31, 2009, from $81,988,488 at December 31, 2008. The Bank realized $3,648,795 in the gains on the sales and calls of securities during 2009, compared to $909,919 in gains on the sales and calls of securities recorded during 2008. The U.S. Treasury’s actions during 2008 to place Fannie Mae under conservatorship resulted in an other-than-temporary impairment to the fair market value of 20,000 shares of Fannie Mae Preferred Stock, Series F held by the Bank as previously disclosed in Current Report Form 8-K dated October 1, 2008. As a result, the Company recorded a writedown of $879,720 due to the other-than-temporary impairment of Fannie Mae Preferred Stock during 2008. At December 31, 2009, the Bank’s investment portfolio had a net unrealized holding loss of $837,491, compared to a net unrealized holding gain of $368,441 at December 31, 2008. The securities in the Bank’s investment portfolio that are temporarily impaired at December 31, 2009 consist of debt securities issued by U.S. Government corporations or agencies, corporate debt with investment-grade credit ratings and preferred stock issued by corporations and government sponsored agencies. At December 31, 2009, one investment held in the Company’s portfolio as available-for-sale, U.S. Bank Capital Trust Preferred VIII, had an unrealized market loss of $348,000 compared an unrealized market loss of $722,000 at December 31, 2008. The unrealized loss is primarily attributable to changes in market interest rates. Management does not intend to sell these securities in the near term. As management has the ability to hold debt securities until maturity and equity securities for the foreseeable future, no declines are deemed to be other than temporary.

Real estate owned and property acquired in settlement of loans was at $100,000 at December 31, 2009 compared to $263,000 at December 31, 2008.

Goodwill was unchanged at $27,293,470 at December 31, 2009, compared to December 31, 2008. Goodwill includes $7,503,046 related to the acquisition of First Brandon Financial Corporation and $7,650,408 related to the acquisition of First Community Bank, both in 2007. Goodwill also includes $2,471,560 relating to the acquisition of Landmark Bank in 1998 and $9,668,456 relating to the acquisition of three branch offices of New London Trust in 2001.

Core deposit intangibles decreased to $2,023,806 at December 31, 2009, compared to $2,560,527 at December 31, 2008. The Bank amortized $536,721 during 2009 and utilized the sum-of-the-years-digits method over ten years to amortize the core deposit intangibles.

Total deposits increased $81,075,443, or 12.41%, to $734,428,768 at December 31, 2009 from $653,353,325 at December 31, 2008. The Bank was able to retain and attract deposits as customers were drawn to the safety and guarantee of FDIC insurance resulting from uncertain credit markets and a lingering national recession.

Advances from the Federal Home Loan Bank (FHLB) increased $29,644,521, or 44.70%, to $95,962,006 from $66,317,485 at December 31, 2008. The weighted average interest rate for the outstanding FHLB advances was 1.71% at December 31, 2009, compared to 2.94% at December 31, 2008.

Liquidity and Capital Resources

The Bank is required to maintain sufficient liquidity for safe and sound operations. At year-end 2009, the Bank’s liquidity was sufficient to cover the Bank’s anticipated needs for funding new loan commitments of approximately $18.3 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 December 31, 2009, the Bank had approximately $132.2 million in additional borrowing capacity from the FHLB.

At December 31, 2009, the Company’s stockholders’ equity totaled $87,776,253, compared to $74,677,092, at year-end 2008. The increase of $13,099,161 reflects net income of $6,597,706, the payout of $2,994,821 in common stock dividends, the payout of $415,278 in preferred stock dividends, the exercise of stock options in the amount of $197,673, including a tax benefit, other comprehensive loss in the amount of $286,119, the issuance of preferred stock in the amount of $9,914,980, and the issuance of common stock warrants in the amount of $85,020.

On June 12, 2007, the Company approved the repurchase of up to an additional 253,776 shares of common stock. At December 31, 2009, 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; 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 2009, no shares were repurchased. However, 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, without the consent of the Treasury prior to January 16, 2012.

 

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Table of Contents
 

 

Management’s Discussion and Analysis (continued)

 

 

At December 31, 2009, the Company had funds in the amount of $1,887,922. Total cash needs for the Company during 2010 will amount to approximately $4.5 million with $3.0 million projected to be used to pay dividends on the Company’s common stock, $1.0 million to pay interest on the Company’s capital securities and $0.5 million to pay interest dividends on the Company’s Preferred Stock Series A. The Bank pays dividends to the Company as its sole stockholder, within guidelines set forth by the Office of Thrift Supervision (OTS). Since the Bank is well capitalized and has capital in excess of regulatory requirements, it is anticipated that funds will be available to cover the Company’s cash needs for 2010 as long as earnings at the Bank are sufficient to maintain adequate Tier I capital.

During 2009, the Bank employed a leverage strategy to utilize the $10 million of capital received through participation n the CPP. This leverage included the purchase of additional investments, primarily in Fannie Mae and Freddie Mac mortgage-back securities, funded through the influx of deposits as well as additional FHLB advances.

Net cash provided by operating activities decreased $5,245,778 to $6,140,450 in 2009 from $11,386,228 in 2008. The decrease includes an increase in the amount of $4,850,900 in provision for loan losses, an increase in gains on sales and calls of securities of $2,738,876, an increase in mortgage servicing rights of $1,936,594, and a decrease of $2,005,800 in accrued expenses and other liabilities.

Net cash flows used in investing activities totaled $105,093,049 in 2009, compared to net cash flows used in investing activities of $24,729,196 in 2008, an increase of $80,363,853. During 2009, net cash provided by loan originations and net principal collections increased by $21,487,728 reflecting the sales of fixed-rate loans into the secondary market, while net cash used in securities available-for-sale increased $99,959,811.

Net cash flows provided by financing activities totaled $114,429,560 in 2009, compared to net cash flows provided by financing activities of $1,870,118, a change of $112,559,442. Net cash provided by FHLB advances increased $26,715,802 during 2009 compared to $2,901,952 during 2008 as cash provided by deposits increased $80,859,385.

The Bank expects to be able to fund loan demand and other investing activities during 2010 by continuing to utilize the FHLB’s advance program and cash flows from securities and loans. On December 31, 2009, approximately $18.3 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 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 reference 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.

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. Please refer to Note 19 of the Consolidated Financial Statements for further discussion.

The OTS requires that the Bank maintain tangible, core, and total risk-based capital ratios of 1.50%, 4.00%, and 8.00%, respectively. At December 31, 2009, the Bank’s ratios were 8.45%, 8.45%, and 13.27%, respectively, well in excess of the OTS requirements for well-capitalized banks.

Book value per common share was $13.48 at December 31, 2009, compared to $12.99 per common share at December 31, 2008. Tangible book value per common share was $10.51 at December 31, 2009, compared to $9.19 per common share at December 31, 2008

Impact of Inflation

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

Unlike other companies, nearly all of the assets and liabilities of a bank are monetary in nature. As a result, interest rates have a far greater impact on a bank’s performance than the effects of the general level of inflation.

 

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Management’s Discussion and Analysis (continued)

 

 

Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services, since such prices are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the Bank’s assets and liabilities are important to the maintenance of acceptable performance levels.

Interest Rate Sensitivity

The principal objective of the Bank’s interest rate management function is to evaluate the interest rate risk inherent in certain balance sheet accounts and determine the appropriate level of risk given the Bank’s business strategies, operating environment, capital and liquidity requirements and performance objectives, and to manage the risk consistent with the Board of Director’s approved guidelines. The Bank’s Board of Directors has established an Asset/Liability Committee (ALCO) to review its asset/liability policies and interest rate position. Trends and interest rate positions are reported to the Board of Directors monthly.

Gap analysis is used to examine the extent to which assets and liabilities are “rate sensitive”. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specified period of time and the amount of interest-bearing liabilities maturing or repricing within the same specified period of time. The strategy of matching rate sensitive assets with similar liabilities stabilizes profitability during periods of interest rate fluctuations.

The Bank’s one-year cumulative interest-rate gap at December 31, 2009, was negative 7.10%, compared to the December 31, 2008 gap of positive 9.57%. At December 31, 2009, repricing liabilities over the next twelve months was $60.8 million more than repricing assets for the same period compared to repricing assets exceeding repricing liabilities in the amount of $69.0 million at December 31, 2008. With a liability sensitive (negative) gap, if rates were to rise, net interest margin would likely decrease and if rates were to fall, the net interest margin would likely increase.

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 to 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 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.

 

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Management’s Discussion and Analysis (continued)

 

 

The following table shows the Bank’s interest rate sensitivity (gap) table at December 31, 2009:

 

     0-3
Months
    3-6
Months
    6 Months-
1 Year
    1-3
Years
    Beyond
3 Years
    Total  
     ($ in thousands)  

Interest-earning assets:

            

Loans

   $ 159,643      $ 57,933      $ 89,639      $ 176,013      $ 137,105      $ 620,333   

Investments and overnight deposit

     23,809        7,619        18,564        68,357        122,144        240,493   
                                                

Total

     183,452        65,552        108,203        244,370        259,249        860,826   
                                                

Interest-bearing liabilities:

            

Deposits

     180,860        90,273        69,767        68,686        324,843        734,429   

Repurchase agreements

     12,119        —          —              12,119   

Borrowings

     60,000        5,000        —          10,000        20,962        95,962   
                                                

Total

     252,979        95,273        69,767        78,686        345,805        842,510   
                                                

Period sensitivity gap

     (69,527     (29,721     38,436        165,684        (86,556   $ 18,316   

Cumulative sensitivity gap

   $ (69,527   $ (99,248   $ (60,812   $ 104,872      $ 18,316        —     

Cumulative sensitivity gap as a percentage of interest-earning assets

     -8.08     -11.53     -7.06     12.18     2.13     2.13

The following table sets forth the Bank’s NPV at December 31, 2009, as calculated by the OTS:

 

Change

in Rates

   Net Portfolio Value     NPV as % of PV Assets
   $ Amount    $ Change    % Change     NPV Ratio     Change

+300 bp

   $ 73,256    -41,451    -36   7.90   -389bp

+200 bp

     90,110    -24,597    -21   9.53   -226bp

+100 bp

     105,505    -9,202    -8   10.96   -82bp

  +50 bp

     110,919    -3,788    -3   11.45   -34bp

      0 bp

     114,707    —      —        11.79   —  

  -50 bp

     118,864    4,158    +4   12.15   +36bp

-100 bp

     121,611    6,904    +6   12.39   +60bp

Comparison of Years Ended December 31, 2009 and 2008

Net Interest and Dividend Income

Net interest and dividend income for the year ended December 31, 2009 increased $1,386,231, or 5.35%, to $27,307,960. The increase was primarily due to the Bank’s lower cost of funds during 2009. Total interest and dividend income decreased $3,251,635, or 7.63%, to $39,384,142 as the yield on interest-earning assets decreased to 4.92% from 5.69%. Interest and fees on loans decreased $4,394,628, or 11.70%, to $33,176,044 in 2009, due primarily to a decrease in the average yield on loans to 5.16% from 5.86%

Interest on taxable investments increased $1,671,709, or 37.48%, to $6,131,899, due primarily to an increase in average taxable investments as the Bank leveraged the capital funds to purchase investments, primarily mortgage-backed securities issued by Fannie Mae and Freddie Mac. Dividends decreased $309,188, or 93.73%, to $20,689. Interest on other investments decreased $219,528, or 79.82%, to $55,510. The yield on the Bank’s investment portfolio declined from 4.67% for the year ended December 31, 2008 to 3.94% the year ended December 31, 2009 due to lower yielding investments purchased to replace maturing and called securities in a falling interest rate environment.

