##### Table of Contents

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



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.





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##### Table of Contents

Table of Contents



|                                     |  |   
|------------------------------------ |  | --
|                                     | 
|Selected Financial Highlights        |  | 1 
|                                     | 
|Presidents Letter                   |  | 2 
|                                     | 
|Managements Discussion and Analysis |  | 5 
|                                     | 
|Report of Independent Auditors       |  | 24
|                                     | 
|Financial Statements                 |  | 25
|                                     | 
|Notes to Financial Statements        |  | 31
|                                     | 
|Form 10-K                            |  | 54
|                                     | 
|Board of Directors                   |  | 82
|                                     | 
|Officers and Managers                |  | 82
|                                     | 
|Board of Advisors                    |  | 83
|                                     | 
|Shareholder Information              |  | 83
|                                     | 
|Information on Common Stock          |  | 83





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##### Table of Contents

Selected Financial Highlights



|                                        |  |                                       |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|--------------------------------------- |  | ------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|For the Periods Ended December 31,      |  | 2003                                  |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|                                        |  | (In thousands, except per share data) |          
|Net Income                              |  | $                                     | 5,771     |   |      | $ | 4,300     |      |  | $ | 3,100     |   |  | $    | 2,412     |   |  | $ | 3,310     |  
|Per Share Data:                         |  |                                       |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic Earnings(1)                       |  | $                                     | 2.92      |   |      | $ | 2.20      |      |  | $ | 1.60      |   |  | $    | 1.17      |   |  | $ | 1.57      |  
|Diluted Earnings                        |  | $                                     | 2.84      |   |      | $ | 2.19      |      |  | $ | 1.59      |   |  | $    | 1.17      |   |  | $ | 1.56      |  
|Dividends Paid                          |  | $                                     | .72       |   |      | $ | .64       |      |  | $ | .64       |   |  | $    | .64       |   |  | $ | .64       |  
|Dividend Payout Ratio                   |  |                                       | 24.66     |   |      |   | 29.09     |      |  |   | 40.00     |   |  |      | 54.70     |   |  |   | 41.03     |  
|Return on Average Assets                |  |                                       | 1.15      | % |      |   | .88       | %    |  |   | .65       | % |  |      | .52       | % |  |   | .91       | %
|Return on Average Equity                |  |                                       | 15.83     | % |      |   | 13.94     | %    |  |   | 11.07     | % |  |      | 8.88      | % |  |   | 12.08     | %
|                                        |  |                                       |           |   |     
|As of December 31,                      |  | 2003                                  |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|                                        |  | (In thousands, except per share data) |          
|Total Assets                            |  | $                                     | 526,246   |   |      | $ | 496,645   |      |  | $ | 493,937   |   |  | $    | 463,397   |   |  | $ | 461,448   |  
|Total Deposits                          |  |                                       | 428,477   |   |      |   | 429,328   |      |  |   | 422,737   |   |  |      | 394,112   |   |  |   | 366,638   |  
|Total Securities(2)                     |  |                                       | 126,179   |   |      |   | 85,828    |      |  |   | 56,784    |   |  |      | 50,724    |   |  |   | 59,581    |  
|Loans, net                              |  |                                       | 344,573   |   |      |   | 317,144   |      |  |   | 337,183   |   |  |      | 348,388   |   |  |   | 346,492   |  
|Federal Home Loan Bank advances         |  |                                       | 22,000    |   |      |   |          |      |  |   |          |   |  |      | 10,000    |   |  |   | 22,000    |  
|Shareholders Equity                    |  |                                       | 39,125    |   |      |   | 33,766    |      |  |   | 28,966    |   |  |      | 26,697    |   |  |   | 27,243    |  
|Book Value of Shares Outstanding        |  | $                                     | 19.48     |   |      | $ | 17.24     |      |  | $ | 14.95     |   |  | $    | 13.53     |   |  | $ | 12.93     |  
|Average Common Equity to Average Assets |  |                                       | 7.28      | % |      |   | 6.35      | %    |  |   | 5.87      | % |  |      | 5.91      | % |  |   | 7.49      | %
|Shares Outstanding                      |  |                                       | 2,008,690 |   |      |   | 1,958,924 |      |  |   | 1,936,974 |   |  |      | 1,973,119 |   |  |   | 2,106,685 |  
|Number of Branch Locations              |  |                                       | 14        |   |      |   | 14        |      |  |   | 14        |   |  |      | 14        |   |  |   | 15        |  



|(1) | See Note 1 to Consolidated Financial Statements regarding earnings per share.
|--- | -----------------------------------------------------------------------------



|(2) | Includes available-for-sale securities shown at fair value, held-to-maturity securities at cost and Federal Home Loan Bank stock at cost.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



1



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##### Table of Contents

Letter to Shareholders



long-term
value is created through a strong customer base, a highly motivated workforce, good asset quality, sustainable earnings and a strong capital position



The Company, once again, experienced record levels of mortgage lending activity during 2003 as interest rates flirted with
40 year lows and the increase in the number of people refinancing their mortgage loans continued unabated throughout the first three quarters of the year. While the unusually high level of mortgage lending placed significant pressures on all
associated segments of our operations, we were pleased with the efficiencies created by the major data processing conversion of just a few years ago that further enhanced our capabilities in this particular area with the addition of new processing
systems and software. The substantial increases in deposits seen over the last couple of years slowed considerably in 2003 as the stock market began to regain some of its credibility and investors, who had retreated to the safety of banks and stayed
on the sidelines, ever so cautiously, started their re-entry into the world of balancing the desire for higher returns against the backdrop of higher risk. The Company continued to build upon the investment portfolio that had been developed over the
last two years by deploying the funding made available from loan portfolio amortization or prepayments and combining that with the initiation of certain leveraging strategies by taking advantage of the yield curve and the historically low short-term
interest rates.



Additionally, the Company endeavored to
further develop the operational themes and underlying aspects of our proven customer service relationship-centered business model in a continuing effort to expand upon our existing leadership position and to strengthen the value of our
multi-office banking franchise. All aspects of the Company, from corporate governance at the board level to policy implementation at the branch level, find their roots in the ongoing recognition that long-term value for the institution is created
through the integration and interdependence of a strong customer base, a highly motivated workforce, good asset quality, sustainable earnings and a strong capital position.



COMPANY EARNINGS



Earnings for 2003 increased by 34% over the previous year and established a new record for the Company. Consolidated net income for the year-ended
December 31, 2003 was $5,771,453 or $2.92 per share of common stock. This compares to net income of $4,299,988, or $2.20 per share, that the Company reported for 2002. With interest rates continuing at their lowest levels in decades, the Company
realized a more active position in the strategic re-balancing of the various asset allocations and a definite trend towards increasing our total investment portfolio through a variety of proactive measures. There is a clear need within the financial
services sector to develop and expand durable sources of income to help offset the industry-wide margin compression pressures now evidencing themselves within the core dependence upon the balance between interest income and interest expense. The
complete financial details for the year-ending December 31, 2003 are more fully covered in the Managements Discussion and Analysis section immediately following this letter.



SHAREHOLDER VALUE



Growth in the shareholder value of financial institutions is, within the prevailing economic climate, becoming more closely aligned with the broader
concepts of managing and mitigating risks. For our part, operating in a best practices environment from the board room to the teller line, the Company seeks to measure and quantify the various levels of credit risk, interest rate risk,
investment risk, technology risk, privacy risk and security riskall under the umbrella of maintaining, enhancing and building sustainable long-term value. As a leading presence within the markets served, the Company looks to strengthen and
expand upon our core operations, while, at the same time, maintaining a strong asset quality position and carefully managing expenses.



The Companys stock price ended the year 2003 at $33.85, having ranged from a low of $18.30 to a high of $34.27 over the course of that twelve month
period. The change from year-end 2002 resulted in a net stock price appreciation of nearly 80%. Shareholders equity ended the year at $39,124,596 as compared to $33,765,996 at December 31, 2002. The number of common shares outstanding at the
end of the year totaled 2,008,690 and the book value per share stood at $19.48, an increase of $2.24 per share over the December 31, 2002 book value of $17.24 per share.



2



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##### Table of Contents

Letter to Shareholders (continued)



Additionally, the Company, at the January 2004 board meeting, authorized an increase in the quarterly
dividend pay-out from $0.18 per share to $0.225 per share, resulting in an annualized dividend of $.90 per share. This change is viewed as being indicative of our belief in the Companys fundamental financial strength, capital position and
ability to develop sustainable levels of net earnings going forward.



THE
BUSINESS OF BANKING



While all areas of the Company
experienced general increases in activity, it was in the mortgage lending area where, once again, the volume and pace of mortgage loan refinancings far exceeded all reasonable and predictable expectations. The operational pressures created by the
on-rush for this perceived once-in-a-lifetime opportunity to lock-in a long-term fixed-rate mortgage before rates might rise again were met by our processing and servicing departments with an incredible level of commitment and dedication
to get the job done and, in so doing, finding creative ways along the way to accomplish tasks and meet deadlines.



From the perspective of strategic positioning, the Company is looking for ways to further develop the asset base of the franchise. Internal and external
growth both involve a coordinated approach centering on increasing the market penetration of the existing branch office network and expanding the network through de novo branching or branch acquisitions resulting from industry consolidations in
attractive and complementary markets. With an eye towards delivering the fundamentals of wealth management as a business line, the Company continues to seek out and identify those areas where we can offer highly competitive products to customers at
all stages in the wealth cyclefrom creationto preservationto transfer.



The regions continuing strong economy benefits the Company as it moves forward to both employ and deploy those resources necessary to ensure the effective implementation of strategies and plans for the
accomplishment of our short-term and long-term goals. Further development of the base of commercial and municipal account relationships, as well as broadening the investment portfolio, are all part of an integrated asset diversification plan as key
ingredients in helping to drive and sustain the institutions growth in assets and earnings in the future. While building the sold loan portfolio has provided the Company with significant income over the last few years, it must be noted that
the overall loan portfolio, particularly mortgage loans, have suffered varying degrees of attrition into a competitive marketplace where price rules and loyalty comes in a distant second.



BALANCE SHEET FUNDAMENTALS



Total assets of the Company stood at $526,246,231 at year-end December 31, 2003 as compared to $496,644,923 at year-end 2002. While this is a net increase
of nearly $30,000,000 over the year, various balance sheet shifts occurred that saw asset increases of just over $27,000,000 in the loan portfolio and just over $40,000,000 in the investment portfolio, with a corresponding decrease in Federal Funds,
an associated leveraging of $22,000,000 in advances from the Federal Home Loan Bank of Boston and very modest increases in total deposits and repurchase agreements. In general, depositors who took money out of stocks over the past few years now
appear to be willing to cautiously re-enter the market when their anticipated returns are sufficient enough to outweigh the risks.



The fourth quarter introduction of a 10-year fixed-rate fully-amortizing mortgage loan originated for the Companys own loan portfolio appeared to
stem the tide of the secondary market refinance activity and, when combined with a recently renewed interest in adjustable rate mortgage loans and an active commercial lending department, resulted in real net growth in loans of $22,533,767 or 6.92%.
At December 31, 2003 the loan portfolio stood at $347,956,158 as compared to $325,422,391 at year-end 2002. In addition, sold loans totaled $289,825,192 at year-end 2003 as compared to $260,774,730 a year earlier, for an increase of 11.14%. The
Company continues to retain the servicing rights on substantially all of these loans in order to retain the direct relationships that are seen as one of the crucial aspects tying a community bank to its customer base.



Diversification, leveraging techniques and more complex asset allocation
models do not in any way diminish our ongoing push for high asset quality in all that we do. The Company maintains active internal loan review



the Company seeks to measure and quantify the various levels of credit risk, interest rate risk, investment risk, technology risk, privacy risk and security
risk



3



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##### Table of Contents

Letter to Shareholders (continued)



the development of a strategically-focused institution requires that all constituencies board,
management and staff alikeneed to know and understand not just the Companys goals and objectives, but why they are in place and why they are important



and audit functions, as well as engaging external auditors to regularly and randomly review various segments of the Company. The annual
Safety and Soundness Examination conducted by the Office of Thrift Supervision in late-2003, resulted in a continuation of our quality rating and served to reinforce the value of our banking franchise. It is important to note that, as part of the
normal examination process, the ongoing threat of terrorism and the possibility of terrorist acts have placed additional burdens upon the financial services industry to help monitor, identify, document and report suspicious activity as defined by
Federal and regulatory mandates.



CURRENT AND FUTURE CHALLENGES



As consolidations provide opportunities, branches become
our points of contact and it is the people in the branches that make the difference. Beyond the two basic strategic issues of growth and profitability lies the realization that banking is not just another business, but a business that carries with
it a high degree of public trust. There remains an expectation across the customer base that the character and content of who we are and what we do is an important factor in establishing and maintaining productive relationships.



The old business environment no longer exists as bosses give way to
leaders and committees give way to teams in the daily activities of a bank and marketing to the generations takes on even broader proportions in a world of longer and healthier lives, families with dual or multiple incomes
and the upcoming transfer of both wealth and economic power as the baby boomers start their next lifestyle transition. The goal is to find ways to cement relationshipsjust knowing about a customer is not the same as knowing what it is that the
customer actually needs and working in an almost advisory capacity to assist that person in reaching their individual goals.



Identifying and meeting customers needs is what we do day after day after day by matching them with a variety of products and services and advising
them on the best possible solution for their situationfrom car loans to mortgage loans, from checking accounts to jumbo CDs, from brokerage services to personal insurance products, from debit cards and ATMs to a host of online banking
optionsandfrom general commercial retail services to municipal accounts and funding sources for either short-term or long-term needs.



We are committed to growing the Company, controlling the various risk aspects, maximizing reliable sources of sustainable revenues and working within a
corporate culture that provides for quality reporting and clearly defined governance goals and objectives. While the Sarbanes-Oxley Act of 2002 has created greater pressures and expenses in the areas of audit, insurance and legal, it has not impeded
our resolve to build upon the Companys well-capitalized position and leverage the embedded capacity to profitably grow the franchise.



IN CLOSING



The development of a strategically-focused institution requires that all constituenciesboard, management and staff alikeneed to know and
understand not just the Companys goals and objectives, but why they are in place and why they are important. The creating and maintaining of a positive working environment is key to unifying the Company, sharing in a vision for the future and
remaining flexible and open to change.



On behalf of all those
involved in helping to ensure the continued success of our banking franchise, I want to take this opportunity to thank youthe shareholdersfor the ongoing support and confidence that you have shown for the Company. It is also important to
take this opportunity to acknowledge the untimely passing of Ralph B. Fifield, Jr., who, at the time of his death, had served the Company as a valuable member of our Board of Directors for nearly fifteen years. We pledge to continue to operate the
Company in the best interests of our shareholders, customers and employees as we seek to meet the needs of the various communities we serve.



/s/  Stephen W. Ensign



Stephen W. Ensign

President and Chief Executive Officer



4



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##### Table of Contents

Managements Discussion and Analysis

of Financial Condition and Results of Operation



General



New Hampshire Thrift Bancshares, Inc.s (the Company)
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



| |  | Earnings were fueled by record low interest rates.
| | - | --------------------------------------------------



| |  | Mortgage Banking activities contributed over $1 million to net income as the refinance boom continued through 2003 which generated a record volume of loans sold to the secondary
market.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Total assets of the Company stood at $526,246,231 at year-end December 31, 2003 as compared to $496,644,923 at year-end 2002. While this is a net increase of nearly $30,000,000 over
the year, various balance sheet shifts occurred that saw asset increases of just over $27,000,000 in the loan portfolio and just over $40,000,000 in the investment portfolio, with a corresponding decrease in Federal Funds, an associated leveraging
of $22,000,000 in advances from the Federal Home Loan Bank of Boston and very modest increases in total deposits and repurchase agreements.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In 2003, the Company earned $5,771,453, or $2.84 per common share, assuming dilution, compared to $4,299,988, or $2.19 per common share, assuming dilution, in 2002.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | With interest rates continuing at their lowest levels in decades, the Company realized a more active position in the strategic re-balancing of the various asset allocations and a
definite trend towards increasing our total investment portfolio through a variety of proactive measures. There is a clear need within the financial services sector to develop and expand durable sources of income to help offset the industry-wide
margin compression pressures now evidencing themselves within the core dependence upon the balance between interest income and interest expense.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The increase in earnings for the year was driven by an increase in net interest income due to the falling interest rate environment and an increase in other income spurred by the
gains generated from the sale of loans to the secondary market.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During 2003, the Bank sold $173.0 million in loans to the secondary market, realizing gains on those sales of $3,420,714.
| | - | -------------------------------------------------------------------------------------------------------------------------



| |  | The low interest rate environment in 2002 carried over to 2003, continuing to create a high demand for fixed rate mortgage loans.
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| |  | In 2003, the Bank originated $380.1 million in loans, compared to $231.5 million in 2002.
| | - | -----------------------------------------------------------------------------------------



| |  | Since the Bank sells fixed rate loans to the secondary market, the Banks servicing portfolio increased from $260.8 million at December 31, 2002 to $289.8 million at December
31, 2003, an increase of $29.0 million, or 11.14%.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Banks interest rate spread increased by 9 basis points to 3.44%.
| | - | ---------------------------------------------------------------------



Forward-looking Statements



The preceding and following discussion may contain certain forward-looking statements, which are based on managements current expectations regarding
economic, legislative, and regulatory issues that may impact the Companys earnings in future periods. Factors that could cause future results to vary materially from current management expectations include, but are not limited to: general
economic conditions, changes in interest rates, deposit flows, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental,
regulatory and technological factors affecting the Companys operations, pricing, products and services. In particular, these issues may impact managements estimates used in evaluating market risk and interest rate risk in its GAP and Net
Portfolio Value (NPV) tables, loan loss provisions, classification of assets, accounting estimates and other estimates used throughout this discussion. The Company disclaims any obligation to subsequently revise any Forward-looking statements, or to
reflect the occurrence of anticipated or unanticipated events.



5



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##### Table of Contents

Managements Discussion and Analysis(continued)



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 14-16 of Managements Discussion and Analysis.



Income Taxes



The Company must estimate income tax expense for each period for which a statement of operations is presented. This involves
estimating the Companys actual current tax exposure as well as assessing temporary differences resulting from differing treatment of items, such as timing of the deduction of expenses, for tax and accounting purposes. These differences result
in deferred tax assets and liabilities, which are included in the Companys consolidated balance sheets. The Company must also assess the likelihood that any deferred tax assets will be recovered from future taxable income and to the extent
that recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining income tax expense, and deferred tax assets and liabilities. As of December 31, 2003, 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.



Acquisition of Assets



On October 13, 1999, the Bank received regulatory
approval to purchase three branches from New London Trust Company, fsb, (NLTC) located in New London, Andover, and Newbury, New Hampshire.



As of the close of business on October 29, 1999, the Bank completed its purchase of certain assets and assumption of certain liabilities of NLTC,
including the three branches, pursuant to an agreement entered with PM Holdings, Inc., (PM Holdings), a wholly owned subsidiary of Phoenix Home Life Mutual Insurance Company (Phoenix), and PM Trust Holding Company, a wholly
owned subsidiary of PM Holdings. The acquisition occurred immediately after PM Trusts acquisition of all outstanding capital stock of New London Trust from Sun Life Assurance Company of Canada (U.S.). The Bank uses the property and equipment
acquired in the same capacity as NLTC. The agreements among the parties relating to this transaction were filed as exhibits to the Form 10-QSB for the quarter ended March 31, 1999.



In connection with the acquisition, the Bank acquired the NLTC main office, Andover and Newbury branches of NLTC with
deposits totaling approximately $100.0 million and gross loans totaling approximately $81.0 million. The consolidated assets of the Company upon consummation of the acquisition of the three branches were in excess of $450.0 million. The acquisition
was consummated after satisfaction of certain conditions, including the receipt of all requisite regulatory approvals and was accounted for as a purchase under generally accepted accounting principles. The Bank paid a $10,576,000 deposit premium.
Systems were successfully converted over the weekend of October 30, 1999.



On August 12, 1999, NHTB Capital Trust I (the Trust), a Delaware business trust formed by the Company, completed the sale of $16.4 million of 9.25% Capital Securities. The Trust also issued common
securities to the Company and used the net proceeds from the offering to purchase a like amount of 9.25% Junior Subordinated Deferrable Interest Debentures (the Debentures) of the Company. The Debentures are the sole assets of the Trust
and are eliminated, along with the related income statement effects, in the consolidated financial statements. The Company contributed $15.0 million from the sale of the Debentures to the Bank as Tier I Capital to support the acquisition of the
three branches of NLT. Total expenses associated with the offering approximating $900,000 are included in other assets and are being amortized on a straight-line basis over the life of the Debentures.



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##### Table of Contents

Managements Discussion and Analysis(continued)



The Capital Securities accrue and pay distributions quarterly at an annual rate of 9.25% 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 the Capital
Securities, but only to the extent that the Trust has funds necessary to make these payments.



The Capital Securities are mandatorily redeemable upon the maturing of the Debentures on September 30, 2029 or upon earlier redemption as provided in the Indenture. The Company has the right to redeem the Debentures,
in whole or in part on or after September 30, 2004 at the liquidation amount plus any accrued but unpaid interest to the redemption date.



Charter Holding Corp.



On October 2, 2000, the Bank and two other New Hampshire banks acquired Charter Holding Corp. (CHC) and Phoenix New England Trust Company (PNET) from
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, at a cost of $3,003,337 each, the Bank and each of the other two banks own one-third of CHC. Headquartered in Concord, New Hampshire, CHC provides trust and investment services from more than a dozen offices across
New Hampshire, as well as one in Norwich, Vermont. The Bank purchased CHC as a means to provide trust and investments services as well as insurance products to the Banks customers. By doing so, the Bank anticipates non-interest income to be
enhanced. For the years ended December 31, 2003 and December 31, 2002, the Bank realized $81,489 and $113,424, respectively in an undistributed gain. The Bank has entered into an agreement with Charter New England Agency (CNEA), a subsidiary of CHC,
which enables the Bank to sell brokerage, securities, and insurance products. For the years ended December 31, 2003 and December 31, 2002, the Bank generated commissions in the amount of $108,818 and $109,398, respectively.



Financial Condition



Total assets increased by $29,601,308 or 5.96%, from $496,644,923 at
December 31, 2002 to $526,246,231 at December 31, 2003. Cash and federal funds sold decreased $34,861,180 as they were invested in loans and investment securities. Net loans receivable and loans held-for-sale increased $22,742,164 over the prior
year-end.



Total gross loans, excluding loans held-for-sale,
increased $27,220,646 or 8.51%, from $319,865,972 at December 31, 2002 to $347,086,618 at December 31, 2003. The increase was attributed to an increase of $18,665,369 or 10.05% in conventional real estate mortgage loans. The Banks promotion of
a fixed rate, ten year amortizing and seven year hybrid loan products generated the majority of this increase. Consumer loans increased $11,625,347, or 36.04%, to $43,880,983 due to a demand for the Banks Home Equity Line of Credit product.
The continued low interest rate environment made the above loan offerings very attractive. Sold loans totaled $289,825,192 at year-end 2003, compared to $260,774,730 for the same period in 2002. The Bank expects to continue to sell 30-year 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 79% of the
Banks real estate mortgage loan portfolio, which is consistent with prior years.



The amortized cost of investment securities increased $40,665,238, or 48.86%, from $83,223,165 at December 31, 2002 to $123,888,403 at December 31, 2003. The Bank took the proceeds of the sale of loans, used Federal
Funds Sold, and advances in the amount of $22,000,000 from the Federal Home Loan Bank (FHLB) and invested these funds in Mortgage Backed Securities and U.S. Government Agencies. The Bank took advantage of the favorable interest rates on the FHLB
advances and invested the proceeds of the advances in higher yielding securities.



The Bank realized gains on the sales of securities in the amount of $227,687 during 2003, compared to $146,473 in 2002. At December 31, 2003, the Banks investment portfolio had an unrealized gain of $122,494,
compared to a net unrealized gain of $233,331 at December 31, 2002. The relatively small unrealized gain for 2003 reflects the short-term duration of the Banks investment portfolio. The majority of holdings carry final or callable maturities
of less than five years which tends to reduce market price volatility.



7



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##### Table of Contents

Managements Discussion and Analysis(continued)



Real estate owned and property acquired in settlement of loans decreased by a net of $20,668 at
December 31, 2003 to $0 at December 31, 2003.



Deposits
decreased slightly by $851,873 or 0.20%, to $428,476,547 at December 31, 2003, from $429,328,420 at December 31, 2002. Time deposits and Money market accounts decreased by $15,323,871, or 7.77%, to $181,836,545 as customers sought higher returns in
non-bank alternatives. These decreases were offset by increases in the Banks core deposits of checking (non-interest-bearing) and savings accounts in the amount of $14,171,999, or 6.23% to $246,640,003, or 57.56% of total deposits. A marketing
campaign conducted by the Bank to attract core accounts contributed in the increase. At December 31, 2003, time deposits comprised 25.39% of total deposits versus 26.59% for the same period in 2002.



Advances from the FHLB increased by $22,000,000 at December 31, 2003 from
zero at December 31, 2002. The Bank employed a leverage strategy and took advantage of the favorable interest rates on the FHLB advances by investing the proceeds of the advances in higher yielding securities. The Bank expects to earn a spread of
approximately 3%, or $660,000 (before tax) from this strategy.



Liquidity
and Capital Resources



The Bank is required to
maintain sufficient liquidity for safe and sound operations. At year-end 2003 the Banks liquidity was sufficient to cover the Banks anticipated needs for funding loan commitments of approximately $22 million. The Banks source of
funds comes primarily from net deposit inflows, loan amortizations, principal pay downs from loans, sold loan proceeds, and advances from the FHLB. At December 31, 2003 the Bank had approximately $145,000,000 in additional borrowing capacity from
the FHLB.



At December 31, 2003, the Companys
shareholders equity totaled $39,124,596, compared to $33,765,996 at year-end 2002. The increase of $5,358,600 reflects net income of $5,771,453, the payment of $1,419,736 in common stock dividends, the exercise of 52,950 stock options in the
amount of $895,183, a tax benefit on the exercise of stock options of $139,921, and an decrease of $28,221 in accumulated other comprehensive income.



On February 22, 2001, the Company announced a stock repurchase program. Repurchases will be made from time to time at the discretion of management. The
stock repurchase program will continue until the repurchase of 124,000 shares are repurchased. As of December 31, 2003, 59,500 shares of common stock had been repurchased. During 2003, no shares were repurchased. The Board of Directors of the
Company has determined that a share buyback is appropriate to enhance shareholder value because such repurchases generally increase earnings per share, return on average assets and on average equity; three performing benchmarks against which bank
and thrift holding companies are measured. The Company buys stock in the open market whenever the price of the stock is deemed reasonable and the Company has funds available for the purchase.



As of December 31, 2003, the Company had funds in the amount of $3,512,669
available, which it planned to use to continue its annual dividend payout of $.90 per share and pay interest on its capital securities. The Company increased the quarterly dividend by $.225 or 25% effective with the January 30, 2004 payment. The
dividend and capital securities payments are approximately $3.4 million per year. 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, funds will be available to cover the Companys future dividend, interest, and stock repurchase needs.



Net cash provided by operating activities increased by $23,812 to $9,956,161 in 2003 from $9,932,349 in 2002. The increase
in net income and decrease in loans held-for-sale accounted for the majority of the change.



Net cash flows used in investing activities totaled $69,212,941 in 2003 compared to $8,040,447 in 2002, a change of $61,172,494. During 2003, the Bank utilized proceeds from both the sale and maturities of investment
securities of $161,539,228 to purchase $202,664,999 in investment securities and $26,879,732 in net new loans. These purchases were either re-investments or additions to the investment portfolio. Cash was provided from financing activities in the
amount of $24,395,600, primarily from FHLB advances in the amount of $22,000,000, and the use of beginning cash and cash equivalents in the amount of $53,387,195.



