Lake Sunapee Bank Group - FORM 10-K

Lake Sunapee Bank Group - FORM 10-K - March 29, 2010

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EX-32.1 - EXHIBIT 32.1 - Lake Sunapee Bank Group	dex321.htm
EX-31.1 - EXHIBIT 31.1 - Lake Sunapee Bank Group	dex311.htm
EX-31.2 - EXHIBIT 31.2 - Lake Sunapee Bank Group	dex312.htm
EX-32.2 - EXHIBIT 32.2 - Lake Sunapee Bank Group	dex322.htm
EX-21.1 - EXHIBIT 21.1 - Lake Sunapee Bank Group	dex211.htm
EX-23.1 - EXHIBIT 23.1 - Lake Sunapee Bank Group	dex231.htm

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

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

Table of Contents


Selected Financial Highlights		1

Letter to Stockholders		2

Management’s Discussion and Analysis of Financial Condition and Results of Operations		5

Report of Independent Registered Public Accounting Firm		25

Financial Statements		26

Notes to Financial Statements		32

Form 10-K		65

Board of Directors		91

Officers and Managers		91

Board of Advisors		92

Stockholder Information		92

Information on Common Stock		92

Selected Financial Highlights


*For the Years Ended December 31,*	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.

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.

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…

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

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,

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,

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.

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.

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.

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.

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
Change in Rates	$ 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

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 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	%

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.

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

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.

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.

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

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

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.

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.

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

Management’s Discussion and Analysis (continued)

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.

Management’s Discussion and Analysis (continued)

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.

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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.

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.

SHATSWELL, MacLEOD & COMPANY, P.C.

West Peabody, Massachusetts

March 26, 2010

LOGO

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

Notes to Consolidated Financial Statements—(Continued)

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

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.

Notes to Consolidated Financial Statements—(Continued)

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

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.

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.

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.

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.

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

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.

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.

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

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	$	12,937,657	$	12,940,592

Deposits from related parties held by the Bank as of December 31, 2009 and 2008 amounted to $2,485,630 and $1,316,574, respectively.

As of December 31, 2009 and 2008, time deposits include $149,961,410 and $104,772,792, respectively, of certificates of deposit with a minimum balance of $100,000. Generally, deposits in excess of $250,000 are not federally insured.

NOTE 8. Federal Home Loan Bank Advances:

Advances consist of funds borrowed from the FHLB.

Notes to Consolidated Financial Statements—(Continued)

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

Maturities of advances from the FHLB for the years ending after December 31, 2009 are summarized as follows:


2010	$	65,000,000
2011		10,000,000
2013		10,000,000
Thereafter		11,000,000
Fair value adjustment		(37,994	)

	$	95,962,006

As of December 31, 2009, the following advances from the FHLB were redeemable at par at the option of the FHLB:


MATURITY DATE	OPTIONAL REDEMPTION DATE	AMOUNT
January 28, 2013	January 28, 2011	$	10,000,000
April 30, 2018	January 28, 2010 and quarterly thereafter		10,000,000

		$	20,000,000

As of December 31, 2009, the Company had a $1,000,000 putable advance (Knock-out Advance) from the FHLB which matures on September 1, 2015, and has a fixed interest rate of 4.13%. The FHLB will require that this borrowing become due immediately upon its Strike Date (next strike date is March 1, 2010, and quarterly thereafter) if the three month LIBOR equals or exceeds the Strike Rate of 6.75%. As of December 31, 2009, the three month LIBOR was at 0.25%.

At December 31, 2009, the interest rates on FHLB advances ranged from 0.21% to 4.13%. The weighted average interest rate at December 31, 2009 is 1.71%.

Amortizing advances are being repaid in equal monthly payments and are being amortized from the date of the advance to the maturity date on a direct reduction basis.

Borrowings from the FHLB are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain unencumbered investment securities and other qualified assets.

NOTE 9. Other borrowed funds:

Other borrowed funds consist of a promissory note payable to a third party in the amount of $77,500. The note is payable in three installments on June 1, 2008, 2009 and 2010, and bears a variable interest rate equal to the prime rate as disclosed in the Wall Street Journal. Other borrowed funds also consists of a line of credit from PNC Bank with an outstanding balance of $2,000,000 at December 31, 2009. The terms of the line of credit are as follows:


ORIGINAL DATE	EXPIRATION DATE	INTEREST RATE	LINE OF CREDIT AMOUNT
March 28, 2008	March 26, 2010	3 month LIBOR plus 2.00%	$	2,000,000

Principal is due in full on the expiration date.

Notes to Consolidated Financial Statements—(Continued)

NOTE 10. Securities sold under agreements to repurchase:

The securities sold under agreements to repurchase as of December 31, 2009 are securities sold on a short-term basis by the Bank that have been accounted for not as sales but as borrowings. The securities consisted of U.S. Agencies. The securities were held in the Bank’s safekeeping account at Bank of America under the control of the Bank and pledged to the purchasers of the securities. The purchasers have agreed to sell to the Bank substantially identical securities at the maturity of the agreements.

NOTE 11. Income taxes:

The components of income tax expense are as follows for the years ended December 31:


	2009			2008			2007
Current tax expense	$	4,537,591		$	3,079,548		$	2,093,512
Benefit from net operating loss carryovers		(224,139	)		(224,140	)		(56,035	)
Deferred tax benefit		(1,200,943	)		(681,082	)		(126,437	)

Total income tax expense	$	3,112,509		$	2,174,326		$	1,911,040

The reasons for the differences between the tax at the statutory federal income tax rate and the effective tax rates are summarized as follows for the years ended December 31:


	2009		2008		2007
Federal income tax at statutory rate	34.0	%	34.0	%	34.0	%
Increase (decrease) in tax resulting from:
Tax-exempt income	(3.2	)	(4.5	)	(3.7	)
Dividends received deduction	(.6	)	(2.1	)	(2.6	)
Federal tax credits	(.4	)	(1.3	)	—
Other, net	2.3		1.4		2.0

Effective tax rates	32.1	%	27.5	%	29.7	%

Notes to Consolidated Financial Statements—(Continued)

NOTE 11. Income taxes: (continued)

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


	2009			2008
Deferred tax assets:
Interest on non-performing loans	$	41,888		$	83,185
Allowance for loan losses		3,559,598			1,972,372
Deferred compensation		576,368			558,980
Deferred retirement expense		480,416			376,560
Accrued directors fees		44,207			49,733
Accrued group health contingency		38,770			23,901
Writedown of securities		367,772			394,040
Net operating loss carryforwards		68,400			292,539
Net unrealized loss on available-for-sale securities		331,730			—
Net unrealized loss on investment at equity		—			7,241
Net unrealized loss on derivative		219,003			315,320
Unrecognized employee benefits under ASC 715-10		1,199,627			1,390,822
Other		40,111			42,230

Gross deferred tax assets		6,967,890			5,506,923


Deferred tax liabilities:
Deferred loan costs, net of fees		(530,987	)		(690,458	)
Prepaid pension		(1,427,265	)		(1,465,847	)
Accelerated depreciation		(459,381	)		(450,835	)
Purchased goodwill		(2,368,579	)		(2,072,506	)
Mortgage servicing rights		(675,022	)		(285,665	)
Core deposit intangibles and other market value adjustments		(1,332,900	)		(1,589,596	)
Net unrealized gain on available-for-sale securities		—			(145,939	)
Other		—			(16,180	)

Gross deferred tax liabilities		(6,794,134	)		(6,717,026	)


Net deferred tax asset (liability)	$	173,756		$	(1,210,103	)

During 2007, deferred tax assets were increased due to the acquisition of First Community Bank and First Brandon National Bank by $1,109,957 and $305,157, respectively. The acquisition also resulted in an increase in deferred tax liabilities of $2,056,263 due to market value adjustments and core deposit intangibles recorded as a result of the acquisitions.

As of December 31, 2009, the Company had federal net operating loss carryovers of $201,177. The carryovers were transferred to the Company upon the acquisition of First Community Bank during 2007. The losses will expire in 2026 and are subject to certain annual limitations. Depending on the future earnings of the Company, up to $659,234 of losses can be used each year until fully utilized.

The Company adopted ASC 740-20, “Income Taxes - Intraperiod Tax Allocation,” as of December 31, 2008. It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. There was no effect on the Company’s balance sheet or income statement from adoption of ASC 740-20.

NOTE 12. Stock compensation plans:

At December 31, 2009, the Company has two fixed stock-based employee compensation plans under which options are outstanding. As of December 31, 2009, 245,510 options are available to be granted. Under the plans, the exercise price of each option equals the market price of the Company’s stock on the date of grant and an option’s maximum term is 10 years. Options are exercisable immediately.

Notes to Consolidated Financial Statements—(Continued)

NOTE 12. Stock compensation plans: (continued)

No modifications have been made to the terms of the option agreements.

A summary of the status of the Company’s fixed stock option plans as of December 31, 2009, 2008 and 2007 and changes during the years ending on those dates is presented below:


	2009				2008				2007
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at beginning of year	337,042		$	12.28	378,042		$	12.10	446,800		$	11.99
Granted	—				—				—
Forfeited	(5,000	)		13.13	(15,000	)		12.27	—
Exercised	(24,000	)		7.52	(26,000	)		9.58	(68,758	)		11.38

Outstanding at end of year	308,042		$	12.64	337,042		$	12.28	378,042		$	12.10


Options exercisable at year-end	308,042				337,042				378,042
Weighted-average fair value of options granted during the year	—				—				—

The following table summarizes information about fixed stock options outstanding as of December 31, 2009:


Options Outstanding and Exercisable
Exercise Prices		Number Outstanding as of 12/31/09		Remaining Contractual Life
$	9.125	$	44,042	2.5 years
	13.05		107,500	3.8 years
	13.25		149,000	5.9 years
	15.30		7,500	6.1 years

$	12.64	$	308,042	4.7 years

NOTE 13. Employee benefit plans:

Defined Benefit Pension Plan

The Company has a defined benefit pension plan covering substantially all full-time employees who have attained age 21 and have completed one year of service. Annual contributions to the plan are based on actuarial estimates. In December 2006, the Company elected to suspend the plan so that employees no longer earn additional benefits for future service under this plan.

Notes to Consolidated Financial Statements—(Continued)

NOTE 13. Employee benefit plans: (continued)

The following tables set forth information about the plan, using a measurement date of December 31 for the years ended December 31, 2009 and 2008 and 2007:


	Years Ended December 31,
	2009			2008			2007
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	5,232,843		$	5,074,576		$	4,879,462
Interest cost		319,947			312,584			304,680
Actuarial loss (gain)		153,100			(3,577	)		57,358
Benefits paid		(139,527	)		(150,740	)		(166,924	)

Benefit obligation at end of year		5,566,363			5,232,843			5,074,576


Change in plan assets:
Plan assets at estimated fair value at beginning of year		5,422,254			7,283,542			7,060,652
Actual return on plan assets		858,334			(1,710,548	)		389,814
Benefits paid		(139,527	)		(150,740	)		(166,924	)

Fair value of plan assets at end of year		6,141,061			5,422,254			7,283,542


Funded status	$	574,698		$	189,411		$	2,208,966

Amounts recognized in accumulated other comprehensive loss, before tax effect, consist of unrecognized net actuarial losses of $3,028,596 and $3,511,289 as of December 31, 2009 and 2008, respectively.

The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 6.00% and 0%, respectively, at December 31, 2009, 6.25% and 0% at December 31, 2008, respectively and 6.25% and 0% at December 31, 2007, respectively.

The accumulated benefit obligation for the defined benefit pension plan was $5,566,363 and $5,232,843 at December 31, 2009 and 2008, respectively.

Components of net periodic cost and other comprehensive loss:


	Years Ended December 31,
	2009			2008			2007
Interest cost on benefit obligation	$	319,947		$	312,584		$	304,680
Expected return on assets		(428,082	)		(576,915	)		(559,795	)
Amortization of unrecognized net loss		205,541			37,209			27,687
Curtailment expense-prior service cost		—			—			—

Net periodic cost (benefit)		97,406			(227,122	)		(227,428	)


Other changes in plan assets and benefit obligations recognized in other comprehensive loss, before tax effect:
Actuarial (gain) loss		(277,152	)		2,283,886			227,339
Amortization of unrecognized actuarial loss		(205,541	)		(37,209	)		(27,687	)

Total recognized in other comprehensive loss		(482,693	)		2,246,677			199,652

Total recognized in net periodic cost (benefit) and other comprehensive loss	$	(385,287	)	$	2,019,555		$	(27,776	)

The estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic pension cost over the year ended December 31, 2010 is $169,557.

Notes to Consolidated Financial Statements—(Continued)

NOTE 13. Employee benefit plans: (continued)

For the years ended December 31, 2009, 2008 and 2007, the assumptions used to determine the net period pension cost are as follows:


	Years Ended December 31,
	2009		2008		2007
Discount rate	6.25	%	6.25	%	6.25	%
Increase in future compensation levels	0	%	0	%	0	%
Expected long-term rate of return on plan assets	8.00	%	8.00	%	8.00	%

The Bank has examined the historical benchmarks for returns in each asset class in its portfolio, and based on the target asset mix has developed a weighted-average expected return for the portfolio as a whole, partly taking into consideration forecasts of long-term expected inflation rates of 2.0% to 3.5%. The long-term rate of return used by the Bank is 8.00%. This rate was determined by adding the expected inflation rates to the weighted sum of the expected long-term return on each asset allocation.