Total interest expense decreased $4,637,866, or 27.75%, to $12,076,182 for the year ended December 31, 2009. For the year ended December 31, 2009, interest on deposits decreased $4,175,506, or 32.27%, to $8,762,151, despite an increase in average deposits as the cost of deposits decreased to 1.36% from 2.08%, compared to the same period in 2008. The increase on average deposits resulted primarily from customers seeking the safety of insured deposits. Interest on FHLB advances and other borrowed money decreased $128,507, or 5.77%, for the twelve months

 

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Management’s Discussion and Analysis (continued)

 

 

ended December 31, 2009, to $2,098,049 for the same period in 2008, as FHLB advances outstanding increased to $95,962,006 at December 31, 2009, from $66,317,485 at December 31, 2008. The Bank was able to replace maturing advances at substantially lower rates during 2009 resulting in overall lower costs due to the falling interest rate environment.

For the year ended December 31, 2009, the Bank’s combined cost of funds decreased to 1.60% as compared to 2.32% for 2008. The cost of deposits, including repurchase agreements, decreased 73 basis points for 2009 to 1.34% compared to 2.07% in 2008, due primarily to the downward repricing of maturing time deposits and advances.

The Bank’s interest rate spread, which represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, decreased to 3.32% in 2009 from 3.37% in 2008. The Bank’s net interest margin, representing net interest income as a percentage of average interest-earning assets, decreased to 3.41% during 2009, from 3.46% during 2008.

 

 

The following table sets forth the average yield on loans and investments, the average interest rate paid on deposits and borrowings, the interest rate spread, and the net interest rate margin:

 

     For the Years Ended December 31,  
     2009     2008     2007     2006     2005  

Yield on loans

   5.16   5.86   6.20   5.80   5.37

Yield on investment securities

   3.94   4.67   4.93   4.41   3.95

Combined yield on loans and investments

   4.92   5.69   5.99   5.53   5.06

Cost of deposits, including repurchase agreements

   1.34   2.07   2.59   1.77   1.09

Cost of other borrowed funds

   3.29   4.19   5.37   5.22   3.94

Combined cost of deposits and borrowings

   1.60   2.32   3.08   2.66   1.66

Interest rate spread

   3.32   3.37   2.91   2.87   3.40

Net interest margin

   3.41   3.46   3.06   3.02   3.49

 

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Management’s Discussion and Analysis (continued)

 

 

The following table presents, for the years indicated, the total dollar amount of interest income from interest-earning assets and the resultant yields as well as the interest paid on interest-bearing liabilities, and the resultant costs:

 

Years ended December 31,

   2009     2008     2007  
     Average
Balance(1)
   Interest    Yield/
Cost
    Average
Balance(1)
   Interest    Yield/
Cost
    Average
Balance(1)
   Interest    Yield/
Cost
 
     ($ in thousands)  

Assets:

                        

Interest-earning assets:

                        

Loans (2)

   $ 642,655    $ 33,176    5.16   $ 641,100    $ 37,571    5.86   $ 552,203    $ 34,258    6.20

Investment securities and other

     157,405      6,208    3.94     108,533      5,065    4.67     109,158      5,385    4.93
                                                

Total interest-earning assets

     800,060      39,384        749,633      42,636    5.69     661,361      39,643    5.99
                                                

Noninterest-earning assets:

                        

Cash

     15,983           17,541           16,940      

Other noninterest-earning assets (3)

     84,867           66,151           43,922      
                                    

Total noninterest-earning assets

     100,850           83,692           60,862      
                                    

Total

   $ 900,910         $ 833,325         $ 722,223      

Liabilities and Stockholders’ Equity:

                        

Interest-bearing liabilities:

                        

Savings, NOW and MMAs

   $ 333,352    $ 1,080    0.32   $ 331,586    $ 2,512    0.76   $ 280,578    $ 2,666    0.95

Time deposits

     310,994      7,682    2.47     290,648      10,426    3.59     226,618      10,275    4.53

Repurchase agreements

     13,705      58    0.42     14,184      234    1.65     10,420      454    4.35

Capital securities and other borrowed funds

     98,913      3,256    3.29     84,276      3,542    4.20     111,499      5,986    5.37
                                                

Total interest-bearing liabilities

     756,964      12,076    1.60     720,694      16,714    2.32     629,115      19,381    3.08
                                                

Noninterest-bearing liabilities:

                        

Demand deposits

     27,917           29,286           30,573      

Other

     30,880           10,309           5,940      
                                    

Total noninterest-bearing liabilities

     58,797           39,595           36,513      
                                    

Stockholders’ equity

     85,149           73,036           56,595      
                                    

Total

   $ 900,910         $ 833,325         $ 722,223      
                                    

Net interest income/Net interest rate spread

      $ 27,308    3.32      $ 25,922    3.37      $ 20,262    2.91
                                                

Net interest margin

         3.41         3.46         3.06
                                    

Percentage of interest-earning assets to interest-bearing liabilities

         105.69         104.02         105.13
                                    

 

(1)

Monthly average balances have been used for all periods.

(2)

Loans include 90-day delinquent loans, which have been placed on a non-accruing status. Management does not believe that including the 90-day delinquent loans in loans caused any material difference in the information presented.

(3)

Other noninterest-earning assets include non-earning assets and other real estate owned.

 

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Management’s Discussion and Analysis (continued)

 

 

The following table sets forth, for the years indicated, a summary of the changes in interest earned and interest paid resulting from changes in volume and rates. The net change attributable to changes in both volume and rate, which cannot be segregated, has been allocated proportionately to the change due to volume and the change due to rate.

 

     Year ended December 31, 2009 vs. 2008
Increase (Decrease)
due to
 
     Volume     Rate     Total  
     ($ in thousands)  

Interest income on loans

   $ 80      $ (4,475   $ (4,395

Interest income on investments

     1,927        (784     1,143   
                        

Total interest income

     2,007        (5,259     (3,252
                        

Interest expense on savings, NOW and MMAs

     6        (1,438     (1,432

Interest expense on time deposits

     503        (3,246     (2,743

Interest expense on repurchase agreements

     (2     (185     (187

Interest expense on capital securities and other borrowings

     482        (757     (275
                        

Total interest expense

     989        (5,626     (4,637
                        

Net interest income

   $ 1,018      $ 367      $ 1,385   
                        

 

     Year ended December 31, 2008 vs. 2007
Increase (Decrease)
due to
 
     Volume     Rate     Total  
     ($ in thousands)  

Interest income on loans

   $ 5,210      $ (1,897   $ 3,313   

Interest income on investments

     (29     (291     (320
                        

Total interest income

     5,181        (2,188     2,993   
                        

Interest expense on savings, NOW and MMAs

     386        (540     (154

Interest expense on time deposits

     2,297        (2,146     151   

Interest expense on repurchase agreements

     65        (274     (209

Interest expense on capital securities and other borrowings

     (1,141     (1,314     (2,455
                        

Total interest expense

     1,607        (4,274     (2,667
                        

Net interest income

   $ 3,574      $ 2,086      $ 5,660   
                        

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 are not collectible in accordance with the contractual terms of the loan. Measurement of impairment can be based on the present

 

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Management’s Discussion and Analysis (continued)

 

 

value of expected cash flows discounted at the loans effective interest rate, the market price of the loan, or the fair value of the collateral if the loan is collateral dependent.

Measurement of impairment does not apply to large groups of smaller balance homogenous loans such as residential mortgage, home equity, or installment loans that are collectively evaluated for impairment. Please refer to Note 4 of the notes to the Consolidated Financial Statements for information regarding impaired loans.

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.

At December 31, 2009, the allowance for loan losses was $9,494,007 compared to $5,567,859 at year-end 2008. The increase is due to provisions of $5,846,000 and recoveries of $211,906, which were partially offset by loan charge-offs of $2,131,758. The amounts shown in this paragraph and the next two paragraphs do not include amounts associated with overdrafts on checking accounts.

The $5,846,000 provision made in 2009 reflects both the higher loan loss experience in 2009 and the changes in economic conditions that increase the risk of loss inherent in the loan portfolio. The higher loan loss experience is largely attributable to weaker real estate market conditions. Management anticipates making additional provisions in 2010 to maintain the allowance at an adequate level.

Loan charge-offs were $2,131,758 in 2009 compared to $545,404 in 2008. The increase reflects a writedown of approximately $1.0 million in commercial real estate in addition to higher charge-offs in all other categories. Recoveries were $211,906 for the period ended December 31, 2009, compared to $42,635 for the same period in 2008 resulting in net charge-offs for 2009 and 2008 of $1,919,852 and $502,769, respectively. The increase in the amount of the allowance for loan losses, due to the provisions made during 2009, increased the allowance from 0.87% to 1.51% of total loans.

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

The allowance for overdrafts was $24,626 at December 31, 2009, compared to $26,453 at year-end 2008. The tables in this section show the activity in the accounts for both the allowance for loan losses and the allowance for overdraft losses.

Total classified loans, excluding special mention loans, at December 31, 2009 and 2008, were $11,876,373 and $9,122,365 respectively. Special mention loans were $14,054,577 at December 31, 2009, compared to $12,153,366 at year-end 2008. These changes are a reflection of the lingering national recession which has adversely affected borrowers’ capacity to service debt. The special mention loans continue to perform and do not warrant adverse classification at this time.

The classified loans include $4,237,087 of impaired loans at December 31, 2009, compared to $4,547,504 at December 31, 2008. The impaired loans meet the criteria established under ASC 310-10-35, although one $2.0 million loan considered restructured at year-end 2009 and impaired at year-end 2008 continues to perform. The $2.0 million loan is not considered collateral dependent at this time, but the appraised value of the commercial real estate suggests no loss of principal and supports the current valuation. Four loans considered impaired loans at December 31, 2009, with specific reserves, are all under $200,000 and are secured with real estate. At December 31, 2009, the allowance included $165,000 allocated to impaired loans. The portion of the allowance allocated to impaired loans at December 31, 2008 was $209,500.

Loans 30 to 89 days past due were $9,883,831 and $10,018,803 at December 31, 2009 and 2008, respectively. Total non-performing loans amounted to $2,754,443 and $7,026,992 at December 31, 2009 and 2008, respectively. Loans over 90 days past due are placed on nonaccrual status and are included in non-performing loans. Loans over 90 days past due were $2,754,443 at December 31, 2009 compared to $3,003,615 at December 31, 2008. At year-end 2009, there were 18 loans over 90 days past due compared to 28 at the end of 2008.

As a percent of assets, non-performing loans decreased from 0.87% at the year-end 2008 to 0.29% at December 31, 2009, and as a percent of total loans, decreased from 1.10% at the end of 2008 to 0.98% at the end of 2009. At December 31, 2009, the Bank held $100,000 of other real estate owned and repossessed assets. This represents a decrease over the $263,000 held at the end of 2008. During 2009, the Bank sold three properties that were acquired in previous periods and sold two properties that were acquired during 2009. One property acquired during 2009 remained in OREO at December 31, 2009 with a book value of $100,000. Adjustments to the valuation of OREO are charged against earnings and do not impact the allowance

for loan losses. If all non-accruing loans had been current in accordance with their terms during the years ended December 31, 2009 and 2008, interest income realized on such loans would have amounted to approximately $139,520 and $118,700 respectively.

 

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Management’s Discussion and Analysis (continued)

 

 

At December 31, 2009, the Bank had eight loans with net carrying values of $3,469,660 considered to be “troubled debt restructurings” as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors.” At December 31, 2009, all “troubled debt restructurings” are performing under contractual terms and are included in impaired loans. At December 31, 2008, the Bank had no loans considered “troubled debt restructures.”

At December 31, 2009 there were no other loans excluded in the tables below or discussed above where known information about possible credit problems of the borrowers caused management to have doubts as to the ability of the borrower to comply with present loan repayment terms and which may result in disclosure of such loans in the future.