In 2003, net cash flows from financing activities totaled $24,395,600 compared to net cash used in financing activities of
$4,809,435 in 2002, a change of $29,205,035.



8



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##### Table of Contents

Managements Discussion and Analysis(continued)



The Bank expects to be able to fund loan demand and other investing activities during 2003 by
continuing to use funds provided by customer deposits, as well as the FHLBs advance program. On December 31, 2003, approximately $22 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 in the Companys liquidity, capital resources or results of operations.



The following table represents the Companys contractual obligations at December 31, 2003:



|                           |  |                                       |        |                  |   |           |  |           |     |                   |   |     |  |   |       
|-------------------------- |  | ------------------------------------- | ------ | ---------------- | - | --------- |  | --------- | --- | ----------------- | - | --- |  | - | ------
|                           |  | Payments Due by Period (in thousands)
|                           |  | Total                                 |        | Less than 1 year |   | 1-3 years |  | 3-5 years |     | More than 5 years
|Long-term Debt Obligation  |  | $                                     | 16,400 |                  | $ |          |  | $         |    |                   | $ |    |  | $ | 16,400
|Operating Lease Obligation |  |                                       | 668    |                  |   | 221       |  |           | 280 |                   |   | 102 |  |   | 65    
|                           |  |                                       |        |                  |   |           |  |           |     |                   |   |     |  |   |       
|Total                      |  | $                                     | 17,068 |                  | $ | 221       |  | $         | 280 |                   | $ | 102 |  | $ | 16,465
|                           |  |                                       |        |                  |   |           |  |           |     |                   |   |     |  |   |       



The OTS requires that
the Bank maintain tangible, core, and total risk-based capital ratios of 1.50%, 4.00%, and 8.00%, respectively. As of December 31, 2003, the Banks ratios were 7.56%, 7.56%, and 11.88%, respectively, well in excess of the OTS requirements.



Book value per share was $19.48 at December 31, 2003 versus
$17.24 per share at December 31, 2002.



Impact of Inflation



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



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



Interest Rate Sensitivity



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



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



The Banks one-year gap at December 31,
2003, was 25.59%, compared to the December 31, 2002 gap of 5.86%. During 2003, the Bank took advantage of the low interest rate environment and borrowed short-term advances from the FHLB. The proceeds of these advances were subsequently
invested in intermediate term government bonds. This leverage strategy created an interest rate mismatch causing the Banks gap to become more negative. If interest rates were to rise, the



9



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##### Table of Contents

Managements Discussion and Analysis(continued)



Banks spread would be reduced because the cost to re-finance the FHLB advances would increase. The Bank continues to offer adjustable rate mortgages,
which reprice at one, three, and five-year intervals. In addition, the Bank sells fixed-rate mortgages to the secondary market in order to minimize interest rate risk.



The Banks one-year gap, of approximately negative twenty six percent at December 31, 2003, means net interest income
would increase if interest rates trended downward. The opposite would occur if interest rates were to rise.



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 Office of Thrift Supervision (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 requires 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.



The following table shows the
Banks interest rate sensitivity (gap) table at December 31, 2003:



|                                                                      |  |                  |         |   |            |   |          |                  |  |   |           |   |  |                |         |   |       |   |         |   |  |   |        
|--------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------- | - | -------- | ---------------- |  | - | --------- | - |  | -------------- | ------- | - | ----- | - | ------- | - |  | - | -------
|                                                                      |  | 0-3 Months       |         |   | 3-6 Months |   |          | 6 Months- 1 Year |  |   | 1-3 Years |   |  | Beyond 3 Years |         |   | Total
|                                                                      |  | ($ in thousands)
|Interest earning assets:                                              |  |                  |         |   |            |   |          |                  |  |   |           |   |  |                |         |   |       |   |         |   |  |   |        
|Loans                                                                 |  | $                | 42,451  |   |            | $ | 13,452   |                  |  | $ | 30,168    |   |  | $              | 88,027  |   |       | $ | 174,374 |   |  | $ | 348,472
|Investments and federal funds sold                                    |  |                  | 14,015  |   |            |   | 4,759    |                  |  |   | 11,591    |   |  |                | 32,938  |   |       |   | 69,171  |   |  |   | 132,474
|                                                                      |  |                  |         |   |            |   |          |                  |  |   |           |   |  |                |         |   |       |   |         |   |  |   |        
|Total                                                                 |  |                  | 56,466  |   |            |   | 18,211   |                  |  |   | 41,759    |   |  |                | 120,965 |   |       |   | 243,545 |   |  |   | 480,946
|                                                                      |  |                  |         |   |            |   |          |                  |  |   |           |   |  |                |         |   |       |   |         |   |  |   |        
|Interest bearing liabilities:                                         |  |                  |         |   |            |   |          |                  |  |   |           |   |  |                |         |   |       |   |         |   |  |   |        
|Deposits                                                              |  |                  | 124,849 |   |            |   | 33,578   |                  |  |   | 30,338    |   |  |                | 22,191  |   |       |   | 186,224 |   |  |   | 397,180
|Repurchase agreements                                                 |  |                  | 12,364  |   |            |   |         |                  |  |   |          |   |  |                |        |   |       |   |        |   |  |   | 12,364 
|Borrowings                                                            |  |                  | 17,000  |   |            |   | 5,000    |                  |  |   | 16,400    |   |  |                |        |   |       |   |        |   |  |   | 38,400 
|                                                                      |  |                  |         |   |            |   |          |                  |  |   |           |   |  |                |         |   |       |   |         |   |  |   |        
|Total                                                                 |  |                  | 154,213 |   |            |   | 38,578   |                  |  |   | 46,738    |   |  |                | 22,191  |   |       |   | 186,224 |   |  |   | 447,944
|                                                                      |  |                  |         |   |            |   |          |                  |  |   |           |   |  |                |         |   |       |   |         |   |  |   |        
|Period sensitivity gap                                                |  |                  | (97,747 | ) |            |   | (20,367  | )                |  |   | (4,979    | ) |  |                | 98,774  |   |       |   | 57,321  |   |  |   |        
|Cumulative sensitivity gap                                            |  | $                | (97,747 | ) |            | $ | (118,114 | )                |  | $ | (123,093  | ) |  | $              | (24,319 | ) |       | $ | 33,002  |   |  |   |        
|Cumulative sensitivity gap as a percentage of interest-earning assets |  |                  | -20.32  | % |            |   | -24.56   | %                |  |   | -25.59    | % |  |                | -5.06   | % |       |   | 6.86    | % |  |   |        



Note: The Bank has used industry
decay formulae in establishing repricing periods for savings and NOW accounts.



10



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##### Table of Contents

Managements Discussion and Analysis(continued)



The following table sets forth the Banks NPV as of December 31, 2003, as calculated by the OTS. For the
December 31, 2003 reporting cycle, all output associated with the 200 bps scenario has been suppressed due to the low prevailing interest rate environment.



|                |          |                     |          |                       |          |      |           |        |        |       
|--------------- | -------- | ------------------- | -------- | --------------------- | -------- | ---- | --------- | ------ | ------ | ------
|Change in Rates |          | Net Portfolio Value |          | NPV as % of PV Assets
|                | $ Amount |                     | $ Change |                       | % Change |      | NPV Ratio |        | Change
|+300 bp         |          | 57,213              |          | -13,094               |          | -19% |           | 10.77% |        | -214bp
|+200 bp         |          | 62,770              |          | -7,537                |          | -11% |           | 11.69% |        | -122bp
|+100 bp         |          | 67,540              |          | -2,766                |          | -4%  |           | 12.46% |        | -44bp 
|0 bp            |          | 70,307              |          |                      |          |     |           | 12.90% |        |      
|-100 bp         |          | 71,098              |          | 791                   |          | +1%  |           | 13.02% |        | + 12bp



11



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##### Table of Contents

Managements Discussion and Analysis(continued)



Results of Operations



Net Interest Income



Net interest income for the year ended December 31, 2003, increased by $947,719 or 6.39%, to $15,788,171. The increase was primarily due to the
continuing low interest rate environment and the Banks negative gap position. As interest rates have fallen, more liabilities (deposits) have re-priced into falling rates, thus reducing the Banks cost of funds at a faster pace than its
income on earning assets. The Banks interest rate spread increased by 9 basis points to 3.44% and the Banks interest margin increased by 2.63%. These increases were driven by a sharp decrease of 53.64% in the Banks cost of
deposits. The Banks overall cost of funds decreased by 45.31% compared to a decrease of 17.59% in the Banks yield on loans and investments.



Total interest income decreased by $3,639,644 or 14.48%. Lower interest rates accounted for the majority of the decrease in interest and fees on
loans. Interest and fees on loans decreased $3,115,175, or 14.90%, to $17,794,613 in 2003, due to a decrease in yield from 6.27% at December 31, 2002 to 5.33% at December 31, 2003. The Bank originated $380.1 million in loans in 2003.



Interest and dividends on investments decreased by
$524,469, or 12.42%, due to a drop in yield from 4.22% to 3.20%, or 24.17%. This decrease was partially offset by a significant increase in the average balance of securities. Several higher-yielding callable agency bonds were called and the proceeds
were re-invested in lower yielding securities. Also during 2002, the Bank repositioned its investment portfolio in order to shorten maturities and, as a result, higher yielding, long-term bonds were liquidated and replaced by lower yielding,
short-term investments.



Total interest expense
decreased $4,587,363, or 44.57%, for the year ended December 31, 2003 compared to 2002. Interest on deposits decreased by $4,467,581, or 52.52% because the Banks deposits re-priced into lower rates. Interest on FHLB advances
increased by $53,115 at December 31, 2003 compared to $0 in 2002 as the Bank took advantage of favorable interest rates on the advances and invested the proceeds of the advances in higher yielding securities.



The Banks overall cost of funds decreased from 2.45% in 2002 to 1.34%,
or 45.31%. The cost of deposits, including repurchase agreements, decreased 53.21% from 2.18% in 2002 to 1.02% in 2003. The Banks certificates of deposit, in particular, rolled into lower rates or transferred into more liquid savings or
checking accounts.



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 3.44% at December 31, 2003 from 3.35% at December 31, 2002. The Banks net
interest margin, representing net interest income as a percentage of average interest-earning assets, increased to 3.51% from 3.42%. Both increases are the result of falling interest rates.



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:



|                                                  |  |      |   |  |      |   |  |      |   |  |      |   |  |      |  
|------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                                                  |  | 2003 |   |  | 2002 |   |  | 2001 |   |  | 2000 |   |  | 1999 |  
|Yield on loans                                    |  | 5.33 | % |  | 6.27 | % |  | 7.25 | % |  | 7.77 | % |  | 7.46 | %
|Yield on investment securities                    |  | 3.20 | % |  | 4.22 | % |  | 6.82 | % |  | 7.71 | % |  | 6.65 | %
|Combined yield on loans and investments           |  | 4.78 | % |  | 5.80 | % |  | 7.18 | % |  | 7.76 | % |  | 7.32 | %
|Cost of deposits, including repurchase agreements |  | 1.02 | % |  | 2.18 | % |  | 3.63 | % |  | 3.86 | % |  | 3.60 | %
|Cost of other borrowed funds                      |  | 7.50 | % |  | 9.25 | % |  | 9.12 | % |  | 7.56 | % |  | 5.86 | %
|Combined cost of deposits and borrowings          |  | 1.34 | % |  | 2.45 | % |  | 3.89 | % |  | 4.20 | % |  | 3.75 | %
|Interest rate spread                              |  | 3.44 | % |  | 3.35 | % |  | 3.29 | % |  | 3.56 | % |  | 3.57 | %
|Net interest margin                               |  | 3.51 | % |  | 3.42 | % |  | 3.33 | % |  | 3.64 | % |  | 3.75 | %



12



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##### Table of Contents

Managements Discussion and Analysis(continued)



The following table presents, for the periods 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,                                           |  | 2003              |         |          | 2002 |            |  | 2001   |                  
|                                                                   |  | Average(1)Balance |         | Interest |      | Yield/Cost |  |        | Average(1)Balance |  | Interest |         | Yield/Cost |   |        | Average(1)Balance |        | Interest |  | Yield/Cost |        
|                                                                   |  | ($ in thousands)  |        
|Assets:                                                            |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Interest earning assets:                                           |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Loans(2),                                                          |  | $                 | 334,041 |          | $    | 17,795     |  | 5.33   | %                 |  | $        | 333,592 |            | $ | 20,910 |                   | 6.27   | %        |  | $          | 353,102 |  | $ | 25,582 |  | 7.25   | %
|Investment securities and other                                    |  |                   | 115,608 |          |      | 3,699      |  | 3.20   | %                 |  |          | 100,023 |            |   | 4,224  |                   | 4.22   | %        |  |            | 68,347  |  |   | 4,662  |  | 6.82   | %
|                                                                   |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Total interest earning assets                                      |  |                   | 449,649 |          |      | 21,494     |  | 4.78   | %                 |  |          | 433,615 |            |   | 25,134 |                   | 5.80   | %        |  |            | 421,449 |  |   | 30,244 |  | 7.18   | %
|                                                                   |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Non-interest earning assets:                                       |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Cash                                                               |  |                   | 13,553  |          |      |            |  |        |                   |  |          | 17,378  |            |   |        |                   |        |          |  |            | 18,211  |  |   |        |  |        |  
|Other non-interest earning assets(3)                               |  |                   | 37,502  |          |      |            |  |        |                   |  |          | 35,142  |            |   |        |                   |        |          |  |            | 36,904  |  |   |        |  |        |  
|                                                                   |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Total non-interest earning assets                                  |  |                   | 51,055  |          |      |            |  |        |                   |  |          | 52,520  |            |   |        |                   |        |          |  |            | 55,115  |  |   |        |  |        |  
|                                                                   |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Total                                                              |  | $                 | 500,704 |          |      |            |  |        |                   |  | $        | 486,135 |            |   |        |                   |        |          |  | $          | 476,564 |  |   |        |  |        |  
|                                                                   |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Liabilities and Shareholders Equity Interest bearing liabilities: |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Savings, NOW and MMAs                                              |  | $                 | 277,968 |          | $    | 1,370      |  | 0.49   | %                 |  | $        | 252,719 |            | $ | 3,193  |                   | 1.26   | %        |  | $          | 222,532 |  | $ | 4,429  |  | 1.99   | %
|Time deposits                                                      |  |                   | 116,354 |          |      | 2,669      |  | 2.29   | %                 |  |          | 134,796 |            |   | 5,314  |                   | 3.94   | %        |  |            | 163,221 |  |   | 9,596  |  | 5.88   | %
|Repurchase agreements                                              |  |                   | 9,165   |          |      | 96         |  | 1.05   | %                 |  |          | 15,683  |            |   | 269    |                   | 1.72   | %        |  |            | 11,817  |  |   | 396    |  | 3.35   | %
|Capital securities and other borrowed funds                        |  |                   | 20,942  |          |      | 1,570      |  | 7.50   | %                 |  |          | 16,400  |            |   | 1,517  |                   | 9.25   | %        |  |            | 19,733  |  |   | 1,799  |  | 9.12   | %
|                                                                   |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Total interest bearing liabilities                                 |  |                   | 424,429 |          |      | 5,705      |  | 1.34   | %                 |  |          | 419,598 |            |   | 10,293 |                   | 2.45   | %        |  |            | 417,303 |  |   | 16,220 |  | 3.89   | %
|                                                                   |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Non-interest bearing liabilities:                                  |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Demand deposits                                                    |  |                   | 30,170  |          |      |            |  |        |                   |  |          | 28,793  |            |   |        |                   |        |          |  |            | 24,954  |  |   |        |  |        |  
|Other                                                              |  |                   | 9,647   |          |      |            |  |        |                   |  |          | 6,896   |            |   |        |                   |        |          |  |            | 6,309   |  |   |        |  |        |  
|                                                                   |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Total non-interest bearing liabilities                             |  |                   | 39,817  |          |      |            |  |        |                   |  |          | 35,689  |            |   |        |                   |        |          |  |            | 31,263  |  |   |        |  |        |  
|                                                                   |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Shareholders equity                                               |  |                   | 36,458  |          |      |            |  |        |                   |  |          | 30,848  |            |   |        |                   |        |          |  |            | 27,998  |  |   |        |  |        |  
|                                                                   |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Total                                                              |  | $                 | 500,704 |          |      |            |  |        |                   |  | $        | 486,135 |            |   |        |                   |        |          |  | $          | 476,564 |  |   |        |  |        |  
|                                                                   |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Net interest rate spread                                           |  |                   |         |          | $    | 15,789     |  | 3.44   | %                 |  |          |         |            | $ | 14,841 |                   | 3.35   | %        |  |            |         |  | $ | 14,024 |  | 3.29   | %
|                                                                   |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Net interest margin                                                |  |                   |         |          |      |            |  | 3.51   | %                 |  |          |         |            |   |        |                   | 3.42   | %        |  |            |         |  |   |        |  | 3.33   | %
|                                                                   |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  
|Ratio of interest earning assets to interest bearing liabilities   |  |                   |         |          |      |            |  | 105.94 | %                 |  |          |         |            |   |        |                   | 103.34 | %        |  |            |         |  |   |        |  | 100.99 | %
|                                                                   |  |                   |         |          |      |            |  |        |                   |  |          |         |            |   |        |                   |        |          |  |            |         |  |   |        |  |        |  



|(1) | Monthly average balances have been used for all periods. Management does not believe that the use of month-end balances
instead of daily average balances caused any material difference in the information presented.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(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 non-interest earning assets includes non-earning assets and other real estate owned.
|--- | ------------------------------------------------------------------------------------------



13



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##### Table of Contents

Managements Discussion and Analysis(continued)



The following table sets forth, for the periods 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, 2003vs. 2002 Increase (Decrease) due to |      
|                                                            |  | Volume                                                          |       |   | Rate |   |        | Total | 
|                                                            |  | ($ in thousands)                                                |      
|Interest income on loans                                    |  | $                                                               | 28    |   |      | $ | (3,143 | )     |  | $ | (3,115 | )
|Interest income on investments                              |  |                                                                 | 569   |   |      |   | (1,094 | )     |  |   | (525   | )
|                                                            |  |                                                                 |       |   |      |   |        |       |  |   |        |  
|Total interest income                                       |  |                                                                 | 597   |   |      |   | (4,237 | )     |  |   | (3,640 | )
|                                                            |  |                                                                 |       |   |      |   |        |       |  |   |        |  
|Interest expense on savings, NOW and MMAs                   |  |                                                                 | 1,091 |   |      |   | (2,914 | )     |  |   | (1,823 | )
|Interest expense on time deposits                           |  |                                                                 | (651  | ) |      |   | (1,994 | )     |  |   | (2,645 | )
|Interest expense on repurchase agreements                   |  |                                                                 | (88   | ) |      |   | (85    | )     |  |   | (173   | )
|Interest expense on capital securities and other borrowings |  |                                                                 | 167   |   |      |   | (114   | )     |  |   | 53     |  
|                                                            |  |                                                                 |       |   |      |   |        |       |  |   |        |  
|Total interest expense                                      |  |                                                                 | 519   |   |      |   | (5,107 | )     |  |   | (4,588 | )
|                                                            |  |                                                                 |       |   |      |   |        |       |  |   |        |  
|Net interest income                                         |  | $                                                               | 84    |   |      | $ | 870    |       |  | $ | 948    |  
|                                                            |  |                                                                 |       |   |      |   |        |       |  |   |        |  



|                                                            |  |                                                                 |        |   |      |   |        |       |  |   |        |  
|----------------------------------------------------------- |  | --------------------------------------------------------------- | ------ | - | ---- | - | ------ | ----- |  | - | ------ | -
|                                                            |  | Year ended December 31, 2002vs. 2001 Increase (Decrease) due to |       
|                                                            |  | Volume                                                          |        |   | Rate |   |        | Total | 
|                                                            |  | ($ in thousands)                                                |       
|Interest income on loans                                    |  | $                                                               | 47     |   |      | $ | (4,719 | )     |  | $ | (4,672 | )
|Interest income on investments                              |  |                                                                 | 1,667  |   |      |   | (2,105 | )     |  |   | (438   | )
|                                                            |  |                                                                 |        |   |      |   |        |       |  |   |        |  
|Total interest income                                       |  |                                                                 | 1,714  |   |      |   | (6,824 | )     |  |   | (5,110 | )
|                                                            |  |                                                                 |        |   |      |   |        |       |  |   |        |  
|Interest expense on savings, NOW and MMAs                   |  |                                                                 | 2,447  |   |      |   | (3,683 | )     |  |   | (1,236 | )
|Interest expense on time deposits                           |  |                                                                 | (1,255 | ) |      |   | (3,027 | )     |  |   | (4,282 | )
|Interest expense on repurchase agreements                   |  |                                                                 | (57    | ) |      |   | (70    | )     |  |   | (127   | )
|Interest expense on capital securities and other borrowings |  |                                                                 | (269   | ) |      |   | (13    | )     |  |   | (282   | )
|                                                            |  |                                                                 |        |   |      |   |        |       |  |   |        |  
|Total interest expense                                      |  |                                                                 | 866    |   |      |   | (6,793 | )     |  |   | (5,927 | )
|                                                            |  |                                                                 |        |   |      |   |        |       |  |   |        |  
|Net interest income                                         |  | $                                                               | 848    |   |      | $ | (31    | )     |  | $ | 817    |  
|                                                            |  |                                                                 |        |   |      |   |        |       |  |   |        |  



14



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##### Table of Contents

Managements Discussion and Analysis(continued)



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 considers many factors in determining the appropriate amount of the allowance and tests the adequacy at least quarterly. The valuation allowance consists
of a specific allowance for identified problem loans and a general allowance for current performing loans. The amount of the specific allowance is based on loss estimates considering expected cash flows or fair value of the collateral. The amount of
the general allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Fluctuations in the balances of impaired loans affect the specific allowance while
fluctuations in volume, concentrations, and market conditions affect the general allowance. The allowance for loan losses is allocated across loan types.



The specific allowance incorporates the results of measuring impairment for specifically identified non-homogenous problem loans in accordance with
Statement of Financial Accounting Standards (SFAS) No. 114 Accounting by creditors for impairment of a loan, and SFAS No. 118, Accounting by creditors for impairment of a loan  income recognition and disclosures. In
accordance with SFAS No.s 114 and 118 the specific allowance reduces the carrying amount of the impaired loans to their estimated fair value. A loan is recognized as impaired when it is probable that principal and/or interest are not
collectible in accordance with the contractual terms of the loan. A loan is not deemed to be impaired if the Bank expects to collect all amounts due, including interest at the contractual rate. Measurement of impairment can be based on the present
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 5 Loans Receivable, in the Consolidated Financial Statements for information
regarding SFAS No. 114 and 118.



The Banks commercial
loan officers review the financial condition of commercial loan customers on a regular basis and perform visual inspections of facilities and inventories. The Bank also has loan review, internal audit, and compliance programs. Results are reported
directly to the Audit Committee of the Banks Board of Directors.



The Bank prepares a worksheet applying loss factors to outstanding loans by type. The worksheet stratifies the loan portfolio by loan type and assigns a loss factor to each type based on an assessment of the inherent risk associated with
each type. In determining the loss factors to apply to each type of loan, the Bank considers historical losses, peer group comparisons, industry data, and market conditions. Loss factors may be adjusted for qualitative factors that, in
managements judgment, affect the collectibility of the portfolio as of the evaluation date. No changes were made to the Banks procedures with respect to maintaining the loan loss allowances as a result of any regulatory examinations.



The allowance for loan losses at December 31, 2003 was
$3,898,650, compared to $3,875,708 at year-end 2002. The increase resulted from provisions and recoveries exceeding charge-offs during 2003. At December 31, 2003 the allowance consisted of $3,891,010 in general reserves compared to $3,847,395 at the
end of 2002. During 2003, the Bank had net charge-offs of $77,054 compared to net charge-offs and write-downs of $649,677 in 2002. The provision for loan losses was $99,996 compared to $120,000 in 2002. The allowance represented 1.12% of total loans
at year-end 2003 compared to 1.21% at year-end 2002. The allowance for loan losses as a percentage of total non-performing loans was 337% at December 31, 2003 compared to 584% at December 31, 2002. The lower amount of charge-offs and write-downs in
2003 is primarily due to $604,686 in write-downs taken prior to the sale of sub-performing and non-performing loans in the third quarter of 2002. The decline in the allowance as a percentage of loans results from the increase in total loans. The
decline in the allowance as a percentage of non-performing loans comes from an increase in loans over 90 days past due. That increase is primarily attributable to one residential mortgage loan that is not expected to affect the allowance.



The provisions made during 2003 resulted in a slight increase
to the allowance for loan losses. The results of the adequacy test led to the determination that, as of December 31, 2003, the allowance remained at an adequate level to cover losses inherent in the loan portfolio. The strong real estate market
conditions in the Lake Sunapee and Upper Valley regions of New Hampshire contributed to that determination.



15



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##### Table of Contents

Managements Discussion and Analysis(continued)



The allocation table below reflects a decline in the allocation for impaired loans, despite the
increase in the impaired loan balance. The increase in impaired loans comes from $726,698 of restructured loans that remain on accrual status and continue to be performing. No specific valuation allowance has been established for those loans,
because the Bank expects no losses from those loans. The table shows a shift in the allowance allocation from other categories to commercial loans. That shift reflects the increase in commercial loan classifications.



Loans classified for regulatory purposes as loss, doubtful, substandard or
special mention, do not result from trends or uncertainties that the Bank reasonably expects will materially impact future operating results, liquidity, or capital resources.



Total classified assets, excluding special mention loans, as of December 31, 2003 and 2002 were $4,046,955 and $3,333,767,
respectively. Total non-performing loans and real estate owned amounted to $1,157,957 and $684,760 for the respective years. Non-performing loans consist of loans 90 days or more past due and non-accrual impaired loans. Non-accrual impaired loans
were $50,934 on December 31, 2003 and $105,354 on December 31, 2002. As of December 31, 2003 the Bank also held $726,698 in restructured loans on accrual status and performing, included in impaired loans. Loans 90 days or more past due were
$1,107,023 at the end of 2003 and $558,738 at the end of 2002. Loans 30 to 89 days past due were $3,397,736 and $4,542,125, respectively at December 31, 2003 and 2002. If all non-accruing loans had been current in accordance with their terms during
the years ended December 31, 2003 and 2002, interest income on such loans would have amounted to approximately $54,000 and $66,000 respectively.



As of December 31, 2003 there were no other loans not included in the tables below or discussed above where known information about possible credit
problems of the borrowers caused management to have doubts as to the ability of the borrower to comply with present loan repayment terms and which may result in disclosure of such loans in the future.