Plan Assets

The Company’s pension plan assets measured at fair value at December 31, 2009, by asset category, are as follows:


	Fair Value Measurements at Reporting Date Using:
Asset Category	December 31, 2009		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3

U.S. equity securities	$	1,028,967	$	1,028,967	$	—	$	—
Registered investment companies (a)		2,436,494		—		2,436,494		—
Corporate debt securities		955,144		—		955,144		—
U.S. Government and agency securities		1,508,118		—		1,508,118		—
Money market		212,338		212,338		—		—

Totals	$	6,141,061	$	1,241,305	$	4,899,756	$	—

(a)	Includes 6.5% invested in fixed income funds and 93.5% invested in equity and index funds.

The Company’s pension plan assets are generally classified within level 1 or level 2 of the fair value hierarchy (See Note 15, “Fair Value Measurements,” to the Consolidated Financial Statements for a description of the fair value hierarchy) because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

Equity securities include 30,294 shares of the Company’s common stock as of December 31, 2009 and December 31, 2008. The fair value of the shares on those dates was $293,549 (4.8% of total plan assets) and $233,749 (4.3% of total plan assets), respectively.

Notes to Consolidated Financial Statements—(Continued)

NOTE 13. Employee benefit plans: (continued)

The investment policy for the defined benefit pension plan sponsored by the Bank is based on ERISA standards for prudent investing. The Bank seeks maximum return while limiting risk, through a balanced portfolio of equity and fixed income investments, as well as alternative asset classes. Within each asset class, a diversified mix of individual securities and bonds is selected. Equity allocations are targeted between 40% and 65% of the portfolio, with the remainder in fixed income investments and a small portion in alternative asset classes such as real estate. Asset manager performance is reviewed at least once every six months and benchmarked against the peer universe for the given investment style. The target allocation for the 2010 plan year and for the prior two years follows.


	Target Percentage of Plan Assets Years Ended December 31,
Asset Category	2010		2009		2008
Equity securities	40-65	%	40-65	%	40-65	%
Corporate debt securities	10-35	%	10-35	%	10-35	%
U.S. Government and agency securities	15-25	%	15-25	%	15-25	%
Other	0-10	%	0-10	%	0-10	%

The Bank does not expect to contribute to the defined benefit pension plan in 2010.

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


2010	$	152,000
2011		153,000
2012		231,000
2013		228,000
2014		241,000
Years 2015-2019		1,689,000

Defined Contribution Plan

The Bank sponsors a Profit Sharing - Stock Ownership Plan. The Bank may elect, but is not required, to make discretionary and/or matching contributions to the Plan.

For 2009, 2008 and 2007, participating employees’ contributions totaled $582,800, $535,985 and $419,204, respectively. The Bank made contributions totaling $527,798 for 2009, $468,370, for 2008 and $371,692 for 2007. A participant’s retirement benefit will depend on the amount of the contributions to the Plan together with the gains or losses on the investments.

Effective January 1, 2008, the Bank amended the Profit Sharing - Stock Ownership Plan whereby employees will receive a safe harbor, nonelective contribution equal to 3% of compensation for the plan year, as defined in the plan. In addition, the Bank shall make a matching contribution in an amount equal to employees’ elective deferrals up to a percentage of compensation for the plan year, to be determined annually, not to exceed 4%. Finally, the Bank may make an additional profit sharing contribution, determined annually, to be allocated on a pro rata basis to eligible employees based on their compensation in relation to the compensation of all participants.

The Company has entered into salary continuation agreements for supplemental retirement income with certain executives and senior officers. The total liability for these agreements included in other liabilities was $1,390,196 and $1,162,232 for the years ended December 31, 2009 and 2008, respectively. Expense recorded under these agreements was $258,874, $191,330 and $53,394 in 2009, 2008 and 2007.

The Company and the Bank entered into parallel employment agreements (the “Agreements”) with the Chief Executive Officer of the Company and with the President and Chief Financial Officer of the Company. The Agreements are for a period of five years and extend automatically each day unless either the Company or the Executive give contrary written notice in advance. The Agreements provide for a salary and certain benefits.

Notes to Consolidated Financial Statements—(Continued)

NOTE 13. Employee benefit plans: (continued)

The Agreements also provide for severance benefits upon termination without cause or following a change in control as defined in the agreements in an amount equal to the present value of the cash compensation and fringe benefits that the Executive(s) would have received if the Executive(s) would have continued working for an additional year.

The severance payments described above are limited to the extent required by virtue of the Company’s participation in the United States Department of the Treasury’s Capital Purchase Program.

In 2008, the Company adopted ASC 715, “Compensation – Retirement Benefits,” and recognized a liability for the Company’s future postretirement benefit obligations under endorsement split-dollar life insurance arrangements. The Company recognized this change in accounting principles as a cumulative effect adjustment in 2008 to retained earnings of $320,034. The total liability for the arrangements included in other liabilities was $394,095 at December 31, 2009 and $331,056 at December 31, 2008. Expense under this arrangement was $63,039 in 2009 and $11,022 in 2008.

NOTE 14. Commitments and contingencies:

In the normal course of business, the Company has outstanding various commitments and contingent liabilities, such as legal claims, which are not reflected in the consolidated financial statements. Management does not anticipate any material loss as a result of these transactions.

As of December 31, 2009, the Company was obligated under non-cancelable operating leases for bank premises and equipment expiring between February 22, 2011 and December 20, 2016. The total minimum rent commitments due in future periods under these existing agreements is as follows as of December 31, 2009:


2010	$	401,203
2011		381,036
2012		270,246
2013		190,144
2014		168,970
Years thereafter		63,310

Total minimum lease payments	$	1,474,909

Certain leases contain provisions for escalation of minimum lease payments contingent upon increases in real estate taxes and percentage increases in the consumer price index. The total rental expense amounted to $428,133, $404,704 and $343,329 for the years ended December 31, 2009, 2008 and 2007, respectively.

NOTE 15. Fair value measurements:

The Company adopted ASC 820-10, “Fair Value Measurements and Disclosures,” which provides a framework for measuring fair value under generally accepted accounting principles. This guidance also allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company did not elect fair value treatment for any financial assets or liabilities upon adoption.

In accordance with ASC 820-10, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

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

Notes to Consolidated Financial Statements—(Continued)

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

Notes to Consolidated Financial Statements—(Continued)

NOTE 15. Fair value measurements: (continued)

Level 3 - Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value for December 31, 2009 and 2008.

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

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

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

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

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

The following summarizes assets and liabilities measured at fair value for the period ending December 31, 2009 and 2008.

Notes to Consolidated Financial Statements—(Continued)

NOTE 15. Fair value measurements: (continued)

Assets measured at fair value on a recurring basis


	Fair Value Measurements at Reporting Date Using:
December 31, 2009	Total		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Securities available-for-sale	$	218,293,101	$	461,830	$	217,831,271	$	—

Totals	$	218,293,101	$	461,830	$	217,831,271	$	—


December 31, 2008	Total		Level 1		Level 2		Level 3
Securities available-for-sale	$	81,988,488	$	367,670	$	81,620,818	$	—

Totals	$	81,988,488	$	367,670	$	81,620,818	$	—

Liabilities measured at fair value on a recurring basis


	Fair Value Measurements at Reporting Date Using:
December 31, 2009	Total		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Derivative - interest rate swap	$	552,899	$	—	$	552,899	$	—

Totals	$	552,899	$	—	$	552,899	$	—


December 31, 2008	Total		Level 1		Level 2		Level 3
Derivative - interest rate swap	$	796,061	$	—	$	796,061	$	—

Totals	$	796,061	$	—	$	796,061	$	—

Assets measured at fair value on a nonrecurring basis

The following table presents the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy at December 31, 2009 and 2008, for which a nonrecurring change in fair value has been recorded:


	Fair Value Measurements at Reporting Date Using:
December 31, 2009	Total		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Impaired loans	$	437,118	$	—	$	437,118	$	—

Totals	$	437,118	$	—	$	437,118	$	—


December 31, 2008	Total		Level 1		Level 2		Level 3
Impaired loans	$	678,941	$	—	$	678,941	$	—

Totals	$	678,941	$	—	$	678,941	$	—

Notes to Consolidated Financial Statements—(Continued)

NOTE 15. Fair value measurements: (continued)

The estimated fair values of the Company’s financial instruments, all of which are held or issued for purposes other than trading, were as follows as of December 31:


	2009				2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	38,038,652	$	38,038,652	$	22,561,691	$	22,561,691
Securities available-for-sale		218,293,101		218,293,101		81,988,488		81,988,488
Federal Home Loan Bank stock		6,175,800		6,175,800		4,946,300		4,946,300
Loans held-for-sale		2,077,900		2,102,912		1,937,750		1,954,036
Loans, net		620,332,606		626,101,000		636,720,290		645,178,000
Other investment		2,000,000		2,000,000		2,000,000		2,000,000
Investment in unconsolidated subsidiaries		620,000		546,828		620,000		515,545
Accrued interest receivable		2,972,403		2,972,403		2,715,864		2,715,864
Due from broker		—		—		20,868,360		20,868,360
Financial liabilities:
Deposits		734,428,768		737,282,000		653,353,325		656,224,000
FHLB advances		95,962,006		96,598,000		66,317,485		67,909,726
Other borrowings		2,077,500		2,077,500		2,157,500		2,157,500
Securities sold under agreements to repurchase		12,118,593		12,118,593		15,072,991		15,072,991
Subordinated debentures		20,620,000		18,186,529		20,620,000		17,146,013
Derivative - interest rate swap		552,899		552,899		796,061		796,061

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

NOTE 16. Shareholders’ equity:

Liquidation account - On May 22, 1986, Lake Sunapee Bank, fsb received approval from the Federal Home Loan Bank Board and converted from a federally chartered mutual savings bank to a federally chartered stock savings bank. At the time of conversion, the Bank established a liquidation account in an amount of $4,292,510 (equal to the Bank’s net worth as of the date of the latest financial statement included in the final offering circular used in connection with the conversion). The liquidation account will be maintained for the benefit of eligible account holders who maintain their deposit accounts in the Bank after conversion. In the event of a complete liquidation of the Bank subsequent to conversion (and only in such event), each eligible account holder will be entitled to receive a liquidation distribution from the liquidation account before any liquidation distribution may be made with respect to capital stock. The amount of the liquidation account is reduced to the extent that the balances of eligible deposit accounts are reduced on any year-end closing date subsequent to the conversion. Company management believes the balance in the liquidation account would be immaterial to the consolidated financial statements as of December 31, 2009.

Dividends - The Bank may not declare or pay a cash dividend on or purchase any of its stock if the effect would be to reduce the net worth of the Bank below either the amount of the liquidation account or the net worth requirements of the banking regulators.

Special bad debts deduction - In prior years, the Bank, a wholly-owned subsidiary of the Company, was allowed a special tax-basis under certain provisions of the Internal Revenue Code. As a result, retained income of the Bank, as of December 31, 2009 includes $2,069,878 for which federal and state income taxes have not been provided. If the Bank no longer qualifies as a bank as defined in certain provisions of the Internal Revenue Code, this amount will be subject to recapture in taxable income ratably over four (4) years, subject to a combined federal and state tax rate of approximately 40%.

Notes to Consolidated Financial Statements—(Continued)

NOTE 17. Earnings per share (EPS):

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


	Income (Numerator)			Shares (Denominator)	Per-Share Amount
Year ended December 31, 2009
Basic EPS
Net income as reported	$	6,597,706		—
Preferred stock net accretion		(16,179	)
Cumulative preferred stock dividend earned		(478,082	)

Net income available to common stockholders		6,103,445		5,760,240	$	1.06
Effect of dilutive securities, options		—		1,708

Diluted EPS
Income available to common stockholders and assumed conversions	$	6,103,445		5,761,948	$	1.06


Year ended December 31, 2008
Basic EPS
Net income and income available to common stockholders	$	5,725,072		5,745,735	$	1.00
Effect of dilutive securities, options		—		12,495

Diluted EPS
Income available to common stockholders and assumed conversions	$	5,725,072		5,758,230	$	0.99


Year ended December 31, 2007
Basic EPS
Net income and income available to common stockholders	$	4,515,682		4,841,538	$	0.93
Effect of dilutive securities, options		—		74,153

Diluted EPS
Income available to common stockholders and assumed conversions	$	4,515,682		4,915,691	$	0.92

NOTE 18. Regulatory matters:

The Bank is subject to various capital requirements administered by its primary federal regulator, the Office of Thrift Supervision (OTS). Failure to meet minimum regulatory requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators, that if undertaken, could have a direct material effect on the Company’s and the Bank’s consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital to risk-weighted assets (as defined in the regulations), core capital to adjusted tangible assets (as defined) and tangible capital to tangible assets (as defined). Management believes, as of December 31, 2009 and 2008, that the Bank meets all capital requirements to which it is subject.

Notes to Consolidated Financial Statements—(Continued)

NOTE 18. Regulatory matters: (continued)

As of December 31, 2009, the most recent notification from the Office of Thrift Supervision categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.