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

 

     2009    2008    2007    2006    2005

Nonaccrual loans (1) (2)

   $ 2,754,443    $ 7,026,992    $ 4,744,729    $ 753,992    $ 278,422

Real estate and chattel property owned

     100,000      288,305      241,346      —        —  
                                  

Total nonperforming assets

   $ 2,854,443    $ 7,315,297    $ 4,986,075    $ 753,992    $ 278,422
                                  

 

(1) All loans 90 days or more delinquent are placed on a nonaccruing status.
(2) At December 31, 2009, $3,469,660 of troubled debt restructured loans, not included above, were on accrual status and performing.

The following table sets forth nonaccrual (1) (2) loans by category at December 31:

 

     2009    2008    2007    2006    2005

Real estate loans -

              

Conventional

   $ 2,116,713    $ 2,471,866    $ 851,201    $ 448,685    $ 254,982

Construction

     —        —        —        —        —  

Consumer loans

     35,612      7,622      97,717      —        7,977

Commercial and municipal loans

     —        524,127      —        —        15,463

Nonaccrual impaired loans

     602,118      4,023,377      3,795,811      305,307      —  
                                  

Total

   $ 2,754,443    $ 7,026,992    $ 4,744,729    $ 753,992    $ 278,422
                                  

 

(1) All loans 90 days or more delinquent are placed on a nonaccruing status.
(2) At December 31, 2009, $3,469,660 of troubled debt restructured loans, not included above, were on accrual status and performing.

 

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Management’s Discussion and Analysis (continued)

 

 

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

 

     2009     2008     2007     2006     2005  

Balance, beginning of year

   $ 5,567,859      $ 5,160,628      $ 3,950,986      $ 3,990,503      $ 4,019,450   
                                        

Charge-offs and writedowns:

          

Residential real estate

     296,801        243,480        89,872        —          —     

Commercial real estate

     1,387,525        133,447        —          —          —     

Construction

     45,102        —          —          —          —     

Consumer loans

     105,326        78,812        33,530        18,498        36,766   

Commercial loans

     297,004        89,665        5,164        56,698        —     
                                        

Total charged-off loans

     2,131,758        545,404        128,566        75,196        36,766   
                                        

Recoveries

          

Residential real estate

     99,570        31,838        5,317        —          2,403   

Commercial real estate

     1,000        —          —          —          —     

Construction

     —          —          —          —          —     

Consumer loans

     11,000        10,797        29,530        5,979        5,416   

Commercial loans

     100,336        —          —          —          —     
                                        

Total recoveries

     211,906        42,635        34,847        5,979        7,819   
                                        

Net charge-offs

     1,919,852        502,769        93,719        69,217        28,947   

Allowance from Acquisitions

     —          —          1,303,361        —          —     

Provision for loan loss charged to income

     5,846,000        910,000        —          29,700        —     
                                        

Balance, end of year

   $ 9,494,007      $ 5,567,859      $ 5,160,628      $ 3,950,986      $ 3,990,503   
                                        

Ratio of net charge-offs to average loans

     0.30     0.08     0.02     0.01     0.01
                                        

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

 

     2009    2008    2007    2006    2005

Beginning Balance

   $ 26,453    $ 20,843    $ 24,136    $ 31,838    $ —  
                                  

Overdraft Charge-offs

     313,736      373,598      273,872      391,821      87,119

Overdraft Recoveries

     205,908      188,108      148,079      183,809      30,457
                                  

Net Overdraft Losses

     107,828      185,490      125,793      208,012      56,662
                                  

Provisions for Overdrafts

     106,000      191,100      122,500      200,310      88,500
                                  

Ending Balance

   $ 24,625    $ 26,453    $ 20,843    $ 24,136    $ 31,838
                                  

 

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Management’s Discussion and Analysis (continued)

 

 

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 at December 31 ($ in thousands):

 

     2009     2008     2007  

Real estate loans -

                     

Conventional

   $ 6,990    74   75   $ 3,448    61   76   $ 3,023    58   76

Construction

     227    2   2     421    8   2     501    10   3

Collateral and consumer loans

     100    1   13     139    2   12     199    4   12

Commercial and municipal loans

     2,012    21   10     1,376    25   9     1,413    27   8

Impaired loans

     165    2   —          210    4   1     45    1   1

Unallocated

     —      —        —          —      —        —          —      —        —     
                                                         

Allowance

   $ 9,494    100   100   $ 5,594    100   100   $ 5,181    100   100
                                                         

Allowance as a percentage of total loans

     1.51%        0.87%        0.82%   
                                                         

 

     2006     2005  

Real estate loans -

              

Conventional

   $ 2,592    65   78   $ 2,544    63   77

Construction

     357    9   3     291    7   3

Collateral and consumer loans

     130    3   13     224    6   14

Commercial and municipal loans

     850    22   6     963    24   6

Impaired loans

     46    1   —          —      —        —     

Unallocated

     —      —        —          —      —        —     
                                      

Allowance

   $ 3,975    100   100   $ 4,022    100   100
                                      

Allowance as a percentage of total loans

     0.80%        0.86%   
                                      

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

Noninterest Income and Expense

Total noninterest income increased $5,148,937, or 66.89%, to $12,846,035 for the twelve months ended December 31, 2009, most notably the net gain on the sales and calls of securities and the net gain on the sales of loans accounted for 86.46% of the increase.

 

   

Customer service fees decreased $55,686, or 1.01%, due primarily to reduced fees assessed on the Bank’s overdraft protection program during 2009.

 

   

Net gain on sales and calls of securities increased $2,738,876 due to the sales, maturities and calls of securities in the amount of $289,998,085 as the Bank took advantage of interest rate volatility on the long-end yield curve.

 

   

Net gain on sales of loans increased $1,713,145, or 204.34%, as the Bank sold $136.5 million in loans to the secondary market during 2009, up from $48.3 million of loans sold during 2008.

 

   

Net loss on sale of other real estate owned and fixed assets decreased $50,443 during 2009 as the Bank recognized losses of $9,435 on other real estate and chattel property owned during 2009 compared to the recognition of losses in 2008 that included losses on leasehold improvements of $38,535 as a result of closing the retail branch in Killington, Vermont, in August 2008, and losses on other real estate owned in the amount of $27,644 during 2008.

 

   

Rental income increased $28,316, or 4.19%, primarily as a result of ordinary consumer price index-based increases during 2009.

 

   

The realized gain in Charter Holding Corp. decreased $146,819, or 58.01%, to $106,295 for the twelve months ended December 31, 2009, from

 

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Management’s Discussion and Analysis (continued)

 

 

 

$253,114 for the same period in 2008, as a direct reflection of earnings reported by Charter Holding Corp. This includes a non-recurring expense of $54,983 recorded during the second quarter of 2009.

 

   

Brokerage service income decreased in the amount of $75,469, or 88.47%, to $9,832 for the year ended December 31, 2009, as the Company saw a decline due to the resignation of the Bank’s principal broker who was not replaced.

Total noninterest expenses decreased $126,549, or 0.51%, to $24,491,780 for the twelve months ended December 31, 2009, from $24,618,329 for the same period in 2008.

 

   

Salaries and employee benefits increased $167,684, or 1.38%, to $12,358,148 for the twelve months ended December 31, 2009 from $12,190,464 for the same period in 2008. Gross salaries and benefits paid, which exclude the deferral of expenses associated with the origination of loans, increased $582,326, or 4.41%, to $13,773,060 for the twelve months ended December 31, 2009, from $13,190,734 for the same period in 2008. Gross salaries increased $181,730, or 1.74%, to $10,627,440 for the twelve months ended December 31, 2009, compared to the same period in 2008. Average full time equivalents decreasing to 234 for the twelve months ended December 31, 2009, compared to 250 for the same period in 2008. Benefits costs, particularly associated with retirement and pension benefits, increased $454,119. This increase includes an increase of $324,528 related to periodic pension costs. The deferral of expenses associated with the origination of loans increased $414,642, or 41.45%, to $1,414,912 for the twelve months ended December 31, 2009, from $1,000,270 for the same period in 2008. This increase was due to higher volume of loans originated in 2009 compared to 2008, resulting in a higher amount of deferred salary and employee benefits expenses associated with origination costs.

 

   

Occupancy and equipment expenses decreased $173,398, or 4.35%, to $3,815,924 for the twelve months ended December 31, 2009 from $3,989,322 for the same period in 2008, due primarily to savings on depreciation as a number of fixed assets became fully depreciated and a reduction in maintenance expenses.

 

   

Advertising and promotion decreased $106,998, or 22.13%, to $376,431 for the twelve months ended December 31, 2009 from $483,429 for the same period in 2008, due primarily to a reduction in the utilization of print media and associated costs.

 

   

Depositors’ insurance increased $1,048,902 to $1,117,519 at December 31, 2009, compared to $128,617 at December 31, 2008, due primarily to an FDIC Special Assessment of $415,887 recorded during the nine months ended September 30, 2009 and the depletion of deposit insurance premium credits.

 

   

Professional fees increased $176,905, or 21.19% to $1,011,861 for the twelve months ended December 31, 2009 from $834,956 for the same period in 2008, due to increased audit, accounting and legal fees during 2009.

 

   

Data processing and outside services fees decreased $65,237, or 6.64%, to $917,170 for the twelve months ended December 31, 2009 from $982,407 for the same period in 2008.

 

   

ATM processing fees increased $31,649, or 5.43%, to $614,516 for the twelve months ended December 31, 2009 from $582,867 for the same period in 2008, due to the increase in ATM transaction activity, which was offset by fees generated from ATM transaction activity.

 

   

Amortization of mortgage servicing rights (MSR) in excess of mortgage servicing income increased $95,885, or 371.03%, to $121,728 for the twelve months ended December 31, 2009 from $25,843 for the same period in 2008, due to a higher volume of prepayments of sold loans during 2009.

 

   

Other expenses decreased $1,229,461, or 24.88%, to $3,711,223 for the twelve months ended December 31, 2009 from $4,940,684 for the same period in 2008. In particular, periodic impairment benefits associated with mortgage servicing rights increased $1,306,849 to $587,576 for the twelve months ended December 31, 2009 compared to periodic impairment costs of $719,273 for the same period in 2008.

Impact of New Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standard Codification 105-10, “Generally Accepted Accounting Principles.” This standard establishes the FASB Accounting Standard Codification (“Codification” or “ASC”) as the source of authoritative U.S. GAAP recognized by the FASB for nongovernmental entities. The Codification is effective for interim and annual periods ending after September 15, 2009. The Codification is a reorganization of existing U.S. GAAP and does not change existing U.S. GAAP. The Company adopted this standard during the third quarter of 2009. The adoption had no impact on the Company’s financial position or results of operations.

 

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Management’s Discussion and Analysis (continued)

 

 

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets,” and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” These standards are effective for the first interim reporting period of 2010. SFAS No. 166 amends the guidance in ASC 860 to eliminate the concept of a qualifying special-purpose entity (“QSPE”) and changes some of the requirements for derecognizing financial assets. SFAS No. 167 amends the consolidation guidance in ASC 810-10. Specifically, the amendments will (a) eliminate the exemption for QSPEs from the new guidance, (b) shift the determination of which enterprise should consolidate a variable interest entity (“VIE”) to a current control approach, such that an entity that has both the power to make decisions and right to receive benefits or absorb losses that could potentially be significant, will consolidate a VIE, and (c) change when it is necessary to reassess who should consolidate a VIE. The Company is evaluating the impact that these standards will have on its financial statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, “Measuring Liabilities at Fair Value,” which updates ASC 820-10, “Fair Value Measurements and Disclosures.” The updated guidance clarifies that the fair value of a liability can be measured in relation to the quoted price of the liability when it trades as an asset in an active market, without adjusting the price for restrictions that prevent the sale of the liability. This guidance is effective beginning January 1, 2010. The Company does not expect that the guidance will change its valuation techniques for measuring liabilities at fair value.