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



|                           |  |      |           |      |   |         |  |      |           |      |   |           |  |   |          
|-------------------------- |  | ---- | --------- | ---- | - | ------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                           |  | 2003 |           | 2002 |   | 2001    |  | 2000 |           | 1999
|Nonaccrual loans(1)        |  | $    | 1,157,957 |      | $ | 664,092 |  | $    | 2,521,424 |      | $ | 1,871,442 |  | $ | 1,750,305
|Real estate owned          |  |      |          |      |   | 20,668  |  |      | 100,000   |      |   | 45,000    |  |   | 219,000  
|                           |  |      |           |      |   |         |  |      |           |      |   |           |  |   |          
|Total nonperforming assets |  | $    | 1,157,957 |      | $ | 684,760 |  | $    | 2,621,424 |      | $ | 1,916,442 |  | $ | 1,969,305
|                           |  |      |           |      |   |         |  |      |           |      |   |           |  |   |          



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



The following table sets forth nonaccrual(1)loans by category:



|                               |  |      |           |      |   |         |  |      |           |      |   |           |  |   |          
|------------------------------ |  | ---- | --------- | ---- | - | ------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                               |  | 2003 |           | 2002 |   | 2001    |  | 2000 |           | 1999
|Real estate loans -            |  |      |           |      |   |         |  |      |           |      |   |           |  |   |          
|Conventional                   |  | $    | 1,074,096 |      | $ | 499,053 |  | $    | 1,048,780 |      | $ | 967,663   |  | $ | 282,194  
|Construction                   |  |      |          |      |   | 59,000  |  |      | 101,606   |      |   |          |  |   |         
|Consumer loans                 |  |      | 1,891     |      |   |        |  |      | 68,474    |      |   | 38,748    |  |   | 8,267    
|Commercial and municipal loans |  |      | 31,036    |      |   | 685     |  |      | 35,527    |      |   |          |  |   | 420,688  
|Nonaccrual impaired loans(2)   |  |      | 50,934    |      |   | 105,354 |  |      | 1,267,037 |      |   | 865,031   |  |   | 1,039,156
|                               |  |      |           |      |   |         |  |      |           |      |   |           |  |   |          
|Total                          |  | $    | 1,157,957 |      | $ | 664,092 |  | $    | 2,521,424 |      | $ | 1,871,442 |  | $ | 1,750,305
|                               |  |      |           |      |   |         |  |      |           |      |   |           |  |   |          



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



|(2) | At 12/31/03 $726,698 of impaired loans, not included above, were on accrual status and performing.
|--- | --------------------------------------------------------------------------------------------------



16



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##### Table of Contents

Managements Discussion and Analysis(continued)



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



|                                                                      |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          
|--------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                                      |  | 2003 |           | 2002 |   | 2001      |  | 2000 |           | 1999
|Balance, beginning of period                                          |  | $    | 3,875,708 |      | $ | 4,405,385 |  | $    | 4,432,854 |      | $ | 4,320,563 |  | $ | 3,117,068
|Write-downs of nonperforming loans transferred to loans held-for-sale |  |      |          |      |   | 604,686   |  |      |          |      |   |          |  |   |         
|Charge-offs:                                                          |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          
|Residential real estate                                               |  |      |          |      |   | 15,964    |  |      | 43,358    |      |   | 6,098     |  |   | 61,237   
|Commercial real estate                                                |  |      |          |      |   |          |  |      | 88,822    |      |   | 57,385    |  |   | 254,168  
|Construction                                                          |  |      |          |      |   |          |  |      | 24,642    |      |   |          |  |   |         
|Consumer Loans                                                        |  |      | 28,862    |      |   | 48,120    |  |      | 18,866    |      |   | 20,615    |  |   | 5,250    
|Commercial Loans                                                      |  |      | 57,780    |      |   | 19,129    |  |      | 25,768    |      |   | 130,752   |  |   | 48,808   
|                                                                      |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          
|Total charged-off loans                                               |  |      | 86,642    |      |   | 687,899   |  |      | 201,456   |      |   | 214,850   |  |   | 369,463  
|Recoveries                                                            |  |      | 9,588     |      |   | 38,222    |  |      | 83,987    |      |   | 267,141   |  |   | 31,284   
|Balance from acquisition                                              |  |      |          |      |   |          |  |      |          |      |   |          |  |   | 1,421,674
|Provision charged to income                                           |  |      | 99,996    |      |   | 120,000   |  |      | 90,000    |      |   | 60,000    |  |   | 120,000  
|                                                                      |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          
|Balance, end of period                                                |  | $    | 3,898,650 |      | $ | 3,875,708 |  | $    | 4,405,385 |      | $ | 4,432,854 |  | $ | 4,320,563
|                                                                      |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          



The following table sets forth the
allocation of the loan loss valuation allowance, the percentage of allowance to the total allowance and the percentage of loans in each category to total loans as of December 31 ($ in thousands):



|                                                   |  |      |       |   |      |     |   |      |     |   |  |   |       |   |  |     |   |  |     |   |  |   |       |   |  |     |   |  |     |  
|-------------------------------------------------- |  | ---- | ----- | - | ---- | --- | - | ---- | --- | - |  | - | ----- | - |  | --- | - |  | --- | - |  | - | ----- | - |  | --- | - |  | --- | -
|                                                   |  | 2003 |       |   | 2002 |     |   | 2001 |    
|Real estate loans -                                |  |      |       |   |      |     |   |      |     |   |  |   |       |   |  |     |   |  |     |   |  |   |       |   |  |     |   |  |     |  
|Conventional                                       |  | $    | 2,514 |   |      | 65  | % |      | 78  | % |  | $ | 2,763 |   |  | 71  | % |  | 80  | % |  | $ | 2,421 |   |  | 55  | % |  | 82  | %
|Construction                                       |  |      | 251   |   |      | 6   | % |      | 4   | % |  |   | 207   |   |  | 5   | % |  | 5   | % |  |   | 176   |   |  | 4   | % |  | 5   | %
|Collateral and Consumer loans                      |  |      | 114   |   |      | 3   | % |      | 13  | % |  |   | 155   |   |  | 4   | % |  | 10  | % |  |   | 132   |   |  | 3   | % |  | 7   | %
|Commercial and Municipal loans                     |  |      | 1,012 |   |      | 26  | % |      | 5   | % |  |   | 723   |   |  | 19  | % |  | 5   | % |  |   | 1,273 |   |  | 29  | % |  | 6   | %
|Impaired loans                                     |  |      | 8     |   |      | 0   | % |      |     |   |  |   | 28    |   |  | 1   | % |  |     |   |  |   | 293   |   |  | 7   | % |  |     |  
|Other                                              |  |      |      |   |      |    |   |      |     |   |  |   |      |   |  |    |   |  |     |   |  |   | 110   |   |  | 2   | % |  |     |  
|                                                   |  |      |       |   |      |     |   |      |     |   |  |   |       |   |  |     |   |  |     |   |  |   |       |   |  |     |   |  |     |  
|Valuation allowance                                |  | $    | 3,899 |   |      | 100 | % |      | 100 | % |  | $ | 3,876 |   |  | 100 | % |  | 100 | % |  | $ | 4,405 |   |  | 100 | % |  | 100 | %
|                                                   |  |      |       |   |      |     |   |      |     |   |  |   |       |   |  |     |   |  |     |   |  |   |       |   |  |     |   |  |     |  
|Valuation allowance as a percentage of Total loans |  |      | 1.12  | % |      |     |   |      |     |   |  |   | 1.21  | % |  |     |   |  |     |   |  |   | 1.29  | % |  |     |   |  |     |  
|                                                   |  |      |       |   |      |     |   |      |     |   |  |   |       |   |  |     |   |  |     |   |  |   |       |   |  |     |   |  |     |  



|                                                   |  |      |       |   |      |     |   |  |     |   |  |   |       |   |  |     |   |  |     |  
|-------------------------------------------------- |  | ---- | ----- | - | ---- | --- | - |  | --- | - |  | - | ----- | - |  | --- | - |  | --- | -
|                                                   |  | 2000 |       |   | 1999 |    
|Real estate loans -                                |  |      |       |   |      |     |   |  |     |   |  |   |       |   |  |     |   |  |     |  
|Conventional                                       |  | $    | 2,457 |   |      | 55  | % |  | 80  | % |  | $ | 1,953 |   |  | 45  | % |  | 78  | %
|Construction                                       |  |      | 176   |   |      | 4   | % |  | 3   | % |  |   | 147   |   |  | 3   | % |  | 2   | %
|Collateral and Consumer loans                      |  |      | 139   |   |      | 3   | % |  | 10  | % |  |   | 133   |   |  | 3   | % |  | 11  | %
|Commercial and Municipal loans                     |  |      | 1,446 |   |      | 33  | % |  | 7   | % |  |   | 1,800 |   |  | 42  | % |  | 9   | %
|Impaired loans                                     |  |      | 130   |   |      | 3   | % |  |     |   |  |   | 209   |   |  | 5   | % |  |     |  
|Other                                              |  |      | 85    |   |      | 2   | % |  |     |   |  |   | 79    |   |  | 2   | % |  |     |  
|                                                   |  |      |       |   |      |     |   |  |     |   |  |   |       |   |  |     |   |  |     |  
|Valuation allowance                                |  | $    | 4,433 |   |      | 100 | % |  | 100 | % |  | $ | 4,321 |   |  | 100 | % |  | 100 | %
|                                                   |  |      |       |   |      |     |   |  |     |   |  |   |       |   |  |     |   |  |     |  
|Valuation allowance as a percentage of Total loans |  |      | 1.26  | % |      |     |   |  |     |   |  |   | 1.23  | % |  |     |   |  |     |  
|                                                   |  |      |       |   |      |     |   |  |     |   |  |   |       |   |  |     |   |  |     |  



17



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##### Table of Contents

Managements Discussion and Analysis(continued)



The Bank believes the current allowance for loan losses is at a level sufficient to cover losses in
the loan portfolio, given the current level of risk in the loan portfolio. 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.



Other Income and Expense



Total other income increased $1,265,800, or 25.66%, to $6,199,290 at
December 31, 2003. Net gains on sales of loans originated for sale increased by $1,217,454, or 55.26%, accounting for 96.18% of the total increase in other income. As mentioned above, the Bank sold approximately $173 million of loans into the
secondary market during 2003. Customer service fees increased by $146,711, or 8.53%, as the Bank was able to reduce waived fees in a more efficient manner, thus increasing the collection of overdraft fees, monthly service charges, and ATM
fees. The undistributed gain in Charter Trust Company decreased by $31,935, or 28.16%, to $81,489 from $113,424. The gain represents the Banks one-third interest in Charter Trust.



Total operating expenses decreased $269,169, or 2.09%, to $12,609,490
at December 31, 2003.



| |  | Salaries and benefits decreased $788,253, or 11.94% compared to December 31, 2002. Gross salaries and benefits paid decreased by $69,162, or 0.83%, to $8,260,860 at December
31, 2003, compared to $8,330,022 at December 31, 2002. Normal salary increases, commission increases associated with the increased origination of loans, and the costs associated with the Banks employee incentive program were mitigated by a
one-time insurance re-imbursement generated from the Banks self-funded group health insurance program and the deferral of expenses in the amount of $2,446,131 at December 31, 2003, compared to $1,727,040 at December 31, 2002, a change of
$719,091.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Occupancy expenses decreased by $102,973, or 4.35%, to $ 2,264,909, due to several pieces of equipment being fully depreciated during 2003.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | Advertising and promotion increased in the amount of $19,620, or 8.71%, to $ 244,886, as the Bank took advantage of the low interest rate environment to heavily promote both
its fixed-rate mortgage loan products and its low-cost transaction-type deposit offerings.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Outside Services increased by $40,526, or 5.18%, to $823,309, due to expenses paid to several consultants used by the Bank for data processing and accounting services.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Amortization of mortgage servicing rights (MSR) increased in the amount of $412,806, or 222.56%, to $598,287, due to the accelerated amortization costs caused by the
increased volume of prepayments on mortgage loans. The Bank amortizes MSRs collected over a five-year period and because higher than normal prepayments occurred during 2003 due to high refinancings, the unamortized portion of the MSRs was required
to be expensed.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other expenses increased in the amount of $154,782, or 5.86%, to $2,796,219, due to normal increases in supplies, postage, and telephone usage.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



Impact of New Accounting Standards



In June 2002, the FASB issued SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activities (SFAS No. 146). This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability
is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this Statement did not have any material impact on the Companys consolidated financial statements.



In October 2002, the FASB issued SFAS No. 147 Acquisitions of
Certain Financial Institutions (SFAS No. 147), an Amendment of SFAS Nos. 72 and 144 and FASB Interpretation No. 9. SFAS No. 72 Accounting for Certain Acquisitions of Banking or Thrift Institutions and FASB
Interpretation No. 9 Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by



18



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##### Table of Contents

Managements Discussion and Analysis(continued)



the Purchase Method provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for
transactions between two or more mutual enterprises, SFAS No. 147 removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with SFAS
No. 141 Business Combinations and SFAS No. 142 Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of SFAS No. 147. In addition, SFAS No. 147 amends SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived Assets to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit
cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires for other long-lived assets
that are held and used.



Paragraph 5 of SFAS No. 147, which
relates to the application of the purchase method of accounting, is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of
certain long-term customer -relationship intangible assets are effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 are effective on October 1, 2002, with earlier
application permitted.



In accordance with paragraph 9 of SFAS
No. 147, the Company, has reclassified, as of September 30, 2002, its recognized unidentifiable intangible asset related to branch acquisition(s). This asset was reclassified as goodwill (reclassified goodwill). The amount reclassified was
$9,668,456, the carrying amount as of January 1, 2002. The reclassified goodwill is being accounted for and reported prospectively as goodwill under SFAS No. 142, with no amortization expense. Accordingly the consolidated financial statements for
the year ended December 31, 2002 do not reflect amortization in the amount of $753,384 that would have been recorded if SFAS No. 147 had not been issued.



In accordance with SFAS No. 147, the Company tested its reclassified goodwill and other goodwill for impairment as of January 1, 2002. The Company also
tested its total goodwill for impairment as of December 31, 2003 and 2002. The Company determined that its goodwill as of January 1, 2002 and December 31,2003 and 2002 was not impaired.



The Companys amortization expense related to reclassified goodwill was $769,421 and $732,324 for the years ended
December 31, 2002 and December 31, 2001, respectively.



The
following is a reconciliation of reported net income adjusted for adoption of SFAS No. 142 for years ended December 31:



|                                                 |  |      |           |      |   |           |  |   |          
|------------------------------------------------ |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                 |  | 2003 |           | 2002 |   | 2001     
|Reported net income                              |  | $    | 5,771,453 |      | $ | 4,299,988 |  | $ | 3,100,464
|Add back goodwill amortization net of tax effect |  |      |          |      |   |          |  |   | 499,354  
|                                                 |  |      |           |      |   |           |  |   |          
|Adjusted net income                              |  | $    | 5,771,453 |      | $ | 4,299,988 |  | $ | 3,599,818
|                                                 |  |      |           |      |   |           |  |   |          
|Basic earnings per share:                        |  |      |           |      |   |           |  |   |          
|Reported net income                              |  | $    | 2.92      |      | $ | 2.20      |  | $ | 1.60     
|Goodwill amortization                            |  |      |          |      |   |          |  |   | .26      
|                                                 |  |      |           |      |   |           |  |   |          
|Adjusted net income                              |  | $    | 2.92      |      | $ | 2.20      |  | $ | 1.86     
|                                                 |  |      |           |      |   |           |  |   |          
|Diluted earnings per share:                      |  |      |           |      |   |           |  |   |          
|Reported net income                              |  | $    | 2.84      |      | $ | 2.19      |  | $ | 1.59     
|Goodwill amortization                            |  |      |          |      |   |          |  |   | .26      
|                                                 |  |      |           |      |   |           |  |   |          
|Adjusted net income                              |  | $    | 2.84      |      | $ | 2.19      |  | $ | 1.85     
|                                                 |  |      |           |      |   |           |  |   |          



In November 2002, the
FASB issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN



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##### Table of Contents

Managements Discussion and Analysis(continued)



45). FIN 45 elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 clarifies that a guarantor is
required to disclose (a) the nature of the guarantee; (b) the maximum potential amount of future payments under the guarantee; (c) the carrying amount of the liability; (d) the nature and extent of any recourse provisions or available collateral
that would enable the guarantor to recover the amounts paid under the guarantee.



The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in FIN 45 are effective
for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted the initial recognition and initial measurement provisions of FIN 45 effective as of January 1, 2003 and adopted the disclosure requirements
effective as of December 31, 2002. The adoption of this interpretation did not have a material effect on the Companys financial position or results of operations.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and
Disclosure, an amendment of SFAS Statement No. 123 (SFAS No. 148). SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.
In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The transition provisions and disclosure provisions are required for financial statements for fiscal years ending after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 as of December
31, 2002 and currently uses the intrinsic value method of accounting for stock options.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities (SFAS No. 149), which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement (a)
clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (b) clarifies when a derivative contains a financing component, (c) amends the definition of an underlying to conform to language
used in FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and (d) amends certain other existing pronouncements. The provisions of
SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003. There was no substantial impact on the Companys consolidated financial statements on adoption of this Statement.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150). This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that certain financial instruments that were previously classified as equity must be classified as a liability. Most of the guidance in SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This Statement did not have any material effect on the Companys consolidated financial statements.



In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46), in an effort to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities
and activities of another entity. In December 2003, the FASB revised Interpretation No. 46, also referred to as Interpretation 46 (R) (FIN 46(R)). The objective of this interpretation is not to restrict the use of variable interest
entities but to improve financial reporting by companies involved with variable interest entities. Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting
interests. This interpretation changes that, by requiring a variable interest entity to be consolidated by a company only if that company is subject to a majority of the risk of loss from the variable interest entitys activities or entitled to
receive a majority of the entitys residual returns or both. The Company is required to apply FIN 46, as revised, to all entities subject to it no later than the end of the first reporting period ending after March 15, 2004. However, prior to
the required application of FIN 46, as revised, the Company shall apply FIN 46 or FIN



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##### Table of Contents

Managements Discussion and Analysis(continued)



46 (R) to those entities that are considered to be special-purpose entities as of the end of the first fiscal year or interim period ending after December
15, 2003. The adoption of this interpretation has not and is not expected to have a material effect on the Companys consolidated financial statements.



In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits - an
amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106 (SFAS No. 132 (revised 2003)). This Statement revises employers disclosures about pension plans and other postretirement benefit plans. It does not change the measurement
or recognition of those plans required by SFAS No. 87, Employers Accounting for Pensions, SFAS No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits, and SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. This Statement retains the disclosure requirements contained in SFAS No. 132, Employers Disclosures About Pensions
and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original Statement 132 about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. This Statement is effective for financial statements with fiscal years ending after December 15, 2003 and interim periods beginning after December 15, 2003. Adoption of this Statement did not have a material
impact on the Companys consolidated financial statements.



Accounting for Income Taxes



The
provision for income taxes for the years ended December 31, 2003, 2002 and 2001 includes net deferred income tax expense of $1,046,854, $811,907, and $387,196, respectively. These amounts were determined by the deferred 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, 2002 and 2001



In 2002, the Company earned $4,299,988 or $2.19 per common share, assuming
dilution, compared to $3,100,464 or $1.59 per common share, assuming dilution, in 2001. The increase in earnings was primarily due to the increase in the Net gain on thesale of loans in the amount of $898,219. During 2002, the
Banks loan originations amounted to $231.5 million as refinancings increased. The Banks sold loan portfolio increased to $260.8 million at December 31, 2002 from $214.6 million at December 31, 2001 as the Bank sold fixed rate loans to
the secondary market. In addition, a prepayment fee in the amount of $608,591 made in 2001 to pay-off FHLB advances generated interest expense savings in 2002 of $281,574.



Financial Condition



Total assets increased slightly by $2,707,847 or 0.55% from $493,937,076 at December 31, 2001 to $496,644,923 at December 31, 2002.



Deposits increased by $6,591,426, or 1.56% to $429,328,420 from
$422,736,994. During 2002, customers sought the safety and predictability of insured deposits because of the instability being experience in the financial markets.



Total gross loans, excluding loans held-for-sale, decreased $20,570,040, or 6.04% from $340,436,012 to $319,865,972.
The declining interest rate environment experienced during 2002 directly influenced this decrease. Customers refinanced adjustable rate mortgages, which the Bank holds in portfolio, into fixed rate mortgages, which the Bank sells to the secondary
market. The majority of the decrease in loans occurred in real estate loans. This segment fell $24,917,225, or 8.43%, to $270,537,843 at December 31, 2002. The decrease in real estate loans was somewhat offset by an increase of $7,498,893, or 30.29%
in commercial and municipal loans.



The amortized cost of
investment securities increased by $27,429,630, or 49.16% from $55,793,535 at December 31, 2001 to $83,223,165. The Bank took the proceeds of the sale of loans and invested these funds in short-term Commercial Paper, Mortgage-backed Securities,
U.S. Government Bonds, and Trust Capital Preferreds. Moreover, the Bank liquidated several long-term corporate bonds in order to shorten the maturities and improve the risk profile of the investment portfolio. The Banks net realized gains on
the sales of investment securities of $146,473 during 2002 compared to $76,863 during 2001. At December 31, 2002, the Banks available-for-sale investment portfolio had a net unrealized gain of $233,331, compared to a net unrealized loss of
$1,456,178 at December 31, 2001. This change of $1,689,509 in market value was significantly influenced by the decline in interest rates during 2002, which increased the market value of the investment portfolio.



21



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##### Table of Contents

Managements Discussion and Analysis(continued)



Real estate owned and property acquired in settlement of loans decreased by a net $79,832, or
79.43%, to $20,668. The balance represented one 35-acre parcel of unimproved land.



Advances from the Federal Home Loan Bank (FHLB) remained at zero during 2002 as the Banks need to fund new loans was offset by the high volume of loans sold to the secondary market.



Net Interest Income



Net interest income for the year ended December 31, 2002, increased
by $815,471 or 5.81%, to $14,840,452. The increase was primarily due to a decrease in interest paid on deposits. The Bank offered time deposit specials during 2000 and 2001 in order to attract and retain customer deposits. These time deposits
matured throughout 2002, and, with interest rates near historic lows, customers rolled these specials into lower costing deposits.



Total interest income decreased by $5,111,494 or 16.90%. Lower interest rates and fewer loans held in portfolio, accounted for the majority of the
decrease in interest and fees on loans. In 2002, the Bank originated $231.5 million in loans. Despite record production volume, total loans decreased from $340,436,012 at December 31, 2001 to $319,865,972 at December 31, 2002. The decrease was
primarily attributed to an increase in loans sold into the secondary market. The Bank sold $95 million in loans during 2002. These sales of loans resulted in the Banks sold loan portfolio increasing by 22% to $260,774,730 at December 31, 2002.



Interest and dividends on investments decreased by
$438,785 or 9.41% due to a drop in yield from 6.82% to 4.22%. The Bank repositioned its investment portfolio during 2002 in order to shorten maturities and, as a result, higher yielding, long-term bonds were liquidated and replaced by lower
yielding, short-term investments.



Total interest
expense decreased $5,926,965, or 36.54%. As mentioned above, interest on deposits decreased significantly due to the maturing of higher costing time deposits. Interest on deposits decreased by $5,518,846, or 39.35%. In addition, interest
on FHLB advance was zero compared to $281,574 in 2001 because the Bank prepaid FHLB advances in 2001.



The Banks overall cost of funds decreased from 3.89% in 2001 to 2.45%, or 37.02%. The cost of deposits, including repurchase agreements, decreased
from 3.63% in 2001 to 2.18% in 2002, or 39.94%. As mentioned above, the change was due to higher costing deposits rolling into a lower interest rate environment. In addition, the Bank was able to prepay all of its outstanding FHLB advances during
2001, thereby reducing interest on advances and other borrowed money by $281,574.



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 3.35%
from 3.29% in 2002 and 2001, respectively. The Banks net interest margin, representing net interest income as a percentage of average interest-earning assets, increased to 3.42% from 3.33%. Both increases are the result of falling interest
rates.



Provision for Loan Losses



The allowance for loan losses at December 31, 2002 was $3,875,708, compared
to $4,405,385 at year-end 2001. The allowance in 2002 included $3,847,395 in general reserves compared to $4,112,733 at the end of 2001. During 2002, the Bank had net charge-offs and write-downs of $649,677 compared to net charge-offs of $117,469 in
2001. Gross charged-off loans during 2002 amounted to 0.21% of average loans, compared to 0.06% in 2001. The provision for loan losses was $120,000 in 2002 compared to $90,000 in 2001. The allowance represented 1.21% of total loans at year-end 2002
versus 1.29% at year-end 2001. The allowance for loan losses as a percentage of total non-performing loans was 584% at December 31, 2002 compared to 175% at December 31, 2001.



The decline in the allowance was primarily the result of $604,686 in loan write-downs, incurred in the third quarter of
2002, in anticipation of selling a $2.0 million pool of sub-performing and non-performing loans. The $30,000 increase in the amount of the provision for loan losses in 2002 helped to maintain the allowance at an adequate level despite the
charge-offs.



Total classified loans, excluding special mention
loans, as of December 31, 2002 and 2001 were $3,333,767 and $7,092,289, respectively. Total non-performing assets amounted to $684,760 and $2,621,424 for the respective years. Non-performing loans consist of non-accrual impaired loans and loans 90
days or more past due. At December 31, 2002 and 2001 the respective amount of impaired loans was $105,354 and $1,267,037 and loans over 90 days past due were $558,738 and $ 1,254,387. Total non-performing loans were $664,092 at the end of 2002
compared to $2,521,424 at the end of 2001. At



22



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##### Table of Contents

Managements Discussion and Analysis(continued)



December 31, 2002 and 2001, loans 30 to 89 days delinquent were $4,542,125 and $5,800,075, respectively.



The decrease in non-performing loans was due to the sale of some and the
repayment, liquidation, or improved performance of others. Classified loans declined largely as a result of the sale of a $2.0 million pool of non-performing and sub-performing loans in the third quarter of 2002. The decision to package and sell
those loans considered factors such as anticipated collateral acquisition, holding, and liquidation costs.



Other Income and Expense



Total other income increased $1,462,166, or 42.12%, to $4,933,490 at December 31, 2002. Net gains on sales of loans originated for sale increased by $898,219, or 68.83%. This accounted for 61.43% of the total increase in other
income. As mentioned above, the Bank sold approximately $95 million of loans into the secondary market during 2002. Customer service fees increased by $218,606, or 14.56%, as the Bank was able to reduce waived fees in a more efficient manner,
thus increasing the collection of overdraft fees, monthly service charges, and ATM fees. In addition, the undistributed gain in Charter Trust Company (CTC) increased by $271,717, or 171.65%, to $113,424 from a loss of $158,293. During 2001,
CTC incurred one-time expenses due to merging into one company.



Total operating expenses increased $249,190, or 1.97%, to $12,878,659 at December 31, 2002. Salaries and benefits increased $1,192,901, or 22.05%. The majority of the increase was due to salaries and commissions associated
with the origination of real estate mortgage loans. Outside services increased $358,615, or 84.55%. During 2002, one-time expenses in the amount of approximately $100,000 were incurred for consulting fees, annual fees in the amount of
$111,000 for the Banks new core processing system were realized, and legal, audit, and other outside fees increased. Amortization of mortgage servicing rights (MSRs) increased $88,092, or 90.45%. The Bank amortizes MSRs collected over a
five-year period and because higher than normal prepayments occurred during 2002 due to high refinancings, the unamortized portion of the MSRs was required to be expensed. These increases in other expenses were offset by two factors. First, the Bank
incurred a one-time penalty in the amount of $608,591 in 2001 to cover the prepayment of FHLB advances. Second, expenses in the amount of $247,156 in Amortization of goodwill and $769,421 in Amortization of unidentifiable intangible
assets (UIA) incurred in 2001 were eliminated. The elimination of the Goodwill and UIA amortization was made in accordance with the provisions of SFAS 147. For a more detailed explanation of SFAS 147, please see the discussion in Impact of
New Accounting Standards.



Off-Balance Sheet Arrangements



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



23



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##### Table of Contents

LOGO



The Board of
Directors

New Hampshire Thrift Bancshares, Inc.

Newport, New Hampshire



INDEPENDENT AUDITORS REPORT



We have audited the accompanying consolidated statements of financial condition of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 2003 and 2002
and the related consolidated statements of income, changes in shareholders equity, cash flows and comprehensive income for each of the years in the three-year period ended December 31, 2003. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our 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, 2003 and 2002 and the consolidated results of their operations
and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.



/s/    SHATSWELL, MacLEOD & COMPANY, P.C.SHATSWELL, MacLEOD & COMPANY, P.C.