	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
			(Dollar amounts in thousands)
As of December 31, 2009:
Total Capital (to Risk Weighted Assets)	$	82,891	13.27	%	$	49,964	>8.0	%	$	62,457	>10.0	%
Core Capital (to Adjusted Tangible Assets)		78,571	8.45			37,201	>4.0			46,498	>5.0
Tangible Capital (to Tangible Assets)		78,571	8.45			13,949	>1.5			N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		78,571	12.58			N/A	N/A			37,474	>6.0

As of December 31, 2008:
Total Capital (to Risk Weighted Assets)		67,118	11.36			47,266	>8.0			59,083	>10.0
Core Capital (to Adjusted Tangible Assets)		65,715	8.12			32,366	>4.0			40,457	>5.0
Tangible Capital (to Tangible Assets)		65,715	8.12			12,137	>1.5			N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		65,715	11.12			N/A	N/A			35,450	>6.0

The following is a reconcilement of the Bank’s total equity included in the consolidated balance sheet to the regulatory capital ratios disclosed in the table above:


	December 31, 2009						December 31, 2008
	Tier 1 Capital			Total Capital			Tier 1 Capital			Total Capital
				(in thousands)
Total equity	$	105,716		$	105,716		$	93,741		$	93,741
Accumulated other comprehensive loss		2,342			2,342			1,900			1,900
Allowable allowance for loan losses		—			7,826			—			5,358
Goodwill and core deposit intangible		(29,317	)		(29,317	)		(29,854	)		(29,854	)
Mortgage servicing asset		(170	)		(170	)		(72	)		(72	)
Equity investments and other assets		—			(3,506	)		—			(3,955	)

	$	78,571		$	82,891		$	65,715		$	67,118

NOTE 19. Preferred stock:

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

Notes to Consolidated Financial Statements—(Continued)

NOTE 19. Preferred stock: (continued)

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. The Company may redeem the Series A Preferred Stock upon payment of the Redemption Amount which is the liquidation amount plus accrued and unpaid dividends.

The Company has allocated the 10 million in proceeds received from the U.S. Treasury Department between Series A Preferred Stock and the Warrants assuming that the Preferred Stock would be replaced with a qualifying equity offering and the Preferred Stock would therefore be redeemed at the end of 5 years. The allocation has been recorded assuming a discount rate of 13% on the cash flows of each instrument.

The allocation of the proceeds is as follows:


Series A Preferred Stock	$	9,914,980
Warrants		85,020

Proceeds received from the Treasury Department	$	10,000,000

The Series A Preferred Stock is being accreted over a 5 year period, so that at the end of 5 years, the balance in Preferred Stock would equal $10,000,000.

Estimated accretion from retained earnings for each of the five years succeeding 2009 is as follows:


2010	$	16,900
2011		16,929
2012		17,004
2013		16,986
2014		1,022

	$	68,841

NOTE 20. Financial instruments:

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include secured interests in mortgages, accounts receivable, inventory, property, plant and equipment and income-producing properties.

Notes to Consolidated Financial Statements—(Continued)

NOTE 20. Financial instruments: (continued)

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of December 31, 2009 and 2008, the maximum potential amount of the Company’s obligation was $1,276,703 and $829,221, respectively, for financial and standby letters of credit. The Company’s outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Company may seek recourse through the customer’s underlying line of credit. If the customer’s line of credit is also in default, the Company may take possession of the collateral, if any, securing the line of credit.

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


	2009		2008
Commitments to extend credit	$	18,292,104	$	16,700,556

Letters of credit	$	1,276,703	$	829,221

Lines of credit	$	89,715,566		$87,761,000

Unadvanced portion of construction loans	$	3,114,383	$	23,413,930

NOTE 21. Acquisitions:

On June 1, 2007, the Company acquired First Brandon Financial Corporation (First Brandon). Costs to acquire consisted of cash of $4,403,088, 1,067,650 shares issued ($14.605 market value per share or $15,593,026) and merger costs of $836,179 for a total acquisition cost of $20,832,293. Goodwill recognized amounted to $7,503,046 and of that total amount, $0 is deductable for tax purposes.

On October 1, 2007, the Company acquired First Community Bank (First Community). Costs to acquire consisted of cash of $3,019,906, 752,063 shares issued ($14.82 market value per share or $11,145,574) and merger costs of $484,168 for a total acquisition cost of $14,649,648. Goodwill recognized amounted to $7,650,408 and of that total amount, $0 is deductable for tax purposes.

A summary of the fair values of assets acquired and liabilities assumed at the date of acquisitions is as follows:


	First Brandon		First Community
Cash and cash equivalents	$	13,658,910	$	2,762,836
Securities available-for-sale		17,309,352		3,545,285
Federal Reserve and Federal Home Loan Bank stock		395,900		367,700
Loans, net		67,524,872		61,705,512
Premises and equipment and investment in real estate		2,488,976		2,104,635
Bank owned life insurance		2,227,260		1,303,530
Other assets and accrued interest receivable		810,063		589,804

Total assets acquired		104,415,333		72,379,302


Total deposits		89,571,569		62,392,819
Securities sold under agreements to repurchase		1,769,612		—
FHLB advances		114,220		3,492,875
Accrued expenses and other liabilities		2,106,685		486,368

Total liabilities assumed		93,562,086		66,372,062

Net assets acquired		10,853,247		6,007,240

Goodwill		7,503,046		7,650,408
Core deposit intangible asset		2,476,000		992,000

Total purchase price	$	20,832,293	$	14,649,648

The results of operations of the acquired entities have been included in the Company’s consolidated financial statements since the respective acquisition dates.

Notes to Consolidated Financial Statements—(Continued)

NOTE 21. Acquisitions: (continued)

The following proforma information assumes that the acquisitions had occurred at the beginning of the period presented.


	2007
	(unaudited)
Total revenue	$	53,726,627
Net income	$	5,249,009
Earnings per share:
Basic	$	0.90
Diluted	$	0.89

The pro forma information is presented for information purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

NOTE 22. Goodwill and intangible assets:

The Company’s assets as of December 31, 2009 include goodwill of $15,153,454 relating to the acquisitions of First Brandon and First Community in 2007. Goodwill also includes $2,471,560 relating to the acquisition of Landmark Bank and $9,668,456 relating to the acquisition of New London Trust in prior years.

The Company evaluated its goodwill and intangible assets as of December 31, 2009 and 2008 and found no impairment.

A summary of acquired amortizing intangible assets is as follows:


	As of December 31, 2009
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Core deposit intangible-First Brandon	$	2,476,000	$	1,065,430	$	1,410,570
Core deposit intangible-First Community		992,000		378,764		613,236

Total	$	3,468,000	$	1,444,194	$	2,023,806


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

Total	$	3,468,000	$	907,473	$	2,560,527

Aggregate amortization expense was $536,721 in 2009, $599,776 in 2008 and $307,697 in 2007. Amortization is being calculated on the sum-of-the-years digit method over ten years.

Estimated amortization expense for each of the five years succeeding 2009 is as follows:


2010	$	473,667
2011		410,612
2012		347,558
2013		284,503
2014		221,448

Notes to Consolidated Financial Statements—(Continued)

NOTE 23. Condensed parent company only financial statements:

The following are condensed balance sheets, statements of income and cash flows for New Hampshire Thrift Bancshares, Inc. (“Parent Company”) as of and for the years ended December 31:

CONDENSED BALANCE SHEETS


	2009		2008
ASSETS
Cash in Lake Sunapee Bank	$	1,887,922	$	1,073,134
Investment in subsidiary, Lake Sunapee Bank		105,715,992		93,732,163
Investment in affiliate, NHTB Capital Trust II		310,000		310,000
Investment in affiliate, NHTB Capital Trust III		310,000		310,000
Investment in DCC		2,000,000		2,000,000
Deferred expenses		261,989		272,683
Advances to Lake Sunapee Bank		44,246		52,664
Other assets		467,021		432,670

Total assets	$	110,997,170	$	98,183,314


LIABILITIES
Subordinated debentures	$	20,620,000	$	20,620,000
Loan payable – PNC		2,000,000		2,000,000
Other liabilities		600,917		886,222

Total liabilities		23,220,917		23,506,222
STOCKHOLDERS’ EQUITY		87,776,253		74,677,092

Total liabilities and stockholders’ equity	$	110,997,170	$	98,183,314

CONDENSED STATEMENTS OF INCOME


	2009		2008		2007
Dividends from subsidiary, Lake Sunapee Bank	$	5,000,000	$	4,500,000	$	12,300,000
Dividends from subsidiaries, NHTB Capital Trust II and III		26,484		38,144		44,534
Investment interest income		240,000		182,000		52,667
Interest expense on subordinated debentures		1,157,953		1,315,365		1,479,622
Interest expense on other borrowings		61,644		71,129		—
Net operating income including tax benefit		134,026		242,574		383,212

Income before equity in undistributed earnings of subsidiaries		4,180,913		3,576,224		11,300,791
Equity in undistributed earnings (loss) of subsidiaries		2,416,793		2,148,848		(6,785,109	)

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

Notes to Consolidated Financial Statements—(Continued)

NOTE 23. Condensed parent company only financial statements: (continued)

CONDENSED STATEMENTS OF CASH FLOWS


	2009			2008			2007
Cash flows from operating activities:
Net income	$	6,597,706		$	5,725,072		$	4,515,682
(Increase) decrease in and other assets					(20,000	)		20,000
(Decrease) increase in accrued interest payable and other liabilities		(42,143	)		34,668			(1,484	)
(Increase) decrease in taxes receivable		(104,315	)		(60,160	)		55,508
(Increase) decrease in prepaid expenses		(9,180	)		10,169			(13,440	)
Amortization of deferred expenses relating to issuance of capital securities and subordinated debentures		10,694			10,693			10,694
Equity in undistributed (earnings) loss of subsidiaries		(2,416,793	)		(2,148,848	)		6,785,109


Net cash provided by operating activities		4,035,969			3,551,594			11,372,069


Cash flows from investing activities:
Purchase of other investment		—			(2,000,000	)		—
Redemption of other investment		—			—			2,000,000
Investment in subsidiary, Lake Sunapee Bank		(10,000,000	)		—			—
Net change in advances to subsidiary, Lake Sunapee Bank		8,418			1,075			73,128
Net cash and cash equivalents paid for First Brandon and First Community acquisitions		—			—			(7,422,994	)


Net cash used in investing activities		(9,991,582	)		(1,998,925	)		(5,349,866	)


Cash flows from financing activities:
Proceeds from exercise of stock options		180,500			249,125			782,732
Issuance of preferred stock		10,000,000			—			—
Proceeds from other borrowed money		—			2,000,000			—
Dividends paid on preferred stock		(415,278	)		—			—
Dividends paid on common stock		(2,994,821	)		(2,988,061	)		(2,475,019	)
Repurchase of treasury stock		—			(60,954	)		(5,291,469	)


Net cash provided by (used in) financing activities		6,770,401			(799,890	)		(6,983,756	)


Net increase (decrease) in cash		814,788			752,779			(961,553	)
Cash, beginning of year		1,073,134			320,355			1,281,908

Cash, end of year	$	1,887,922		$	1,073,134		$	320,355

The Parent Company Only Statements of Changes in Stockholders’ Equity are identical to the Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2009, 2008 and 2007, and therefore are not reprinted here.

Notes to Consolidated Financial Statements—(Continued)

NOTE 24. Quarterly Results of Operations (UNAUDITED)

Summarized quarterly financial data for 2009 and 2008 follows:


	(In thousands, except earnings per share) 2009 Quarters Ended
	March 31		June 30		Sept. 30		Dec. 31
Interest and dividend income	$	9,892	$	9,766	$	9,879	$	9,847
Interest expense		3,316		3,199		2,950		2,611

Net interest and dividend income		6,576		6,567		6,929		7,236
Provision for loan losses		1,765		630		931		2,626
Noninterest income		2,835		2,827		2,916		4,268
Noninterest expense		5,695		6,300		6,164		6,333

Income before income taxes		1,951		2,464		2,750		2,545
Income tax expense		619		782		941		770

Net income	$	1,332	$	1,682	$	1,809	$	1,775


Net income available to common stockholders	$	1,227	$	1,554	$	1,679	$	1,644


Basic earnings per common share	$	0.21	$	0.27	$	0.29	$	0.28

Earnings per common share, assuming dilution	$	0.21	$	0.27	$	0.29	$	0.28


	(In thousands, except earnings per share) 2008 Quarters Ended
	March 31		June 30		Sept. 30		Dec. 31
Interest and dividend income	$	11,068	$	10,506	$	10,512	$	10,550
Interest expense		4,944		4,331		3,902		3,537

Net interest and dividend income		6,124		6,175		6,610		7,013
Provision for loan losses		37		140		184		741
Noninterest income		2,063		1,985		1,103		2,546
Noninterest expense		6,021		5,861		5,841		6,895

Income before income taxes		2,129		2,159		1,688		1,923
Income tax expense		745		753		582		94

Net income	$	1,384	$	1,406	$	1,106	$	1,829


Net income available to common stockholders	$	1,384	$	1,406	$	1,106	$	1,829


Basic earnings per common share	$	0.24	$	0.24	$	0.19	$	0.32

Earnings per common share, assuming dilution	$	0.24	$	0.24	$	0.19	$	0.32

NOTE 25. Reclassification

Certain amounts in the prior year have been reclassified to be consistent with the current year’s statement presentation.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended: December 31, 2009

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

SEC Commission File Number 000-17859

NEW HAMPSHIRE THRIFT BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Delaware

02-0430695

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

9 Main Street, PO Box 9

Newport, New Hampshire 03773-0009

(Address of principal executive offices)

Registrant’s telephone number, including area code: (603) 863-0886

Securities registered pursuant to Section 12(b) of the Act:


Common Stock, $.01 par value		The Nasdaq Stock Market, LLC
Title of Class		Name of Exchange on which Registered

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark is the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

As of March 17, 2010 there were issued and outstanding 5,771,772 shares of the registrant’s common stock.