In May 2009, the FASB updated ASC 855, “Subsequent Events.” ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted this guidance during the second quarter of 2009. In accordance with the update, the Company evaluates subsequent events through the date its financial statements are issued. The adoption of this guidance did not have an impact on the Company’s financial position or results of operations.

In April 2009, the FASB updated ASC 320-10, “Investments – Debt and Equity Securities.” The guidance amends the other-than-temporary impairment (“OTTI”) guidance for debt securities. If the fair value of a debt security is less than its amortized cost basis at the measurement date, the updated guidance requires the Company to determine whether it has the intent to sell the debt security or whether it is more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis. If either condition is met, an entity must recognize full impairment. For all other debt securities that are considered other-than-temporarily impaired and do not meet either condition, the guidance requires that the credit loss portion of impairment be recognized in earnings and the temporary impairment related to all other factors be recorded in other comprehensive income. In addition, the guidance requires additional disclosures regarding impairments on debt and equity securities. The Company adopted this guidance effective April 1, 2009. The adoption of this guidance did not have an impact on the Company’s financial position or results of operations.

In April 2009, the FASB updated ASC 820-10, “Fair Value Measurements and Disclosures,” to provide guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. This issuance provides guidance on estimating fair value when there has been a significant decrease in the volume and level of activity for the asset or liability and for identifying transactions that may not be orderly. The guidance requires entities to disclose the inputs and valuation techniques used to measure fair value and to discuss changes in valuation techniques and related inputs, if any, in both interim and annual periods. The Company adopted this guidance during 2009 and the adoption did not have a material impact on the Company’s financial position and results of operations. The enhanced disclosures related to this guidance are included in Note 15, “Fair Value Measurements,” to the Consolidated Financial Statements.

In April 2009, the FASB updated ASC 825-10 “Financial Instruments.” This update amends the fair value disclosure guidance in ASC 825-10-50 and requires an entity to disclose the fair value of its financial instruments in interim reporting periods as well as in annual financial statements. The methods and significant assumptions used to estimate the fair value of financial instruments and any changes in methods and assumptions used during the reporting period are also required to be disclosed both on an interim and annual basis. The Company adopted this guidance during 2009. The required disclosures have been included in Note 15, “Fair Value Measurements,” to the Consolidated Financial Statements.

In June 2008, the FASB updated ASC 260-10, “Earnings Per Share”. The guidance concludes that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities that should be included in the earnings allocation in computing earnings per share under the two-class method. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior period earnings per share data presented must be adjusted retrospectively. The adoption of this update, effective January 1, 2009, did not have an impact on the Company’s earnings per share.

 

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Management’s Discussion and Analysis (continued)

 

 

In March 2008, the FASB updated ASC 815, “Derivatives and Hedging.” This guidance changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under ASC 815 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The guidance in ASC 815 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This guidance encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of this guidance did not have a material impact on the Company’s financial condition and results of operations.

In February 2008, the FASB updated ASC 860, “Transfers and Servicing.” This guidance clarifies how the transferor and transferee should separately account for a transfer of a financial asset and a related repurchase financing if certain criteria are met. This guidance became effective January 1, 2009. The adoption of this guidance did not have a material effect on the Company’s results of operations or financial position.

In December 2007, the FASB updated ASC 810-10, “Consolidation”, which provides new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest should be reported as a component of equity in the consolidated financial statements. This guidance also required expanded disclosures that identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of an entity. The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position.

In December 2007, the FASB updated ASC 805, “Business Combinations.” The updated guidance significantly changed the accounting for business combinations. Under ASC 805, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. It also amends the accounting treatment for certain specific items including acquisition costs and non controlling minority interests and includes a substantial number of new disclosure requirements. ASC 805 applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The adoption of this statement did not have a material impact on the Company’s financial condition and results of operations.

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

Accounting for Income Taxes

The provision for income taxes for the years ended December 31, 2009, 2008, and 2007 includes net deferred income tax benefit of $1,200,943, $681,082, and $126,437, respectively. These amounts were determined by the asset and liability method in accordance with generally accepted accounting principles for each year.

The Bank has provided deferred income taxes on the difference between the provision for loan losses permitted for income tax purposes and the provision recorded for financial reporting purposes.

Comparison of Years Ended December 31, 2008 and 2007

In 2008, the Company earned $5,725,072, or $0.99 per common share, assuming dilution, compared to $4,515,682 or $0.92 per common share, assuming dilution, in 2007.

Financial Condition

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

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

The fair value of investment securities available-for-sale decreased $4,821,515, or 5.55%, to $81,988,488 as of

 

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

Real estate owned and property acquired in settlement of loans was at $263,000 at December 31, 2008 compared to $240,802 at December 31, 2007.

Goodwill was unchanged at $27,293,470 as of December 31, 2008, compared to December 31, 2007. Goodwill recognized due to the acquisition of First Brandon amounted to $7,503,046, after acquisition costs of $20,832,293. Goodwill recognized due to the acquisition of First Community amounted to $7,650,408, after acquisition costs of $14,649,648. Goodwill also included $2,471,560 relating to the acquisition of Landmark Bank in 1998 and $9,668,456 relating to the acquisition of three branch offices of New London Trust in 2001.

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

Total deposits increased $401,308, or 0.06%, to $653,353,325 as of December 31, 2008 from $652,952,017 as of December 31, 2007.

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

Net Interest and Dividend Income

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

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

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

For the year ended December 31, 2008, the Bank’s combined cost of funds decreased to 2.32% as compared to 3.08% for the same period in 2007. The cost of deposits, including repurchase agreements, decreased 52 basis points in 2008 to 2.07% compared to 2.59% in 2007, due primarily to the downward repricing of maturing time deposits.

The Bank’s interest rate spread, which represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, increased to 3.37 % in 2008 from 2.91% in 2007. The Bank’s net interest margin, representing net interest income as a percentage of average interest-earning assets, increased to 3.46% during 2008, from 3.06% during 2007. Both increases were indicative of the Federal Reserve Bank’s easing of the Fed Funds rate and the subsequent steepening of the yield curve. For the year ended December 31, 2008, the Bank’s interest expense decreased 13.76% compared to the increase in interest income of 7.55% during the same period in 2007.

 

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Allowance and Provision for Loan Losses

At December 31, 2008, the allowance for loan losses was $5,567,859 compared to $5,160,628 at year-end 2007. The increase is due to provisions of $910,000 and recoveries of $42,635, which were partially offset by loan charge-offs of $545,404. The amounts shown in this paragraph and the next two paragraphs do not include amounts associated with overdrafts.

There was no loan loss provision during 2007. The $910,000 provision made in 2008 reflected both the higher loan loss experience in 2008 and the changes in economic conditions that increased the risk of loss inherent in the loan portfolio. The higher loan loss experience was largely attributable to weaker real estate market conditions. Unlike prior periods, some borrowers experiencing difficulty were not able to sell their property to resolve repayment issues.

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

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

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

Total classified loans, excluding special mention loans, as of December 31, 2008 and 2007, were $9,122,365 and $6,172,310, respectively. The increase came from a $1.8 million increase in loans over 90 days past due and changes in the risk ratings of some performing loans. Special mention loans were $12,153,366 at December 31, 2008, compared to $2,099,598 at year-end 2007. The increase resulted from changes in loan risk ratings. Those changes were a reflection of economic conditions with some borrowers experiencing weaker cash flows and diminished capacity to service debt.

The classified loans include $4,547,504 of impaired loans at December 31, 2008, compared to $3,795,811 at December 31, 2007. The impaired loans met the criteria established under ASC 310-10-35, although one $2.9 million loan considered impaired at both year-end 2008 and 2007 continues to perform. The increase in impaired loans came from seven loans that were unlikely to be repaid in accordance with contractual terms at December 31, 2008. At December 31, 2008, the allowance included $209,500 allocated to impaired loans. The portion of the allowance allocated to impaired loans at December 31, 2007 was $45,000.

Loans 30 to 89 days past due were $10,018,803 and $8,291,466 at December 31, 2008 and 2007, respectively. Total non-performing loans amounted to $7,026,992 and $4,744,729 at December 31, 2008 and 2007, respectively. Loans over 90 days past due are placed on nonaccrual status and are included in non-performing loans. Loans over 90 days past due were $3,003,615 at December 31, 2008 compared to $1,230,348 at December 31, 2007. The $1.8 million increase included two loans over $500,000 and three over $200,000. No loss was expected on those loans as they were well secured with real estate. At year-end 2008, there were 28 loans over 90 days past due compared to 27 at the end of 2007.

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

At December 31, 2008 the Bank had no loans considered to be “troubled debt restructurings” as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors.” At December 31, 2007, the Bank had $53,352 of “troubled debt restructured” loans. The restructuring did not improve performance, and the loan was charged off in 2008.

 

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Management’s Discussion and Analysis (continued)

 

 

Noninterest Income and Expense

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

The realized gain in Charter Holding Corp. increased $28,738, or 12.81%, to $253,114 for the twelve months ended December 31, 2008, from $224,376 for the same period in 2007, as a direct reflection of earnings reported by Charter Holding Corp.

 

   

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

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

 

   

Salaries and employee benefits increased $1,720,564, or 16.43%, to $12,190,464 for the twelve months ended December 31, 2008 from $10,469,900 for the same period in 2007. Gross salaries and benefits paid, which exclude the deferral of expenses associated with the origination of loans, increased $1,854,482, or 16.36%, to $13,190,734 for the twelve months ended December 31, 2008, from $11,336,252 for the same period in 2007. In addition to normal salary and benefit increases, during 2008, the Bank recognized a full twelve months of expenses associated with staffing the branches acquired from First Brandon and First Community. Average full time equivalents increased to 250 for the twelve months ended December 31, 2008, compared to 214 for the same period in 2007 due to the acquisitions during 2007. The deferral of expenses in conjunction with the origination of loans increased $133,918, or 15.46%, to $1,000,270 for the twelve months ended December 31, 2008, from $866,352 for the same period in 2007. This increase was due to higher volume of loans originated in 2008 compared to 2007, which resulted in a higher amount of deferred expenses associated with origination costs associated with salary and employee benefits.

 

   

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

 

   

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

 

   

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

 

   

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

 

   

ATM processing fees increased $65,941, or 12.76%, to $582,867 for the twelve months ended December 31, 2008 from $516,926 for the same period in

 

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Table of Contents
 

 

Management’s Discussion and Analysis (continued)

 

 

 

2007, due to the increase in ATM transaction activity, which were offset by fees generated from ATM transaction activity, due in part to the placement of additional ATMs into service 2008 compared to 2007 through the acquisitions.

 

   

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

 

   

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

Off-Balance Sheet Arrangements

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, standby letters of credit and unadvanced funds on loans. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. Further detail on the financial instruments with off-balance sheet risk to which the Company is party is contained in Note 20 to the Consolidated Financial Statements.

 

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LOGO

The Board of Directors

New Hampshire Thrift Bancshares, Inc.

Newport, New Hampshire

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited the accompanying consolidated balance sheets of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 2009 and 2008 and the related consolidated statements of income, changes in stockholders’ equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 2009 and 2008 and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

 

LOGO
SHATSWELL, MacLEOD & COMPANY, P.C.