West Peabody, Massachusetts

January 8, 2004



LOGO



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##### Table of Contents

New Hampshire Thrift Bancshares Inc. and Subsidiaries

Consolidated Statements of Financial Condition



|                                                                                                                                                                                                                                            |  |      |             |   |      |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|As of December 31,                                                                                                                                                                                                                          |  | 2003 |             |   | 2002 |  
|ASSETS                                                                                                                                                                                                                                      |  |      |             |   |      |   |             |  
|Cash and due from banks                                                                                                                                                                                                                     |  | $    | 12,107,645  |   |      | $ | 21,364,567  |  
|Federal Home Loan Bank overnight deposit                                                                                                                                                                                                    |  |      | 6,418,370   |   |      |   | 32,022,628  |  
|                                                                                                                                                                                                                                            |  |      |             |   |      |   |             |  
|Total cash and cash equivalents                                                                                                                                                                                                             |  |      | 18,526,015  |   |      |   | 53,387,195  |  
|Securities available-for-sale                                                                                                                                                                                                               |  |      | 121,009,752 |   |      |   | 80,453,729  |  
|Securities held-to-maturity (fair values of $3,063,200 as of December 31, 2003 and $3,087,400 as of December 31, 2002)                                                                                                                      |  |      | 3,001,145   |   |      |   | 3,002,767   |  
|Federal Home Loan Bank stock                                                                                                                                                                                                                |  |      | 2,167,800   |   |      |   | 2,371,400   |  
|Loans held-for-sale                                                                                                                                                                                                                         |  |      | 869,540     |   |      |   | 5,556,419   |  
|Loans receivable, net of the allowance for loan losses of $3,898,650 as of December 31, 2003 and $3,875,708 as of December 31,
2002                                                                                                         |  |      | 344,572,715 |   |      |   | 317,143,672 |  
|Accrued interest receivable                                                                                                                                                                                                                 |  |      | 1,941,059   |   |      |   | 2,243,968   |  
|Bank premises and equipment, net                                                                                                                                                                                                            |  |      | 9,305,828   |   |      |   | 9,385,618   |  
|Investments in real estate                                                                                                                                                                                                                  |  |      | 524,925     |   |      |   | 473,722     |  
|Real estate owned and property acquired in settlement of loans                                                                                                                                                                              |  |      |            |   |      |   | 20,668      |  
|Goodwill                                                                                                                                                                                                                                    |  |      | 12,140,016  |   |      |   | 12,140,016  |  
|Investment in partially owned Charter Holding Corp., at equity                                                                                                                                                                              |  |      | 3,124,955   |   |      |   | 3,043,466   |  
|Other assets                                                                                                                                                                                                                                |  |      | 9,062,481   |   |      |   | 7,422,283   |  
|                                                                                                                                                                                                                                            |  |      |             |   |      |   |             |  
|Total assets                                                                                                                                                                                                                                |  | $    | 526,246,231 |   |      | $ | 496,644,923 |  
|                                                                                                                                                                                                                                            |  |      |             |   |      |   |             |  
|LIABILITIES AND SHAREHOLDERS EQUITY LIABILITIES                                                                                                                                                                                            |  |      |             |   |      |   |             |  
|Deposits:                                                                                                                                                                                                                                   |  |      |             |   |      |   |             |  
|Noninterest-bearing                                                                                                                                                                                                                         |  | $    | 31,296,606  |   |      | $ | 29,860,806  |  
|Interest-bearing                                                                                                                                                                                                                            |  |      | 397,179,941 |   |      |   | 399,467,614 |  
|                                                                                                                                                                                                                                            |  |      |             |   |      |   |             |  
|Total deposits                                                                                                                                                                                                                              |  |      | 428,476,547 |   |      |   | 429,328,420 |  
|Federal Home Loan Bank advances                                                                                                                                                                                                             |  |      | 22,000,000  |   |      |   |            |  
|Securities sold under agreements to repurchase                                                                                                                                                                                              |  |      | 12,364,124  |   |      |   | 8,592,098   |  
|Guaranteed preferred beneficial interest in junior subordinated debentures                                                                                                                                                                  |  |      | 16,400,000  |   |      |   | 16,400,000  |  
|Accrued expenses and other liabilities                                                                                                                                                                                                      |  |      | 7,880,964   |   |      |   | 8,558,409   |  
|                                                                                                                                                                                                                                            |  |      |             |   |      |   |             |  
|Total liabilities                                                                                                                                                                                                                           |  |      | 487,121,635 |   |      |   | 462,878,927 |  
|                                                                                                                                                                                                                                            |  |      |             |   |      |   |             |  
|SHAREHOLDERS EQUITY                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|Preferred stock, $.01 par value, per share: 2,500,000 shares authorized, no shares issued or outstanding                                                                                                                                    |  |      |            |   |      |   |            |  
|Common stock, $.01 par value, per share: 5,000,000 shares authorized, 2,542,908 shares issued and 2,008,690 shares outstanding as of December
31, 2003 and 2,489,958 shares issued and 1,958,924 shares outstanding as of December 31, 2002 |  |      | 25,429      |   |      |   | 24,899      |  
|Paid-in capital                                                                                                                                                                                                                             |  |      | 19,510,646  |   |      |   | 18,402,577  |  
|Retained earnings                                                                                                                                                                                                                           |  |      | 24,404,156  |   |      |   | 20,052,439  |  
|Accumulated other comprehensive income                                                                                                                                                                                                      |  |      | 73,974      |   |      |   | 102,195     |  
|                                                                                                                                                                                                                                            |  |      |             |   |      |   |             |  
|                                                                                                                                                                                                                                            |  |      | 44,014,205  |   |      |   | 38,582,110  |  
|Treasury stock, at cost, 534,218 shares as of December 31, 2003 and 531,034 shares as of December 31, 2002                                                                                                                                  |  |      | (4,889,609  | ) |      |   | (4,816,114  | )
|                                                                                                                                                                                                                                            |  |      |             |   |      |   |             |  
|Total shareholders equity                                                                                                                                                                                                                  |  |      | 39,124,596  |   |      |   | 33,765,996  |  
|                                                                                                                                                                                                                                            |  |      |             |   |      |   |             |  
|Total liabilities and shareholders equity                                                                                                                                                                                                  |  | $    | 526,246,231 |   |      | $ | 496,644,923 |  
|                                                                                                                                                                                                                                            |  |      |             |   |      |   |             |  



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



25



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##### Table of Contents

New Hampshire Thrift Bancshares Inc. and Subsidiaries

Consolidated Statements of Income



|                                                                                          |  |      |            |   |      |   |            |  |   |            |  
|----------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- |  | - | ---------- | -
|For the years ended December 31,                                                          |  | 2003 |            |   | 2002 |   | 2001       | 
|INTEREST INCOME                                                                           |  |      |            |   |      |   |            |  |   |            |  
|Interest and fees on loans                                                                |  | $    | 17,794,613 |   |      | $ | 20,909,788 |  | $ | 25,582,497 |  
|Interest and dividends on investments                                                     |  |      | 3,699,079  |   |      |   | 4,223,548  |  |   | 4,662,333  |  
|                                                                                          |  |      |            |   |      |   |            |  |   |            |  
|Total interest income                                                                     |  |      | 21,493,692 |   |      |   | 25,133,336 |  |   | 30,244,830 |  
|                                                                                          |  |      |            |   |      |   |            |  |   |            |  
|INTEREST EXPENSE                                                                          |  |      |            |   |      |   |            |  |   |            |  
|Interest on deposits                                                                      |  |      | 4,039,149  |   |      |   | 8,506,730  |  |   | 14,025,576 |  
|Interest on advances and other borrowed money                                             |  |      | 53,115     |   |      |   |           |  |   | 281,574    |  
|Interest expenses on NHTB Capital Trust I capital securities                              |  |      | 1,517,000  |   |      |   | 1,517,000  |  |   | 1,517,000  |  
|Interest on securities sold under agreements to repurchase                                |  |      | 96,257     |   |      |   | 269,154    |  |   | 395,699    |  
|                                                                                          |  |      |            |   |      |   |            |  |   |            |  
|Total interest expense                                                                    |  |      | 5,705,521  |   |      |   | 10,292,884 |  |   | 16,219,849 |  
|                                                                                          |  |      |            |   |      |   |            |  |   |            |  
|Net interest income                                                                       |  |      | 15,788,171 |   |      |   | 14,840,452 |  |   | 14,024,981 |  
|PROVISION FOR LOAN LOSSES                                                                 |  |      | 99,996     |   |      |   | 120,000    |  |   | 90,000     |  
|                                                                                          |  |      |            |   |      |   |            |  |   |            |  
|Net interest income after provision for loan losses                                       |  |      | 15,688,175 |   |      |   | 14,720,452 |  |   | 13,934,981 |  
|                                                                                          |  |      |            |   |      |   |            |  |   |            |  
|OTHER INCOME                                                                              |  |      |            |   |      |   |            |  |   |            |  
|Customer service fees                                                                     |  |      | 1,866,250  |   |      |   | 1,719,539  |  |   | 1,500,933  |  
|Net gain on sales and calls of securities                                                 |  |      | 227,687    |   |      |   | 146,473    |  |   | 76,863     |  
|Net (loss) gain on sales of premises, equipment, other real estate owned and other assets |  |      | (618       | ) |      |   | 17,625     |  |   | 4,083      |  
|Net gain on sale of loans                                                                 |  |      | 3,420,714  |   |      |   | 2,203,260  |  |   | 1,305,041  |  
|Rental income                                                                             |  |      | 494,950    |   |      |   | 483,484    |  |   | 498,017    |  
|Realized gain (loss) in Charter Holding Corp.                                             |  |      | 81,489     |   |      |   | 113,424    |  |   | (158,293   | )
|Brokerage service income                                                                  |  |      | 108,818    |   |      |   | 109,398    |  |   | 103,460    |  
|Other income                                                                              |  |      |           |   |      |   | 140,287    |  |   | 141,220    |  
|                                                                                          |  |      |            |   |      |   |            |  |   |            |  
|Total other income                                                                        |  |      | 6,199,290  |   |      |   | 4,933,490  |  |   | 3,471,324  |  
|                                                                                          |  |      |            |   |      |   |            |  |   |            |  
|OTHER EXPENSES                                                                            |  |      |            |   |      |   |            |  |   |            |  
|Salaries and employee benefits                                                            |  |      | 5,814,729  |   |      |   | 6,602,982  |  |   | 5,410,081  |  
|Occupancy expenses                                                                        |  |      | 2,264,909  |   |      |   | 2,367,882  |  |   | 2,293,883  |  
|Advertising and promotion                                                                 |  |      | 244,886    |   |      |   | 225,266    |  |   | 243,853    |  
|Depositors insurance                                                                     |  |      | 67,151     |   |      |   | 72,828     |  |   | 74,453     |  
|Outside services                                                                          |  |      | 823,309    |   |      |   | 782,783    |  |   | 424,168    |  
|Amortization of goodwill                                                                  |  |      |           |   |      |   |           |  |   | 247,156    |  
|Amortization of unidentifiable intangible asset from branch acquisitions                  |  |      |           |   |      |   |           |  |   | 769,421    |  
|Amortization of mortgage servicing rights in excess of mortgage servicing income          |  |      | 598,287    |   |      |   | 185,481    |  |   | 97,389     |  
|Prepayment penalty expense Federal Home Loan Bank                                         |  |      |           |   |      |   |           |  |   | 608,591    |  
|Other expenses                                                                            |  |      | 2,796,219  |   |      |   | 2,641,437  |  |   | 2,460,474  |  
|                                                                                          |  |      |            |   |      |   |            |  |   |            |  
|Total other expenses                                                                      |  |      | 12,609,490 |   |      |   | 12,878,659 |  |   | 12,629,469 |  
|                                                                                          |  |      |            |   |      |   |            |  |   |            |  
|INCOME BEFORE PROVISION FOR INCOME TAXES                                                  |  |      | 9,277,975  |   |      |   | 6,775,283  |  |   | 4,776,836  |  
|PROVISION FOR INCOME TAXES                                                                |  |      | 3,506,522  |   |      |   | 2,475,295  |  |   | 1,676,372  |  
|                                                                                          |  |      |            |   |      |   |            |  |   |            |  
|NET INCOME                                                                                |  | $    | 5,771,453  |   |      | $ | 4,299,988  |  | $ | 3,100,464  |  
|                                                                                          |  |      |            |   |      |   |            |  |   |            |  
|Earnings per common share                                                                 |  | $    | 2.92       |   |      | $ | 2.20       |  | $ | 1.60       |  
|                                                                                          |  |      |            |   |      |   |            |  |   |            |  
|Earnings per common share, assuming dilution                                              |  | $    | 2.84       |   |      | $ | 2.19       |  | $ | 1.59       |  
|                                                                                          |  |      |            |   |      |   |            |  |   |            |  
|Dividends declared per common share                                                       |  | $    | .72        |   |      | $ | .64        |  | $ | .64        |  
|                                                                                          |  |      |            |   |      |   |            |  |   |            |  



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



26



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##### Table of Contents

New Hampshire Thrift Bancshares Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders Equity



|                                                                                               |  |      |            |   |      |   |            |      |  |   |            |  
|---------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|For the years ended December 31,                                                               |  | 2003 |            |   | 2002 |   |            | 2001 | 
|COMMON STOCK                                                                                   |  |      |            |   |      |   |            |      |  |   |            |  
|Balance, beginning of year                                                                     |  | $    | 24,899     |   |      | $ | 24,798     |      |  | $ | 24,798     |  
|Exercise of stock options (52,950 shares in 2003, 10,100 shares in 2002 and 0 shares in 2001)  |  |      | 530        |   |      |   | 101        |      |  |   |           |  
|                                                                                               |  |      |            |   |      |   |            |      |  |   |            |  
|Balance, end of year                                                                           |  | $    | 25,429     |   |      | $ | 24,899     |      |  | $ | 24,798     |  
|                                                                                               |  |      |            |   |      |   |            |      |  |   |            |  
|PAID-IN CAPITAL                                                                                |  |      |            |   |      |   |            |      |  |   |            |  
|Balance, beginning of year                                                                     |  | $    | 18,402,577 |   |      | $ | 18,110,685 |      |  | $ | 17,896,810 |  
|Increase on issuance of common stock for the exercise of stock options                         |  |      | 968,148    |   |      |   | 134,365    |      |  |   |           |  
|Increase on issuance of treasury stock for the exercise of stock options                       |  |      |           |   |      |   | 122,400    |      |  |   | 176,879    |  
|Tax benefit for stock options                                                                  |  |      | 139,921    |   |      |   | 35,127     |      |  |   | 36,996     |  
|                                                                                               |  |      |            |   |      |   |            |      |  |   |            |  
|Balance, end of year                                                                           |  | $    | 19,510,646 |   |      | $ | 18,402,577 |      |  | $ | 18,110,685 |  
|                                                                                               |  |      |            |   |      |   |            |      |  |   |            |  
|RETAINED EARNINGS                                                                              |  |      |            |   |      |   |            |      |  |   |            |  
|Balance, beginning of year                                                                     |  | $    | 20,052,439 |   |      | $ | 16,986,069 |      |  | $ | 15,129,160 |  
|Net income                                                                                     |  |      | 5,771,453  |   |      |   | 4,299,988  |      |  |   | 3,100,464  |  
|Cash dividends paid                                                                            |  |      | (1,419,736 | ) |      |   | (1,233,618 | )    |  |   | (1,243,555 | )
|                                                                                               |  |      |            |   |      |   |            |      |  |   |            |  
|Balance, end of year                                                                           |  | $    | 24,404,156 |   |      | $ | 20,052,439 |      |  | $ | 16,986,069 |  
|                                                                                               |  |      |            |   |      |   |            |      |  |   |            |  
|ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Balance, beginning of year                                                                     |  | $    | 102,195    |   |      | $ | (1,301,372 | )    |  | $ | (2,228,130 | )
|Net unrealized holding (loss) gain on securities available- for- sale, net of tax effect       |  |      | (28,221    | ) |      |   | 981,581    |      |  |   | 1,348,744  |  
|Minimum pension liability adjustment, net of tax effect                                        |  |      |           |   |      |   | 421,986    |      |  |   | (421,986   | )
|                                                                                               |  |      |            |   |      |   |            |      |  |   |            |  
|Balance, end of year                                                                           |  | $    | 73,974     |   |      | $ | 102,195    |      |  | $ | (1,301,372 | )
|                                                                                               |  |      |            |   |      |   |            |      |  |   |            |  
|TREASURY STOCK                                                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Balance, beginning of year                                                                     |  | $    | (4,816,114 | ) |      | $ | (4,854,285 | )    |  | $ | (4,125,314 | )
|Shares repurchased, (3,184 shares in 2003, 0 shares in 2002 and 59,500 shares in 2001)         |  |      | (73,495    | ) |      |   |           |      |  |   | (804,875   | )
|Exercise of stock options, (0 shares in 2003, 11,850 shares in 2002 and 23,355 shares in 2001) |  |      |           |   |      |   | 38,171     |      |  |   | 75,904     |  
|                                                                                               |  |      |            |   |      |   |            |      |  |   |            |  
|Balance, end of year                                                                           |  | $    | (4,889,609 | ) |      | $ | (4,816,114 | )    |  | $ | (4,854,285 | )
|                                                                                               |  |      |            |   |      |   |            |      |  |   |            |  



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



27



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##### Table of Contents

New Hampshire Thrift Bancshares Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income



|                                                                                       |  |      |           |   |      |   |           |  |   |           |  
|-------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- |  | - | --------- | -
|For the years ended December 31,                                                       |  | 2003 |           |   | 2002 |   | 2001      | 
|Net income                                                                             |  | $    | 5,771,453 |   |      | $ | 4,299,988 |  | $ | 3,100,464 |  
|                                                                                       |  |      |           |   |      |   |           |  |   |           |  
|Other comprehensive (loss) income                                                      |  |      |           |   |      |   |           |  |   |           |  
|Net unrealized holding (loss) gain on securities available-for-sale, net of tax effect |  |      | (28,221   | ) |      |   | 981,581   |  |   | 1,348,744 |  
|Minimum pension liability adjustment                                                   |  |      |          |   |      |   | 421,986   |  |   | (421,986  | )
|                                                                                       |  |      |           |   |      |   |           |  |   |           |  
|Total other comprehensive (loss) income                                                |  |      | (28,221   | ) |      |   | 1,403,567 |  |   | 926,758   |  
|                                                                                       |  |      |           |   |      |   |           |  |   |           |  
|Comprehensive income                                                                   |  | $    | 5,743,232 |   |      | $ | 5,703,555 |  | $ | 4,027,222 |  
|                                                                                       |  |      |           |   |      |   |           |  |   |           |  



Reclassification disclosure for the
years ended December 31:



|                                                             |  |      |          |   |      |   |           |      |  |   |           |  
|------------------------------------------------------------ |  | ---- | -------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                             |  | 2003 |          |   | 2002 |   |           | 2001 | 
|Net unrealized gains on available-for-sale securities        |  | $    | 116,850  |   |      | $ | 1,835,982 |      |  | $ | 2,290,202 |  
|Reclassification adjustment for realized gains in net income |  |      | (227,687 | ) |      |   | (146,473  | )    |  |   | (76,863   | )
|                                                             |  |      |          |   |      |   |           |      |  |   |           |  
|Other comprehensive (loss) income before income tax effect   |  |      | (110,837 | ) |      |   | 1,689,509 |      |  |   | 2,213,339 |  
|Income tax benefit (expense)                                 |  |      | 82,616   |   |      |   | (707,928  | )    |  |   | (864,595  | )
|                                                             |  |      |          |   |      |   |           |      |  |   |           |  
|Other comprehensive (loss) income, net of tax                |  | $    | (28,221  | ) |      | $ | 981,581   |      |  | $ | 1,348,744 |  
|                                                             |  |      |          |   |      |   |           |      |  |   |           |  
|Minimum pension liability adjustment                         |  | $    |         |   |      | $ | 692,462   |      |  | $ | (692,462  | )
|Income tax (expense) benefit                                 |  |      |         |   |      |   | (270,476  | )    |  |   | 270,476   |  
|                                                             |  |      |          |   |      |   |           |      |  |   |           |  
|                                                             |  | $    |         |   |      | $ | 421,986   |      |  | $ | (421,986  | )
|                                                             |  |      |          |   |      |   |           |      |  |   |           |  



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



|                                                                             |  |      |        |      |   |         |  |   |            |  
|---------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------- |  | - | ---------- | -
|                                                                             |  | 2003 |        | 2002 |   | 2001    | 
|Net unrealized gains (losses) on available-for-sale securities, net of taxes |  | $    | 73,974 |      | $ | 102,195 |  | $ | (879,386   | )
|Minimum pension liability adjustment, net of taxes                           |  |      |       |      |   |        |  |   | (421,986   | )
|                                                                             |  |      |        |      |   |         |  |   |            |  
|Accumulated other comprehensive income (loss)                                |  | $    | 73,974 |      | $ | 102,195 |  | $ | (1,301,372 | )
|                                                                             |  |      |        |      |   |         |  |   |            |  



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



28



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##### Table of Contents

New Hampshire Thrift Bancshares Inc. and Subsidiaries

Consolidated Statements of Cash Flows



|                                                                                                                                      |  |      |              |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------------ | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|For the years ended December 31,                                                                                                      |  | 2003 |              |   | 2002 |   |             | 2001 | 
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                                                  |  |      |              |   |      |   |             |      |  |   |             |  
|Net income                                                                                                                            |  | $    | 5,771,453    |   |      | $ | 4,299,988   |      |  | $ | 3,100,464   |  
|Depreciation and amortization                                                                                                         |  |      | 1,360,447    |   |      |   | 1,307,149   |      |  |   | 1,001,072   |  
|Net increase in mortgage servicing rights                                                                                             |  |      | (660,982     | ) |      |   | (270,471    | )    |  |   | (393,447    | )
|Amortization (accretion) of securities, net                                                                                           |  |      | 688,220      |   |      |   | (26,923     | )    |  |   | 42,946      |  
|Amortization of goodwill                                                                                                              |  |      |             |   |      |   |            |      |  |   | 247,156     |  
|Amortization of unidentifiable intangible asset from branch acquisitions                                                              |  |      |             |   |      |   |            |      |  |   | 769,421     |  
|Amortization of deferred expenses relating to issuance of NHTB Capital Trust I capital securities                                     |  |      | 30,136       |   |      |   | 30,135      |      |  |   | 30,136      |  
|Amortization of fair value adjustments, net                                                                                           |  |      | 12,073       |   |      |   | 12,073      |      |  |   | 12,073      |  
|Net decrease (increase) in loans held-for-sale                                                                                        |  |      | 4,686,879    |   |      |   | 3,079,613   |      |  |   | (6,984,832  | )
|Writedown of premises and equipment                                                                                                   |  |      |             |   |      |   | 20,912      |      |  |   |            |  
|Net loss (gain) on sales of premises, equipment, other real estate owned and other assets                                             |  |      | 618          |   |      |   | (17,625     | )    |  |   | (4,083      | )
|Net (gain) loss on sales and calls of debt securities available-for-sale                                                              |  |      | (227,687     | ) |      |   | (146,473    | )    |  |   | (76,863     | )
|Realized (gain) loss in Charter Holding Corp.                                                                                         |  |      | (81,489      | ) |      |   | (113,424    | )    |  |   | 158,293     |  
|Provision for loan losses                                                                                                             |  |      | 99,996       |   |      |   | 120,000     |      |  |   | 90,000      |  
|Deferred tax expense                                                                                                                  |  |      | 1,046,854    |   |      |   | 811,907     |      |  |   | 387,196     |  
|Increase in accrued interest receivable and other assets                                                                              |  |      | (897,335     | ) |      |   | (273,167    | )    |  |   | (456,137    | )
|Change in deferred loan origination fees and costs, net                                                                               |  |      | (231,339     | ) |      |   | (1,109      | )    |  |   | (102,410    | )
|(Decrease) increase in accrued expenses and other liabilities                                                                         |  |      | (1,641,683   | ) |      |   | 1,099,764   |      |  |   | 2,072,498   |  
|                                                                                                                                      |  |      |              |   |      |   |             |      |  |   |             |  
|Net cash provided by (used in) operating activities                                                                                   |  |      | 9,956,161    |   |      |   | 9,932,349   |      |  |   | (106,517    | )
|                                                                                                                                      |  |      |              |   |      |   |             |      |  |   |             |  
|                                                                                                                                      |  |      |             
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                                                  |  |      |              |   |      |   |             |      |  |   |             |  
|Proceeds from sales of other real estate owned                                                                                        |  |      | 17,050       |   |      |   | 67,189      |      |  |   | 49,083      |  
|Proceeds from sales of other assets                                                                                                   |  |      |             |   |      |   | 6,570       |      |  |   |            |  
|Proceeds from sale of equipment                                                                                                       |  |      | 3,000        |   |      |   |            |      |  |   |            |  
|Capital expenditures - software                                                                                                       |  |      | (71,500      | ) |      |   | (328,894    | )    |  |   | (1,751,998  | )
|Capital expenditures - premises and equipment                                                                                         |  |      | (929,547     | ) |      |   | (536,466    | )    |  |   | (678,359    | )
|Principal reduction on securities held-to-maturity                                                                                    |  |      |             |   |      |   | 1,000,000   |      |  |   | 4,500,000   |  
|Proceeds from sales of securities available-for-sale                                                                                  |  |      | 36,241,623   |   |      |   | 28,873,099  |      |  |   | 7,662,948   |  
|Purchases of securities available-for-sale                                                                                            |  |      | (202,664,999 | ) |      |   | (98,152,915 | )    |  |   | (30,686,142 | )
|Proceeds from maturities of securities available-for-sale                                                                             |  |      | 125,297,605  |   |      |   | 41,023,582  |      |  |   | 14,763,381  |  
|Redemption (purchases) of Federal Home Loan Bank stock                                                                                |  |      | 203,600      |   |      |   | 75,400      |      |  |   | (67,600     | )
|Increase in unidentifiable intangible assets relating to acquisition of assets and assumption of liabilities of New London Trust,
FSB |  |      |             |   |      |   |            |      |  |   | (206,156    | )
|Loan originations and principal collections, net                                                                                      |  |      | (26,879,732  | ) |      |   | 21,187,774  |      |  |   | 11,254,656  |  
|Purchases of loans                                                                                                                    |  |      | (439,629     | ) |      |   | (1,294,008  | )    |  |   | (233,422    | )
|Recoveries of loans previously charged off                                                                                            |  |      | 9,588        |   |      |   | 38,222      |      |  |   | 83,987      |  
|                                                                                                                                      |  |      |              |   |      |   |             |      |  |   |             |  
|Net cash (used in) provided by investing activities                                                                                   |  |      | (69,212,941  | ) |      |   | (8,040,447  | )    |  |   | 4,690,378   |  
|                                                                                                                                      |  |      |              |   |      |   |             |      |  |   |             |  



29



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##### Table of Contents

New Hampshire Thrift Bancshares Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Continued)



|                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|---------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|For the years ended December 31,                                       |  | 2003 |             |   | 2002 |   |             | 2001 | 
|CASH FLOWS FROM FINANCING ACTIVITIES                                   |  |      |             |   |      |   |             |      |  |   |             |  
|Net increase in demand deposits, savings and NOW accounts              |  |      | 4,217,767   |   |      |   | 45,354,416  |      |  |   | 36,663,661  |  
|Net decrease in time deposits                                          |  |      | (5,069,640  | ) |      |   | (38,762,990 | )    |  |   | (8,038,592  | )
|Increase in short-term advances from Federal Home Loan Bank            |  |      | 9,000,000   |   |      |   |            |      |  |   |            |  
|Principal advances from Federal Home Loan Bank                         |  |      | 13,000,000  |   |      |   |            |      |  |   |            |  
|Principal payments of advances from Federal Home Loan Bank             |  |      |            |   |      |   |            |      |  |   | (10,000,000 | )
|Net increase (decrease) in repurchase agreements                       |  |      | 3,772,026   |   |      |   | (10,462,280 | )    |  |   | 6,871,881   |  
|Repurchase of treasury stock                                           |  |      | (73,495     | ) |      |   |            |      |  |   | (804,875    | )
|Dividends paid                                                         |  |      | (1,419,736  | ) |      |   | (1,233,618  | )    |  |   | (1,243,555  | )
|Proceeds from exercise of stock options                                |  |      | 968,678     |   |      |   | 295,037     |      |  |   | 252,783     |  
|                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by (used in) financing activities                    |  |      | 24,395,600  |   |      |   | (4,809,435  | )    |  |   | 23,701,303  |  
|                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                   |  |      | (34,861,180 | ) |      |   | (2,917,533  | )    |  |   | 28,285,164  |  
|CASH AND CASH EQUIVALENTS, beginning of year                           |  |      | 53,387,195  |   |      |   | 56,304,728  |      |  |   | 28,019,564  |  
|                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|CASH AND CASH EQUIVALENTS, end of year                                 |  | $    | 18,526,015  |   |      | $ | 53,387,195  |      |  | $ | 56,304,728  |  
|                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                      |  |      |             |   |      |   |             |      |  |   |             |  
|Interest paid                                                          |  | $    | 5,729,557   |   |      | $ | 10,699,568  |      |  | $ | 15,623,039  |  
|                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|Income taxes paid                                                      |  | $    | 2,620,972   |   |      | $ | 1,728,728   |      |  | $ | 1,523,567   |  
|                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES |  |      |             |   |      |   |             |      |  |   |             |  
|Transfers from loans to other assets                                   |  | $    |            |   |      | $ | 2,506       |      |  | $ | 500         |  
|                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|Transfers from loans to real estate acquired through foreclosure       |  | $    |            |   |      | $ | 23,796      |      |  | $ | 100,000     |  
|                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|Transfers from loans to loans held-for-sale                            |  | $    |            |   |      | $ | 1,368,835   |      |  | $ |            |  
|                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|Real estate owned transferred to loans                                 |  | $    |            |   |      | $ | 50,000      |      |  | $ |            |  
|                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|Transfer from premises and equipment to investments in real estate     |  | $    | 159,852     |   |      | $ |            |      |  | $ |            |  
|                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|Transfer from investments in real estate to premises and equipment     |  | $    | 100,446     |   |      | $ |            |      |  | $ |            |  
|                                                                       |  |      |             |   |      |   |             |      |  |   |             |  



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



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##### Table of Contents

N
otes to Consolidated Financial Statements



|NOTE 1. | Summary of significant accounting policies:
|------- | -------------------------------------------



Nature of operations - New Hampshire Thrift Bancshares, Inc. (Company) is a savings association holding company headquartered in Newport, New
Hampshire. The Companys subsidiary, Lake Sunapee Bank, fsb (Bank), a federal stock savings bank operates fourteen branches primarily in Grafton, Sullivan, and Merrimack Counties in west central New Hampshire. Although the Company has a
diversified portfolio, a substantial portion of its debtors abilities to honor their contracts is dependent on the economic health of the region. Its primary source of revenue is providing loans to customers who are predominately small and
middle-market businesses and 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, NHTB Capital Trust I, 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. NHTB Capital Trust I, a subsidiary of the Company, was formed to sell capital securities to the public. All significant intercompany
accounts and transactions have been eliminated in consolidation.