The common stock is listed for trading on the NASDAQ Stock Market under the symbol “NHTB”. Based on the closing price of $9.85 on June 30, 2009, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $56.9 million.

Documents Incorporated By Reference:

Portions of the proxy statement for the 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.

New Hampshire Thrift Bancshares, Inc.

INDEX


PART I

Item 1.	Business	66
Item 2.	Properties	81
Item 3.	Legal Proceedings	82
Item 4.	Reserved	83

PART II

Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	84
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	84
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	84
Item 8.	Financial Statements
	Report of Independent Registered Public Accounting Firm	25
	Consolidated Balance Sheets	26
	Consolidated Statements of Income	27
	Consolidated Statements of Changes in Stockholders’ Equity	28
	Consolidated Statements of Comprehensive Income	29
	Consolidated Statements of Cash Flows	30
	Notes to Consolidated Financial Statements	32
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	85
Item 9A(T).	Controls and Procedures	85
Item 9B.	Other Information	85

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	85
Item 11.	Executive Compensation	86
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	86
Item 13.	Certain Relationships and Related Transactions, and Director Independence	87
Item 14.	Principal Accountant Fees and Services	87

PART IV

Item 15.	Exhibits and Financial Statement Schedules	87
	Signatures	90

PART I.

Item 1.

Business

GENERAL

Organization

New Hampshire Thrift Bancshares, Inc. (NHTB or the Company), a Delaware holding company organized on July 5, 1989, is the parent company of Lake Sunapee Bank, fsb (the Bank), a federally chartered savings bank. The Bank was originally chartered by the State of New Hampshire in 1868 as the Newport Savings Bank. The Bank became a member of the Federal Deposit Insurance Corporation (FDIC) in 1959 and a member of the Federal Home Loan Bank of Boston in 1978. On December 1, 1980, the Bank was the first bank in the United States to convert from a state-chartered mutual savings bank to a federally-chartered mutual savings bank. In 1981, the Bank changed its name to “Lake Sunapee Savings Bank, fsb” and in 1994, refined its name to “Lake Sunapee Bank, fsb.” The Bank’s deposits are insured by the Deposit Insurance Fund of the FDIC.

The Bank is a thrift institution established for the purposes of providing the public with a convenient and safe place to invest funds, for the financing of housing, consumer-oriented products and commercial loans, and for providing a variety of other consumer-oriented financial services. The Bank is a full-service community institution promoting the ideals of thrift, security, home ownership and financial independence for its customers. The Bank’s operations are conducted from its home office located in Newport, New Hampshire and its branch offices located in Sunapee, Newbury, New London, Bradford, Grantham, Guild, Lebanon, West Lebanon, Hillsboro, Peterborough, Andover, Claremont, Enfield, and Milford, New Hampshire, and Brandon, Pittsford, Rutland, West Rutland, and Woodstock, Vermont. The Company had assets of approximately $962.6 million as of December 31, 2009.

Through its subsidiary, Lake Sunapee Financial Services Corporation, the Bank offers brokerage services to its customers.

Market Area

The Bank’s market area is concentrated in the counties of Merrimack, Sullivan, Hillsborough, Grafton and Cheshire in central and western New Hampshire and the counties of Rutland and Windsor in Vermont. These areas are best known for their recreational facilities and their resort/retirement environment.

There are several distinct regions within the Bank’s market area. The Upper Valley region is located in the northwest-central area of New Hampshire, and includes the towns of Lebanon, a commerce and manufacturing center, home to Dartmouth-Hitchcock Medical Center, New Hampshire’s only academic medical center, and Hanover, home of Dartmouth College. The central and south-east portion of the Bank’s market area in New Hampshire is Lake Sunapee, a popular year-round recreation and resort area that includes both Lake Sunapee and Mount Sunapee. Finally, the Monadnock region, in southwestern New Hampshire, is named after Mount Monadnock, the major geographic landmark in the region and consists of Cheshire, southern Sullivan and western Hillsborough counties.

Rutland and Windsor counties are located in south central Vermont. This region is home to many attractions, including Killington Mountain, Okemo Resort, and the city of Rutland. The popular vacation destinations in this region include Woodstock, Brandon, Ludlow and Quechee.

Available Information

The Company files annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, proxy statements or other information filed by the Company at the SEC’s public reference room in Washington, D.C., which is located at the following address: Public Reference Room, 100 F Street N.E., Washington, D.C. 20549.

You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the SEC’s public reference room. The Company’s SEC filings are also available to the public from document retrieval services and at the SEC’s Internet website (http://www.sec.gov). We also make our filings available free of charge on our website (http://www.nhthrift.com) by clicking on “SEC Filings.”

LENDING ACTIVITIES

The Bank’s net loan portfolio was $620,332,606 at December 31, 2009, representing approximately 65% of total assets. As of December 31, 2009, approximately 72% of the mortgage loan portfolio had adjustable rates. As of December 31, 2009, the Bank had sold $352,066,692 in fixed-rate mortgage loans in an effort to meet customer demands for fixed-rate loans, minimize the Bank’s interest rate risk, provide liquidity and build a servicing portfolio.

REAL ESTATE LOANS. Conventional residential mortgage loans are solicited by the Bank’s loan origination team in the local real estate marketplace. Residential borrowers are frequently referred to the Bank by its existing customers or real estate agents. Generally, the Bank makes conventional mortgage loans (loans of 80% of value or less that are neither insured nor partially guaranteed by government agencies) on one- to four-family owner occupied dwellings. The Bank also makes residential loans up to 95% of the appraised value if the top 20% of the loan is covered by private mortgage insurance. Residential mortgage loans typically have terms up to 30 years and are amortized on a monthly basis with principal and interest due each month. Currently, the Bank offers one-year, three-year and five-year adjustable-rate mortgage loans and long-term fixed-rate loans. Borrowers may prepay loans at their option or refinance their loans on terms agreeable to the Bank. The Bank’s management believes that, due to prepayments in connection with refinancing and sales of property, the average length of the Bank’s long-term residential loans is approximately seven years.

The terms of conventional residential mortgage loans originated by the Bank have contained a “due-on-sale” clause which permits the Bank to accelerate the indebtedness of a loan upon the sale or other disposition of the mortgaged property. Due-on-sale clauses are an important means of increasing the turnover of mortgage loans in the Bank’s portfolio.

Commercial real estate loans are solicited by the Bank’s commercial banking team in the Bank’s local real estate market. In addition, commercial borrowers are frequently referred to the Bank by its existing customers, local accountants, and attorneys. Generally, the Bank makes commercial real estate loans on loans up to 75% of value with terms up to twenty years, amortizing on a monthly basis with principal and interest due each month. Debt service coverage (the amount of cash left over after expenses have been paid) required to cover the Bank’s interest and principal payments generally must equal or exceed 125% of the loan payments.

REAL ESTATE CONSTRUCTION LOANS. The Bank offers construction loan financing on one- to four-family owner occupied dwellings in the Bank’s local real estate market. Generally, the Bank makes construction up to 80% of value with terms of up to nine months. During the construction phase, inspections are made to assess construction progress and monitor the disbursement of loan proceeds. The Bank also offers a “one-step” construction loan, which provides construction and permanent financing with one loan closing. The “one-step” is provided under the same terms and conditions of the Bank’s conventional residential program.

CONSUMER LOANS. The Bank makes various types of secured and unsecured consumer loans, including home improvement loans. The Bank offers loans secured by automobiles, boats and other recreational vehicles. The Bank believes that the shorter terms and the normally higher interest rates available on various types of consumer loans is helpful in maintaining a more profitable spread between the Bank’s average loan yield and its cost of funds.

The Bank provides home equity loans secured by liens on residential real estate located within the Bank’s market area. These include loans with regularly scheduled principal and interest payments as well as revolving credit agreements. The interest rate on these loans is adjusted quarterly and tied to the movement of the prime rate.

COMMERCIAL LOANS. The Bank offers commercial loans in accordance with regulatory requirements. Under current regulation, the Bank’s commercial loan portfolio is limited to 20% of total assets.

MUNICIPAL LOANS. The Bank’s activity in the municipal lending market is limited to those towns and school districts located within its primary lending area and such loans are extended for the purposes of either tax anticipation, building improvements or other capital spending requirements. Municipal lending is considered to be an area of accommodation and part of the Bank’s continuing involvement with the communities it serves.

The following table sets forth the composition of the Bank’s loan portfolio in dollar amounts and as a percentage of the portfolio at December 31:


	2009					2008					2007
	Amount			% of Total		Amount			% of Total		Amount			% of Total
	($ in thousands)
Real estate loans
Conventional and Commercial	$	469,371		74.84	%	$	483,694		75.68	%	$	478,252		76.14	%
Construction		12,468		1.98			13,515		2.11			21,704		3.46
Consumer loans		82,982		13.23			79,468		12.43			75,619		12.04
Commercial and municipal loans		62,387		9.95			62,491		9.78			52,515		8.36

Total loans		627,208		100.00	%		639,168		100.00	%		628,090		100.00	%
Unamortized adjustment to fair value		1,303					1,400					1,496
Allowance for loan losses		(9,519	)				(5,594	)				(5,181	)
Deferred loan origination costs, net		1,342					1,746					1,869

Loans receivable, net	$	620,334				$	636,720				$	626,274


	2006					2005
	Amount			% of Total		Amount			% of Total
	($ in thousands)
Real estate loans
Conventional and Commercial	$	385,002		77.79	%	$	359,304		77.21	%
Construction		17,109		3.45			13,080		2.81
Consumer loans		63,277		12.79			64,393		13.84
Commercial and municipal loans		29,522		5.97			28,558		6.14

Total loans		494,910		100.00	%		465,335		100.00	%
Unamortized adjustment to fair value		36					48
Allowance for loan losses		(3,975	)				(4,022	)
Deferred loan origination costs, net		1,741					1,790

Loans receivable, net	$	492,712				$	463,151

The following table sets forth the maturities of the loan portfolio at December 31, 2009, and whether such loans have fixed or adjustable interest rates:


Maturities	One year or less		One through five years		Over five years		Total

Real Estate Loans with:
Predetermined interest rates	$	3,873,978	$	9,433,217	$	118,274,996	$	131,582,191
Adjustable interest rates		10,904,943		7,843,923		331,506,704		350,255,570

		14,778,921		17,277,140		449,781,700		481,837,761


Collateral/Consumer Loans with:
Predetermined interest rates		1,523,309		5,437,883		415,527		7,376,719
Adjustable interest rates		1,023,181		17,403,404		57,178,385		75,604,970

		2,546,490		22,841,287		57,593,912		82,981,689


Commercial/Municipal Loans with:
Predetermined interest rates		6,515,435		9,170,517		16,915,121		32,601,073
Adjustable interest rates		9,848,914		3,154,897		16,781,942		29,785,753

		16,364,349		12,325,414		33,697,063		62,386,826


Unamortized adjustment to fair value		—		—		1,303,258		1,303,258

Totals	$	33,689,760	$	52,443,841	$	542,375,933	$	628,509,534

The preceding schedule includes $2,754,443 of non-performing loans categorized within the respective loan types.

Origination, Purchase and Sale of Loans

The primary lending activity of the Bank is the origination of conventional loans (i.e., loans of 80% of value or less that are neither insured nor partially guaranteed by government agencies) secured by first mortgage liens on residential properties, principally single-family residences, substantially all of which are located in the west-central area of New Hampshire and Rutland and Windsor counties in Vermont.

The Bank evaluates the security for each new loan made. Appraisals, when required, are made for the Bank by qualified sub-contracted appraisers. The appraisal of the real property upon which the Bank makes a mortgage loan is of particular significance to the Bank in the event that the loan is foreclosed, since an improper appraisal may contribute to a loss by, or other financial detriment to, the Bank in the disposition of the loan.

Detailed applications for mortgage loans are verified through the use of credit reports, financial statements and confirmations. Depending upon the size of the loan involved, a varying number of senior officers of the Bank must approve the application before the loan can be granted. The Loan Review Committee of the Bank’s Board of Directors reviews particularly large loans.

The Bank requires title certification on all first mortgage loans and the borrower is required to maintain hazard insurance on the security property.

Delinquent Loans, Classified Assets and Other Real Estate Owned

Reports listing delinquent accounts are generated and reviewed by management and the Board of Directors on a monthly basis. The procedures taken by the Bank when a loan becomes delinquent vary depending on the nature of the loan. When a borrower fails to make a required loan payment, the Bank takes a number of steps to ensure that the borrower will cure the delinquency. The Bank generally sends the borrower a notice of non-payment. The Bank then follows-up with telephone and/or written correspondence. When contact is made, the Bank attempts to obtain full payment, work out a repayment schedule, or in certain instances obtain a deed in lieu of foreclosure. If foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the property securing the loan generally is sold at foreclosure. If the Bank purchases the property, it becomes other real estate owned.

Federal regulations and the Bank’s Assets Classification Policy require that the Bank utilize an internal asset classification system as a means of reporting problem and potential problem assets. The Bank has incorporated the OTS internal asset classifications as part of its credit monitoring system. The Bank currently classifies problem and potential problem assets as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain “some loss” if the deficiency is not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the additional characteristics that the weaknesses present make collection and liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated special mention.

When an insured institution classifies one or more assets or portions thereof as substandard or doubtful, it is required to establish a general valuation allowance for loan losses in an amount deemed prudent by management. General valuation allowances represent loss allowances, which have been established to recognize the inherent risk associated with activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets or portions thereof as loss, it is required to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount.