West Peabody, Massachusetts

March 26, 2010

LOGO

 

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New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

 

As of December 31,

  2009     2008  

ASSETS

   

Cash and due from banks

  $ 20,338,652      $ 22,561,691   

Federal Reserve Bank interest bearing deposit

    17,700,000        —     
               

Total cash and cash equivalents

    38,038,652        22,561,691   

Securities available-for-sale

    218,293,101        81,988,488   

Federal Home Loan Bank stock

    6,175,800        4,946,300   

Loans held-for-sale

    2,077,900        1,937,750   

Loans receivable, net of the allowance for loan losses of $9,518,632 as of December 31, 2009 and $5,594,312 as of December 31, 2008

    620,332,606        636,720,290   

Accrued interest receivable

    2,972,403        2,715,864   

Premises and equipment, net

    17,034,220        17,649,624   

Investments in real estate

    3,505,828        3,587,020   

Other real estate owned

    100,000        263,000   

Goodwill

    27,293,470        27,293,470   

Intangible assets - core deposits

    2,023,806        2,560,527   

Investment in partially owned Charter Holding Corp., at equity

    3,083,084        3,135,895   

Bank owned life insurance

    9,965,068        9,556,167   

Due from broker

    —          20,868,360   

Other assets

    11,705,249        7,413,968   
               

Total assets

  $ 962,601,187      $ 843,198,414   
               

LIABILITIES AND SHAREHOLDERS’ EQUITY

   

LIABILITIES

   

Deposits:

   

Noninterest-bearing

  $ 48,430,291      $ 45,968,057   

Interest-bearing

    685,998,477        607,385,268   
               

Total deposits

    734,428,768        653,353,325   

Federal Home Loan Bank advances

    95,962,006        66,317,485   

Other borrowings

    2,077,500        2,157,500   

Securities sold under agreements to repurchase

    12,118,953        15,072,991   

Subordinated debentures

    20,620,000        20,620,000   

Accrued expenses and other liabilities

    9,617,707        11,000,021   
               

Total liabilities

    874,824,934        768,521,322   
               

Commitments and contingencies

   

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 as of December 31, 2009; liquidation value $1,000 per share

    100        —     

Common stock, $.01 par value, per share: 10,000,000 shares authorized, 6,232,051 shares issued and 5,771,772 shares outstanding as of December 31, 2009 and 6,208,051 shares issued and 5,747,772 shares outstanding as of December 31, 2008

    62,321        62,081   

Warrants

    85,020        —     

Paid-in capital

    55,884,604        45,756,112   

Retained earnings

    41,570,797        38,399,369   

Accumulated other comprehensive loss

    (2,675,866     (2,389,747

Treasury stock, 460,279 shares as of December 31, 2009 and 2008, at cost

    (7,150,723     (7,150,723
               

Total stockholders’ equity

    87,776,253        74,677,092   
               

Total liabilities and stockholders’ equity

  $ 962,601,187      $ 843,198,414   
               

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

 

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New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

 

For the years ended December 31,

  2009     2008     2007

INTEREST AND DIVIDEND INCOME

     

Interest and fees on loans

  $ 33,176,044      $ 37,570,672      $ 34,257,504

Interest on debt investments

     

Taxable

    6,131,899        4,460,190        4,272,274

Dividends

    20,689        329,877        539,418

Other

    55,510        275,038        573,881
                     

Total interest and dividend income

    39,384,142        42,635,777        39,643,077
                     

INTEREST EXPENSE

     

Interest on deposits

    8,762,151        12,937,657        12,940,592

Interest on advances and other borrowed money

    2,098,049        2,226,556        4,506,663

Interest on debentures

    1,157,953        1,315,365        1,479,622

Interest on securities sold under agreements to repurchase

    58,029        234,470        453,738
                     

Total interest expense

    12,076,182        16,714,048        19,380,615
                     

Net interest and dividend income

    27,307,960        25,921,729        20,262,462

PROVISION FOR LOAN LOSSES

    5,952,000        1,101,100        122,500
                     

Net interest and dividend income after provision for loan losses

    21,355,960        24,820,629        20,139,962
                     

NONINTEREST INCOME

     

Customer service fees

    5,437,153        5,492,839        4,784,625

Net gain on sales and calls of securities

    3,648,795        909,919        —  

Writedown of securities

    —          (879,720     —  

Income on other investments

    —          —          144,174

Net gain on sales of loans

    2,551,545        838,400        845,832

Net loss on sales of other real estate owned, other assets and fixed assets

    (9,435     (59,878     —  

Rental income

    703,572        675,256        652,562

Realized gain in Charter Holding Corp.

    106,295        253,114        224,376

Brokerage service income

    9,832        85,301        182,089

Bank owned life insurance income

    371,930        380,195        80,307

Other income

    26,348        1,672        412
                     

Total noninterest income

    12,846,035        7,697,098        6,914,377
                     

NONINTEREST EXPENSES

     

Salaries and employee benefits

    12,358,148        12,190,464        10,469,900

Occupancy and equipment expenses

    3,815,924        3,989,322        3,358,720

Advertising and promotion

    376,431        483,429        403,436

Depositors’ insurance

    1,177,519        128,617        60,269

Professional services

    1,011,861        834,956        608,528

Data processing and outside services fees

    917,170        982,407        795,538

ATM processing fees

    614,516        582,867        516,926

Amortization of mortgage servicing rights in excess of mortgage servicing income

    121,728        25,843        86,189

Supplies

    387,260        459,740        438,691

Other expenses

    3,711,223        4,940,684        3,889,420
                     

Total noninterest expenses

    24,491,780        24,618,329        20,627,617
                     

INCOME BEFORE PROVISION FOR INCOME TAXES

    9,710,215        7,899,398        6,426,722

PROVISION FOR INCOME TAXES

    3,112,509        2,174,326        1,911,040
                     

NET INCOME

  $ 6,597,706      $ 5,725,072      $ 4,515,682
                     

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

  $ 6,103,445      $ 5,725,072      $ 4,515,682
                     

Earnings per common share

  $ 1.06      $ 1.00      $ 0.93
                     

Earnings per common share, assuming dilution

  $ 1.06      $ 0.99      $ 0.92
                     

Dividends declared per common share

  $ 0.52      $ 0.52      $ 0.52
                     

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

 

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New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

 

For the years ended December 31,

  2009     2008     2007  

PREFERRED STOCK

     

Balance, beginning of year

  $ —        $ —        $ —     

Issuance of preferred stock

    100        —          —     
                       

Balance, end of year

  $ 100      $ —        $ —     
                       

COMMON STOCK

     

Balance, beginning of year

  $ 62,081      $ 61,821      $ 42,936   

Exercise of stock options (24,000 shares in 2009, 26,000 shares in 2008, 68,758 shares in 2007)

    240        260        688   

Shares issued for acquisitions (1,819,713 shares)

    —          —          18,197   
                       

Balance, end of year

  $ 62,321      $ 62,081      $ 61,821   
                       

WARRANTS

     

Balance, beginning of year

  $ —        $ —        $ —     

Issuance of warrants

    85,020        —          —     
                       

Balance, end of year

  $ 85,020      $ —        $ —     
                       

PAID-IN CAPITAL

     

Balance, beginning of year

  $ 45,756,112      $ 45,480,955      $ 17,930,597   

Increase on issuance of common stock from the exercise of stock options

    180,260        248,865        782,044   

Tax benefit for stock options

    17,173        26,292        47,911   

Issuance of preferred stock

    9,914,880        —          —     

Preferred stock net accretion

    16,179        —          —     

Acquisition of First Brandon

    —          —          15,582,350   

Acquisition of First Community

    —          —          11,138,053   
                       

Balance, end of year

  $ 55,884,604      $ 45,756,112      $ 45,480,955   
                       

RETAINED EARNINGS

     

Balance, beginning of year

  $ 38,399,369      $ 35,982,392      $ 33,941,729   

Net income

    6,597,706        5,725,072        4,515,682   

Cumulative effect of a change in accounting principle - initial application of ASC 715 - 60

    —          (320,034     —     

Preferred stock net accretion

    (16,179     —          —     

Cash dividends paid, preferred stock

    (415,278     —          —     

Cash dividends paid, common stock

    (2,994,821     (2,988,061     (2,475,019
                       

Balance, end of year

  $ 41,570,797      $ 38,399,369      $ 35,982,392   
                       

ACCUMULATED OTHER COMPREHENSIVE LOSS

     

Balance, beginning of year

  $ (2,389,747   $ (1,768,076   $ (1,707,556

Unrealized holding (loss) gain on securities available-for-sale, net of tax effect

    (728,263     1,226,878        60,050   

Other comprehensive income (loss) - pension plan

    291,498        (1,356,767     (120,570

Other comprehensive income (loss) - derivative

    146,845        (480,741     —     

Other comprehensive income (loss) - equity investment

    3,801        (11,041     —     
                       

Balance, end of year

  $ (2,675,866   $ (2,389,747   $ (1,768,076
                       

TREASURY STOCK

     

Balance, beginning of year

  $ (7,150,723   $ (7,089,769   $ (1,798,300

Shares repurchased (5,000 shares in 2008 and 341,779 shares in 2007)

    —          (60,954     (5,291,469
                       

Balance, end of year

  $ (7,150,723   $ (7,150,723   $ (7,089,769
                       

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

 

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New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

 

For the years ended December 31,

   2009     2008     2007  

Net income

   $ 6,597,706      $ 5,725,072      $ 4,515,682   

Other comprehensive loss, net of tax effect

     (286,119     (621,671     (60,520
                        

Comprehensive income

   $ 6,311,587      $ 5,103,401      $ 4,455,162   
                        
      

Reclassification disclosure for the years ended December 31:

 

     2009     2008     2007  

Net unrealized holding gains on available-for-sale securities

   $ 2,442,863      $ 2,061,789      $ 99,438   

Reclassification adjustment for realized gains in net income

     (3,648,795     (30,199     —     
                        

Other comprehensive (loss) income before income tax effect

     (1,205,932     2,031,590        99,438   

Income tax benefit (expense)

     477,669        (804,712     (39,388
                        
     (728,263     1,226,878        60,050   
                        

Other comprehensive income (loss) - pension plan

     482,693        (2,246,677     (199,652

Income tax (expense) benefit

     (191,195     889,910        79,082   
                        
     291,498        (1,356,767     (120,570
                        

Change in fair value of derivatives used for cash flow hedges

     243,162        (796,061     —     

Income tax (expense) benefit

     (96,317     315,320        —     
                        
     146,845        (480,741     —     
                        

Other comprehensive income (loss) - equity investment

     11,042        (18,282     —     

Income tax (expense) benefit

     (7,241     7,241        —     
                        
     3,801        (11,041     —     
                        

Other comprehensive loss, net of tax effect

   $ (286,119   $ (621,671   $ (60,520
                        

Accumulated other comprehensive loss consists of the following as of December 31:

 

     2009     2008     2007  

Net unrealized holding (losses) gains on available-for-sale securities, net of taxes

   $ (505,761   $ 222,502      $ (1,004,376

Unrecognized net actuarial loss, defined benefit pension plan, net of tax

     (1,828,969     (2,120,467     (763,700

Unrecognized net loss, derivative, net of tax

     (333,896     (480,741     —     

Unrecognized net loss, equity investment, net of tax

     (7,240     (11,041     —     
                        

Accumulated other comprehensive loss

   $ (2,675,866   $ (2,389,747   $ (1,768,076
                        

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

 

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New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 

For the years ended December 31,

   2009     2008     2007  

Cash flows from operating activities:

      

Net income

   $ 6,597,706      $ 5,725,072      $ 4,515,682   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     1,497,721        1,521,290        1,671,562   

Net (increase) decrease in mortgage servicing rights

     (982,975     953,619        227,113   

Amortization of securities, net

     391,218        8,541        54,106   

Amortization of deferred expenses relating to issuance of capital securities and subordinated debentures

     10,694        10,693        10,694   

Amortization of fair value adjustments, net (loans, deposits and borrowings)

     123,409        273,863        209,715   

Amortization of core deposit intangible

     536,721        599,776        307,697   

Net (increase) decrease in loans held-for-sale

     (140,150     570,130        (737,380

Writedown of other real estate

     —          53,741        —     

Net loss on sales of premises, equipment, investment in real estate, other real estate owned and other assets

     9,435        59,878        —     

Net gain on sales and calls of securities

     (3,648,795     (909,919     —     

Writedown of securities

     —          879,720        —     

Equity in gain of partially owned Charter Holding Corp.