Cash and cash equivalents - For purposes of reporting cash flows, the Company considers cash and due from banks and Federal Home Loan Bank overnight deposit to be cash equivalents. Cash and due from banks as of December 31, 2003 and
2002 includes $4,342,000 and $2,588,000, respectively which is subject to withdrawal and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank.



Securities available-for-sale - Available-for-sale securities consist of bonds, notes, debentures, and certain equity
securities. Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as a net amount in a separate component of shareholders equity until realized. Gains and losses on the sale of available-for-sale
securities are determined using the specific-identification method. Declines that are other than temporary in the fair value of individual available-for-sale securities below their cost result in write-downs of the individual securities to their
fair value. There were no write-downs for the years ended 2003, 2002 and 2001, respectively.



Securities held-to-maturity - Bonds, notes and debentures which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts recognized in
interest income using the interest method over the period to maturity. Declines that are other than temporary in the fair value of individual held-to-maturity securities below their cost result in write-downs of the individual securities to their
fair value. No write-downs have occurred for securities held-to-maturity.



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 statement of financial condition 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, at an additional cost of $3,033,337 each, the Bank and each of the other two banks own one-third of CHC. Headquartered in Concord, New Hampshire, CHC provides trust and investment services from more than a
dozen offices across New Hampshire, as well as one in Norwich, Vermont. 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 W.S. Griffith Inc., a wholly owned subsidiary of PM Holdings.



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##### Table of Contents

Notes to Consolidated Financial Statements



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



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, 2003 and 2002 the carrying amount of the Companys investment in CHC equalled the amount of the
Banks underlying equity in the net assets of CHC.



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



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



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



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



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.



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Notes to Consolidated Financial Statements



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



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.



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



Concentration of credit risk - Most of the Companys business
activity is with customers located within the state. There are no concentrations of credit to borrowers that have similar economic characteristics. The majority of the Companys loan portfolio is comprised of loans collateralized by real estate
located in the state of New Hampshire.



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



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



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.



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##### Table of Contents

Notes to Consolidated Financial Statements



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



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 and held-to-maturity securities - Fair values for available-for-sale and held-to-maturity 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.



Accrued interestreceivable- 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 Federal Home Loan Bank 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 Federal Home Loan Bank advances.



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



Junior subordinated debentures - Fair values of the guaranteed
preferred beneficial interests in junior subordinated debentures are based on the quoted market prices of the NHTB Capital Trust I Capital Securities.



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.



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##### Table of Contents

Notes to Consolidated Financial Statements



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



Stock based compensation - At December 31, 2003, the Company has four fixed stock-based
employee compensation plans which are described more fully in Note 11. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost has been recognized for its fixed stock option plans. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.



|                                                                                                                                            |  |      |           |      |   |           |  |   |          
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|For the years ended December 31,                                                                                                            |  | 2003 |           | 2002 |   | 2001     
|Net income, as reported                                                                                                                     |  | $    | 5,771,453 |      | $ | 4,299,988 |  | $ | 3,100,464
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |      | 652,078   |      |   | 324,178   |  |   |         
|                                                                                                                                            |  |      |           |      |   |           |  |   |          
|Pro forma net income                                                                                                                        |  | $    | 5,119,375 |      | $ | 3,975,810 |  | $ | 3,100,464
|                                                                                                                                            |  |      |           |      |   |           |  |   |          
|Earnings per share:                                                                                                                         |  |      |           |      |   |           |  |   |          
|Basic - as reported                                                                                                                         |  | $    | 2.92      |      | $ | 2.20      |  | $ | 1.60     
|Basic - pro forma                                                                                                                           |  | $    | 2.59      |      | $ | 2.04      |  | $ | 1.60     
|Diluted - as reported                                                                                                                       |  | $    | 2.84      |      | $ | 2.19      |  | $ | 1.59     
|Diluted - pro forma                                                                                                                         |  | $    | 2.52      |      | $ | 2.02      |  | $ | 1.59     



Recent Accounting
Pronouncements - In June 2002, the FASB issued SFAS No. 146 Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146). This Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this Statement did not
have any material impact on the Companys consolidated financial statements.



In October 2002, the FASB issued SFAS No. 147 Acquisitions of Certain Financial Institutions (SFAS No. 147), an Amendment of SFAS Nos. 72 and 144 and FASB Interpretation No. 9. SFAS No. 72
Accounting for Certain Acquisitions of Banking or Thrift Institutions and FASB Interpretation No. 9 Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, SFAS No. 147
removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with SFAS No. 141 Business Combinations and SFAS No. 142
Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of SFAS No. 147. In addition, SFAS No. 147 amends SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible
assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires for other long-lived assets that are held and used.



Paragraph 5 of SFAS No. 147, which relates to the application of the purchase
method of accounting, is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer -relationship
intangible assets are effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 are effective on October 1, 2002, with earlier application permitted.



35



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##### Table of Contents

Notes to Consolidated Financial Statements



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



In accordance with paragraph 9 of SFAS No. 147, the Company has reclassified, as of September 30,
2002, its recognized unidentifiable intangible asset related to branch acquisition(s). This asset was reclassified as goodwill (reclassified goodwill). The amount reclassified was $9,668,456, the carrying amount as of January 1, 2002. The
reclassified goodwill is being accounted for and reported prospectively as goodwill under SFAS No. 142, with no amortization expense. Accordingly, the consolidated financial statements for the year ended December 31, 2002 do not reflect amortization
in the amount of $753,384 that would have been recorded if SFAS No. 147 had not been issued.



In accordance with SFAS No. 147, the Company tested its reclassified goodwill and other goodwill for impairment as of January 1, 2002. The Company also tested its total goodwill for impairment as of December 31, 2002
and 2003. The Company determined that its goodwill as of January 1, 2002 and December 31, 2002 and 2003 was not impaired.



The Companys amortization expense related to reclassified goodwill was $769,421 and $732,324 for the years ended December 31, 2002 and 2001,
respectively.



The following is a reconciliation of reported
net income adjusted for adoption of SFAS No. 142 for years ended December 31:



|                                                 |  |      |           |      |   |           |  |   |          
|------------------------------------------------ |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                 |  | 2003 |           | 2002 |   | 2001     
|Reported net income                              |  | $    | 5,771,453 |      | $ | 4,299,988 |  | $ | 3,100,464
|Add back goodwill amortization net of tax effect |  |      |          |      |   |          |  |   | 499,354  
|                                                 |  |      |           |      |   |           |  |   |          
|Adjusted net income                              |  | $    | 5,771,453 |      | $ | 4,299,988 |  | $ | 3,599,818
|                                                 |  |      |           |      |   |           |  |   |          
|Basic earnings per share:                        |  |      |           |      |   |           |  |   |          
|Reported net income                              |  | $    | 2.92      |      | $ | 2.20      |  | $ | 1.60     
|Goodwill amortization                            |  |      |          |      |   |          |  |   | .26      
|                                                 |  |      |           |      |   |           |  |   |          
|Adjusted net income                              |  | $    | 2.92      |      | $ | 2.20      |  | $ | 1.86     
|                                                 |  |      |           |      |   |           |  |   |          
|Diluted earnings per share:                      |  |      |           |      |   |           |  |   |          
|Reported net income                              |  | $    | 2.84      |      | $ | 2.19      |  | $ | 1.59     
|Goodwill amortization                            |  |      |          |      |   |          |  |   | .26      
|                                                 |  |      |           |      |   |           |  |   |          
|Adjusted net income                              |  | $    | 2.84      |      | $ | 2.19      |  | $ | 1.85     
|                                                 |  |      |           |      |   |           |  |   |          



In November 2002, the
FASB issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 elaborates on the disclosure to be made
by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. FIN 45 clarifies that a guarantor is required to disclose (a) the nature of the guarantee; (b) the maximum potential amount of future payments under the guarantee; (c) the carrying amount
of the liability; (d) the nature and extent of any recourse provisions or available collateral that would enable the guarantor to recover the amounts paid under the guarantee.



The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted the initial recognition and initial measurement
provisions of FIN 45 effective as of January 1, 2003 and adopted the disclosure requirements effective as of December 31, 2002. The adoption of this interpretation did not have a material effect on the Companys financial position or results of
operations.



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Notes to Consolidated Financial Statements



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



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of SFAS Statement No. 123 (SFAS No. 148). SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The transition provisions and disclosure provisions are required for financial statements for fiscal years ending after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148
as of December 31, 2002 and currently uses the intrinsic value method of accounting for stock options.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities (SFAS No.
149), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement (a) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (b) clarifies when a derivative contains a financing component, (c)
amends the definition of an underlying to conform to language used in FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and (d)
amends certain other existing pronouncements. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003. There was no substantial impact on the Companys consolidated financial statements on
adoption of this Statement.



In May 2003, the FASB issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150). This Statement establishes standards for the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that certain financial instruments that were previously classified as equity must be classified as a liability. Most of the guidance in SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This Statement did not have any material effect on the Companys
consolidated financial statements.



In January 2003, the FASB
issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), in an effort to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial
statements the assets, liabilities and activities of another entity. In December 2003, the FASB revised Interpretation No. 46, also referred to as Interpretation 46 (R) (FIN 46(R)). The objective of this interpretation is not to restrict
the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, one company generally has included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. This interpretation changes that, by requiring a variable interest entity to be consolidated by a company only if that company is subject to a majority of the risk of loss from the variable interest
entitys activities or entitled to receive a majority of the entitys residual returns or both. The Company is required to apply FIN 46, as revised, to all entities subject to it no later than the end of the first reporting period ending
after March 15, 2004. However, prior to the required application of FIN 46, as revised, the Company shall apply FIN 46 or FIN 46 (R) to those entities that are considered to be special-purpose entities as of the end of the first fiscal year or
interim period ending after December 15, 2003. The adoption of this interpretation has not and is not expected to have a material effect on the Companys consolidated financial statements.



37



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Notes to Consolidated Financial Statements



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



In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers Disclosures
about Pensions and Other Postretirement Benefits - an amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106 (SFAS No. 132 (revised 2003)). This Statement revises employers disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, Employers Accounting for Pensions, SFAS No. 88, Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. This Statement retains the disclosure requirements contained
in SFAS No. 132, Employers Disclosures About Pensions and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original Statement 132 about assets, obligations, cash flows and net
periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. This Statement is effective for financial statements with fiscal years ending after December 15, 2003 and interim periods beginning after December
15, 2003. Adoption of this Statement did not have a material impact on the Companys consolidated financial statements.



Reclassifications - Certain amounts in the 2002 and 2001 consolidated financial statements have been reclassified to conform to the current
years presentation.



|NOTE 2. | Issuance of Capital Securities:
|------- | -------------------------------



In August, 1999, NHTB Capital Trust I (the Trust), a wholly owned subsidiary of the Company, sold capital securities to the public. The
capital securities sold consisted of 1,640,000 9.25% Capital Securities with a $10.00 liquidation amount for each capital security, for a total of $16,400,000. The capital securities are fully guaranteed by the Company. Each capital security pays a
cumulative quarterly distribution at the annual rate of 9.25% of the liquidation amounts. Each capital security represents an undivided preferred beneficial interest in the assets of the Trust. The Trust used the proceeds of the above sale and the
proceeds of the sale of its common securities to the Company to buy $16,907,300 of 9.25% subordinated debentures issued by the Company. These debentures mature on September 20, 2029. The subordinated debentures have the same financial terms as the
capital securities. The Company makes interest payments and other payments under the subordinated debentures to the Trust. The Companys obligations under the subordinated debentures are unsecured and rank junior to all of the Companys
other borrowings, except borrowings that by their terms rank equal or junior to the subordinated debentures. The Company guaranteed the payment by the Trust of the amounts that are required to be paid on the capital securities, to the extent that
the Trust has funds available for such payments.



The Company
may shorten the maturity date of the subordinated debentures. The Trust must redeem the capital securities when the subordinated debentures are paid on the maturity date, or following any earlier redemption of the subordinated debentures.



Costs relating to the sale of the capital certificates and the
issuance of the subordinated debentures totaled $906,710. Such costs are being amortized to other expense over 30 years.



|NOTE 3. | Acquisition of assets and assumption of liabilities of certain offices of New London Trust FSB:
|------- | -----------------------------------------------------------------------------------------------



During 2001, adjustments of $206,156 increased the unidentified intangible asset arising from the acquisition of assets and
assumption of liabilities in 1999 of certain offices of New London Trust FSB. The principal adjustments were a decrease in the fair value of loans acquired, severance plan payments and an adjustment of Automated Clearing House deposits.



|NOTE 4. | Securities:
|------- | -----------



Debt and equity securities have been classified in the consolidated statements of financial condition according to managements intent.



38



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##### Table of Contents

Notes to Consolidated Financial Statements



|NOTE 4. | Securities:(continued)
|------- | ----------------------



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



|                                     |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|------------------------------------ |  | -------------- | ----------- | ----------------------------------------------- | - | ------------------------------------------------ |  | ---------- | ------- |  | - | -----------
|                                     |  | Amortized Cost |             | Gains In Accumulated Other Comprehensive Income |   | Losses In Accumulated Other Comprehensive Income |  | Fair Value
|Available-for-sale:                  |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|December 31, 2003:                   |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|Bonds and notes -                    |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|U. S. Government, including agencies |  | $              | 39,059,281  |                                                 | $ | 291,004                                          |  | $          | 63,344  |  | $ | 39,286,941 
|Mortgage-backed securities           |  |                | 58,009,781  |                                                 |   | 151,236                                          |  |            | 540,819 |  |   | 57,620,198 
|Other bonds and debentures           |  |                | 23,333,810  |                                                 |   | 290,200                                          |  |            | 43,897  |  |   | 23,580,113 
|Equity securities                    |  |                | 484,386     |                                                 |   | 38,114                                           |  |            |        |  |   | 522,500    
|                                     |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|Total available-for-sale             |  | $              | 120,887,258 |                                                 | $ | 770,554                                          |  | $          | 648,060 |  | $ | 121,009,752
|                                     |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|December 31, 2002:                   |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|Bonds and notes -                    |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|U. S. Government, including agencies |  | $              | 23,902,013  |                                                 | $ | 245,608                                          |  | $          |        |  | $ | 24,147,621 
|Mortgage-backed securities           |  |                | 14,328,508  |                                                 |   | 176,809                                          |  |            |        |  |   | 14,505,317 
|Commercial paper                     |  |                | 16,972,695  |                                                 |   |                                                 |  |            | 87,116  |  |   | 16,885,579 
|Other bonds and debentures           |  |                | 24,532,796  |                                                 |   | 242,902                                          |  |            | 247,136 |  |   | 24,528,562 
|Equity securities                    |  |                | 484,386     |                                                 |   | 1,140                                            |  |            | 98,876  |  |   | 386,650    
|                                     |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|Total available-for-sale             |  | $              | 80,220,398  |                                                 | $ | 666,459                                          |  | $          | 433,128 |  | $ | 80,453,729 
|                                     |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|                                     |  |                |             |                                                
|                                     |  | Amortized Cost |             | Gross Unrecognized Holding Gains                |   | Gross Unrecognized Holding Losses                |  | Fair Value
|Held-to-maturity:                    |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|December 31, 2003:                   |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|Bonds and notes -                    |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|Other bonds and debentures           |  | $              | 3,001,145   |                                                 | $ | 73,200                                           |  | $          | 11,145  |  | $ | 3,063,200  
|                                     |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|Total held-to-maturity               |  | $              | 3,001,145   |                                                 | $ | 73,200                                           |  | $          | 11,145  |  | $ | 3,063,200  
|                                     |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|December 31, 2002:                   |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|Bonds and notes -                    |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|Other bonds and debentures           |  | $              | 3,002,767   |                                                 | $ | 97,400                                           |  | $          | 12,767  |  | $ | 3,087,400  
|                                     |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            
|Total held-to-maturity               |  | $              | 3,002,767   |                                                 | $ | 97,400                                           |  | $          | 12,767  |  | $ | 3,087,400  
|                                     |  |                |             |                                                 |   |                                                  |  |            |         |  |   |            



For the years ended
December 31, 2003, 2002 and 2001, proceeds from sales of debt securities available-for-sale amounted to $36,241,623, $28,873,099 and $7,662,948, respectively. Gross gains of $265,794, $1,075,473 and $76,863, and gross losses of $55, $929,000 and $0,
were realized during 2003, 2002 and 2001, respectively, on sales of available-for-sale debt securities. The tax provision applicable to these net realized gains and losses amounted to $105,259, $58,018 and $30,446, respectively. There were no sales
of available-for-sale equity securities during 2003, 2002 and 2001.



39



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##### Table of Contents

Notes to Consolidated Financial Statements



|NOTE 4. | Securities:(continued)
|------- | ----------------------



Maturities of debt securities, excluding mortgage-backed securities, classified as available-for-sale
are as follows as of December 31, 2003:



|                                             |  |            |           
|-------------------------------------------- |  | ---------- | ----------
|                                             |  | Fair Value
|U.S. Government, including agencies          |  | $          | 5,222     
|Other bonds and debentures                   |  |            | 1,000,000 
|                                             |  |            |           
|Total due in less than one year              |  | $          | 1,005,222 
|                                             |  |            |           
|U.S. Government, including agencies          |  | $          | 39,281,719
|Other bonds and debentures                   |  |            | 13,314,249
|                                             |  |            |           
|Total due after one year through five years  |  | $          | 52,595,968
|                                             |  |            |           
|Other bonds and debentures                   |  | $          | 1,942,729 
|                                             |  |            |           
|Total due after five years through ten years |  | $          | 1,942,729 
|                                             |  |            |           
|Other bonds and debentures                   |  | $          | 7,323,135 
|                                             |  |            |           
|Total due after ten years                    |  | $          | 7,323,135 
|                                             |  |            |           



Maturities of debt
securities classified as held-to-maturity are as follows as of December 31, 2003:



|                                |  |                |           |            |   |          
|------------------------------- |  | -------------- | --------- | ---------- | - | ---------
|                                |  | Amortized Cost |           | Fair Value
|Other bonds and debentures      |  |                |           |            |   |          
|Total due in less than one year |  | $              | 1,001,145 |            | $ | 990,000  
|Total due after ten years       |  |                | 2,000,000 |            |   | 2,073,200
|                                |  |                |           |            |   |          
|                                |  | $              | 3,001,145 |            | $ | 3,063,200
|                                |  |                |           |            |   |          



There were no
securities of issuers which exceeded 10% of shareholders equity as of December 31, 2003.



Securities, carried at $94,395,722 and $32,441,923 were pledged to secure public deposits, the treasury, tax and loan account and securities sold under agreements to repurchase as of December 31, 2003 and 2002,
respectively.



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, 2003:



|                                      |  |                     |            |                     |   |            |  |                   |         |            |   |                   |  |   |            |  |   |        
|------------------------------------- |  | ------------------- | ---------- | ------------------- | - | ---------- |  | ----------------- | ------- | ---------- | - | ----------------- |  | - | ---------- |  | - | -------
|                                      |  | Less than 12 Months |            | 12 Months or Longer |   | Total     
|                                      |  | Fair Value          |            | Unrealized Losses   |   | Fair Value |  | Unrealized Losses |         | Fair Value |   | Unrealized Losses
|Bonds and notes - U.S.                |  |                     |            |                     |   |            |  |                   |         |            |   |                   |  |   |            |  |   |        
|Government, including agencies        |  | $                   | 7,912,813  |                     | $ | 63,344     |  | $                 |        |            | $ |                  |  | $ | 7,912,813  |  | $ | 63,344 
|Mortgage-backed securities            |  |                     | 42,108,046 |                     |   | 540,819    |  |                   |        |            |   |                  |  |   | 42,108,046 |  |   | 540,819
|Other bonds and debentures            |  |                     | 2,355,312  |                     |   | 43,897     |  |                   | 990,000 |            |   | 11,145            |  |   | 3,345,312  |  |   | 55,042 
|                                      |  |                     |            |                     |   |            |  |                   |         |            |   |                   |  |   |            |  |   |        
|Total temporarily impaired securities |  | $                   | 52,376,171 |                     | $ | 648,060    |  | $                 | 990,000 |            | $ | 11,145            |  | $ | 53,366,171 |  | $ | 659,205
|                                      |  |                     |            |                     |   |            |  |                   |         |            |   |                   |  |   |            |  |   |        



The investments in the
Companys investment portfolio that are temporarily impaired as of December 31, 2003 consist of debt securities issued by U.S. government corporations and agencies and corporate debt with strong credit ratings. The unrealized losses in the
above table are attributable to changes in market interest rates. Company management does not intend to sell these securities in the near term, and due to the securities relative short duration, anticipates that the unrealized losses that
currently exist will be reduced going forward.



40



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##### Table of Contents

Notes to Consolidated Financial Statements



|NOTE 5. | Loans receivable:
|------- | -----------------



Loans receivable consisted of the following as of December 31:



|                                     |  |      |             |   |      |   |             |  
|------------------------------------ |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                     |  | 2003 |             |   | 2002 |  
|Real estate loans                    |  |      |             |   |      |   |             |  
|Conventional                         |  | $    | 204,282,408 |   |      | $ | 185,627,039 |  
|Construction                         |  |      | 15,241,362  |   |      |   | 14,109,848  |  
|Commercial                           |  |      | 67,326,286  |   |      |   | 70,800,956  |  
|                                     |  |      |             |   |      |   |             |  
|                                     |  |      | 286,850,056 |   |      |   | 270,537,843 |  
|Consumer loans                       |  |      | 43,880,983  |   |      |   | 32,255,636  |  
|Commercial and municipal loans       |  |      | 16,013,413  |   |      |   | 16,987,979  |  
|Unamortized adjustment to fair value |  |      | 72,441      |   |      |   | 84,514      |  
|Lease financing receivable           |  |      | 269,725     |   |      |   |            |  
|                                     |  |      |             |   |      |   |             |  
|Total loans                          |  |      | 347,086,618 |   |      |   | 319,865,972 |  
|Allowance for loan losses            |  |      | (3,898,650  | ) |      |   | (3,875,708  | )
|Deferred loan origination costs, net |  |      | 1,384,747   |   |      |   | 1,153,408   |  
|                                     |  |      |             |   |      |   |             |  
|Loans receivable, net                |  | $    | 344,572,715 |   |      | $ | 317,143,672 |  
|                                     |  |      |             |   |      |   |             |  



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



|                                                                     |  |      |           |   |      |   |           |      |  |   |           |  
|-------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                     |  | 2003 |           |   | 2002 |   |           | 2001 | 
|BALANCE, beginning of year                                           |  | $    | 3,875,708 |   |      | $ | 4,405,385 |      |  | $ | 4,432,854 |  
|Charged-off loans                                                    |  |      | (86,642   | ) |      |   | (83,213   | )    |  |   | (201,456  | )
|Writedowns of nonperforming loans transferred to loans held-for-sale |  |      |          |   |      |   | (604,686  | )    |  |   |          |  
|Recoveries                                                           |  |      | 9,588     |   |      |   | 38,222    |      |  |   | 83,987    |  
|Provision for loan losses charged to income                          |  |      | 99,996    |   |      |   | 120,000   |      |  |   | 90,000    |  
|                                                                     |  |      |           |   |      |   |           |      |  |   |           |  
|BALANCE, end of year                                                 |  | $    | 3,898,650 |   |      | $ | 3,875,708 |      |  | $ | 4,405,385 |  
|                                                                     |  |      |           |   |      |   |           |      |  |   |           |  



Certain directors and
executive officers of the Company and companies in which they have significant ownership interest were customers of the Bank during 2003. Total loans to such persons and their companies amounted to $1,128,082 as of December 31, 2003. During 2003
principal advances of $379,510 were made and principal payments totaled $166,824.



The following table sets forth information regarding nonaccrual loans and accruing loans 90 days or more overdue as of December 31:



|                                                                                    |  |      |           |      |   |        
|----------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | -------
|                                                                                    |  | 2003 |           | 2002
|Nonaccrual loans                                                                    |  | $    | 1,157,957 |      | $ | 664,092
|                                                                                    |  |      |           |      |   |        
|Accruing loans which are 90 days or more overdue                                    |  | $    |          |      | $ |       
|                                                                                    |  |      |           |      |   |        
|                                                                                    |  |     
|Impaired loans as of December 31,                                                   |  | 2003 |           | 2002
|Average recorded investment in impaired loans                                       |  | $    | 425,009   |      | $ | 770,979
|Recorded investment in impaired loans at December 31                                |  | $    | 777,632   |      | $ | 105,354
|Portion of valuation allowance allocated to impaired loans                          |  | $    | 116,645   |      | $ | 28,313 
|Net balance of impaired loans                                                       |  | $    | 660,987   |      | $ | 77,041 
|Interest income recognized on impaired loans                                        |  | $    | 22,770    |      | $ | 68,916 
|Interest income on impaired loans on cash basis                                     |  | $    | 8,945     |      | $ | 68,916 
|Recorded investment in impaired loans with a related allowance for credit losses    |  | $    | 777,632   |      | $ | 105,354
|Recorded investment in impaired loans without a related allowance for credit losses |  | $    |          |      | $ |       



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Notes to Consolidated Financial Statements



|NOTE 5. | 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:



|                    |  |      |             |      |   |            
|------------------- |  | ---- | ----------- | ---- | - | -----------
|                    |  | 2003 |             | 2002
|Sold loans          |  | $    | 289,825,192 |      | $ | 260,774,730
|                    |  |      |             |      |   |            
|Participation loans |  | $    | 7,672,024   |      | $ | 7,704,223  
|                    |  |      |             |      |   |            



The balance of
capitalized servicing rights, net of valuation allowances, included in other assets at December 31, 2003 and 2002 was $2,334,473 and $1,673,491, respectively.