A savings institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which can order the classification of additional assets and establishment of additional general or specific loss allowances. The OTS, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management has analyzed all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement.

Although management believes that, based on information currently available to it at this time, its allowance for loan losses is adequate, actual losses are dependent upon future events and, as such, further additions to the allowance for loan losses may become necessary.

The Bank classifies assets in accordance with the management guidelines described above. Total classified loans, excluding special mention, as of December 31, 2009 and 2008 were $11,876,373 and $9,122,365, respectively. For further discussion regarding nonperforming assets, impaired loans and the allowance for loan losses, please see Management’s Discussion and Analysis of Financial Condition and Results of Operations herein.

SUBSIDIARY ACTIVITIES

Service Corporations

The Bank has an expanded service corporation authority because of its conversion from a state-chartered mutual savings bank to a federal institution in 1980. This authority, grandfathered in that conversion, permits the Bank to invest 15% of its deposits, plus an amount of approximately $825,000, in service corporation activities permitted by New Hampshire law. However, the first 3% of these activities is subject to federal regulation and the remainder is subject to state law. This permits a 3% investment in activities not permitted by state law.

As of December 31, 2009, the Bank owned two service corporations, the Lake Sunapee Group, Inc., and the Lake Sunapee Financial Services Corporation. The Lake Sunapee Group owns and maintains the Bank’s buildings and investment properties. The Lake Sunapee Financial Services Corporation sells brokerage, securities, and insurance products to its customers.

NHTB Capital Trust II and III

NHTB Capital Trust II (Trust II) and NHTB Capital Trust III (Trust III) are statutory business trusts formed under the laws of the State of Connecticut and are wholly owned subsidiaries of the Company. On March 30, 2004, the Trust III issued $10.0 million of 6.06%, 5-year Fixed-Floating Capital Securities. On March 30, 2004, the Trust II issued $10.0 million of Floating Capital Securities, adjustable every three months at LIBOR plus 2.79%. On May 1, 2008, the Company entered into an interest rate swap agreement with PNC Bank to convert the floating-rate payments on Trust 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, Inc.
Payment dates:		Quarterly
Fixed-rate:		6.65%
Floating rate payer:		PNC Bank
Payment dates:		Quarterly
Index:		Three-month LIBOR

For more information, see Note 2 of the Consolidated Financial Statements.

COMPETITION

The Bank faces strong competition in the attraction of deposits. Its most direct competition for deposits comes from the other thrifts and commercial banks as well as credit unions located in its primary market areas. The Bank faces additional significant competition for investors’ funds from mutual funds and other corporate and government securities.

The Bank competes for deposits principally by offering depositors a wide variety of savings programs, a market rate of return, tax-deferred retirement programs and other related services. The Bank does not rely upon any individual, group or entity for a material portion of its deposits.

The Bank’s competition for real estate loans comes from mortgage banking companies, other thrift institutions and commercial banks. The Bank competes for loan originations primarily through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers, real estate brokers and builders. The Bank’s competition for loans varies from time to time depending upon the general availability of lendable funds and credit, general and local economic conditions, current interest rate levels, volatility in the mortgage markets and other factors which are not readily predictable. The Bank has six loan originators on staff who call on real estate agents, follow leads, and are available seven days a week to service the mortgage loan market.

INVESTMENT ACTIVITIES

Federally chartered savings institutions have the authority to invest in various types of liquid assets including United States Treasury obligations, securities of various federal agencies, certificates of deposit of insured banks and savings institutions, bankers’ acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment-grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly.

The Bank categorizes its securities as held-to-maturity, available-for-sale, or held-for-trading according to management intent. Please refer to Note 3 of the Consolidated Financial Statements for certain information regarding amortized costs, fair values and maturities of securities.

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


	Fair Value		Amortized Cost		Weighted Average Yield

*Available-for-sale securities*
U.S. Government, including agencies	$	2,049,688	$	2,004,184	4.94	%
Other bonds and debentures		1,054,394		1,033,856	7.13

Total due in less than one year		3,104,082		3,038,039	5.68


Other bonds and debentures		33,263,057		33,038,876	4.42

Total due after one year through five years		33,263,057		33,038,876	4.42


Other bonds and debentures		7,801,880		7,875,655	4.84

Total due after five years through ten years		7,801,880		7,875,655	4.84


Preferred stock with maturities		4,652,000		5,000,000	6.35
Other bonds and debentures		186,649		235,000	6.79

Total due after ten years		4,838,649		5,235,000	6.37

	$	49,007,668	$	49,187,570	4.79	%

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


December 31, 2009	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:
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 securities	$	219,130,592	$	721,314	$	1,558,805	$	218,293,101


December 31, 2008	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:
Bonds and notes-
U.S. Government, including agencies	$	13,015,080	$	157,733	$	—	$	13,172,813
Mortgage-backed securities		59,209,471		1,334,771		40,545		60,503,697
Asset-backed securities		1,499,732		—		305,642		1,194,090
Other bonds and debentures		2,401,098		71,120		—		2,472,218
Preferred stock with maturities		5,000,000		—		722,000		4,278,000
Equity securities		494,666		540		127,536		367,670

Total available-for-sale securities	$	81,620,047	$	1,564,164	$	1,195,723	$	81,988,488


December 31, 2007	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:
Bonds and notes-
U.S. Government, including agencies	$	21,516,957	$	11,632	$	13,548	$	21,515,041
Mortgage-backed securities		50,945,486		130,641		604,756		50,471,371
Asset-backed securities		1,499,688		3,403		—		1,503,091
Other bonds and debentures		8,136,635		20,628		21,963		8,135,300
Preferred stock with maturities		5,000,000		—		950,000		4,050,000
Equity securities		1,374,386		100,814		340,000		1,135,200

Total available-for-sale securities	$	88,473,152	$	267,118	$	1,930,267	$	86,810,003

DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS

The Bank offers a variety of deposit accounts with a range of interest rates and terms. The Bank’s deposits consist of business checking, money market accounts, savings, NOW and certificate accounts. The flow of deposits is influenced by general economic conditions, changes in money market rates, prevailing interest rates and competition. The Bank’s deposits are obtained predominantly from within the Bank’s primary market areas. The Bank uses traditional means to advertise its deposit products, including print media, and generally does not solicit deposits from outside its primary market areas. The Bank offers negotiated rates on some of its certificate accounts. At December 31, 2009, time deposits represented approximately 46% of total deposits. Time deposits included $149,961,410 of certificates of deposit in excess of $100,000.

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


	2009		2008			2007
	($ in Thousands)
Net deposits (withdrawals)	$	72,313	$	(12,537	)	$	22,561
Acquired deposits		—		—			151,964
Interest credited on deposit accounts		8,762		12,938			12,941

Total increase in deposit accounts	$	81,075	$	401		$	187,466

At December 31, 2009, the Bank had $150.0 million in certificate of deposit accounts in amounts of $100,000 or more maturing as follows:


Maturity Period	Amount		Weighted Average Rate
	($ in thousands)
3 months or less	$	53,904	1.41	%
Over 3 through 6 months		36,380	1.65	%
Over 6 through 12 months		31,291	1.48	%
Over 12 months		28,386	2.93	%

Total	$	149,961	1.77	%

The following table sets forth the distribution of the Bank’s deposit accounts as of December 31 indicated and the percentage to total deposits:


	2009				2008				2007
	Amount		% of Total		Amount		% of Total		Amount		% of Total
	($ in thousands)
Checking accounts	$	48,430	6.6	%	$	45,968	7.0	%	$	48,260	7.4	%
NOW accounts		178,049	24.2			155,662	23.9			151,847	23.3
Money market accounts		38,806	5.3			40,424	6.2			41,225	6.3
Regular savings accounts		10,958	1.5			11,063	1.7			12,031	1.8
Treasury savings accounts		116,817	15.9			107,110	16.4			104,163	16.0
Club deposits		96	—			93	—			94	—

Total		393,156	53.5			360,320	55.2			357,620	54.8

Time deposits
Less than 12 months		268,298	36.5			261,556	40.0			270,586	41.5
Over 12 through 36 months		68,686	9.4			29,248	4.5			23,780	3.6
Over 36 months		4,289	0.6			2,229	0.3			966	0.1

Total time deposits		341,273	46.5			293,033	44.8			295,332	45.2

Total Deposits	$	734,429	100.0	%	$	653,353	100.0	%	$	652,952	100.0	%

The following table presents the average balance of each type of deposit and the average rate paid on each type of deposit for the year indicated.


	For the Year Ended December 31,
	2009				2008				2007
	Average Balance		Average Rate Paid		Average Balance		Average Rate Paid		Average Balance		Average Rate Paid
	($ in thousands)
NOW	$	170,268	0.10	%	$	169,835	0.27	%	$	119,238	0.67	%
Savings deposits		126,015	0.51			122,516	1.06			104,455	0.64
Money market deposits		37,069	0.70			39,235	1.46			32,252	1.37
Time deposits		310,994	2.47			290,648	3.59			226,618	4.53
Demand deposits		27,917	—			29,286	—			30,573	—

Total Deposits	$	672,263			$	651,520			$	513,136

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


Time Deposits	2009		2008		2007
	($ in thousands)
0.00% – 0.99%	$	3,130	$	1,117	$	3,447
1.00% – 1.99%		257,229		18,563		13,364
2.00% – 2.99%		42,670		118,986		8,229
3.00% – 3.99%		36,041		134,865		15,781
4.00% – 4.99%		2,201		19,256		195,714
5.00% – 5.99%		2		246		57,653
6.00% – 6.99%		—		—		1,144

Total	$	341,273	$	293,033	$	295,332

Borrowings

The Bank utilizes advances from the Federal Home Loan Bank of Boston (FHLB) as a funding source alternative to retail deposits. By utilizing FHLB advances, the Bank can meet its liquidity needs without otherwise being dependent upon retail deposits. These advances are collateralized primarily by mortgage loans and mortgage-backed securities held by the Bank and secondarily by the Bank’s investment in capital stock of the FHLB. The maximum amount that the FHLB will advance to member institutions fluctuates from time-to-time in accordance with the policies of the FHLB. At December 31, 2009, the Bank had outstanding advances of $96.0 million from FHLB compared to advances outstanding of $66.3 million from FHLB at December 31, 2008.

The following table represents the balances, average amount outstanding, maximum outstanding, and average interest rates for short-term borrowings reported in Note 8 of the financial statements for the year indicated:


	2009			2008			2007
	($ in thousands)
Balance at year end	$	40,000		$	5,000		$	—
Average amount outstanding		16,233			861			32,917
Maximum amount outstanding at any month-end		50,000			5,000			55,000
Average interest rate for the year		0.40	%		1.28	%		5.31	%
Average interest rate on year-end balance		0.22	%		1.28	%		—

REGULATION

General. NHTB is regulated as a savings and loan holding company by the OTS. NHTB is required to file reports with, and otherwise comply with the rules and regulations of, the OTS and the SEC under the federal securities laws. The Bank, as a federal savings bank, is subject to regulation, examination and supervision by the OTS, as its primary regulator, and the Federal Deposit Insurance Corporation (FDIC) as its deposit insurer. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition.

The following references to the laws and regulations under which NHTB and the Bank are regulated are brief summaries thereof, do not purport to be complete, and are qualified in their entirety by reference to such laws and regulations. The OTS and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies under the applicable laws and regulations. Any change in such laws, regulations or policies, whether by the OTS, the FDIC, the SEC or the Congress, could have a material adverse impact on NHTB and the Bank, and their operations and stockholders.

Regulation of Federal Savings Associations

Business Activities. The Bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended (the “HOLA”), and the regulations of the OTS. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments. The Bank’s authority to invest in certain types of loans or other investments is limited by federal law and regulation.

Loans to One Borrower. The Bank is generally subject to the same limits on loans to one borrower as a national bank. With specified exceptions, the Bank’s total loans or extensions of credit to a single borrower cannot exceed 15% of the Bank’s unimpaired capital and surplus which does not include accumulated other comprehensive income. The Bank may lend additional amounts up to 10% of its unimpaired capital and surplus which does not include accumulated other comprehensive income, if the loans or extensions of credit are fully-secured by readily-marketable collateral. The Bank currently complies with applicable loans-to-one borrower limitations.

QTL Test. Under federal law, the Bank must comply with the qualified thrift lender, or “QTL” test. Under the QTL test, the Bank is required to maintain at least 65% of its “portfolio assets” in certain “qualified thrift investments” in at least nine months of the most recent 12-month period. “Portfolio assets” means, in general, the Bank’s total assets less the sum of:

•

specified liquid assets up to 20% of total assets;

•

goodwill and other intangible assets; and

•

the value of property used to conduct the Bank’s business.

“Qualified thrift investments” include certain assets that are includable without limit, such as residential and manufactured housing loans, home equity loans, education loans, small business loans, credit card loans, mortgage backed securities, Federal Home Loan Bank stock and certain U.S. government obligations. The term also includes assets that are includable up to 20% of portfolio assets, such as certain consumer loans and loans in “credit-needy” areas.

The Bank may also satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986. The Bank met the QTL test at December 31, 2009, and in each of the prior 12 months, and, therefore, is a “qualified thrift lender.” If the Bank fails the QTL test, and is unable to correct that failure for a period of time, it must either operate under certain restrictions on its activities or convert to a bank charter.