     (117,334     (253,116     (224,375

Provision for loan losses

     5,952,000        1,101,100        122,500   

Deferred tax benefit

     (1,200,943     (681,082     (126,437

Change in cash surrender value of life insurance

     (397,806     (403,223     (104,597

(Increase) decrease in accrued interest receivable and other assets

     (2,982,905     (340,816     373,777   

Change in deferred loan origination costs, net

     404,330        123,037        (128,158

Increase (decrease) in accrued expenses and other liabilities

     88,124        2,093,924        (2,135,727
                        

Net cash provided by operating activities

     6,140,450        11,386,228        4,036,172   
                        

Cash flows from investing activities:

      

Proceeds from sale of premises and equipment

     —          16,000        —     

Capital expenditures - investment in real estate

     (12,503     (164,692     (54,896

Capital expenditures - software

     (32,148     (191,779     (26,213

Capital expenditures - premises and equipment

     (681,617     (1,381,003     (1,762,264

Proceeds from sales of securities available-for-sale

     249,601,020        20,191,593        —     

Purchases of securities available-for-sale

     (403,382,693     (76,008,596     (13,017,831

Proceeds from maturities of securities available-for-sale

     40,397,065        41,823,406        37,980,100   

Purchases of Federal Home Loan Bank stock

     (1,229,500     (660,700     —     

Redemption of Federal Home Loan Bank stock

     —          3,247,100        759,500   

Redemption of Federal Reserve Bank stock

     —          —          12,000   

Capital distribution - Charter Holding Corp., at equity

     170,145        251,171        212,463   

Loan originations and principal collections, net

     10,569,361        (10,918,367     (2,639,379

Purchases of loans

     (1,176,964     (1,326,296     (2,173,433

Recoveries of loans previously charged off

     417,815        230,744        182,926   

Proceeds from sales of other real estate and other assets

     278,065        173,318        —     

Purchases of limited partnerships

     —          —          (246,288

Purchase of bank owned life insurance

     —          —          (5,000,000

Premium paid on life insurance policies

     (11,095     (11,095     (11,095

Cash and cash equivalents acquired from First Brandon and First Community, net of expenses paid of $1,320,347

     —          —          7,678,405   
                        

Net cash (used in) provided by investing activities

     (105,093,049     (24,729,196     21,893,995   
                        

 

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New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Continued)

 

For the years ended December 31,

   2009     2008     2007  

Cash flows from financing activities:

      

Net increase (decrease) in demand deposits, savings and NOW accounts

     32,835,474        2,700,885        (11,904,868

Net increase (decrease) in time deposits

     48,239,969        (2,484,827     47,270,927   

Increase in short-term advances from Federal Home Loan Bank

     35,000,000        4,383,000        617,000   

Principal advances from Federal Home Loan Bank

     5,000,000        60,000,000        10,000,000   

Repayment of advances from Federal Home Loan Bank

     (10,382,246     (61,481,048     (70,848,726

Increase in other borrowed funds

     —          2,000,000        237,500   

Repayment of other borrowed funds

     (80,000     (80,000     —     

Net (decrease) increase in repurchase agreements

     (2,954,038     (368,002     4,789,517   

Proceeds from issuance of preferred stock

     10,000,000        —          —     

Repurchase of treasury stock

     —          (60,954     (5,291,469

Dividends paid on preferred stock

     (415,278     —          —     

Dividends paid on common stock

     (2,994,821     (2,988,061     (2,475,019

Proceeds from exercise of stock options

     180,500        249,125        782,732   
                        

Net cash provided by (used in) financing activities

     114,429,560        1,870,118        (26,822,406
                        

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     15,476,961        (11,472,850     (892,239

CASH AND CASH EQUIVALENTS, beginning of year

     22,561,691        34,034,541        34,926,780   
                        

CASH AND CASH EQUIVALENTS, end of year

   $ 38,038,652      $ 22,561,691      $ 34,034,541   
                        

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

      

Interest paid

   $ 12,232,380      $ 17,216,587      $ 19,392,958   
                        

Income taxes paid

   $ 4,036,885      $ 2,966,932      $ 2,098,875   
                        

Loans transferred to other real estate owned

   $ 350,000      $ 284,000      $ 240,802   
                        

Loans originated from sales of other real estate owned

   $ 225,500      $ —        $ —     
                        

Investment in real estate transferred to premises and equipment

   $ —        $ —        $ 4.425   
                        

Change in due from broker

   $ (20,868,360   $ 20,868,360      $ —     
                        

First Brandon Financial Corporation and First Community Bank acquisitions:

 

Cash and cash equivalents acquired

   $ 16,421,746

Available-for-sale securities

     20,854,637

Federal Home Loan Bank stock

     751,600

Federal Reserve Bank stock

     12,000

Net loans acquired

     129,230,384

Premises and equipment acquired

     4,283,792

Investment in real estate acquired

     309,819

Accrued interest receivable

     770,286

Bank owned life insurance policies

     3,530,790

Other assets acquired

     629,581

Core deposit intangible

     3,468,000
      
     180,262,635
      

Deposits assumed

     151,964,388

Federal Home Loan Bank borrowings assumed

     3,607,095

Securities sold under agreements to repurchase assumed

     1,769,612

Other liabilities assumed

     2,593,053
      
     159,934,148
      

Net assets acquired

     20,328,487

Merger costs

     35,481,941
      

Goodwill

   $ 15,153,454
      

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

 

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Notes to Consolidated Financial Statements

NOTE 1. Summary of significant accounting policies:

Nature of operations - New Hampshire Thrift Bancshares, Inc. (Company) is a savings and loan holding company headquartered in Newport, New Hampshire. The Company’s subsidiary, Lake Sunapee Bank, fsb (“Bank”), a federal stock savings bank, operates twenty eight branches primarily in Grafton, Hillsborough, Sullivan, and Merrimack Counties in west central New Hampshire and Rutland and Windsor Counties in Vermont. Although the Company has a diversified portfolio, a substantial portion of its debtors’ abilities to honor their contracts is dependent on the economic health of the region. Its primary source of revenue is providing loans to customers who are predominately small and middle-market businesses and individuals.

Use of estimates in the preparation of financial statements - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of consolidation - The consolidated financial statements include the accounts of the Company, the Bank, Lake Sunapee Group, Inc. (LSGI), which owns and maintains all buildings, and Lake Sunapee Financial Services Corp. (LSFSC), which was formed to handle the flow of funds from the brokerage services. LSGI and LSFSC are wholly-owned subsidiaries of the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.

NHTB Capital Trust II and NHTB Capital Trust III, affiliates of the Company, were formed to sell capital securities to the public through a third party trust pool. In accordance with ASC 810-10, “Consolidation - Overall,” the subsidiaries have not been included in the consolidated financial statements.

As described in recent accounting pronouncements, in June of 2009 ASC 810-10 was amended by SFAS No. 166 and SFAS No. 167, which are effective for the Company in the first interim reporting period of 2010. SFAS No. 167 amends the consolidation guidance in ASC 810-10. The Company is evaluating the impact that these standards will have on its financial statements.

Cash and cash equivalents - For purposes of reporting cash flows, the Company considers cash and due from banks and Federal Home Loan Bank (FHLB) overnight deposit to be cash equivalents. Cash and due from banks as of December 31, 2009 and 2008 includes $9,049,000 and $7,946,000, respectively which is subject to withdrawal and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank and PNC Bank.

Securities available-for-sale - Available-for-sale securities consist of bonds, notes, debentures, and certain equity securities. Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as a net amount in a separate component of shareholders’ equity until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method.

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. No write-downs have occurred for securities held-to-maturity.

For any debt security with a fair value less than its amortized cost basis, the Company will determine whether it has the intent to sell the debt security or whether it is more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis. If either condition is met, the Company will recognize a full impairment charge to earnings. For all other debt securities that are considered other-than-temporarily impaired and do not meet either condition, the credit loss portion of impairment will be recognized in earnings as realized losses. The other-than-temporary impairment related to all other factors will be recorded in other comprehensive income.

Declines in marketable equity securities below their cost that are deemed other than temporary are reflected in earnings as realized losses.

 

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Table of Contents
 

 

Notes to Consolidated Financial Statements—(Continued)

 

 

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

 

Securities held for trading - Trading securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses for trading securities are included in earnings.

Federal Home Loan Bank stock - Federal Home Loan Bank stock is a restricted investment and is carried at cost. On December 8, 2008, the Federal Home Loan Bank of Boston announced a moratorium on the repurchase of excess stock held by its members. The moratorium will remain in effect indefinitely.

Investment in Charter Holding Corp. - As of December 31, 1999, the Company had an investment of $79,999 in the common stock of Charter Holding Corp. (CHC). This investment was included in other investments on the consolidated balance sheet and was accounted for under the cost method of accounting for investments. On October 2, 2000, the Bank and two other New Hampshire banks acquired CHC and Phoenix New England Trust Company (PNET) from the Phoenix Home Life Mutual Insurance Company of Hartford, Connecticut. Contemporaneous with the acquisition, CHC and PNET merged under the continuing name of Charter Holding Corp. with assets of approximately $1.7 billion under management. As a result of the acquisitions and merger, the Bank and each of the other two banks own one-third of CHC at an additional cost of $3,033,337 each. Headquartered in Concord, New Hampshire, CHC provides trust and investment services from seven offices across New Hampshire. Charter New England Agency, a subsidiary of CHC, provides life insurance, fixed and variable annuities and mutual fund products, in addition to full brokerage services through a broker/dealer affiliation with Lincoln Financial.

Goodwill resulting from the acquisition was “pushed down” to the financial statements of CHC.

The Bank uses the equity method of accounting to account for its investment in CHC. An investor using the equity method initially records an investment at cost. Subsequently, the carrying amount of the investment is increased to reflect the investor’s share of income of the investee and is reduced to reflect the investor’s share of losses of the investee or dividends received from the investee. The investor’s share of the income or losses of the investee is included in the investor’s net income as the investee reports them. Adjustments similar to those made in preparing consolidated financial statements, such as elimination of intercompany gains and losses, also are applicable to the equity method.

At December 31, 2009 and 2008 the carrying amount of the Company’s investment in CHC equaled the amount of the Bank’s underlying equity in the net assets of CHC.

Loans held-for-sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. No losses have been recorded.

Nonaccrual loans - Residential real estate loans and consumer loans are placed on nonaccrual status when they become 90 days past due. Commercial loans are placed on nonaccrual status when they become 90 days past due or when it becomes probable that the Bank will be unable to collect all amounts due pursuant to the terms of the loan agreement. When a loan has been placed on nonaccrual status, previously accrued interest is reversed with a charge against interest income on loans. Interest received on nonaccrual loans is generally booked to interest income on a cash basis. Residential real estate loans and consumer loans generally are returned to accrual status when they are no longer over 90 days past due. Commercial loans are generally returned to accrual status when the collectibility of principal and interest is reasonably assured.

Allowance for loan losses - The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

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Table of Contents
 

 

Notes to Consolidated Financial Statements—(Continued)

 

 

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

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.

Deferred loan origination fees - Loan origination, commitment fees and certain direct origination costs are deferred, and the net amount is being amortized as an adjustment of the related loan’s yield. The Company is amortizing these amounts over the contractual life of the related loans.