Servicing assets of $1,837,297 and $1,141,341 were capitalized in 2003 and 2002, respectively. Amortization of servicing assets was $1,293,748 in 2003,
$802,540 in 2002 and $599,547 in 2001.



The fair value of
servicing assets was $2,945,009 and $2,058,682 as of December 31, 2003 and 2002, respectively. Following is an analysis of the aggregate changes in the valuation allowances for servicing assets:



|                           |  |      |          |   |      |   |        
|-------------------------- |  | ---- | -------- | - | ---- | - | -------
|                           |  | 2003 |          |   | 2002
|Balance, beginning of year |  | $    | 178,548  |   |      | $ | 110,218
|(Decrease) increase        |  |      | (117,433 | ) |      |   | 68,330 
|                           |  |      |          |   |      |   |        
|Balance, end of year       |  | $    | 61,115   |   |      | $ | 178,548
|                           |  |      |          |   |      |   |        



|NOTE 6. | Bank premises and equipment:
|------- | ----------------------------



Bank premises and equipment are shown on the consolidated statements of financial condition at cost, net of accumulated depreciation, as follows as of
December 31:



|                                  |  |      |            |      |   |           
|--------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                  |  | 2003 |            | 2002
|Land                              |  | $    | 1,221,249  |      | $ | 1,128,768 
|Buildings and premises            |  |      | 9,702,994  |      |   | 9,142,924 
|Furniture, fixtures and equipment |  |      | 4,709,441  |      |   | 7,876,732 
|                                  |  |      |            |      |   |           
|                                  |  |      | 15,633,684 |      |   | 18,148,424
|Less - Accumulated depreciation   |  |      | 6,327,856  |      |   | 8,762,806 
|                                  |  |      |            |      |   |           
|                                  |  | $    | 9,305,828  |      | $ | 9,385,618 
|                                  |  |      |            |      |   |           



Depreciation expense amounted to
$949,931, $976,746 and $919,252 for the years ending December 31, 2003, 2002 and 2001, respectively.



|NOTE 7. | Deposits:
|------- | ---------



The following is a summary of maturities of time deposits as of December 31, 2003:



|           |  |   |            
|---------- |  | - | -----------
|2004       |  | $ | 87,019,589 
|2005       |  |   | 18,635,275 
|2006       |  |   | 3,555,846  
|2007       |  |   | 823,757    
|2008       |  |   | 1,342,967  
|Thereafter |  |   | 493        
|           |  |   |            
|           |  | $ | 111,377,927
|           |  |   |            



42



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##### Table of Contents

Notes to Consolidated Financial Statements



|NOTE 7. | Deposits:(continued)
|------- | --------------------



Deposits from related parties held by the Bank as of December 31, 2003 and 2002 amounted to
$3,786,673 and $4,334,577, respectively.



As of December 31,
2003 and 2002, time deposits include $29,813,003 and $31,620,171, respectively of certificates of deposit with a minimum balance of $100,000.



|NOTE 8. | Federal Home Loan Bank Advances:
|------- | --------------------------------



Advances consist of funds borrowed from the Federal Home Loan Bank of Boston (FHLB).



As of December 31, 2003, FHLB advances total $22,000,000 and mature within six months. At December 31, 2003 the interest
rates on FHLB advances ranged from 1.18% to 1.26%. The weighted average interest rate is 1.22%.



Advances are secured by the Companys stock in that institution, its residential real estate mortgage portfolio and the remaining U.S. government and
agencies obligations not otherwise pledged.



|NOTE 9. | Securities sold under agreements to repurchase:
|------- | -----------------------------------------------



The securities sold under agreements to repurchase as of December 31, 2003 and 2002 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 Fleet Bank 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 10. | Income taxes:
|-------- | -------------



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



|                         |  |      |           |      |   |           |  |   |          
|------------------------ |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                         |  | 2003 |           | 2002 |   | 2001     
|Current tax expense      |  | $    | 2,459,668 |      | $ | 1,663,388 |  | $ | 1,289,176
|Deferred tax expense     |  |      | 1,046,854 |      |   | 811,907   |  |   | 387,196  
|                         |  |      |           |      |   |           |  |   |          
|Total income tax expense |  | $    | 3,506,522 |      | $ | 2,475,295 |  | $ | 1,676,372
|                         |  |      |           |      |   |           |  |   |          



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



|                                           |  |      |   |  |      |   |  |      |  
|------------------------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                                           |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Federal income tax at statutory rate       |  | 34.0 | % |  | 34.0 | % |  | 34.0 | %
|Increase (decrease) in tax resulting from: |  |      |   |  |      |   |  |      |  
|Tax-exempt income                          |  | (.1  | ) |  | (.1  | ) |  | (.7  | )
|Dividends received deduction               |  | (.9  | ) |  | (1.1 | ) |  | (1.5 | )
|Goodwill amortization                      |  |     |   |  |     |   |  | 1.8  |  
|Overaccrual reversals                      |  |     |   |  |     |   |  | (2.2 | )
|Other, net                                 |  | 4.8  |   |  | 3.7  |   |  | 3.7  |  
|                                           |  |      |   |  |      |   |  |      |  
|Effective tax rates                        |  | 37.8 | % |  | 36.5 | % |  | 35.1 | %
|                                           |  |      |   |  |      |   |  |      |  



43



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Notes to Consolidated Financial Statements



|NOTE 10. | Income taxes:(continued)
|-------- | ------------------------



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



|                                                                    |  |      |            |   |      |   |            |  
|------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                    |  | 2003 |            |   | 2002 |  
|Deferred tax assets:                                                |  |      |            |   |      |   |            |  
|Interest on non-performing loans                                    |  | $    | 21,255     |   |      | $ | 8,246      |  
|Allowance for loan losses                                           |  |      | 1,148,977  |   |      |   | 1,096,380  |  
|Deferred compensation                                               |  |      | 47,686     |   |      |   | 41,749     |  
|Deferred retirement expense                                         |  |      | 147,975    |   |      |   | 131,432    |  
|Accrued directors fees                                              |  |      | 55,021     |   |      |   | 53,418     |  
|Other                                                               |  |      | 10,103     |   |      |   | 7,079      |  
|Net unrealized holding loss on equity securities available-for-sale |  |      |           |   |      |   | 38,713     |  
|                                                                    |  |      |            |   |      |   |            |  
|Gross deferred tax assets                                           |  |      | 1,431,017  |   |      |   | 1,377,017  |  
|Valuation allowance                                                 |  |      |           |   |      |   | (38,713    | )
|                                                                    |  |      |            |   |      |   |            |  
|                                                                    |  |      | 1,431,017  |   |      |   | 1,338,304  |  
|                                                                    |  |      |            |   |      |   |            |  
|Deferred tax liabilities:                                           |  |      |            |   |      |   |            |  
|Deferred loan costs, net of fees                                    |  |      | 524,996    |   |      |   | 430,105    |  
|Prepaid pension                                                     |  |      | 986,839    |   |      |   | 562,226    |  
|Accelerated depreciation                                            |  |      | 688,181    |   |      |   | 627,193    |  
|Net unrealized holding gain on securities available-for-sale        |  |      | 48,520     |   |      |   | 131,136    |  
|Purchased goodwill                                                  |  |      | 592,144    |   |      |   | 296,072    |  
|Mortgage servicing rights                                           |  |      | 925,873    |   |      |   | 662,870    |  
|                                                                    |  |      |            |   |      |   |            |  
|Gross deferred tax liabilities                                      |  |      | 3,766,553  |   |      |   | 2,709,602  |  
|                                                                    |  |      |            |   |      |   |            |  
|Net deferred tax liabilities                                        |  | $    | (2,335,536 | ) |      | $ | (1,371,298 | )
|                                                                    |  |      |            |   |      |   |            |  



As of December 31,
2003, the Company had no operating loss and tax credit carryover for tax purposes.



|NOTE 11. | Stock compensation plans:
|-------- | -------------------------



At December 31, 2003, the Company has four fixed stock-based employee compensation plans. Under the plans, amounts equal to 10% of the issued and
outstanding common stock of the Company were reserved for future issuance. As of December 31, 2003 all such options had been 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.



The fair value of each option granted in 2003 and 2002 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:



|                                 |  |                |  |              
|-------------------------------- |  | -------------- |  | -------------
|                                 |  | 2003           |  | 2002         
|Weighted risk-free interest rate |  | 4.36%          |  | 5.13%        
|Weighted expected life           |  | 10 years       |  | 10 years     
|Weighted expected volatility     |  | 22.3%          |  | 19.3%        
|Weighted expected dividend yield |  | 2.78% per year |  | 3.5% per year



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



44



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Notes to Consolidated Financial Statements



|NOTE 11. | Stock compensation plans:(continued)
|-------- | ------------------------------------



A summary of the status of the Companys fixed stock option plans as of December 31, 2003, 2002
and 2001 and changes during the years ending on those dates is presented below:



|                                                               |  |        |         |      |                              |      |        |  |   |                              |   |        |   |       |                              |         |   |  |   |      
|-------------------------------------------------------------- |  | ------ | ------- | ---- | ---------------------------- | ---- | ------ |  | - | ---------------------------- | - | ------ | - | ----- | ---------------------------- | ------- | - |  | - | -----
|                                                               |  | 2003   |         | 2002 |                              | 2001
|                                                               |  | Shares |         |      | WeightedAverageExercisePrice |      | Shares |  |   | WeightedAverageExercisePrice |   | Shares |   |       | WeightedAverageExercisePrice
|Outstanding at beginning of year                               |  |        | 205,350 |      |                              | $    | 17.47  |  |   | 140,800                      |   |        | $ | 16.41 |                              | 173,005 |   |  | $ | 15.70
|Granted                                                        |  |        | 109,000 |      |                              |      | 26.10  |  |   | 100,000                      |   |        |   | 18.25 |                              |        |   |  |   |      
|Exercised                                                      |  |        | (52,950 | )    |                              |      | 18.30  |  |   | (21,950                      | ) |        |   | 13.44 |                              | (23,355 | ) |  |   | 10.82
|Forfeited                                                      |  |        |        |      |                              |      |       |  |   | (13,500                      | ) |        |   | 18.82 |                              | (8,850  | ) |  |   | 17.22
|                                                               |  |        |         |      |                              |      |        |  |   |                              |   |        |   |       |                              |         |   |  |   |      
|Outstanding at end of year                                     |  |        | 261,400 |      |                              | $    | 20.90  |  |   | 205,350                      |   |        | $ | 17.47 |                              | 140,800 |   |  | $ | 16.41
|                                                               |  |        |         |      |                              |      |        |  |   |                              |   |        |   |       |                              |         |   |  |   |      
|Options exercisable at year-end                                |  |        | 261,400 |      |                              |      |        |  |   | 205,350                      |   |        |   |       |                              | 140,800 |   |  |   |      
|Weighted-average fair value of options granted during the year |  | $      | 6.58    |      |                              |      |        |  | $ | 3.90                         |   |        |   |       |                              | N/A     |   |  |   |      



The following table
summarizes information about fixed stock options outstanding as of December 31, 2003:



|                                    |  |                                   |  |                           
|----------------------------------- |  | --------------------------------- |  | --------------------------
|Options Outstanding and Exercisable
|Exercise Prices                     |  | Number Outstanding as of 12/31/03 |  | Remaining Contractual Life
|$10.125                             |  | 7,700                             |  | 2.42 years                
|12.50                               |  | 10,500                            |  | 2.92 years                
|14.75                               |  | 32,600                            |  | 5.50 years                
|18.25                               |  | 68,500                            |  | 8.50 years                
|21.00                               |  | 36,500                            |  | 4.00 years                
|26.10                               |  | 105,600                           |  | 9.75 years                
|                                    |  |                                   |  |                           
|20.90                               |  | 261,400                           |  | 7.60 years                
|                                    |  |                                   |  |                           



|NOTE 12. | 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.



The plan was amended in 2001, effective December 1, 2000, to provide certain benefits on the early retirement of certain employees. In connection with the
amendment, in 2000 net periodic pension cost was erroneously charged with $262,107. Subsequent to the date the Company issued its consolidated financial statements for the year ended December 31, 2000, the Company received supplemental information
stating that the actuarial firms original report was in error in that the $262,107 charge to expense for early retirement benefits should have been zero. In 2001 the error was corrected by reducing net periodic pension cost by $262,107.



45



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##### Table of Contents

Notes to Consolidated Financial Statements



|NOTE 12. | Employee benefit plans:(continued)
|-------- | ----------------------------------



The following tables set forth information about the plan as of December 31 and the years then ended:



|                                                         |  |      |           |   |      |   |            |  
|-------------------------------------------------------- |  | ---- | --------- | - | ---- | - | ---------- | -
|                                                         |  | 2003 |           |   | 2002 |  
|Change in projected benefit obligation:                  |  |      |           |   |      |   |            |  
|Benefit obligation at beginning of year                  |  | $    | 3,998,524 |   |      | $ | 3,705,620  |  
|Service cost                                             |  |      | 314,033   |   |      |   | 216,417    |  
|Interest cost                                            |  |      | 244,762   |   |      |   | 274,849    |  
|Liability (gain) loss                                    |  |      | (87,600   | ) |      |   | 186,921    |  
|Benefits paid                                            |  |      | (112,209  | ) |      |   | (531,493   | )
|Plan amendments                                          |  |      |          |   |      |   | 146,210    |  
|                                                         |  |      |           |   |      |   |            |  
|Benefit obligation at end of year                        |  |      | 4,357,510 |   |      |   | 3,998,524  |  
|                                                         |  |      |           |   |      |   |            |  
|Change in plan assets:                                   |  |      |           |   |      |   |            |  
|Plan assets at estimated fair value at beginning of year |  |      | 2,953,827 |   |      |   | 2,531,653  |  
|Actual return on plan assets                             |  |      | 770,102   |   |      |   | (210,255   | )
|Employer contribution                                    |  |      | 1,445,121 |   |      |   | 1,163,922  |  
|Benefits paid                                            |  |      | (112,209  | ) |      |   | (531,493   | )
|                                                         |  |      |           |   |      |   |            |  
|Fair value of plan assets at end of year                 |  |      | 5,056,841 |   |      |   | 2,953,827  |  
|                                                         |  |      |           |   |      |   |            |  
|Funded status                                            |  |      | 699,331   |   |      |   | (1,044,697 | )
|Unrecognized net loss                                    |  |      | 1,617,519 |   |      |   | 2,280,225  |  
|Unrecognized prior service cost                          |  |      | 174,477   |   |      |   | 183,875    |  
|                                                         |  |      |           |   |      |   |            |  
|Prepaid pension cost                                     |  | $    | 2,491,327 |   |      | $ | 1,419,403  |  
|                                                         |  |      |           |   |      |   |            |  



The discount rate and
rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 6.5% and 3.5% for 2003, 7.0% and 3.5% for 2002 and 7.5% and 3.5% for 2001, respectively. The expected long-term
rate of return on assets was 8% for 2003, 8% for 2002 and 9% for 2001.



Lake Sunapee 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 Lake Sunapee 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.



Components of net
periodic cost (benefit):



|                                                |  |      |          |   |      |   |          |      |  |   |          |  
|----------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                |  | 2003 |          |   | 2002 |   |          | 2001 | 
|Service cost                                    |  | $    | 314,033  |   |      | $ | 216,417  |      |  | $ | 170,959  |  
|Interest cost on benefit obligation             |  |      | 244,762  |   |      |   | 274,849  |      |  |   | 236,478  |  
|Expected return on assets                       |  |      | (289,033 | ) |      |   | (274,469 | )    |  |   | (234,372 | )
|Amortization of unrecognized prior service cost |  |      | 9,398    |   |      |   | 9,398    |      |  |   | (164     | )
|Amortization of unrecognized net loss           |  |      | 94,037   |   |      |   | 76,594   |      |  |   | 48,507   |  
|Correction of early retirement plan charge      |  |      |         |   |      |   |         |      |  |   | (262,107 | )
|                                                |  |      |          |   |      |   |          |      |  |   |          |  
|Net periodic cost (benefit)                     |  | $    | 373,197  |   |      | $ | 302,789  |      |  | $ | (40,699  | )
|                                                |  |      |          |   |      |   |          |      |  |   |          |  



The accumulated
benefit obligation for the defined benefit pension plan was $3,477,702 and $2,947,594 at December 31, 2003 and 2002, respectively.



15,000 and 7,500 shares of the Company were included in plan assets as of December 31, 2003 and 2002, respectively. The fair value of the shares on those
dates was $507,000 (10% of total plan assets) and $139,500 (4.7% of total plan assets), respectively. In addition, 4,700 Capital Securities issued by NHTB Capital Trust I, a wholly owned subsidiary of the Company, were included in plan assets as of
December 31, 2003 and 2002 with fair values of $48,645 (.96% of total plan assets) and $47,705 (1.6% of total plan assets), respectively.



46



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##### Table of Contents

Notes to Consolidated Financial Statements



|NOTE 12. | Employee benefit plans:(continued)
|-------- | ----------------------------------



Plan Assets



The Companys pension plan weighted-average asset allocations by asset category are as follows:



|                                        |  |                             |           |         |       |   |      |   |           |  |       |  
|--------------------------------------- |  | --------------------------- | --------- | ------- | ----- | - | ---- | - | --------- |  | ----- | -
|                                        |  | Plan Assets at December 31, |          
|Asset Category                          |  | 2003                        |           | Percent |       |   | 2002 |   | Percent   | 
|Equity securities                       |  | $                           | 3,315,844 |         | 65.6  | % |      | $ | 1,516,861 |  | 51.3  | %
|Debt securities                         |  |                             | 465,102   |         | 9.2   |   |      |   | 347,082   |  | 11.8  |  
|U.S. Government and agencies securities |  |                             | 1,189,894 |         | 23.5  |   |      |   | 791,855   |  | 26.8  |  
|Money Market                            |  |                             | 86,001    |         | 1.7   |   |      |   | 298,029   |  | 10.1  |  
|                                        |  |                             |           |         |       |   |      |   |           |  |       |  
|Total                                   |  | $                           | 5,056,841 |         | 100.0 | % |      | $ | 2,953,827 |  | 100.0 | %
|                                        |  |                             |           |         |       |   |      |   |           |  |       |  



The investment policy
for the defined benefit pension plan sponsored by Lake Sunapee 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 35% and 55% 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 2004 plan year and
for the prior two years follows.



|                                      |  |                                                  |   |  |      |   |  |      |  
|------------------------------------- |  | ------------------------------------------------ | - |  | ---- | - |  | ---- | -
|                                      |  | Target Percentage of Plan Assets at December 31, |  
|Asset Category                        |  | 2004                                             |   |  | 2003 |   |  | 2002 |  
|Equity securities                     |  | 40-65                                            | % |  | 61   | % |  | 40   | %
|Debt securities                       |  | 10-35                                            | % |  | 13   | % |  | 32   | %
|U.S. Government and agency securities |  | 15-25                                            | % |  | 23   | % |  | 24   | %
|Other                                 |  | 0-10                                             | % |  | 3    | % |  | 4    | %
|                                      |  |                                                  |   |  |      |   |  |      |  
|                                      |  |                                                  |   |  | 100  | % |  | 100  | %
|                                      |  |                                                  |   |  |      |   |  |      |  



The Bank expects to
contribute $500,000 to the defined benefit pension plan in 2004.



Profit
Sharing - Stock Ownership 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 2003, 2002 and 2001, participating employees contributions totaled $295,090, $255,160 and $254,808, respectively. The Bank made a matching
contribution of $40,000 for 2003, $20,000 for 2002 and $10,000 for 2001. 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.



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



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



47



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Notes to Consolidated Financial Statements



|NOTE 13. | 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.



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, 2003 and 2002, the maximum potential amount of the Companys obligation
was $2,005,230 and $1,176,528, 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.



The Company has issued commitments to extend credit, letters of credit and
has approved lines of credit loans to specific individuals and companies. The financial instruments outstanding whose contract amounts represent credit risk are as follows as of December 31:



|                             |  |      |            |      |   |           
|---------------------------- |  | ---- | ---------- | ---- | - | ----------
|                             |  | 2003 |            | 2002
|Commitments to extend credit |  | $    | 21,524,995 |      | $ | 24,790,294
|                             |  |      |            |      |   |           
|Letters of credit            |  | $    | 2,005,230  |      | $ | 1,176,528 
|                             |  |      |            |      |   |           
|Lines of credit              |  | $    | 31,669,000 |      | $ | 32,387,519
|                             |  |      |            |      |   |           



As of December 31,
2003, the Company was obligated under non-cancelable operating leases for bank premises and equipment expiring between June 30, 2004 and September 30, 2012. The total minimum rental due in future periods under these existing agreements is as follows
as of December 31, 2003:



|                             |  |   |        
|---------------------------- |  | - | -------
|2004                         |  | $ | 221,260
|2005                         |  |   | 159,414
|2006                         |  |   | 120,343
|2007                         |  |   | 79,046 
|2008                         |  |   | 22,574 
|Years thereafter             |  |   | 65,529 
|                             |  |   |        
|Total minimum lease payments |  | $ | 668,166
|                             |  |   |        



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 $222,094, $244,241 and $218,989 for the years ended
December 31, 2003, 2002 and 2001, respectively.



|NOTE 14. | 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, 2003.



48



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Notes to Consolidated Financial Statements



|NOTE 14. | Shareholders equity:(continued)
|-------- | --------------------------------



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, 2003 includes $2,069,898 for which federal and state income taxes have not been provided. If the Bank no longer qualifies as a bank as defined in
certain provisions of the Internal Revenue Code, this amount will be subject to recapture in taxable income ratably over six (6) years, subject to a combined federal and state tax rate of approximately 39%.



|NOTE 15. | 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, 2003                                    |  |                    |           |                      |           |                  |   |     
|Basic EPS                                                       |  |                    |           |                      |           |                  |   |     
|Net income and income available to common stockholders          |  | $                  | 5,771,453 |                      | 1,978,813 |                  | $ | 2.92
|Effect of dilutive securities, options                          |  |                    |           |                      | 54,613    |                  |   |     
|                                                                |  |                    |           |                      |           |                  |   |     
|Diluted EPS                                                     |  |                    |           |                      |           |                  |   |     
|Income available to common stockholders and assumed conversions |  | $                  | 5,771,453 |                      | 2,033,426 |                  | $ | 2.84
|                                                                |  |                    |           |                      |           |                  |   |     
|Year ended December 31, 2002                                    |  |                    |           |                      |           |                  |   |     
|Basic EPS                                                       |  |                    |           |                      |           |                  |   |     
|Net income and income available to common stockholders          |  | $                  | 4,299,988 |                      | 1,950,616 |                  | $ | 2.20
|Effect of dilutive securities, options                          |  |                    |           |                      | 15,429    |                  |   |     
|                                                                |  |                    |           |                      |           |                  |   |     
|Diluted EPS                                                     |  |                    |           |                      |           |                  |   |     
|Income available to common stockholders and assumed conversions |  | $                  | 4,299,988 |                      | 1,966,045 |                  | $ | 2.19
|                                                                |  |                    |           |                      |           |                  |   |     
|Year ended December 31, 2001                                    |  |                    |           |                      |           |                  |   |     
|Basic EPS                                                       |  |                    |           |                      |           |                  |   |     
|Net income and income available to common stockholders          |  | $                  | 3,100,464 |                      | 1,937,228 |                  | $ | 1.60
|Effect of dilutive securities, options                          |  |                    |           |                      | 8,852     |                  |   |     
|                                                                |  |                    |           |                      |           |                  |   |     
|Diluted EPS                                                     |  |                    |           |                      |           |                  |   |     
|Income available to common stockholders and assumed conversions |  | $                  | 3,100,464 |                      | 1,946,080 |                  | $ | 1.59
|                                                                |  |                    |           |                      |           |                  |   |     



|NOTE 16. | Regulatory matters:
|-------- | -------------------



The Company and the Bank are subject to various capital requirements administered by their primary federal regulator, the Office of Thrift Supervision
(OTS). Failure to meet minimum regulatory requirements can initiate mandatory, and possible additional discretionary actions by regulators, that if undertaken, could have a direct material effect on the Companys and the 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.



49



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Notes to Consolidated Financial Statements



|NOTE 16. | Regulatory matters:(continued)
|-------- | ------------------------------



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 and Tier 1 capital to risk-weighted assets (as defined in the regulations), Tier 1 capital to adjusted total assets (as defined) and tangible capital to adjusted total
assets (as defined).



Management believes, as of December 31,
2003, that the Bank meets all capital requirements to which it is subject.