Capital Requirements. OTS regulations require savings associations to meet three minimum capital standards:

(1)

a tangible capital ratio requirement of 1.5% of total assets as adjusted under the OTS regulations;

(2)

a leverage ratio requirement of 3.0% of core capital to such adjusted total assets, if the Bank has been assigned the highest composite rating of 1 (one) under the Uniform Financial Institutions Rating System; the minimum leverage capital ratio for any other depository institution that does not have a composite rating of 1 (one) will be 4.0%;

(3)

a risk-based capital ratio requirement of 8.0% of core and supplementary capital to total risk-based assets, provided that the amount of supplementary capital used to satisfy this requirement shall not exceed the amount of core capital.

Higher capital ratios may be required if warranted by the particular circumstances or risk profile of the depository institution. In determining the amount of risk-weighted assets for purposes of the risk-based capital requirement, a savings association must compute its risk-based assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the United States Government or its agencies to 100% for consumer, commercial loans, home equity and construction loans and certain other assets as assigned by the OTS capital regulations based on the risks found by the OTS to be inherent in the type of asset. The risk-weight for certain positions in eligible rated securities ranges from 20% for the highest or second highest rating category to 200% for one rating category below investment grade.

Tangible capital is defined, generally, as common stockholder’s equity (including retained earnings), certain noncumulative perpetual preferred stock and related earnings, minority interests in equity accounts of fully consolidated subsidiaries, less intangible assets (other than certain servicing rights and nonsecurity financial instruments) and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital (or tier 1 capital) is defined similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital (or tier 2 capital) includes cumulative and other preferred stock, mandatory convertible debt securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses. In addition, up to 45% of unrealized gains on available-for-sale equity securities with a readily determinable fair value may be included in tier 2 capital. The allowance for loan and lease losses includable in tier 2 capital is limited to a maximum of 1.25% of risk-weighted assets.

At December 31, 2009, the Bank met each of its capital requirements. The table below presents the Bank’s regulatory capital as compared to the OTS regulatory capital requirements at December 31, 2009:


	Bank		Capital Requirements		Excess Capital
	($ in thousands)
Tangible capital	$	78,571	$	13,949	$	64,622
Core capital		78,571		37,201		41,370
Risk-based capital		82,891		49,964		32,927

Community Reinvestment Act. Under the Community Reinvestment Act (CRA), as implemented by OTS regulations, the Bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for the Bank nor does it limit the Bank’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings association, to assess the association’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received a “Satisfactory” rating in its most recent CRA examination, dated March 31, 2009.

The CRA regulations establish an assessment system that bases an association’s rating on its actual performance in meeting community needs. The assessment system for institutions of the Bank’s size focuses on two tests:

•

a lending test, to evaluate the institution’s record of making loans in its assessment areas;

•

a community development test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses in its assessment area or a broader area that includes its assessment area; and to evaluate the institution’s delivery of services through its retail banking channels and the extent and innovativeness of its community development services.

Transactions with Affiliates. The Bank’s authority to engage in transactions with its “affiliates” is limited by the OTS regulations, the Federal Reserve Board’s Regulation W and Sections 23A and 23B of the Federal Reserve Act (FRA). In general, these transactions must be on terms which are at least as favorable to the Bank as comparable transactions with non-affiliates. In addition, certain types of these transactions referred to as “covered transactions” are subject to quantitative limits based on a percentage of the Bank’s capital, thereby restricting the total dollar amount of transactions the Bank may engage in with each individual affiliate and with all affiliates in the aggregate. Affiliates must pledge qualifying collateral in amounts between 100% and 130% of the covered transaction in order to receive loans from the Bank. In addition, applicable regulations prohibit a savings association from lending to any of its affiliates that engage in activities that are not permissible for bank holding companies and from purchasing low-quality (e.g., non-performing) assets from an affiliate or purchasing the securities of any affiliate, other than a subsidiary.

Loans to Insiders. The Bank’s authority to extend credit to its directors, executive officers and principal stockholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders:

•

be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with non-insiders and that do not involve more that the normal risk of repayment or present other features that are unfavorable to the Bank; and

•

not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.

The regulations allow small discounts on fees on residential mortgages for directors, officers and employees, but, generally, specialized terms must be made widely available to all employees rather than to a select subset of insiders, such as executive officers. In addition, extensions for credit to insiders in excess of certain limits must be approved by the Bank’s Board of Directors.

Enforcement. The OTS has primary enforcement responsibility over savings associations, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices.

Prompt Corrective Action Regulations. Under the prompt corrective action (PCA) statute and regulations implemented by the OTS, the OTS is required to take certain, and is authorized to take other, supervisory actions against savings associations whose capital falls below certain levels. For this purpose, a savings association is placed in one of the following four categories based on the association’s capital:

•

well capitalized;

•

adequately capitalized;

•

undercapitalized; or

•

critically undercapitalized.

The PCA statute and regulations provide for progressively more stringent supervisory measures as a savings association’s capital category declines. At December 31, 2009, the Bank met the criteria for being considered “well-capitalized.”

Standards for Safety and Soundness. Pursuant to the Federal Deposit Insurance Act, the OTS has adopted a set of guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to areas including internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings standards, compensation, fees and benefits. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.

In addition, the OTS adopted regulations that authorize, but do not require, the OTS to order an institution that has been given notice that it is not satisfying these safety and soundness standards to submit a compliance plan. If, after being notified, an institution fails to submit an acceptable plan or fails in any material respect to implement an accepted plan, the OTS must issue an order directing action to correct the deficiency. Further, the OTS may issue an order directing corrective actions and may issue an order directing other actions of the types to which an undercapitalized association is subject under the “prompt corrective action” provisions of federal law. If an institution fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties.

Limitations on Capital Distributions. The OTS imposes various restrictions or requirements on the Bank’s ability to make capital distributions, including cash dividends. A savings institution that is the subsidiary of a savings and loan holding company must file a notice with the OTS at least 30 days before making a capital distribution. The Bank must file an application for prior approval if the total amount of its capital distributions, including the proposed distribution, for the applicable calendar year would exceed an amount equal to the Bank’s net income for that year plus the Bank’s retained net income for the previous two years.

The OTS may disapprove a notice or application if:

•

The Bank would be undercapitalized following the distribution;

•

the proposed capital distribution raises safety and soundness concerns; or

•

the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

NHTB’s ability to pay dividends, service debt obligations and repurchase common stock is dependent upon receipt of dividend payments from the Bank.

Liquidity. The Bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.

Insurance of Deposit Accounts. The Bank is a member of the Deposit Insurance Fund maintained by the FDIC, and the Bank pays its deposit insurance assessments to the Deposit Insurance Fund. The Deposit Insurance Fund was formed on March 31, 2006, following the merger of the Bank Insurance Fund and the Savings Association Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005 (“DIF Act”). In addition to merging the insurance funds, the DIF Act established a statutory minimum and maximum designated reserve ratio for the Deposit Insurance Fund and granted the FDIC greater flexibility in establishing the required reserve ratio. In its regulations implementing the DIF Act, the FDIC has set the current annual designated reserve ratio for the Deposit Insurance Fund at 1.25%.

In order to maintain the Deposit Insurance Fund, member institutions are assessed an insurance premium. The amount of each institution’s premium is currently based on the balance of insured deposits and the degree of risk the institution poses to the Deposit Insurance Fund. Under the assessment system, the FDIC assigns an institution to one of four risk categories using a two-step process based first on capital ratios (the capital group assignment) and then on other relevant information (the supervisory subgroup assignment). Each risk category is assigned an assessment rate.

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

On February 27, 2009, the FDIC issued new rules to take effect April 1, 2009 that changed the way the FDIC differentiates risk and appropriate assessment rates. Base assessment rates set that took affect on April 1, 2009 ranged from 12 to 45 basis points, but giving effect to certain risk adjustments in the rule issued by the FDIC on February 27, 2009, assessments range from 7 to 77.5 basis points. In addition, the FDIC also issued an interim rule on February 27, 2009 that imposed an emergency special assessment of 5 basis points on adjusted assets in addition to its risk-based assessment. This assessment was imposed on June 30, 2009 and collected on September 30, 2009. Due to the systemic increase in deposit insurance assessments, and the special emergency assessment, the Bank will be subject to increased deposit premium expenses in future periods.

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

In addition, all FDIC-insured institutions are required to pay a pro rata portion of the interest due on obligations issued by the Financing Corporation to fund the closing and disposal of failed thrift institutions by the Resolution Trust Corporation. At December 31, 2009, the Federal Deposit Insurance Corporation assessed Deposit Insurance Fund-insured deposits 1.30 basis points per $100 of deposits to cover those obligations. The Financing Corporation rate is adjusted quarterly to reflect changes in assessment bases of the Deposit Insurance Fund. This obligation will continue until the Financing Corporation bonds mature in 2017.

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of Boston, which is one of the regional FHLBs comprising the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. The Bank, as a member of the FHLB of Boston, is required to acquire and hold shares of capital stock in the FHLB of Boston. While the required percentages of stock ownership are subject to change by the FHLB, the Bank was in compliance with this requirement with an investment in FHLB of Boston stock at December 31, 2009 of $6.2 million. Any advances from a FHLB must be secured by specified types of collateral, and all long-term advances may be obtained only for the purpose of providing funds for residential housing finance.

The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, the Bank’s net interest income would be affected.

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

Federal Reserve System. Under regulations of the FRB, the Bank is required to maintain noninterest-earning reserves against its transaction accounts (primarily NOW and regular checking accounts). The FRB regulations exempt $8,500,000 of otherwise reservable balances from the reserve requirements. A 3% reserve is required for transaction account balances over $9,300,000 and up to $34,600,000. Transaction account balances over $34,600,000 are subject to a reserve requirement of $1,038,000 plus 10% of any amount over $34,600,000. The Bank is in compliance with the foregoing reserve requirements. Because required reserves must be maintained in the form of vault cash, a noninterest-bearing account at a Federal Reserve Bank, or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce the Bank’s interest-earning assets. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS. FHLB System members are also authorized to borrow from the Federal Reserve discount window.

Prohibitions Against Tying Arrangements. The Bank is subject to prohibitions on certain tying arrangements. A depository institution is prohibited, subject to certain exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional product or service from the institution or its affiliates or not obtain services of a competitor of the institution.

The Bank Secrecy Act. The Bank and NHTB are subject to the Bank Secrecy Act, as amended by the USA PATRIOT Act, which gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance powers, and mandatory transaction reporting obligations. By way of example, the Bank Secrecy Act imposes an affirmative obligation on the Bank to report currency transactions that exceed certain thresholds and to report other transactions determined to be suspicious.

Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among financial institutions, bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, the USA PATRIOT Act imposes the following obligations on financial institutions:

•

financial institutions must establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures, and controls, (ii) specific designation of an anti-money laundering compliance officer, (iii) ongoing employee training programs, and (iv) an independent audit function to test the anti-money laundering program;

•

financial institutions must establish and meet minimum standards for customer due diligence, identification and verification;

•

financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent

accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) must establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering through those accounts;

•

financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and are subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks; and

•

bank regulators are directed to consider a bank’s or holding company’s effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications.

Office of Foreign Asset Control. The Bank and NHTB, like all United States companies and individuals, are prohibited from transacting business with certain individuals and entities named on the Office of Foreign Asset Control’s list of Specially Designated Nationals and Blocked Persons. Failure to comply may result in fines and other penalties. The Office of Foreign Asset Control issued guidance directed at financial institutions in which it asserted that it may, in its discretion, examine institutions determined to be high-risk or to be lacking in their efforts to comply with these prohibitions.

Holding Company Regulation

NHTB is a savings and loan holding company regulated by the OTS. As such, NHTB is registered with and subject to OTS examination and supervision, as well as certain reporting requirements. In addition, the OTS has enforcement authority over NHTB and any of its non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of a subsidiary savings institution. Unlike bank holding companies, federal savings and loan holding companies are not subject to regulatory capital requirements or to supervision by the FRB.

HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring control (as defined under HOLA) of another savings institution without prior OTS approval. In addition, a savings and loan holding company is prohibited from directly or indirectly acquiring, (i) through mergers, consolidation or purchase of assets, another savings association or a holding company thereof, or acquiring all or substantially all of the assets of such association or company without prior OTS approval; and (ii) control of any depository institution not insured by the FDIC (except through a merger with and into the holding company’s savings institution association that is approved by the OTS).

A savings and loan holding company may not acquire as a separate subsidiary an insured institution that has a principal office outside of the state where the principal office of its subsidiary institution in located, except, (i) in the case of certain emergency acquisitions approved by the FDIC; (ii) if the holding company controls a savings institution subsidiary that operated a home or branch office in such additional state as of March 5, 1987; or (iii) if the laws of the home state of the savings institution to be acquired specifically authorize a savings institution chartered by that state to be acquired by a savings institution chartered by the state where the acquiring savings institution or savings and loan holding company is located or by a holding company that controls such a state chartered association.

Laws governing savings and loan holding companies historically have classified such entities based upon the number of thrift institutions which they control. NHTB is classified as a unitary savings and loan holding company because it controls only one thrift, the Bank. Under the Gramm Leach Bliley Act of 1999 (GLB Act), any company which becomes a unitary savings and loan holding company pursuant to a charter application filed with the OTS after May 4, 1999, is prohibited from engaging in non-financial activities or affiliating with non-financial companies. All unitary savings and loan holding companies in existence prior to May 4, 1999, such as NHTB, are “grandfathered” under the GLB Act and may continue to operate as unitary savings and loan holding companies without any limitations in the types of businesses with which they may engage at the holding company level, provided that the thrift subsidiary of the holding company continues to satisfy the QTL test.