Loan servicing - For loans sold after December 31, 1995 with servicing retained, the Company recognizes as separate assets from their related loans the rights to service mortgage loans for others, either through acquisition of those rights or from the sale or securitization of loans with the servicing rights retained on those loans, based on their relative fair values. To determine the fair value of the servicing rights created, the Company uses the market prices under comparable servicing sale contracts, when available, or alternatively uses a valuation model that calculates the present value of future cash flows to determine the fair value of the servicing rights. In using this valuation method, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which includes estimates of the cost of servicing loans, the discount rate, ancillary income, prepayment speeds and default rates.

Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. Refinance activities are considered in estimating the period of net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights are stratified based on the interest rate risk characteristics of the underlying loans. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value.

Concentration of credit risk - Most of the Company’s business activity is with customers located within the states of New Hampshire and Vermont. 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 states of New Hampshire and Vermont.

Premises and equipment - Company premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. Estimated lives are 5 to 40 years for buildings and premises and 3 to 15 years for furniture, fixtures and equipment. Expenditures for replacements or major improvements are capitalized; expenditures for normal maintenance and repairs are charged to expense as incurred. Upon the sale or retirement of company premises and equipment, the cost and accumulated depreciation are removed from the respective accounts and any gain or loss is included in income.

 

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Table of Contents
 

 

Notes to Consolidated Financial Statements—(Continued)

 

 

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

 

Investment in real estate - Investment in real estate is carried at the lower of cost or estimated fair value. The buildings are being depreciated over their useful lives. The properties consist of three buildings that the Company rents for commercial purposes. Rental income is recorded in income when received and expenses for maintaining these assets are charged to expense as incurred.

Real estate owned and property acquired in settlement of loans - The Company classifies loans as in-substance repossessed or foreclosed if the Company receives physical possession of the debtor’s assets regardless of whether formal foreclosure proceedings take place. At the time of foreclosure or possession, the Company records the property at the lower of fair value minus estimated costs to sell or the outstanding balance of the loan. All properties are periodically reviewed and declines in the value of the property are charged against income.

Earnings per share - Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share, if applicable, reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

Advertising - The Company directly expenses costs associated with advertising as they are incurred.

Income taxes - The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled.

Fair value of financial instruments - The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:

Cash and cash equivalents - The carrying amounts of cash and cash equivalents approximate their fair value.

Available-for-sale securities - Fair values for available-for-sale securities are based on quoted market prices.

Other investments - The carrying amounts of other investments approximate their fair values.

Loans held-for-sale - Fair values of loans held-for-sale are based on estimated market values.

Loans receivable - For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

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

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

Accrued interest receivable - The carrying amounts of accrued interest receivable approximate their fair values.

Deposit liabilities - The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed term money-market accounts and certificates of deposits (CD’s) approximate their fair values at the reporting date. Fair values for fixed-rate CD’s are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal Home Loan Bank advances - Fair values for FHLB advances are estimated using a discounted cash flow technique that applies interest rates currently being offered on advances to a schedule of aggregated expected monthly maturities on FHLB advances.

Other borrowed funds - The carrying amounts of other borrowed funds approximate their fair values.

Securities sold under agreements to repurchase - The carrying amounts of securities sold under agreements to repurchase approximate their fair values.

 

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Table of Contents
 

 

Notes to Consolidated Financial Statements—(Continued)

 

 

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

 

Subordinated debentures - Fair values of subordinated debentures are estimated using discounted cash flow analyses, using interest rates currently being offered for debentures with similar terms.

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

Off-balance sheet instruments - Fair values for loan commitments have not been presented as the future revenue derived from such financial instruments is not significant.

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

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

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

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

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

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

Stock based compensation - At December 31, 2009, the Company has two stock-based employee compensation plans. The Company accounts for those plans under ASC 718-10, “Compensation - Stock Compensation - Overall.”

Recent accounting pronouncements - In June 2009, the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standard Codification 105-10, “Generally Accepted Accounting Principles.” This standard establishes the FASB Accounting Standard Codification (“Codification” or “ASC”) as the source of authoritative U.S. GAAP recognized by the FASB for nongovernmental entities. The Codification is effective for interim and annual periods ending after September 15, 2009. The Codification is a reorganization of existing U.S. GAAP and does not change existing U.S. GAAP. The Company adopted this standard during the third quarter of 2009. The adoption had no impact on the Company’s financial position or results of operations.

 

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Notes to Consolidated Financial Statements—(Continued)

 

 

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

 

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets,” and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” These standards are effective for the first interim reporting period of 2010. SFAS No. 166 amends the guidance in ASC 860 to eliminate the concept of a qualifying special-purpose entity (“QSPE”) and changes some of the requirements for derecognizing financial assets. SFAS No. 167 amends the consolidation guidance in ASC 810-10. Specifically, the amendments will (a) eliminate the exemption for QSPEs from the new guidance, (b) shift the determination of which enterprise should consolidate a variable interest entity (“VIE”) to a current control approach, such that an entity that has both the power to make decisions and right to receive benefits or absorb losses that could potentially be significant, will consolidate a VIE, and (c) change when it is necessary to reassess who should consolidate a VIE. The Company is evaluating the impact that these standards will have on its financial statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, “Measuring Liabilities at Fair Value,” which updates ASC 820-10, “Fair Value Measurements and Disclosures.” The updated guidance clarifies that the fair value of a liability can be measured in relation to the quoted price of the liability when it trades as an asset in an active market, without adjusting the price for restrictions that prevent the sale of the liability. This guidance is effective beginning January 1, 2010. The Company does not expect that the guidance will change its valuation techniques for measuring liabilities at fair value.

In May 2009, the FASB updated ASC 855, “Subsequent Events.” ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted this guidance during the second quarter of 2009. In accordance with the update, the Company evaluates subsequent events through the date its financial statements are issued. The adoption of this guidance did not have an impact on the Company’s financial position or results of operations.

In April 2009, the FASB updated ASC 320-10, “Investments – Debt and Equity Securities.” The guidance amends the other-than-temporary impairment (“OTTI”) guidance for debt securities. If the fair value of a debt security is less than its amortized cost basis at the measurement date, the updated guidance requires the Company to determine whether it has the intent to sell the debt security or whether it is more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis. If either condition is met, an entity must recognize full impairment. For all other debt securities that are considered other-than-temporarily impaired and do not meet either condition, the guidance requires that the credit loss portion of impairment be recognized in earnings and the total impairment related to all other factors be recorded in other comprehensive income. In addition, the guidance requires additional disclosures regarding impairments on debt and equity securities. The Company adopted this guidance effective April 1, 2009. The adoption of this guidance did not have an impact on the Company’s financial position or results of operations.

In April 2009, the FASB updated ASC 820-10, “Fair Value Measurements and Disclosures,” to provide guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. This issuance provides guidance on estimating fair value when there has been a significant decrease in the volume and level of activity for the asset or liability and for identifying transactions that may not be orderly. The guidance requires entities to disclose the inputs and valuation techniques used to measure fair value and to discuss changes in valuation techniques and related inputs, if any, in both interim and annual periods. The Company adopted this guidance during 2009 and the adoption did not have a material impact on the Company’s financial position and results of operations. The enhanced disclosures related to this guidance are included in Note 15, “Fair Value Measurements,” to the Consolidated Financial Statements.

In April 2009, the FASB updated ASC 825-10 “Financial Instruments.” This update amends the fair value disclosure guidance in ASC 825-10-50 and requires an entity to disclose the fair value of its financial instruments in interim reporting periods as well as in annual financial statements. The methods and significant assumptions used to estimate the fair value of financial instruments and any changes in methods and assumptions used during the reporting period are also required to be disclosed both on an interim and annual basis. The Company adopted this guidance during 2009. The required disclosures have been included in Note 15, “Fair Value Measurements,” to the Consolidated Financial Statements.

 

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Table of Contents
 

 

Notes to Consolidated Financial Statements—(Continued)

 

 

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

 

In June 2008, the FASB updated ASC 260-10, “Earnings Per Share”. The guidance concludes that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities that should be included in the earnings allocation in computing earnings per share under the two-class method. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior period earnings per share data presented must be adjusted retrospectively. The adoption of this update, effective January 1, 2009, did not have an impact on the Company’s earnings per share.

In March 2008, the FASB updated ASC 815, “Derivatives and Hedging.” This guidance changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under ASC 815 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The guidance in ASC 815 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This guidance encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of this guidance did not have a material impact on the Company’s financial condition and results of operations.

In February 2008, the FASB updated ASC 860, “Transfers and Servicing.” This guidance clarifies how the transferor and transferee should separately account for a transfer of a financial asset and a related repurchase financing if certain criteria are met. This guidance became effective January 1, 2009. The adoption of this guidance did not have a material effect on the Company’s results of operations or financial position.

In December 2007, the FASB updated ASC 810-10, “Consolidation”, which provides new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest should be reported as a component of equity in the consolidated financial statements. This guidance also required expanded disclosures that identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of an entity. The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position.

In December 2007, the FASB updated ASC 805, “Business Combinations.” The updated guidance will significantly change the accounting for business combinations. Under ASC 805, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. It also amends the accounting treatment for certain specific items including acquisition costs and non controlling minority interests and includes a substantial number of new disclosure requirements. ASC 805 applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The adoption of this statement did not have a material impact on the Company’s financial condition and results of operations.

NOTE 2. Issuance of Capital Securities:

On March 30, 2004, NHTB Capital Trust II (“Trust II”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of Floating Capital Securities, adjustable every three months at LIBOR plus 2.79% (“Capital Securities II”). Trust II also issued common securities to the Company and used the net proceeds from the offering to purchase a like amount of Junior Subordinated Deferrable Interest Debentures (“Debentures II”) of the Company. Debentures II are the sole assets of Trust II. The Company used a portion of the proceeds to redeem the balance of securities issued by NHTB Capital Trust I, which were callable on September 30, 2004. The balance of the proceeds of Trust II are being used for general corporate purposes. Total expenses associated with the offering of $160,402 are included in other assets and are being amortized on a straight-line basis over the life of Debentures II.

 

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Notes to Consolidated Financial Statements—(Continued)

 

 

NOTE 2. Issuance of Capital Securities: (continued)

 

Capital Securities II accrue and pay distributions quarterly based on the stated liquidation amount of $10 per Capital Security. The Company has fully and unconditionally guaranteed all of the obligations of Trust II. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities II, but only to the extent that Trust II has funds necessary to make these payments.

Capital Securities II are mandatorily redeemable upon the maturing of Debentures II on March 30, 2034 or upon earlier redemption as provided in the Indenture. The Company has the right to redeem Debentures II, in whole or in part on or after March 30, 2009 at the liquidation amount plus any accrued but unpaid interest to the redemption date.

On March 30, 2004, NHTB Capital Trust III (“Trust III”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of 6.06%, 5 Year Fixed-Floating Capital Securities (“Capital Securities III”). Trust III also issued common securities to the Company and used the net proceeds from the offering to purchase a like amount of 6.06% Junior Subordinated Deferrable Interest Debentures (“Debentures III”) of the Company. Debentures III are the sole assets of Trust III. The Company used the proceeds to redeem the securities issued by NHTB Capital Trust I, a wholly owned subsidiary of the Company, which were callable on September 30, 2004. Total expenses associated with the offering of $160,402 are included in other assets and are being amortized on a straight-line basis over the life of Debentures III.

Capital Securities III accrue and pay distributions quarterly at an annual rate of 6.06% for the first 5 years of the stated liquidation amount of $10 per Capital Security. The Company has fully and unconditionally guaranteed all of the obligations of the Trust. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities III, but only to the extent that the Trust has funds necessary to make these payments.

Capital Securities III are mandatorily redeemable upon the maturing of Debentures III on March 30, 2034 or upon earlier redemption as provided in the Indenture. The Company has the right to redeem Debentures III, in whole or in part on or after March 30, 2009 at the liquidation amount plus any accrued but unpaid interest to the redemption date.