As of December 31, 2003, the most recent notification from the Office of Thrift Supervision categorized the Bank as well capitalized under the regulatory frame work for prompt corrective action. To be categorized as
well capitalized 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 CapitalAdequacyPurposes |   |        | To Be Well Capitalized Under Prompt Corrective Action Provisions |       
|                                           |  | Amount                        |        | Ratio |                             |   | Amount |                                                                  | Ratio  |  |      | Amount |  | Ratio |       
|                                           |  | (Dollar amounts in thousands) |       
|As of December 31, 2003:                   |  |                               |        |       |                             |   |        |                                                                  |        |  |      |        |  |       |        |  |       |  
|Total Capital (to Risk Weighted Assets)    |  | $                             | 38,751 |       | 11.88                       | % |        | $                                                                | 26,093 |  | >8.0 | %      |  | $     | 32,617 |  | >10.0 | %
|Core Capital (to Adjusted Tangible Assets) |  |                               | 38,777 |       | 7.56                        |   |        |                                                                  | 20,505 |  | >4.0 |        |  |       | 25,631 |  | >5.0  |  
|Tangible Capital (to Tangible Assets)      |  |                               | 38,777 |       | 7.56                        |   |        |                                                                  | 7,689  |  | >1.5 |        |  |       | N/A    |  | N/A   |  
|Tier 1 Capital (to Risk Weighted Assets)   |  |                               | 38,777 |       | 11.89                       |   |        |                                                                  | N/A    |  | N/A  |        |  |       | 19,570 |  | >6.0  |  
|                                           |  |                               |        |       |                             |  
|As of December 31, 2002:                   |  |                               |        |       |                             |   |        |                                                                  |        |  |      |        |  |       |        |  |       |  
|Total Capital (to Risk Weighted Assets)    |  |                               | 36,859 |       | 12.12                       |   |        |                                                                  | 24,324 |  | >8.0 |        |  |       | 30,405 |  | >10.0 |  
|Core Capital (to Adjusted Tangible Assets) |  |                               | 33,918 |       | 7.02                        |   |        |                                                                  | 19,328 |  | >4.0 |        |  |       | 24,160 |  | >5.0  |  
|Tangible Capital (to Tangible Assets)      |  |                               | 33,918 |       | 7.02                        |   |        |                                                                  | 7,248  |  | >1.5 |        |  |       | N/A    |  | N/A   |  
|Tier 1 Capital (to Risk Weighted Assets)   |  |                               | 33,918 |       | 11.15                       |   |        |                                                                  | N/A    |  | N/A  |        |  |       | 18,243 |  | >6.0  |  



|NOTE 17. | Fair value of financial instruments:
|-------- | ------------------------------------



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



|                                                                            |  |                 |             |            |   |                |  |            |             |  |   |            
|--------------------------------------------------------------------------- |  | --------------- | ----------- | ---------- | - | -------------- |  | ---------- | ----------- |  | - | -----------
|                                                                            |  | 2003            |             | 2002      
|                                                                            |  | Carrying Amount |             | Fair Value |   | CarryingAmount |  | Fair Value
|Financial assets:                                                           |  |                 |             |            |   |                |  |            |             |  |   |            
|Cash and cash equivalents                                                   |  | $               | 18,526,015  |            | $ | 18,526,015     |  | $          | 53,387,195  |  | $ | 53,387,195 
|Securities available-for-sale                                               |  |                 | 121,009,752 |            |   | 121,009,752    |  |            | 80,453,729  |  |   | 80,453,729 
|Securities held-to-maturity                                                 |  |                 | 3,001,145   |            |   | 3,063,200      |  |            | 3,002,767   |  |   | 3,087,400  
|Federal Home Loan Bank stock                                                |  |                 | 2,167,800   |            |   | 2,167,800      |  |            | 2,371,400   |  |   | 2,371,400  
|Loans held-for-sale                                                         |  |                 | 869,540     |            |   | 874,469        |  |            | 5,556,419   |  |   | 5,594,620  
|Loans, net                                                                  |  |                 | 344,572,715 |            |   | 349,517,000    |  |            | 317,143,672 |  |   | 322,941,000
|Accrued interest receivable                                                 |  |                 | 1,941,059   |            |   | 1,941,059      |  |            | 2,243,968   |  |   | 2,243,968  
|                                                                            |  |                 |             |           
|Financial liabilities:                                                      |  |                 |             |            |   |                |  |            |             |  |   |            
|Deposits                                                                    |  |                 | 428,476,547 |            |   | 429,101,000    |  |            | 429,328,420 |  |   | 430,054,000
|FHLB advances                                                               |  |                 | 22,000,000  |            |   | 22,000,000     |  |            |            |  |   |           
|Securities sold under agreements to repurchase                              |  |                 | 12,364,124  |            |   | 12,364,124     |  |            | 8,592,098   |  |   | 8,592,098  
|Guaranteed preferred beneficial interests in junior subordinated debentures |  |                 | 16,400,000  |            |   | 17,072,400     |  |            | 16,400,000  |  |   | 16,646,000 



50



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Notes to Consolidated Financial Statements



|NOTE 17. | Fair value of financial instruments: (continued)
|-------- | ------------------------------------------------



The carrying amounts of financial instruments shown in the above table are included in the
consolidated statements of financial condition under the indicated captions.



|NOTE 18. | Condensed parent company financial statements:
|-------- | ----------------------------------------------



The following are condensed statements of financial condition, income and cash flows for New Hampshire Thrift Bancshares, Inc. (Parent
Company) for the years ended December 31:



CONDENSED
STATEMENTS OF FINANCIAL CONDITION



|                                               |  |      |            |      |   |           
|---------------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                               |  | 2003 |            | 2002
|ASSETS                                         |  |      |            |      |   |           
|Cash in Lake Sunapee Bank                      |  | $    | 3,079,384  |      | $ | 2,680,239 
|Investment in subsidiary, Lake Sunapee Bank    |  |      | 51,223,466 |      |   | 46,326,537
|Investment in subsidiary, NHTB Capital Trust I |  |      | 507,300    |      |   | 507,300   
|Deferred expenses                              |  |      | 781,009    |      |   | 811,145   
|Advances to Lake Sunapee Bank                  |  |      | 433,285    |      |   | 342,413   
|Other assets                                   |  |      | 7,452      |      |   | 5,662     
|                                               |  |      |            |      |   |           
|Total assets                                   |  | $    | 56,031,896 |      | $ | 50,673,296
|                                               |  |      |            |      |   |           
|OTHER LIABILITIES                              |  |      |            |      |   |           
|Subordinated debentures                        |  | $    | 16,907,300 |      | $ | 16,907,300
|                                               |  |      |            |      |   |           
|Total liabilities                              |  |      | 16,907,300 |      |   | 16,907,300
|                                               |  |      |            |      |   |           
|SHAREHOLDERS EQUITY                           |  |      | 39,124,596 |      |   | 33,765,996
|                                               |  |      |            |      |   |           
|Total liabilities and shareholders equity     |  | $    | 56,031,896 |      | $ | 50,673,296
|                                               |  |      |            |      |   |           



CONDENSED STATEMENTS OF
INCOME



|                                                 |  |      |           |      |   |           |  |   |          
|------------------------------------------------ |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                 |  | 2003 |           | 2002 |   | 2001     
|Dividends from subsidiary, Lake Sunapee Bank     |  | $    | 2,000,000 |      | $ | 3,500,000 |  | $ | 2,800,000
|Dividends from subsidiary, NHTB Capital Trust I  |  |      | 46,925    |      |   | 46,925    |  |   | 46,925   
|Interest expense on subordinated debentures      |  |      | 1,563,925 |      |   | 1,563,925 |  |   | 1,563,925
|Net operating income including tax benefit       |  |      | 363,303   |      |   | 405,092   |  |   | 410,083  
|                                                 |  |      |           |      |   |           |  |   |          
|Income before equity in earnings of subsidiaries |  |      | 846,303   |      |   | 2,388,092 |  |   | 1,693,083
|Equity in undistributed earnings of subsidiaries |  |      | 4,925,150 |      |   | 1,911,896 |  |   | 1,407,381
|                                                 |  |      |           |      |   |           |  |   |          
|Net income                                       |  | $    | 5,771,453 |      | $ | 4,299,988 |  | $ | 3,100,464
|                                                 |  |      |           |      |   |           |  |   |          



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Notes to Consolidated Financial Statements



|NOTE 18. | Condensed parent company financial statements:(continued)
|-------- | ---------------------------------------------------------



CONDENSED STATEMENTS OF CASH FLOWS



|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                  |  | 2003 |            |   | 2002 |   |            | 2001 | 
|Cash flows from operating activities:                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Net income                                                                                        |  | $    | 5,771,453  |   |      | $ | 4,299,988  |      |  | $ | 3,100,464  |  
|(Increase) decrease in accounts receivable                                                        |  |      | (1,168     | ) |      |   | 12,713     |      |  |   | (16,250    | )
|(Decrease) increase in taxes payable                                                              |  |      |           |   |      |   | (11,378    | )    |  |   | 6,061      |  
|Increase in taxes receivable                                                                      |  |      | (622       | ) |      |   | (2,125     | )    |  |   |           |  
|Decrease in accounts payable                                                                      |  |      |           |   |      |   |           |      |  |   | (5,729     | )
|Amortization of deferred expenses relating to issuance of NHTB Capital Trust I capital securities |  |      | 30,136     |   |      |   | 30,135     |      |  |   | 30,136     |  
|Equity in undistributed earnings of subsidiaries                                                  |  |      | (4,925,150 | ) |      |   | (1,911,896 | )    |  |   | (1,407,381 | )
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided by operating activities                                                         |  |      | 874,649    |   |      |   | 2,417,437  |      |  |   | 1,707,301  |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Cash flows from investing activities:                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Net change in advances to subsidiary, Lake Sunapee Bank                                           |  |      | 49,049     |   |      |   | 304,963    |      |  |   | 199,494    |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided by investing activities                                                         |  |      | 49,049     |   |      |   | 304,963    |      |  |   | 199,494    |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Cash flows from financing activities:                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Proceeds from exercise of stock options                                                           |  |      | 968,678    |   |      |   | 295,037    |      |  |   | 252,783    |  
|Dividends paid                                                                                    |  |      | (1,419,736 | ) |      |   | (1,233,618 | )    |  |   | (1,243,555 | )
|Repurchase of treasury stock                                                                      |  |      | (73,495    | ) |      |   |           |      |  |   | (804,875   | )
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash used in financing activities                                                             |  |      | (524,553   | ) |      |   | (938,581   | )    |  |   | (1,795,647 | )
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net increase in cash                                                                              |  |      | 399,145    |   |      |   | 1,783,819  |      |  |   | 111,148    |  
|Cash, beginning of year                                                                           |  |      | 2,680,239  |   |      |   | 896,420    |      |  |   | 785,272    |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Cash, end of year                                                                                 |  | $    | 3,079,384  |   |      | $ | 2,680,239  |      |  | $ | 896,420    |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  



The Parent Only
Statements of Changes in Shareholders Equity are identical to the Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 2003, 2002 and 2001, and therefore are not reprinted here.



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Notes to Consolidated Financial Statements



|NOTE 19. | Quarterly Results of Operations (UNAUDITED)
|-------- | -------------------------------------------



Summarized quarterly financial data for 2003 and 2002 follows:



|                                            |  |                                                               |       |         |   |          |  |         |       |  |   |      
|------------------------------------------- |  | ------------------------------------------------------------- | ----- | ------- | - | -------- |  | ------- | ----- |  | - | -----
|                                            |  | (In thousands, except earnings per share) 2003 Quarters Ended
|                                            |  | March 31                                                      |       | June 30 |   | Sept. 30 |  | Dec. 31
|Interest and dividend income                |  | $                                                             | 5,319 |         | $ | 5,300    |  | $       | 5,156 |  | $ | 5,719
|Interest expense                            |  |                                                               | 1,640 |         |   | 1,398    |  |         | 1,335 |  |   | 1,333
|                                            |  |                                                               |       |         |   |          |  |         |       |  |   |      
|Net interest and dividend income            |  |                                                               | 3,679 |         |   | 3,902    |  |         | 3,821 |  |   | 4,386
|Provision for loan losses                   |  |                                                               | 25    |         |   | 25       |  |         | 25    |  |   | 25   
|Other income                                |  |                                                               | 1,300 |         |   | 1,831    |  |         | 1,981 |  |   | 1,087
|Other expense                               |  |                                                               | 3,013 |         |   | 3,335    |  |         | 2,911 |  |   | 3,350
|                                            |  |                                                               |       |         |   |          |  |         |       |  |   |      
|Income before income taxes                  |  |                                                               | 1,941 |         |   | 2,373    |  |         | 2,866 |  |   | 2,098
|Income tax expense                          |  |                                                               | 704   |         |   | 899      |  |         | 1,118 |  |   | 786  
|                                            |  |                                                               |       |         |   |          |  |         |       |  |   |      
|Net income                                  |  | $                                                             | 1,237 |         | $ | 1,474    |  | $       | 1,748 |  | $ | 1,312
|                                            |  |                                                               |       |         |   |          |  |         |       |  |   |      
|Basic earnings per common share             |  | $                                                             | 0.63  |         | $ | 0.75     |  | $       | 0.88  |  | $ | 0.66 
|                                            |  |                                                               |       |         |   |          |  |         |       |  |   |      
|Earnings per common share assuming dilution |  | $                                                             | 0.62  |         | $ | 0.72     |  | $       | 0.85  |  | $ | 0.65 
|                                            |  |                                                               |       |         |   |          |  |         |       |  |   |      



|                                            |  |                                                               |       |         |   |          |  |         |       |  |   |      
|------------------------------------------- |  | ------------------------------------------------------------- | ----- | ------- | - | -------- |  | ------- | ----- |  | - | -----
|                                            |  | (In thousands, except earnings per share) 2002 Quarters Ended
|                                            |  | March 31                                                      |       | June 30 |   | Sept. 30 |  | Dec. 31
|Interest and dividend income                |  | $                                                             | 6,510 |         | $ | 6,676    |  | $       | 6,438 |  | $ | 5,509
|Interest expense                            |  |                                                               | 3,061 |         |   | 2,777    |  |         | 2,406 |  |   | 2,049
|                                            |  |                                                               |       |         |   |          |  |         |       |  |   |      
|Net interest and dividend income            |  |                                                               | 3,449 |         |   | 3,899    |  |         | 4,032 |  |   | 3,460
|Provision for loan losses                   |  |                                                               | 30    |         |   | 30       |  |         | 30    |  |   | 30   
|Other income                                |  |                                                               | 1,068 |         |   | 831      |  |         | 988   |  |   | 2,047
|Other expense                               |  |                                                               | 2,760 |         |   | 3,169    |  |         | 3,377 |  |   | 3,573
|                                            |  |                                                               |       |         |   |          |  |         |       |  |   |      
|Income before income taxes                  |  |                                                               | 1,727 |         |   | 1,531    |  |         | 1,613 |  |   | 1,904
|Income tax expense                          |  |                                                               | 627   |         |   | 526      |  |         | 600   |  |   | 722  
|                                            |  |                                                               |       |         |   |          |  |         |       |  |   |      
|Net income                                  |  | $                                                             | 1,100 |         | $ | 1,005    |  | $       | 1,013 |  | $ | 1,182
|                                            |  |                                                               |       |         |   |          |  |         |       |  |   |      
|Basic earnings per common share             |  | $                                                             | 0.57  |         | $ | 0.52     |  | $       | 0.52  |  | $ | 0.61 
|                                            |  |                                                               |       |         |   |          |  |         |       |  |   |      
|Earnings per common share assuming dilution |  | $                                                             | 0.56  |         | $ | 0.51     |  | $       | 0.52  |  | $ | 0.60 
|                                            |  |                                                               |       |         |   |          |  |         |       |  |   |      



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---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-K



For Annual and
Transistion Reports Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934



SEC Commission Number 17859



For the fiscal year ended: December 31, 2003



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)



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



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

None



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

Common Stock, $.01 par value

Title of Class



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



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act. Yes ̈No x



As of March 11, 2004
there were issued and outstanding 2,062,683 shares of the registrants common stock.



The common stock is listed for trading on NASDAQ under the symbol NHTB. Based on the closing price of June 30, 2003, of $24.740 the aggregate market value of the voting and non-voting common equity held by
non-affiliates was $48.8 million.



Documents Incorporated By Reference:

Part III of Form 10-K  Portions of the proxy statement for the 2004 Annual Meeting of Stockholders



---



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New Hampshire Thrift Bancshares, Inc.



INDEX



|         |  |                                                                                       |  |   
|-------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I   |  |                                                                                       |  |   
|         |  |                                                                                      
|Item 1.  |  | Business                                                                              |  | 56
|Item 2.  |  | Properties                                                                            |  | 74
|Item 3.  |  | Legal Proceedings                                                                     |  | 74
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 74
|         |  |                                                                                      
|PART II  |  |                                                                                       |  |   
|         |  |                                                                                      
|Item 5.  |  | Market for the Registrants Common Stock and Related Stockholder Matters              |  | 75
|Item 6.  |  | Selected Financial Highlights                                                         |  | 75
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 77
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 77
|Item 8.  |  | Financial Statements and Supplementary Information                                    |  | 77
|         |  | Report of Independent Auditors                                                        |  | 24
|         |  | Consolidated Statements of Financial Condition                                        |  | 25
|         |  | Consolidated Statements of Income                                                     |  | 26
|         |  | Consolidated Statements of Changes in Shareholders Equity                            |  | 27
|         |  | Consolidated Statements of Cash Flows                                                 |  | 29
|         |  | Notes to Consolidated Financial Statements                                            |  | 31
|Item 9.  |  | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 77
|Item 9A. |  | Controls and Procedures                                                               |  | 77
|         |  |                                                                                      
|PART III |  |                                                                                       |  |   
|         |  |                                                                                      
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  | 77
|Item 11. |  | Executive Compensation                                                                |  | 77
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 77
|Item 13. |  | Certain Relationships and Related Transactions                                        |  | 78
|Item 14. |  | Principal Account Fees and Services                                                   |  | 78
|         |  |                                                                                      
|PART IV  |  |                                                                                       |  |   
|         |  |                                                                                      
|Item 15. |  | Exhibits and Reports on Form 8-K                                                      |  |   
|         |  | Exhibits                                                                              |  | 78
|         |  | Reports on Form 8-K                                                                   |  | 78
|         |  |                                                                                      
|         |  | Signatures                                                                            |  | 81



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PART I.



|Item 1. | Business
|------- | --------



GENERAL



Organization



New Hampshire Thrift
Bancshares, Inc. (NHTB), 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 Savings Association Insurance Fund (SAIF) 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, and Andover, New Hampshire. The Bank had assets of approximately $526 milllion as of December 31, 2003.



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



Market Area



The Banks market area consists of west-central New Hampshire in the counties of Merrimack, Sullivan, Hillsboro, and
Grafton. This area is best known for its recreational facilities and its resort/retirement environment. Within the market area are two major ski areas, several lakes, retirement communities, a four-season recreational development center designed to
support 3,500 families, Colby Sawyer, New England, and Dartmouth Colleges and several industrial manufacturing employers.



In addition to the year-round regional population, the Upper Valley-Kearsarge-Lake Sunapee area has a sizable number of seasonal residents. In 1990, a
total of over 3,600 seasonal dwellings were listed by the Census Bureau. Based on an occupancy rate of five persons per seasonal unit, the regional seasonal population can be estimated to be over 18,000 persons.



LENDING ACTIVITIES



The Banks loan portfolio totaled $347,086,618 at December 31, 2003,
representing approximately 66% of total assets. As of December 31, 2003, approximately 79% of the mortgage loan portfolio had adjustable rates. As of December 31, 2003, the Bank had sold $289,825,192 in fixed rate mortgage loans in an effort to meet
customer demands for fixed rate loans, minimize interest rate risk, and build a servicing portfolio.



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



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Since the middle of the 1960s, the terms of conventional residential mortgage loans originated by
the Bank have contained a due-on-sale clause which permits the Bank to accelerate the indebtedness of a loan upon the sale or other disposition of the mortgaged property. Due-on-sale clauses are an important means of increasing the
turnover of mortgage loans in the Banks portfolio.



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.



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. The Bank currently has 9.82% of its total loan portfolio as commercial loans.



MUNICIPAL LOANS. The Banks activity in the municipal lending market is
limited to those towns and school districts located within our 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.



HOME EQUITY LOANS. 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.



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:



|                                     |  |                  |         |            |        |   |        |      |            |  |        |        |  |            |         |  |        |  
|------------------------------------ |  | ---------------- | ------- | ---------- | ------ | - | ------ | ---- | ---------- |  | ------ | ------ |  | ---------- | ------- |  | ------ | -
|                                     |  | 2003             |         |            | 2002   |   |        | 2001 |           
|                                     |  | Amount           |         | % of Total |        |   | Amount |      | % of Total |  |        | Amount |  | % of Total |        
|                                     |  | ($ in thousands) |        
|Real estate loans                    |  |                  |         |            |        |   |        |      |            |  |        |        |  |            |         |  |        |  
|Conventional and Commercial          |  | $                | 271,608 |            | 78.27  | % |        | $    | 256,428    |  | 80.19  | %      |  | $          | 278,811 |  | 81.92  | %
|Construction                         |  |                  | 15,241  |            | 4.39   |   |        |      | 14,110     |  | 4.41   |        |  |            | 16,644  |  | 4.89   |  
|Consumer loans                       |  |                  | 43,881  |            | 12.65  |   |        |      | 32,256     |  | 10.09  |        |  |            | 24,757  |  | 7.28   |  
|Commercial and municipal loans       |  |                  | 16,013  |            | 4.61   |   |        |      | 16,988     |  | 5.31   |        |  |            | 20,128  |  | 5.91   |  
|Other loans                          |  |                  | 270     |            | 0.08   |   |        |      |           |  |       |        |  |            |        |  |       |  
|                                     |  |                  |         |            |        |   |        |      |            |  |        |        |  |            |         |  |        |  
|Total loans                          |  |                  | 347,015 |            | 100.00 | % |        |      | 319,782    |  | 100.00 | %      |  |            | 340,340 |  | 100.00 | %
|Unamortized adjustment to fair value |  |                  | 72      |            |        |   |        |      | 85         |  |        |        |  |            | 97      |  |        |  
|Less - Allowance for loan losses     |  |                  | 3,899   |            |        |   |        |      | 3,876      |  |        |        |  |            | 4,405   |  |        |  
|Deferred loan origination costs, net |  |                  | 1,385   |            |        |   |        |      | 1,153      |  |        |        |  |            | 1,151   |  |        |  
|                                     |  |                  |         |            |        |   |        |      |            |  |        |        |  |            |         |  |        |  
|Loans receivable, net                |  | $                | 344,573 |            |        |   |        | $    | 317,144    |  |        |        |  | $          | 337,183 |  |        |  
|                                     |  |                  |         |            |        |   |        |      |            |  |        |        |  |            |         |  |        |  



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



|                                     |  |                  |         |            |        |   |        |   |            |  |        |  
|------------------------------------ |  | ---------------- | ------- | ---------- | ------ | - | ------ | - | ---------- |  | ------ | -
|                                     |  | 2000             |         |            | 1999   |  
|                                     |  | Amount           |         | % of Total |        |   | Amount |   | % of Total | 
|                                     |  | ($ in thousands) |        
|Real estate loans                    |  |                  |         |            |        |   |        |   |            |  |        |  
|Conventional and Commercial          |  | $                | 279,804 |            | 79.57  | % |        | $ | 275,563    |  | 78.73  | %
|Construction                         |  |                  | 16,333  |            | 4.64   |   |        |   | 4,260      |  | 1.22   |  
|Consumer loans                       |  |                  | 35,467  |            | 10.09  |   |        |   | 37,954     |  | 10.84  |  
|Commercial and municipal loans       |  |                  | 20,056  |            | 5.70   |   |        |   | 32,216     |  | 9.21   |  
|Other loans                          |  |                  | 2       |            |       |   |        |   | 4          |  |       |  
|                                     |  |                  |         |            |        |   |        |   |            |  |        |  
|Total loans                          |  |                  | 351,662 |            | 100.00 | % |        |   | 349,997    |  | 100.00 | %
|Unamortized adjustment to fair value |  |                  | 109     |            |        |   |        |   | 121        |  |        |  
|Less - Allowance for loan losses     |  |                  | 4,433   |            |        |   |        |   | 4,321      |  |        |  
|Deferred loan origination costs, net |  |                  | 1,050   |            |        |   |        |   | 695        |  |        |  
|                                     |  |                  |         |            |        |   |        |   |            |  |        |  
|Loans receivable, net                |  | $                | 348,388 |            |        |   |        | $ | 346,492    |  |        |  
|                                     |  |                  |         |            |        |   |        |   |            |  |        |  



The following table sets forth the
maturities of the loan portfolio and whether such loans have fixed or adjustable interest rates at December 31, 2003:



|                                     |  |                 |            |                       |   |                |  |       |             |  |   |            
|------------------------------------ |  | --------------- | ---------- | --------------------- | - | -------------- |  | ----- | ----------- |  | - | -----------
|Maturities                           |  | One yearor less |            | One throughfive years |   | Overfive years |  | Total
|Real Estate Loans with:              |  |                 |            |                       |   |                |  |       |             |  |   |            
|Predetermined interest rates         |  | $               | 2,510,228  |                       | $ | 2,406,795      |  | $     | 54,032,517  |  | $ | 58,949,540 
|Adjustable interest rates            |  |                 | 755,848    |                       |   | 4,982,599      |  |       | 222,162,069 |  |   | 227,900,516
|                                     |  |                 |            |                       |   |                |  |       |             |  |   |            
|                                     |  |                 | 3,266,076  |                       |   | 7,389,394      |  |       | 276,194,586 |  |   | 286,850,056
|                                     |  |                 |            |                       |   |                |  |       |             |  |   |            
|Collateral/Consumer Loans with:      |  |                 |            |                       |   |                |  |       |             |  |   |            
|Predetermined interest rates         |  |                 | 968,293    |                       |   | 6,245,355      |  |       | 839,446     |  |   | 8,053,094  
|Adjustable interest rates            |  |                 | 625,236    |                       |   | 2,942,659      |  |       | 32,259,994  |  |   | 35,827,889 
|                                     |  |                 |            |                       |   |                |  |       |             |  |   |            
|                                     |  |                 | 1,593,529  |                       |   | 9,188,014      |  |       | 33,099,440  |  |   | 43,880,983 
|                                     |  |                 |            |                       |   |                |  |       |             |  |   |            
|Commercial/Municipal Loans with:     |  |                 |            |                       |   |                |  |       |             |  |   |            
|Predetermined interest rates         |  |                 | 1,067,047  |                       |   | 2,507,939      |  |       | 523,146     |  |   | 4,098,132  
|Adjustable interest rates            |  |                 | 4,626,240  |                       |   | 2,589,780      |  |       | 4,699,261   |  |   | 11,915,281 
|                                     |  |                 |            |                       |   |                |  |       |             |  |   |            
|                                     |  |                 | 5,693,287  |                       |   | 5,097,719      |  |       | 5,222,407   |  |   | 16,013,413 
|                                     |  |                 |            |                       |   |                |  |       |             |  |   |            
|Other Loans with:                    |  |                 |            |                       |   |                |  |       |             |  |   |            
|Predetermined interest rates         |  |                 |           |                       |   | 269,725        |  |       |            |  |   | 269,725    
|                                     |  |                 |            |                       |   |                |  |       |             |  |   |            
|                                     |  |                 |           |                       |   | 269,725        |  |       |            |  |   | 269,725    
|                                     |  |                 |            |                       |   |                |  |       |             |  |   |            
|Unamortized adjustment to fair value |  |                 |           |                       |   |               |  |       | 72,441      |  |   | 72,441     
|                                     |  |                 |            |                       |   |                |  |       |             |  |   |            
|Totals                               |  | $               | 10,552,892 |                       | $ | 21,944,852     |  | $     | 314,588,874 |  | $ | 347,086,618
|                                     |  |                 |            |                       |   |                |  |       |             |  |   |            



The preceding schedule includes
$1,157,957 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



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residential properties, principally single-family residences, substantially all of which are located in the west-central area of New Hampshire.



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



Detailed applications for mortgage loans are verified through the use of credit reports, financial statements and confirmations. Depending upon the size
of the loan involved, a varying number of senior officers of the Bank must approve the application before the loan can be granted. At times, the Loan Review Committee of the Bank 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 prior to foreclosure, 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 weakness present make collection and liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured
institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated special mention.



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



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



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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, 2003 and 2002 were $4,046,955 and $3,333,767, respectively. For further discussion regarding nonperforming assets, impaired loans and the allowance for loan losses, please see Managements Discussion and
Analysis.



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, 2003, the Bank had 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.



NHTB Capital Trust I



NHTB Capital Trust I (the Trust) is a
statutory business trust formed under the laws of the State of Delaware and a wholly-owned subsidiary of the Company. On August 5, 1999, the Trust issued $16.4 million of 9.25% capital securities. See Note 2 of Notes to 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 located in its primary market area. 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 four 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.



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The Bank is required by SFAS No. 115 to categorize its securities as held-to-maturity,
available-for-sale, or held-for-trading. Please refer to Note 4 Securities, in the Consolidated Financial Statements for certain information regarding amortized costs, fair values and maturities of securities.