Transactions between the Bank and NHTB and its other subsidiaries are subject to various conditions and limitations. See “Regulation of Federal Savings Associations - Transactions with Affiliates” and “Regulation of Federal Savings Associations - Limitation on Capital Distributions.”

The Sarbanes-Oxley Act. As a public company, NHTB is subject to the Sarbanes-Oxley Act. The Sarbanes-Oxley Act’s principal legislation and the derivative regulation and rule making promulgated by the SEC includes:

•

the creation of an independent accounting oversight board;

•

auditor independence provisions which restrict non-audit services that accountants may provide to their audit clients;

•

additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer certify financial statements;

•

a requirement that companies establish and maintain a system of internal control over financial reporting and that a company’s management provide an annual report regarding its assessment of the effectiveness of such internal control over financial reporting to the company’s independent accountants and that such accountants provide an attestation report with respect to management’s assessment of the effectiveness of the company’s internal control over financial reporting;

•

the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;

•

an increase in the oversight of, and enhancement of certain requirements relating to audit committees of public companies and how they interact with the company’s independent auditors;

•

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

•

the requirement that companies disclose whether at least one member of the committee is a “financial expert” (as such term is defined by the Securities and Exchange Commission) and if not, why not;

•

expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods;

•

a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions;

•

disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code;

•

mandatory disclosure by analysts of potential conflicts of interest; and

•

a range of enhanced penalties for fraud and other violations.

Section 402 of the Sarbanes-Oxley Act of 2002 prohibits the extension of personal loans to directors and executive officers of issuers (as defined in Sarbanes-Oxley). The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as the Bank, that are subject to the insider lending restrictions of Section 22(h) of the Federal Reserve Act.

Although NHTB anticipates that it will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on its results of operations or financial condition.

Federal Securities Laws. NHTB’s common stock is registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934, as amended (Exchange Act). NHTB is subject to information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act.

Quotation on Nasdaq. NHTB’s common stock is quoted on The Nasdaq Stock Market (NASDAQ). In order to maintain such quotation, NHTB is subject to certain corporate governance requirements, including:

•

a majority of its board must be composed of independent directors;

•

the requirement to have an audit committee composed of at least three directors, each of whom is an independent director, as such term is defined by both the rules of the NASDAQ and by the Exchange Act, as amended, regulations promulgated thereunder;

•

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

•

that the audit committee and nominating committee must each have a publicly available written charter.

Taxation

A thrift institution organized in stock form which utilizes the bad debt reserve method for bad debt will be subject to certain recapture taxes on such reserves in the event it makes certain types of distributions to its stockholders. Dividends may be paid out of appropriated retained income without the imposition of any tax on an institution to the extent that the amounts paid as dividends do not exceed such current and accumulated earnings and profits as calculated for federal income tax purposes. Stock redemptions, dividends paid in excess of an institution’s current and accumulated earnings and profits as calculated for tax purposes, and partial or complete liquidation distributions made with respect to an institution’s stock, however, are deemed under applicable provisions of the Code to be made from the institution’s bad debt reserve, to the extent that such reserve exceeds the amount that could have been accumulated under the actual experience method. In the event a thrift institution makes a distribution that is treated as having been made from the tax bad debt reserve, the distribution is treated as an after tax distribution and the institution will be liable for tax on the gross amount before tax at the then current tax rate. Amounts added to the bad debt reserves for federal income tax purposes are also used by the Bank to meet the OTS reserve requirements described under “Regulation-Insurance of Accounts.”

The Bank’s tax returns have been audited and accepted through December 31, 1996 by the Internal Revenue Service.

State Income Tax

The Bank is subject to an annual Business Profits Tax imposed by the State of New Hampshire at the rate of 8.50% of the total amount of federal taxable income, less deductions for interest earned on United States government securities. The State of New Hampshire has also instituted a Business Enterprise Tax, which places a tax on certain expense items. Interest, dividends, wages, benefits and pensions are taxed at a rate of 0.50%. Business Enterprise Taxes are allowed as a credit against the Business Profits Tax.

Upon conversion to a holding company, NHTB became subject to a state franchise tax imposed by Delaware. For the year ended 2009, the Delaware franchise tax amounted to $43,323.

EMPLOYEES

At December 31, 2009, Lake Sunapee Bank had a total of 219 full-time employees, 21 part-time employees and 9 per-diem employees. These employees are not represented by collective bargaining agents. The Bank believes that its relationship with its employees is good.

Item 2.

Properties

The following table sets forth the location of the Bank’s offices and certain additional information relating to these offices at December 31, 2009:


Location	Year Opened	Net Book Value			Expiration Date of Lease	Lease Renewal Option
Location	Year Opened	Leased	Owned		Expiration Date of Lease	Lease Renewal Option

9 Main Street
Newport, NH	1868		$	1,658,367

565 Route 11
Sunapee, NH	1965		$	55,443

115 East Main Street
Bradford, NH	1975		$	383,708

300 Sunapee Street
Newport, NH	1978		$	61,505

165 Route 10 South
Grantham, NH	1980		$	293,072

116 Newport Road
New London, NH	1981		$	752,908

200 Heater Road
Lebanon, NH	1986		$	418,625

106 Hanover Street
Lebanon, NH	1997		$	1,659,836

15 Antrim Road
Hillsboro, NH	1994		$	719,754

321 Main Street
New London, NH	1999		$	1,072,244

32 Elm Street
Milford, NH	2006		$	1,126,904


(Continued) Location	Year Opened	Net Book Value				Expiration Date of Lease	Lease Renewal Option
(Continued) Location	Year Opened	Leased		Owned		Expiration Date of Lease	Lease Renewal Option
2 Park Street
Brandon, VT	2007			$	1,061,653

Route 4 and Depot Hill Road.
Pittsford, VT	2007			$	319,849

484 Main Street
West Rutland, VT	2007			$	377,814

1340 Franklin Street
Brandon, VT	2007			$	740,451

No. One Bond Street
Woodstock, VT	2007			$	969,521

Route 4 West
Woodstock, VT	2007			$	180,814

100 Woodstock Avenue
Rutland, VT	2007			$	487,697

2997 Franklin Street ⁽¹⁾
Brandon, VT	2007			$	740,451

83 Main Street ⁽¹⁾
West Lebanon, NH	1994	$	105,534			2014	5 Years

12 Centerra Pkwy. ⁽¹⁾
Lebanon, NH	1997	$	49,471			2012	10 Years

Route 103 ⁽¹⁾
Newbury, NH	1999	$	128,913			2011	10 Years

7 Lawrence Street ⁽¹⁾
Andover, NH	2003	$	296,533			2012	15 Years

2-4 Main Street ⁽¹⁾
Peterborough, NH	2004	$	621,918			2014	25 Years

468 US Route 4 ⁽¹⁾
Enfield, NH	2005	$	365,583			2014	15 Years

345 Washington Street ⁽¹⁾
Claremont, NH	2005	$	271,030			2014	5 Years

12 South Street ⁽¹⁾
Hanover, NH	2007	$	168,845			2016	10 Years

104-110 Merchants Row ⁽¹⁾
Rutland, VT	2007	$	20,676			2011	12 Years

⁽¹⁾	Operating lease, value of improvements.

Item 3.

Legal Proceedings

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

Item 4.

Reserved

PART II.

Item 5.

Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

The following table shows the market range for the Company’s common stock based on reported sales prices on the NASDAQ Global Market. New Hampshire Thrift Bancshares, Inc. is traded under the symbol “NHTB.”


	Period	High		Low
2009	First Quarter	$	8.300	$	6.400
	Second Quarter		10.400		6.950
	Third Quarter		10.380		9.210
	Fourth Quarter		9.990		8.770
2008	First Quarter	$	13.400	$	11.450
	Second Quarter		12.490		10.350
	Third Quarter		10.706		8.510
	Fourth Quarter		9.700		6.250

The bid quotations set forth above represent prices between dealers and do not include retail mark-ups, mark-downs or commissions and may not represent actual transactions. As of March 17, 2010, the Company had approximately 761 stockholders of record. The number of stockholders does not reflect the number of persons or entities who held their stock in nominee or “street” name through various brokerage firms.

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


	2009		2008
First Quarter	$	0.1300	$	0.1300
Second Quarter		0.1300		0.1300
Third Quarter		0.1300		0.1300
Fourth Quarter		0.1300		0.1300

For information regarding limitations on the declaration and payment of dividends by New Hampshire Thrift Bancshares, Inc., see Note 16 of the Consolidated Financial Statements.

On January 11, 2007, the Company reactivated a previously adopted but uncompleted stock repurchase program. Repurchases will be made from time to time at the discretion of management. The stock repurchase program continued until 214,679 shares were repurchased. On June 20, 2007, the Company reactivated a previously adopted but uncompleted stock repurchase program. Repurchases were made from time to time at the discretion of management. The stock repurchase program will continue until 253,776 shares are repurchased. As of December 31, 2009, 237,500 shares of common stock had been repurchased. During 2009, no shares were repurchased.

The following table provides information regarding repurchases of our common stock in each month of the quarter ended December 31, 2009:


Period	Total number of shares repurchased	Average price paid per share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽¹⁾	Maximum Number of Shares that may yet be Purchased under the Plans or Programs⁽¹⁾
October 1, 2009 – December 31, 2009	—	—	—	148,088
Total	—	—	—	148,088

⁽¹⁾	The Company announced a stock repurchase program on June 20, 2007. The program will continue until the repurchase of 253,776 shares is complete.

Item 7.

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

The information called for by this item is contained on pages 5 through 24 of this document.

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

The information called for by this item is contained on pages 5 through 24 of this document.

Item 8.

Financial Statements

The report of independent registered public accounting firm and the financial information called for by this item are contained on pages 25 through 63 of this document.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A(T).

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management, including the Company’s President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Company’s President and Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is (i) recorded, processed, summarized and reported as and when required, and (ii) accumulated and communicated to the Company’s management, including the Company’s President and Chief Executive Officer and the Company’s Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) of the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on our assessment we believe that, as of December 31, 2009, the Company’s internal control over financial reporting is effective based on those criteria.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission.

Item 9B.

Other Information

None.

PART III.

Item 10.

Directors, Executive Officers and Corporate Governance

Certain information relating to directors and executive officers of the Company, executive compensation, security ownership of certain beneficial owners and management, and certain relationships and related transactions is incorporated by reference herein from the Company’s definitive proxy statement in connection with its Annual Meeting of Stockholders to be held on May 13, 2010, which definitive proxy statement will be filed with the Securities and Exchange Commission as part of the proxy statement to be filed on or about March 29, 2010.

Code of Ethics. The Company has adopted a Code of Ethics Policy, which applies to all employees, directors and officers of the Company and Lake Sunapee Bank. The Company has also adopted a Code of Ethics for Senior Financial Officers of the Company, which applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller or person performing similar functions for the Company and Lake Sunapee Bank, and which requires compliance with the Conflict of Interest Policy and Code of Conduct. The Code of Ethics for Senior Financial Officers of the Company meets the requirements of a “code of ethics” as defined by Item 406 of Regulation S-K. The Code of Ethics for Senior Financial Officers was filed as Exhibit 14.1 to the Form 10-K for the year ended December 31, 2003.

You may obtain a copy of the Code of Ethics for Senior Financial Officers, free of charge, by sending a request in writing to Laura Jacobi at the following address:

Laura Jacobi

Corporate Secretary

New Hampshire Thrift Bancshares, Inc.

9 Main Street

P.O. Box 9

Newport, New Hampshire 03773-0009

Item 11.

Executive Compensation

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters

Certain information relating to directors and executive officers of the Company, executive compensation, security ownership of certain beneficial owners and management, and certain relationships and related transactions is incorporated by reference herein from the Company’s definitive proxy statement in connection with its Annual Meeting of Stockholders to be held on May 13, 2010 which definitive proxy statement will be filed with the Securities and Exchange Commission as part of the proxy statement to be filed on or about March 29, 2010.

The following table sets forth the aggregate information of our equity compensation plans in effect as of December 31, 2009.


Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders	308,042	$	12.64	—

Equity compensation plans not approved by security holders	—		—	—

Total	308,042	$	12.64	—

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Certain information relating to directors and executive officers of the Company, executive compensation, security ownership of certain beneficial owners and management, and certain relationships and related transactions is incorporated by reference herein from the Company’s definitive proxy statement in connection with its Annual Meeting of Stockholders to be held on May 13, 2010 which definitive proxy statement will be filed with the Securities and Exchange Commission as part of the proxy statement to be filed on or about March 29, 2010.

Item 14.

Principal Accountant Fees and Services

Information regarding the aggregate fees billed for each of the last two fiscal years by NHTB’s principal accountant is incorporated by reference herein from NHTB’s definitive proxy statement in connection with its Annual Meeting of Stockholders to be held on May 13, 2010 which definitive proxy statement will be filed with the Securities and Exchange Commission as part of the proxy statement to be filed on or about March 29, 2010.

PART IV.

Item 15.

Exhibits and Financial Statement Schedules

The exhibits filed as a part of this Registration Statement are as follows:

(a) Listed below are all financial statements filed as part of this report:

(1)

The consolidated balance sheets of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 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, together with the related notes and the report of independent registered public accounting firm of Shatswell, MacLeod & Company, P.C. independent public accountants.

(2)

Schedules omitted as they are not applicable.

(b) List of Exhibits. (Filed herewith unless otherwise noted.)