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

 

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

NOTE 3. Securities:

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent.

 

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Table of Contents
 

 

Notes to Consolidated Financial Statements—(Continued)

 

 

NOTE 3. Securities: (continued)

 

The amortized cost of securities and their approximate fair values are summarized as follows:

 

     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value

Available-for-sale:

           

December 31, 2009:

           

Bonds and notes -

           

U. S. Government, including agencies

   $ 2,004,184    $ 45,504    $ —      $ 2,049,688

Mortgage-backed securities

     169,448,355      367,048      991,800      168,823,603

Other bonds and debentures

     42,183,387      285,382      162,789      42,305,980

Preferred stock with maturities

     5,000,000      —        348,000      4,652,000

Equity securities

     494,666      23,380      56,216      461,830
                           

Total available-for-sale

   $ 219,130,592    $ 721,314    $ 1,558,805    $ 218,293,101
                           

Available-for-sale:

           

December 31, 2008:

           

Bonds and notes -

           

U. S. Government, including agencies

   $ 13,015,080    $ 157,733    $ —      $ 13,172,813

Mortgage-backed securities

     59,209,471      1,334,771      40,545      60,503,697

Asset-backed securities

     1,499,732      —        305,642      1,194,090

Other bonds and debentures

     2,401,098      71,120      —        2,472,218

Preferred stock with maturities

     5,000,000      —        722,000      4,278,000

Equity securities

     494,666      540      127,536      367,670
                           

Total available-for-sale

   $ 81,620,047    $ 1,564,164    $ 1,195,723    $ 81,988,488
                           

For the year ended December 31, 2009, proceeds from sales of securities available-for-sale amounted to $249,601,020. Gross gains of $3,664,809 and gross losses of $27,889 were realized during 2009 on sales of available-for-sale securities. The tax provision applicable to these net realized gains amounted to $1,440,584. For the year ended December 31, 2008, proceeds from sales of securities available-for-sale amounted to $20,191,593. Gross gains of $909,919 were realized during 2008 on sales of available-for-sale securities. The tax provision applicable to these gross realized gains amounted to $360,419. For the year ended December 31, 2007, there were no sales of securities available-for-sale.

Maturities of debt securities, excluding mortgage-backed securities and asset-backed securities, classified as available-for-sale are as follows as of December 31, 2009:

 

     Fair
Value

U.S. Government, including agencies

   $ 2,049,688

Other bonds and debentures

     1,054,394
      

Total due in less than one year

   $ 3,104,082
      

Other bonds and debentures

   $ 33,263,057
      

Total due after one year through five years

   $ 33,263,057
      

Other bonds and debentures

   $ 7,801,880
      

Total due after five years through ten years

   $ 7,801,880
      

Preferred stock with maturities

   $ 4,652,000

Other bonds and debentures

     186,649
      

Total due after ten years

   $ 4,838,649
      

 

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Table of Contents
 

 

Notes to Consolidated Financial Statements—(Continued)

 

 

NOTE 3. Securities: (continued)

 

There were no issuers of securities, other than U.S. government and agency obligations, whose aggregate carrying value exceeded 10% of equity as of December 31, 2009.

Securities, carried at $154,067,231 and $92,739,149 were pledged to secure public deposits, the treasury, tax and loan account and securities sold under agreements to repurchase as of December 31, 2009 and 2008, respectively. The securities pledged at December 31, 2008 includes a security sold on December 19, 2008 that did not settle until January 2009. The fair value of this security was $20,961 as of December 31, 2008.

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized-loss position for less than twelve months and for twelve months or more, and are not other than temporarily impaired, are as follows as of December 31:

 

     Less than 12 Months    12 Months or Longer    Total
     Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses

December 31, 2009:

                 

Bonds and notes -

                 

Mortgage-backed securities

   $ 136,208,493    $ 991,800    $ —      $ —      $ 136,208,493    $ 991,800

Other bonds and debentures

     13,625,504      162,789      —        —        13,625,504      162,789

Preferred stock with maturities

     —        —        4,652,000      348,000      4,652,000      348,000

Equity securities

     —        —        432,630      56,216      432,630      56,216
                                         

Total temporarily impaired securities

   $ 149,833,997    $ 1,154,589    $ 5,084,630    $ 404,216    $ 154,918,627    $ 1,558,805
                                         

December 31, 2008:

                 

Bonds and notes -

                 

Mortgage-backed securities

   $ 1,176,741    $ 33,269    $ 3,926,061    $ 7,276    $ 5,102,802    $ 40,545

Asset-backed securities

     1,194,090      305,642      —        —        1,194,090      305,642

Preferred stock with maturities

     —        —        4,278,000      722,000      4,278,000      722,000

Equity securities

     353,115      127,536      —        —        353,115      127,536
                                         

Total temporarily impaired securities

   $ 2,723,946    $ 466,447    $ 8,204,061    $ 729,276    $ 10,928,007    $ 1,195,723
                                         

The investments in the Company’s investment portfolio that are temporarily impaired as of December 31, 2009 consist of mortgage-backed securities issued by U.S. Government sponsored enterprises and agencies, a trust preferred security issued by a bank, and a common equity position in a local bank. The unrealized losses on debt securities are primarily attributable to changes in market interest rates and current market inefficiencies. The unrealized losses in equity securities are due to general stock market declines and are not specific to the issuer of the security. As company management has the ability to hold debt securities until maturity and equity securities for the foreseeable future, no declines are deemed to be other than temporary.

 

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Table of Contents
 

 

Notes to Consolidated Financial Statements—(Continued)

 

 

NOTE 4. Loans receivable:

Loans receivable consisted of the following as of December 31:

 

     2009     2008  

Real estate loans

    

Conventional

   $ 333,531,436      $ 344,101,400   

Construction

     12,467,786        13,515,208   

Commercial

     135,838,539        139,592,335   
                
     481,837,761        497,208,943   

Consumer loans

     82,981,689        79,468,380   

Commercial and municipal loans

     62,386,826        62,491,345   

Unamortized adjustment to fair value

     1,303,258        1,399,900   
                

Total loans

     628,509,534        640,568,568   

Allowance for loan losses

     (9,518,632     (5,594,312

Deferred loan origination costs, net

     1,341,704        1,746,034   
                

Loans receivable, net

   $ 620,332,606      $ 636,720,290   
                

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

 

     2009     2008     2007  

BALANCE, beginning of year

   $ 5,594,312      $ 5,181,471      $ 3,975,122   

Charged-off loans

     (2,445,495     (919,003     (402,438

Recoveries of loans previously charged-off

     417,815        230,744        182,926   

Provision for loan losses charged to income

     5,952,000        1,101,100        122,500   

Increase in allowance for loan losses from acquisitions

     —          —          1,303,361   
                        

BALANCE, end of year

   $ 9,518,632      $ 5,594,312      $ 5,181,471   
                        

Certain directors and executive officers of the Company and companies in which they have significant ownership interest were customers of the Bank during 2009. Total loans to such persons and their companies amounted to $732,256 as of December 31, 2009. During 2009 principal advances of $187,343 were made and principal payments totaled $238,078.

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

 

          December 31,
          2009    2008

Total nonaccrual loans

      $ 2,754,443    $ 7,011,209
                

Accruing loans which are 90 days or more overdue

      $ —      $ —  
                

Impaired loans as of December 31,

        2009    2008

Recorded investment in impaired loans at December 31

      $ 4,237,087    $ 4,547,504

Portion of allowance for loan losses allocated to impaired loans

        165,000      209,500

Net balance of impaired loans

        4,072,087      4,338,004

Recorded investment in impaired loans with a related allowance for credit losses

        602,118      888,441

Years Ended December 31,

   2009    2008    2007

Average recorded investment in impaired loans

   $ 4,990,862    $ 3,923,353    $ 1,805,074

Interest income recognized on impaired loans

     114,353    $ 144,512    $ 143,452

Interest income recognized on impaired loans on a cash basis

     52,482    $ 144,512    $ 143,452

Included in certain loan categories in the impaired loans are troubled debt restructurings that were classified as impaired. At December 31, 2009, the Company had $408,877 of residential mortgages, $2,382,864 of commercial real estate loans, and $677,919 of commercial loans that were modified in troubled debt restructurings and impaired. As of December 31, 2009, these troubled debt restructurings were performing in accordance with their modified terms. None of these loans were included in the nonaccrual table at December 31, 2009.

 

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Table of Contents
 

 

Notes to Consolidated Financial Statements—(Continued)

 

 

NOTE 4. Loans receivable: (continued)

 

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:

 

     2009    2008

Sold loans

   $ 352,066,692    $ 311,228,362
             

Participation loans

   $ 27,168,509    $ 21,958,789
             

The balance of capitalized servicing rights, net of valuation allowances, included in other assets at December 31, 2009 and 2008 was $1,704,170 and $721,195, respectively.

Servicing rights of $1,349,169, $583,738 and $661,973 were capitalized in 2009, 2008 and 2007, respectively. Amortization of capitalized servicing rights was $953,770 in 2009, $818,084 in 2008 and $883,980 in 2007.

The fair value of capitalized servicing rights was $2,077,317 and $834,659 as of December 31, 2009 and 2008, respectively. Following is an analysis of the aggregate changes in the valuation allowances for capitalized servicing rights:

 

     2009     2008

Balance, beginning of year

   $ 729,817      $ 10,544

(Decrease) increase

     (587,576     719,273
              

Balance, end of year

   $ 142,241      $ 729,817
              

NOTE 5. Premises and equipment:

Premises and equipment are shown on the consolidated balance sheets at cost, net of accumulated depreciation, as follows as of December 31:

 

     2009    2008

Land and land improvements

   $ 2,437,784    $ 2,437,784

Buildings and premises

     18,509,782      18,099,097

Furniture, fixtures and equipment

     8,654,366      8,383,434
             
     29,601,932      28,920,315

Less - Accumulated depreciation

     12,567,712      11,270,691
             
   $ 17,034,220    $ 17,649,624
             

Depreciation expense amounted to $1,297,021, $1,345,106 and $1,225,934 for the years ending December 31, 2009, 2008 and 2007, respectively.

NOTE 6. Investment in real estate:

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

 

     2009    2008

Land and land improvements

   $ 411,828    $ 411,828

Building

     3,516,124      3,503,621
             
     3,927,952      3,915,449

Less - Accumulated depreciation

     422,124      328,429
             
   $ 3,505,828    $ 3,587,020
             

 

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Notes to Consolidated Financial Statements—(Continued)

 

 

NOTE 6. Investment in real estate: (continued)

 

Rental income from investment in real estate amounted to $224,366, $210,918 and $195,056 for the years ended December 31, 2009, 2008 and 2007, respectively. Depreciation expense amounted to $93,695, $89,798 and $84,948 for the years ending December 31, 2009, 2008 and 2007, respectively.

NOTE 7. Deposits:

Deposits are summarized as follows as of December 31:

 

     2009    2008

Demand deposits

   $ 48,430,291    $ 45,968,057

Savings

     127,871,076      118,265,931

N.O.W.

     178,048,057      155,661,950

Money market

     38,806,464      40,424,476

Time deposits

     341,272,880      293,032,911
             
   $ 734,428,768    $ 653,353,325
             

The following is a summary of maturities of time deposits as of December 31, 2009:

 

2010

   $ 268,298,319

2011

     44,247,685

2012

     24,437,693

2013

     2,025,112

2014

     2,264,071
      
   $ 341,272,880
      

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

 

     2009    2008    2007

Time deposits

   $ 7,682,078    $ 10,425,592    $ 10,391,841

N.O.W.

     162,079      466,225      980,180

Money market

     258,054      572,185      439,538

Savings

     659,940      1,473,655      1,129,033
                    
   $ 8,762,151    $ 12