Exhibit No.		Description

2.1		Agreement and Plan of Merger by and between NHTB and First Brandon Financial Corporation dated as of December 14, 2006 (filed as Exhibit 2.5 to NHTB’s Current Report on Form 8-K filed with the Commission on December 15, 2006 and incorporated by reference herein).

2.2		Agreement and Plan of Merger by and between NHTB and First Community Bank dated as of April 16, 2007 (filed as Exhibit 2.6 to NHTB’s Current Report on Form 8-K filed with Commission on April 16, 2007 and incorporated by reference herein).

3.1.1		Amended and Restated Certificate of Incorporation of NHTB (filed as Exhibit 3.1 to NHTB’s Registration Statement on Form S-4, as amended, filed with the Commission on November 5, 1996 and incorporated herein by reference).



3.1.2		Certificate of Amendment of the Certificate of Incorporation of NHTB (filed as Exhibit 3.1 to NHTB’s Form 10-Q for the quarter ended June 30, 2005 filed with the Commission on August 15, 2005 and incorporated herein by reference).

3.1.3		Certificate of Designations establishing the rights of NHTB’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (filed as Exhibit 3.1 to NHTB’s Current Report on Form 8-K filed with the Commission on January 22, 2009 and incorporated herein by reference).

3.2.1		Amended and Restated Bylaws of NHTB (filed as Exhibit 3.2.3 NHTB’s Annual Report on Form 10-KSB for the year ended December 31, 1997 filed with the Commission on March 5, 1998 and incorporated herein by reference).

3.2.2		Amendment to Bylaws of NHTB (filed as an Exhibit 3.2(a) to NHTB’s Current Report on Form 8-K filed with the Commission on March 11, 2005 and incorporated herein by reference).

3.2.3		Amendment to Bylaws of NHTB (filed as an Exhibit 3.2.2 to NHTB’s Current Report on Form 8-K filed with the Commission on October 1, 2007 and incorporated herein by reference).

4.1		Stock Certificate of NHTB (filed as Exhibit to NHTB’s Registration Statement on Form S-4 filed with the Commission on March 1, 1989 and incorporated herein by reference).

4.2		Indenture by and between NHTB, as Issuer, and U.S. Bank National Association, as Trustee, dated March 30, 2004 for Floating Rate Junior Subordinated Deferrable Interest Debentures (filed as Exhibit 4.2 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Commission on March 29, 2005 and incorporated herein by reference).

4.3		Form of Floating Rate Junior Subordinated Deferrable Interest Debentures issued by NHTB to U.S. Bank National Association dated March 30, 2004 (filed as Exhibit A to Exhibit 4.2 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Commission on March 29, 2004 and incorporated herein by reference).

4.4		Indenture by and between New NHTB, as Issuer, and U.S. Bank National Association, as Trustee, dated March 30, 2004 for Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (filed as Exhibit 4.4 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Commission on March 29, 2005 and incorporated herein by reference).

4.5		Form of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures issued by NHTB to U.S. Bank National Association dated March 30, 2004 (filed as Exhibit A to Exhibit 4.4 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Commission on March 29, 2005 and incorporated herein by reference).

4.6		Form of specimen stock certificate for NHTB’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (filed as Exhibit 4.1 to NHTB’s Current Report on Form 8-K filed with the Commission on January 22, 2009 and incorporated herein by reference).

4.7		Warrant to purchase shares of NHTB common stock (filed as Exhibit 4.2 to NHTB’s Current Report on Form 8-K filed with the Commission on January 22, 2009 and incorporated herein by reference).

10.1		Profit Sharing-Stock Ownership Plan of Lake Sunapee Bank, fsb (filed as Exhibit 10.1 to NHTB’s Registration Statement on Form S-4, as amended, filed with the Commission on November 5, 1996 and incorporated herein by reference).

10.2		New Hampshire Thrift Bancshares, Inc. 1996 Stock Option Plan (filed as Exhibit 10.2 to NHTB’s Registration Statement on Form S-4, as amended, filed with the Commission on November 5, 1996 and incorporated herein by reference).

10.3		Employment Agreement between NHTB and Stephen W. Ensign (filed as Exhibit 10.5 to NHTB’s Registration Statement on Form S-4, as amended, filed with the Commission on November 5, 1996 and incorporated herein by reference).



10.4		Employment Agreement between Lake Sunapee Bank, fsb and Steven R. Theroux (filed as Exhibit 10.6 to NHTB’s Registration Statement on Form S-4, as amended, filed with the Commission on November 5, 1996 and incorporated herein by reference).

10.5		Guarantee Agreement by and between NHTB and U.S. Bank National Association dated March 30, 2004 (filed as Exhibit 10.7 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Commission on March 29, 2005 and incorporated herein by reference).

10.6		Guarantee Agreement by and between New NHTB and U.S. Bank National Association dated March 30, 2004 (filed as Exhibit 10.8 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Commission on March 29, 2005 and incorporated herein by reference).

10.7		NHTB’s 1998 Stock Option Plan (filed as Appendix A to NHTB’s Definitive Proxy Statement filed with the Commission on March 6, 1998 and incorporated herein by reference).

10.8		NHTB’s 2004 Stock Incentive Plan (filed as Appendix B to NHTB’s Definitive Proxy Statement filed with the Commission on April 8, 2004 and incorporated herein by reference).

10.9		Amended and Restated Supplemental Executive Retirement Plan of New Hampshire Thrift Bancshares, Inc. (filed as Exhibit 10.9 to NHTB’s Current Report on Form 8-K filed with Commission on December 14, 2005 and incorporated herein by reference).

10.10		Amendment to the Supplemental Executive Retirement Plan of New Hampshire Thrift Bancshares, Inc. (filed as Exhibit 10.9 to NHTB’s Current Report on Form 8-K filed with Commission on March 14, 2006 and incorporated herein by reference).

10.11		Amendment to the Supplemental Executive Retirement Plan of New Hampshire Thrift Bancshares, Inc. (filed as Exhibit 10.13 to NHTB’s Current Report on Form 8-K filed with Commission on March 14, 2006 and incorporated herein by reference).

10.12		Forms of Executive Salary Continuation Agreement among NHTB, Lake Sunapee Bank, fsb and Stephen W. Ensign and Stephen R. Theroux (filed as Exhibit 10.14 to NHTB’s Current Report on Form 8-K filed with Commission on March 14, 2006 and incorporated herein by reference).

10.13		Letter Agreement, dated as of January 16, 2009, between New Hampshire Thrift Bancshares, Inc. and the United States Department of the Treasury, and the Securities Purchase Agreement — Standard Terms attached thereto (filed as Exhibit 10.1 to NHTB’s Current Report on Form 8-K filed with the Commission on January 22, 2009 and incorporated herein by reference).

13.1		Annual Report to Stockholders for the year ended December 31, 2009.

14.1		Code of Ethics (filed as Exhibit 14.1 to NHTB’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Commission on March 30, 2004 and incorporated herein by reference).

21.1		Subsidiaries of NHTB.

23.1		Consent of Shatswell, MacLeoad & Company, P.C.

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Principal Executive Officer.

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Principal Financial Officer.

32.1		Written statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Principal Executive Officer.

32.2		Written statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Principal Financial Officer.

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


Name	Title	Date

/S/ STEPHEN W. ENSIGN	Chairman of the Board	March 29, 2010
(Stephen W. Ensign)	and Chief Executive Officer
	(Principal Executive Officer)

/S/ STEPHEN R. THEROUX	Vice Chairman of the Board,	March 29, 2010
(Stephen R. Theroux)	President, Chief Operating Officer, Chief Financial Officer and Secretary
	(Principal Accounting Officer)

/S/ LEONARD R. CASHMAN	Director
(Leonard R. Cashman)		March 29, 2010

/S/ WILLIAM C. HORN	Director	March 29, 2010
(William C. Horn)

/S/ PETER R. LOVELY	Director	March 29, 2010
(Peter R. Lovely)

/S/ JACK H. NELSON	Director	March 29, 2010
(Jack H. Nelson)

/S/ MICHAEL T. PUTZIGER	Director	March 29, 2010
(Michael T. Putziger)

/S/ PETER D. TERWILLIGER	Director	March 29, 2010
(Peter D. Terwilliger)

/S/ JOSEPH B. WILLEY	Director	March 29, 2010
(Joseph B. Willey)

New Hampshire Thrift Bancshares, Inc.


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

Lake Sunapee Bank, fsb


Directors	Angie L. Deschenes	Albert S. Freeman III	Paul W. St. Martin
Stephen W. Ensign, Chairman	Retail Banking	Commercial Lending	Information Technology
Stephen R. Theroux
Leonard R. Cashman	Paul Faber	Marlene H. Gardner	Janet L. Zutell
William C. Horn	Commercial Lending	BSA and Security Officer	Consumer Lending
John A. Kelley, Jr.
Peter R. Lovely	Kenneth E. Howe	David W. Green	*Assistant Vice Presidents*
Jack H. Nelson	Commercial Lending	Retail Banking	Nancy Barthol
Michael T. Putziger			Retail Banking
Peter D. Terwilliger	Jodi L. Hoyt	Debora S. Henderson
Joseph B. Willey	Human Resources	Retail Banking	Sue L. Bryan
			Retail Banking
Executive Officers	Laura Jacobi	Peter N. Jennings
Stephen W. Ensign	Chief Risk Officer and	Loan Origination	Dean Cashman
Chairman of the Board	Accounting and Finance		Business Banking
and Chief Executive Officer		Suzanne Johnson
	Karen D. Lynch	Loan Servicing	Andrea K. Coppola
Stephen R. Theroux	Commercial Lending		Retail Banking
President, Chief Operating Officer,		James H. Miller
and Chief Financial Officer	Robert C. O’Brien	Control Officer	Dennis J. Driscoll, Jr.
	Business Development		Commercial Lending
William J. McIver		Dianne E. Nicol
Executive Vice President,	Vice Presidents	Retail Banking	Vicki M. Lewis
Chief Information Officer and	Brandy L. Blackinton		Consumer Lending
Chief Administrative Officer	Retail Banking	Marie A. Pelletier
		Commercial Lending	Donald J. Pasini
First Vice Presidents	Erik C. Cinquemani		Loan Origination
Scott W. Laughinghouse	Loan Review	Francetta Raymond
Commercial Lending		Loan Operations	Maryanne E. Petrin
	Stephen DeClue		Accounting and Finance
Sharon L. Whitaker	Commercial Lending	Dorisann D. Ross
Mortgage Lending		Retail Banking	Pellegrino A. Rossi
	Juanita A. Dupont		Lake Sunapee Group
Senior Vice Presidents	Loan Processing	Terri G. Spanos
H. Bliss Dayton		Retail Banking	Dena L. Sclafani
Chief Compliance Officer	Thomas B. Evans		Loan Origination
	Commercial Lending	Sue G. Shaw
Colin S. Campbell		Commercial Lending	Roxanne M. Shedd
Commercial Lending	Susan Fernald		Retail Banking
	Retail Operations
			Christine Waite
			Retail Banking


*Board of Advisors*

Benjamin K. Barton		Paul J. Linehan
Douglas S. Baxter		Robert MacNeil
William S. Berger		Elizabeth W. Maiola
William A. Bittinger		Thomas F. McCormick
Phillip C. Camp, Sr.		J. David McCrillis
Paul R. Boucher		John C. McCrillis
Ruth I. Clough		F. Graham McSwiney
J. D. Colcord		Charles Memoe
Jacqueline C. Cote		Kenneth Miller
Ernest G. Dennis, Jr.		Thomas J. Mills
William J. Faccone, Sr.		Linda L. Oldham
John W. Flynn, Jr.		Daniel P. O’Neill
John W. Flynn, Sr.		Betty H. Ramspott
James J. Ford, Jr.		Robert F. Sennott
Sheffield J. Halsey		William J. Simms
Thomas Hayes		Charles Smid
Douglas J. Homan		Fredric M. Smith
Curtis A. Jacques		Earl F. Strout
Sharon J. Jacques		James R. Therrien
Charles S. Jakiela		Stefan Timbrell
Michael D. Johnson		Janis H. Wallace
David H. Kidder		James P. Wheeler
Janet R. Kidder		Carolyn B. Whittaker
John J. Kiernan, Jr.		John W. Wiggins, Sr.
John J. Kiernan, Sr.		Bruce Williamson
Victor W. Laro		Thomas B. Woodger
		Michael J. Work

Stockholder Information

Corporate Headquarters

New Hampshire Thrift Bancshares, Inc.

9 Main Street

PO Box 9

Newport, NH 03773-0009

Tel: 1-603-863-0886

Fax: 1-603-863-9571

Transfer Agent

Registrar and Transfer Company

10 Commerce Drive

Cranford, NJ 07016

Tel: Investor Relations 1-800-368-5948

Website: www.rtco.com

Independent Auditors

Shatswell, MacLeod & Company, P.C.

83 Pine Street

West Peabody, MA 01960-3635

Legal Counsel

Hogan & Hartson, LLP

555 Thirteenth Street, NW

Washington, DC 20004

Information on Common Stock

The common stock is traded over-the-counter and quoted on the NASDAQ Global Market under the symbol “NHTB”. There were approximately 761 stockholders of record on March 17, 2010. The number of stockholders does not reflect the number of persons or entities who held their stock in nominee or “street” name through various brokerage firms.

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


2009	High		Low
First Quarter	$	8.300	$	6.400
Second Quarter		10.400		6.950
Third Quarter		10.380		9.210
Fourth Quarter		9.990		8.770

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company