Maturities of debt securities, excluding mortgage-backed securities are as follows as of
December 31, 2003:



|                                             |  |            |            |                |   |                      |  |       |  
|-------------------------------------------- |  | ---------- | ---------- | -------------- | - | -------------------- |  | ----- | -
|                                             |  | Fair Value |            | Amortized Cost |   | WeightedAverageYield | 
|Available-for-sale securities                |  |            |            |                |   |                      |  |       |  
|U.S. Government, including agencies          |  | $          | 5,222      |                | $ | 5,000                |  | 6.65  | %
|Other bonds and debentures                   |  |            | 1,000,000  |                |   | 998,520              |  | 7.70  |  
|                                             |  |            |            |                |   |                      |  |       |  
|Total due in less than one year              |  |            | 1,005,222  |                |   | 1,003,520            |  | 7.70  |  
|                                             |  |            |            |                |   |                      |  |       |  
|U.S. Government, including agencies          |  |            | 39,281,719 |                |   | 39,054,281           |  | 5.32  |  
|Other bonds and debentures                   |  |            | 13,314,249 |                |   | 13,159,148           |  | 3.65  |  
|                                             |  |            |            |                |   |                      |  |       |  
|Total due after one year through five years  |  |            | 52,595,968 |                |   | 52,213,429           |  | 4.06  |  
|                                             |  |            |            |                |   |                      |  |       |  
|Other bonds and debentures                   |  |            | 1,942,729  |                |   | 1,940,000            |  | 5.66  |  
|                                             |  |            |            |                |   |                      |  |       |  
|Total due after five years through ten years |  |            | 1,942,729  |                |   | 1,940,000            |  | 5.66  |  
|                                             |  |            |            |                |   |                      |  |       |  
|Other bonds and debentures                   |  |            | 7,323,135  |                |   | 7,236,143            |  | 7.62  |  
|                                             |  |            |            |                |   |                      |  |       |  
|Total due after ten years                    |  |            | 7,351,750  |                |   | 7,236,143            |  | 7.62  |  
|                                             |  |            |            |                |   |                      |  |       |  
|                                             |  | $          | 62,867,054 |                | $ | 62,393,092           |  | 4.585 |  
|                                             |  |            |            |                |   |                      |  |       |  
|Held-to-maturity securities                  |  |            |            |                |   |                      |  |       |  
|Other bonds and debentures                   |  |            |            |                |   |                      |  |       |  
|Total due in less than one year              |  | $          | 990,000    |                | $ | 1,001,145            |  | 7.43  |  
|Total due after ten years                    |  |            | 2,073,200  |                |   | 2,000,000            |  | 8.53  |  
|                                             |  |            |            |                |   |                      |  |       |  
|                                             |  | $          | 3,063,200  |                | $ | 3,001,145            |  | 8.17  |  
|                                             |  |            |            |                |   |                      |  |       |  



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



|                                    |  |               |             |                                             |   |                                              |  |           |         |  |   |            
|----------------------------------- |  | ------------- | ----------- | ------------------------------------------- | - | -------------------------------------------- |  | --------- | ------- |  | - | -----------
|December 31, 2003                   |  | AmortizedCost |             | Gains inAccumulatedOtherComprehensiveIncome |   | Losses inAccumulatedOtherComprehensiveIncome |  | FairValue
|Available-for-sale:                 |  |               |             |                                             |   |                                              |  |           |         |  |   |            
|Bonds and notes-                    |  |               |             |                                             |   |                                              |  |           |         |  |   |            
|U.S. Government, including agencies |  | $             | 39,059,281  |                                             | $ | 291,004                                      |  | $         | 63,344  |  | $ | 39,286,941 
|Mortgage-backed securities          |  |               | 58,009,781  |                                             |   | 151,236                                      |  |           | 540,819 |  |   | 57,620,198 
|Commercial paper                    |  |               |            |                                             |   |                                             |  |           |        |  |   |           
|Other bonds and debentures          |  |               | 23,333,810  |                                             |   | 290,200                                      |  |           | 43,897  |  |   | 23,580,113 
|Equity securities                   |  |               | 484,386     |                                             |   | 38,114                                       |  |           |        |  |   | 522,500    
|                                    |  |               |             |                                             |   |                                              |  |           |         |  |   |            
|Total available-for-sale securities |  | $             | 120,887,258 |                                             | $ | 770,554                                      |  | $         | 648,060 |  | $ | 121,009,752
|                                    |  |               |             |                                             |   |                                              |  |           |         |  |   |            
|                                    |  |               |             |                                            
|                                    |  | AmortizedCost |             | GrossUnrecognizedHolding Gains              |   | GrossUnrecognizedHolding Losses              |  | FairValue
|Held-to-maturity:                   |  |               |             |                                             |   |                                              |  |           |         |  |   |            
|Bonds and notes-                    |  |               |             |                                             |   |                                              |  |           |         |  |   |            
|Other bonds and debentures          |  | $             | 3,001,145   |                                             | $ | 73,200                                       |  | $         | 11,145  |  | $ | 3,063,200  
|                                    |  |               |             |                                             |   |                                              |  |           |         |  |   |            
|Total held-to-maturity securities   |  | $             | 3,001,145   |                                             | $ | 73,200                                       |  | $         | 11,145  |  | $ | 3,063,200  
|                                    |  |               |             |                                             |   |                                              |  |           |         |  |   |            
|                                    |  |               |             |                                            
|December 31, 2002                   |  | AmortizedCost |             | Gains inAccumulatedOtherComprehensiveIncome |   | Losses inAccumulatedOtherComprehensiveIncome |  | FairValue
|Available-for-sale:                 |  |               |             |                                             |   |                                              |  |           |         |  |   |            
|Bonds and notes-                    |  |               |             |                                             |   |                                              |  |           |         |  |   |            
|U.S. Government, including agencies |  | $             | 23,902,013  |                                             | $ | 245,608                                      |  | $         |        |  | $ | 24,147,621 
|Mortgage-backed securities          |  |               | 14,328,508  |                                             |   | 176,809                                      |  |           |        |  |   | 14,505,317 
|Commercial paper                    |  |               | 16,972,695  |                                             |   |                                             |  |           | 87,116  |  |   | 16,885,579 
|Other bonds and debentures          |  |               | 24,532,796  |                                             |   | 242,902                                      |  |           | 247,136 |  |   | 24,528,562 
|Equity securities                   |  |               | 484,386     |                                             |   | 1,140                                        |  |           | 98,876  |  |   | 386,650    
|                                    |  |               |             |                                             |   |                                              |  |           |         |  |   |            
|Total available-for-sale securities |  | $             | 80,220,398  |                                             | $ | 666,459                                      |  | $         | 433,128 |  | $ | 80,453,729 
|                                    |  |               |             |                                             |   |                                              |  |           |         |  |   |            
|                                    |  |               |             |                                            
|                                    |  | AmortizedCost |             | GrossUnrecognizedHolding Gains              |   | GrossUnrecognizedHolding Losses              |  | FairValue
|Held-to-maturity:                   |  |               |             |                                             |   |                                              |  |           |         |  |   |            
|Bonds and notes-                    |  |               |             |                                             |   |                                              |  |           |         |  |   |            
|Other bonds and debentures          |  | $             | 3,002,767   |                                             | $ | 97,400                                       |  | $         | 12,767  |  | $ | 3,087,400  
|                                    |  |               |             |                                             |   |                                              |  |           |         |  |   |            
|Total held-to-maturity securities   |  | $             | 3,002,767   |                                             | $ | 97,400                                       |  | $         | 12,767  |  | $ | 3,087,400  
|                                    |  |               |             |                                             |   |                                              |  |           |         |  |   |            



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|                                    |  |                |            |                                             |   |                                              |  |            |           |  |   |           
|----------------------------------- |  | -------------- | ---------- | ------------------------------------------- | - | -------------------------------------------- |  | ---------- | --------- |  | - | ----------
|December 31, 2001                   |  | Amortized Cost |            | Gains inAccumulatedOtherComprehensiveIncome |   | Losses inAccumulatedOtherComprehensiveIncome |  | Fair Value
|Available-for-sale:                 |  |                |            |                                             |   |                                              |  |            |           |  |   |           
|Bonds and notes-                    |  |                |            |                                             |   |                                              |  |            |           |  |   |           
|U.S. Government, including agencies |  | $              | 20,624,659 |                                             | $ | 368,866                                      |  | $          | 30,626    |  | $ | 20,962,899
|Mortgage-backed Securities          |  |                | 10,374,842 |                                             |   | 140,279                                      |  |            | 13        |  |   | 10,515,108
|Other bonds and Debentures          |  |                | 20,304,794 |                                             |   | 32,632                                       |  |            | 1,828,617 |  |   | 18,508,809
|Equity securities                   |  |                | 484,385    |                                             |   | 400                                          |  |            | 139,099   |  |   | 345,686   
|                                    |  |                |            |                                             |   |                                              |  |            |           |  |   |           
|Total available-for-sale Securities |  | $              | 51,788,680 |                                             | $ | 542,177                                      |  | $          | 1,998,355 |  | $ | 50,332,502
|                                    |  |                |            |                                             |   |                                              |  |            |           |  |   |           
|                                    |  |                |            |                                            
|                                    |  | Amortized Cost |            | GrossUnrecognizedHolding Gains              |   | GrossUnrecognizedHolding Losses              |  | Fair Value
|Held-to-maturity:                   |  |                |            |                                             |   |                                              |  |            |           |  |   |           
|Bonds and notes-                    |  |                |            |                                             |   |                                              |  |            |           |  |   |           
|U.S. Government, including agencies |  | $              | 1,000,465  |                                             | $ | 36,722                                       |  | $          |          |  | $ | 1,037,187 
|Other bonds and debentures          |  |                | 3,004,390  |                                             |   | 75,000                                       |  |            | 11,690    |  |   | 3,067,700 
|                                    |  |                |            |                                             |   |                                              |  |            |           |  |   |           
|Total held-to-maturity securities   |  | $              | 4,004,855  |                                             | $ | 111,722                                      |  | $          | 11,690    |  | $ | 4,104,887 
|                                    |  |                |            |                                             |   |                                              |  |            |           |  |   |           



Deposit Activities and Other
Sources of Funds



The Bank offers a variety of deposit
accounts with a range of interest rates and terms. The Banks deposits consist of business checking, money market accounts, savings, NOW and certificate accounts. The flow of deposits is influenced by general economic conditions, changes in
money market rates, prevailing interest rates and competition. The Banks deposits are obtained predominately from within the Banks primary market area. The Bank uses traditional means of advertising its deposit products, including print
media, and generally does not solicit deposits from outside its primary market area. The Bank offers negotiated rates on some of its certificate accounts. At December 31, 2003, time deposits represented approximately 26% of total deposits. Time
deposits included $29,813,003 of certificates of deposit in excess of $100,000.



The following table presents deposit activity of the Bank for the years ended December 31: (in thousands)



|                                              |  |      |        |   |      |   |        |      |  |   |       
|--------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------
|                                              |  | 2003 |        |   | 2002 |   |        | 2001
|Net deposits (withdrawals)                    |  | $    | (4,891 | ) |      | $ | (1,916 | )    |  | $ | 14,599
|Interest credited on deposit accounts         |  |      | 4,039  |   |      |   | 8,507  |      |  |   | 14,026
|                                              |  |      |        |   |      |   |        |      |  |   |       
|Total increase (decrease) in deposit accounts |  | $    | (852   | ) |      | $ | 6,591  |      |  | $ | 28,625
|                                              |  |      |        |   |      |   |        |      |  |   |       



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At December 31, 2003, the Bank had $29.8 million in certificate of deposit accounts in amounts of $100,000 or more
maturing as follows:



|                         |  |                |        |                      |      |  
|------------------------ |  | -------------- | ------ | -------------------- | ---- | -
|Maturity Period          |  | Amount         |        | WeightedAverage Rate |     
|                         |  | (in thousands) |       
|3 months or less         |  | $              | 5,027  |                      | 1.79 | %
|Over 3 through 6 months  |  |                | 8,814  |                      | 2.16 | %
|Over 6 through 12 months |  |                | 11,035 |                      | 2.45 | %
|Over 12 months           |  |                | 4,937  |                      | 3.62 | %
|                         |  |                |        |                      |      |  
|Total                    |  | $              | 29,813 |                      | 2.45 | %
|                         |  |                |        |                      |      |  



The following table sets forth the
distribution of the Banks deposit accounts for the periods indicated and the percentage to total deposits:



|                          |  |                        |         |           |       |   |        |      |           |  |       |        |  |           |         |  |       |  
|------------------------- |  | ---------------------- | ------- | --------- | ----- | - | ------ | ---- | --------- |  | ----- | ------ |  | --------- | ------- |  | ----- | -
|                          |  | 2003                   |         |           | 2002  |   |        | 2001 |          
|                          |  | Amount                 |         | % ofTotal |       |   | Amount |      | % ofTotal |  |       | Amount |  | % ofTotal |        
|                          |  | (Dollars in thousands) |        
|Checking accounts         |  | $                      | 31,297  |           | 7.3   |   |        | $    | 29,861    |  | 7.0   |        |  | $         | 29,520  |  | 7.0   |  
|NOW accounts              |  |                        | 110,541 |           | 25.8  |   |        |      | 105,791   |  | 24.6  |        |  |           | 75,393  |  | 17.8  |  
|Money Market accounts     |  |                        | 69,927  |           | 16.3  |   |        |      | 80,713    |  | 18.8  |        |  |           | 77,039  |  | 18.2  |  
|Regular savings accounts  |  |                        | 16,318  |           | 3.8   |   |        |      | 16,362    |  | 3.8   |        |  |           | 15,841  |  | 3.8   |  
|Treasury savings accounts |  |                        | 88,971  |           | 20.8  |   |        |      | 80,105    |  | 18.7  |        |  |           | 69,690  |  | 16.5  |  
|Club deposits             |  |                        | 45      |           |      |   |        |      | 48        |  |      |        |  |           | 43      |  |      |  
|                          |  |                        |         |           |       |   |        |      |           |  |       |        |  |           |         |  |       |  
|Total                     |  |                        | 317,099 |           | 74.0  |   |        |      | 312,880   |  | 72.9  |        |  |           | 267,526 |  | 63.3  |  
|                          |  |                        |         |           |       |   |        |      |           |  |       |        |  |           |         |  |       |  
|Time deposits             |  |                        |         |           |       |   |        |      |           |  |       |        |  |           |         |  |       |  
|Less than 12 months       |  |                        | 87,019  |           | 20.3  |   |        |      | 82,957    |  | 19.3  |        |  |           | 142,657 |  | 33.7  |  
|Over 12 through 36 months |  |                        | 22,191  |           | 5.2   |   |        |      | 32,119    |  | 7.5   |        |  |           | 12,242  |  | 2.9   |  
|Over 36 months            |  |                        | 2,168   |           | 0.5   |   |        |      | 1,372     |  | 0.3   |        |  |           | 312     |  | 0.1   |  
|                          |  |                        |         |           |       |   |        |      |           |  |       |        |  |           |         |  |       |  
|Total time deposits       |  |                        | 111,378 |           | 26.0  |   |        |      | 116,448   |  | 27.1  |        |  |           | 155,211 |  | 36.7  |  
|                          |  |                        |         |           |       |   |        |      |           |  |       |        |  |           |         |  |       |  
|Total deposits            |  | $                      | 428,477 |           | 100.0 | % |        | $    | 429,328   |  | 100.0 | %      |  | $         | 422,737 |  | 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 period indicated.



|                      |  |                                 |         |                 |      |   |                |      |                 |  |      |                |  |                 |         |  |      |  
|--------------------- |  | ------------------------------- | ------- | --------------- | ---- | - | -------------- | ---- | --------------- |  | ---- | -------------- |  | --------------- | ------- |  | ---- | -
|                      |  | For the Year Ended December 31, |        
|                      |  | 2003                            |         |                 | 2002 |   |                | 2001 |                
|                      |  | AverageBalance                  |         | AverageRatePaid |      |   | AverageBalance |      | AverageRatePaid |  |      | AverageBalance |  | AverageRatePaid |        
|NOW                   |  | $                               | 99,597  |                 | 0.23 | % |                | $    | 82,914          |  | 0.32 | %              |  | $               | 72,434  |  | 0.36 | %
|Savings deposits      |  |                                 | 103,968 |                 | 0.52 |   |                |      | 94,946          |  | 1.57 |                |  |                 | 92,817  |  | 2.37 |  
|Money market deposits |  |                                 | 74,403  |                 | 0.78 |   |                |      | 74,859          |  | 1.87 |                |  |                 | 57,281  |  | 4.25 |  
|Time deposits         |  |                                 | 116,354 |                 | 2.29 |   |                |      | 134,796         |  | 3.94 |                |  |                 | 163,221 |  | 5.88 |  
|Demand deposits       |  |                                 | 30,170  |                 |     |   |                |      | 28,793          |  |     |                |  |                 | 24,954  |  |     |  
|                      |  |                                 |         |                 |      |   |                |      |                 |  |      |                |  |                 |         |  |      |  
|Total Deposits        |  | $                               | 424,492 |                 |      |   |                | $    | 416,308         |  |      |                |  | $               | 410,707 |  |      |  
|                      |  |                                 |         |                 |      |   |                |      |                 |  |      |                |  |                 |         |  |      |  



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



|              |  |                |         |      |   |         |  |   |        
|------------- |  | -------------- | ------- | ---- | - | ------- |  | - | -------
|Time Deposits |  | 2003           |         | 2002 |   | 2001   
|              |  | (in thousands)
|0.00%  0.99% |  | $              | 20,099  |      | $ |        |  | $ |       
|1.00%  1.99% |  |                | 48,116  |      |   | 23,121  |  |   |       
|2.00%  2.99% |  |                | 30,460  |      |   | 72,484  |  |   | 29,010 
|3.00%  3.99% |  |                | 6,294   |      |   | 8,675   |  |   | 18,692 
|4.00%  4.99% |  |                | 3,837   |      |   | 8,564   |  |   | 28,196 
|5.00%  5.99% |  |                | 1,294   |      |   | 2,376   |  |   | 13,636 
|6.00%  6.99% |  |                |        |      |   | 16      |  |   | 59,362 
|7.00%  7.99% |  |                | 1,278   |      |   | 1,212   |  |   | 6,315  
|              |  |                |         |      |   |         |  |   |        
|Total         |  | $              | 111,378 |      | $ | 116,448 |  | $ | 155,211
|              |  |                |         |      |   |         |  |   |        



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Borrowings



The Bank utilizes advances from the Federal Home Loan Bank (FHLB) of Boston as a funding source alternative to retail deposits. By utilizing FHLB of
Boston 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 of Boston. The maximum amount that the FHLB of Boston will advance to member institutions fluctuates from time-to-time in accordance with the policies of the FHLB of Boston. At December 31, 2003,
the Bank had outstanding advances of $22 million from FHLB of Boston; and no advances outstanding from FHLB of Boston at December 31, 2002.



REGULATION



General



The Bank is subject to extensive regulation, examination, and supervision by the OTS, as its chartering agency, and the Federal Deposit Insurance
Corporation (FDIC), as its deposit insurer. The Banks deposit accounts are insured up to applicable limits by the SAIF administered by the FDIC, and the Bank is a member of the FHLB of Boston. The Bank must file reports with the OTS and the
FDIC concerning its activities and financial condition, and it must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of other depository institutions. The OTS and the FDIC conduct
periodic examinations to assess the Banks compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings association can engage and is intended primarily
for the protection of the insurance fund and depositors. NHTB, as a savings and loan holding company, files certain reports with, and otherwise complies with, the rules and regulations of the OTS and SEC under federal securities laws.



The OTS and the FDIC have a significant discretion in connection with their
supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by
the OTS, the FDIC, SEC or the Congress, could have a material adverse impact on the Company, the Bank and the operations of both.



On November 12, 1999, President Clinton signed into law landmark financial services legislation, titled the Gramm-Leach-Bliley Act (GLBA). The
GLBA repeals depression-era laws restricting affiliations among banks, securities firms, insurance companies and other financial service providers. The impact of the GLBA on NHTB and the Bank, where relevant, is discussed throughout the regulation
section below.



The following discussion is intended to be a
summary of the material statutes and regulations applicable to savings associations and their holding companies, and it does not purport to be a comprehensive description of all such statutes and regulations.



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 thereunder. 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 and
securities and insurance brokerage. The Banks authority to invest in certain types of loans or other investments is limited by federal law.



Loans to One Borrower. Under the HOLA, savings associations are generally subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the associations unimpaired capital and surplus. Additional amounts may be lent, not
in excess of 10% of impaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral. Such collateral is defined to include certain debt and equity securities and bullion but generally does not
include real



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estate. At December 31, 2003, the Banks regulatory limit on loans to one borrower was approximately $6.3 million. At December 31, 2003, the Banks
largest aggregate committed amount of loans to one borrower was $5,472,307, and the second largest borrower had an aggregate committed balance of $5,094,404. The Bank is in compliance with all applicable limitations on loans to one borrower.



QTL Test. The HOLA requires a savings association to meet a
qualified thrift lender, or QTL test. Under the QTL test, a savings association 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, an associations total assets less the sum of (a) specified liquid assets up to 20% of total assets, (b) certain intangibles, including goodwill and credit card and
purchased mortgage servicing rights, and (c) the value of property used to conduct the associations business. Qualified thrift investments includes various types of loans made for residential and housing purposed, investments
related to such purposes, including certain mortgage-backed and related securities, consumer loans, small business loans, educational loans, and credit card loans. At December 31, 2003, the Bank maintained 81.25% of its portfolio assets in qualified
thrift investments. The Bank had also met the QTL test in each of the prior 12 months and was, therefore, a qualified thrift lender. A savings association may also satisfy the QTL test by qualifying as a domestic building and loan
association as defined in the Internal Revenue Code of 1986.



A savings association that fails the QTL test must either operate under certain restrictions on its activities or convert to a bank charter. The initial restrictions include prohibitions against (a) engaging in any new activity not
permissible for a national bank, (b) paying dividends not permissible under national bank regulations, (c) obtaining new advances from any Federal Home Loan Bank and (d) establishing any new branch office in a location not permissible for a national
bank in the associations home state. In addition, within one year of the date that a savings association ceases to meet the QTL test, any company controlling the association would have to register under, and become subject to the requirements
of, the Bank Holding Company Act of 1956, as amended (the BHC Act). If the savings association does not requalify under the QTL test within the three-year period after it failed the QTL test, it would be required to terminate any
activity and to dispose of any investment not permissible for a national bank and would have to repay as promptly as possible any outstanding advances from a Federal Home Loan Bank. A savings association that has failed the QTL test may requalify
under the QTL test and be free of such limitations, but it may only do so once.



Capital Requirements. The OTS regulations require savings associations to meet three minimum capital standards: (1) a tangible capital requirement of 1.5% of total assets, as adjusted under the OTS regulations; (2) a
leverage ratio requirement of 3% of core capital to such adjusted assets; and (3) a risk-based capital ratio requirement of 8% of total risk-based capital to total risk-weighted assets. The minimum leverage capital ratio for any other depository
institution that does not have a composite rating of 1 will be 4%. In determining compliance with the risk-based capital requirement, a savings association must compute its risk-weighted 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 and commercial loans, as assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. Tangible capital is defined, generally, as common stockholders equity (including retained earnings), certain noncumulative perpetual preferred stock and related earnings, certain noncumulative perpetual preferred
stock and related earnings and minority interests in equity accounts of fully consolidated subsidiaries, less intangibles (other than certain purchased mortgage servicing rights) and investments in and loans to subsidiaries engaged in activities not
permissible for a national bank. Core capital is defined similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital currency includes
cumulative and other perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses. The allowance for loan and lease losses includable in supplementary
capital is limited to a maximum of 1.25% of risk-weighted assets, and the amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital.



At December 31, 2003, the Bank met each of its capital requirements. For information pertaining to capital requirements,
please see Note 16 of the Consolidated Financial Statements.



Limitations on Capital Distributions. Under OTS capital distribution regulations, certain savings associations will be permitted to pay capital distributions during a calendar year that do not exceed the associations net income for
that year plus its retained net income for the prior two years, without notice to, or approval of, the OTS. However, a savings association subsidiary of a savings and loan holding company, such as



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the Bank, will continue to have to file a notice unless the specific capital distribution requires an application. In addition, the OTS can prohibit a
proposed capital distribution, otherwise permissible under the regulation, if the OTS has determined that the association is in need of more than normal supervision or if it determines that a proposed distribution by an association would constitute
an unsafe or unsound practice. Furthermore, under the OTS prompt corrective action regulations, the Bank would be prohibited from making any capital distribution if, after the distribution, the Bank failed to meet its minimum capital requirements,
as described below. See Prompt Corrective Regulatory Action.



Assessments. Savings associations are required by OTS regulators to pay assessments to the OTS to fund the operations of the OTS. The general assessment, paid on a semiannual basis, is computed upon the savings
associations total assets, including consolidated subsidiaries, as reported in the associations latest quarterly Thrift Financial Report. During 2003, the Bank paid assessments of $111,397.



Branching. Subject to certain limitations, the HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any state of the United States. The authority to establish such branches is available (a) in states that expressly authorize branches of savings associations located in another
state, or (b) to an association that either satisfies the QTL test for a qualified thrift lender or qualifies as a domestic building and loan association under the Internal Revenue Code of 1986, which imposes qualification
requirements similar to those for a qualified thrift lender under the HOLA. See QTL Test. The authority for a federal savings association to establish an interstate branch network would facilitate a geographic diversification
of the associations activities. This authority under the HOLA and the OTS regulations preempts any state law purporting to regulate branching by federal savings associations.



Community Reinvestment. Under the Community Reinvestment Act (the CRA), as implemented by OTS regulations, a
savings association 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 financial institutions nor does it limit an institution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 he 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 CRA rating in its most recent examination.



The CRA regulations establish an assessment system that rates an institution
based on its actual performance in meeting community needs. In particular, the system focuses on three tests: (a) a lending test, to evaluate the institutions record of making loans in its assessment areas; (b) an investment test, to evaluate
the institutions record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and (c) a service test, to evaluate the institutions delivery of
services through its branches, ATMs and other offices. The amended CRA regulations also clarify how an institutions CRA performance would be considered in the applications process.



Transactions with Related Parties. The Banks authority to engage in
transactions with its affiliates is limited by the OTS regulations and by Sections 23A and 23B of the Federal Reserve Act (the FRA). In general, an affiliate of the Bank is any company that controls the Bank or any other
company that is controlled by a company that controls the Bank or any other company that is controlled by a company that controls the Bank, excluding the Banks subsidiaries other than those that are insured depository institutions. The OTS
regulations prohibit a savings association (a) from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies under Section 4(c) at the BHC Act and (b) from purchasing the securities of any
affiliates other than a subsidiary. Section 23A limits the aggregate amount of transactions with all affiliates to 20% of the savings associations capital and surplus. Extensions of credit to affiliates are required to be secured by collateral
in an amount and of a type described in Section 23A, and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the association as those prevailing at the time for comparable transactions with nonaffiliated companies.



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Effective April 1, 2003, the Federal Reserve Board, or FRB, rescinded its interpretations of Sections 23A
and 23B of the FRA and replaced these interpretations with Regulation W. In addition, Regulation W made various changes to existing law regarding Sections 23A and 23B, including expanding the definition of what constitutes an affiliate subject to
Sections 23A and 23B and exempting certain subsidiaries of state-chartered banks from the restrictions of Sections 23A and 23B.



Under Regulation W, all transactions entered into on or before December 12, 2002, which either became subject to Sections 23A and 23B solely because of
Regulation W, and all transactions covered by Sections 23A and 23B, the treatment of which will change solely because of Regulation W, will become subject to Regulation W on July 1, 2003. All other covered affiliate transactions become subject to
Regulation W on April 1, 2003. The Federal Reserve Board expects each depository institution that is subject to Sections 23A and 23B to implement policies and procedures to ensure compliance with Regulation W. We do not expect that the changes made
by Regulation W will have a material adverse effect on our business.



The Banks authority to extend credit to its directors, executive officers, and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Section 22(g) and 22(h) of the FRA and
Regulation O of the FRB thereunder. Among other things, these provisions require that extensions of credit to insiders (a) 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 unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) 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 associations capital. In addition, extensions of credit in excess of certain limits must be approved by the associations board of
directors.



Section 402 of the Sarbanes-Oxley Act of 2002, or
Sarbanes-Oxley, 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 FRA.



Real Estate Lending Standards. The OTS and other federal banking agencies adopted regulations to prescribe standards for extensions of credit that (a) are secured by real estate or (b) are made for the purpose of
financing the construction of improvements on real estate. The OTS regulations require each savings association to establish and maintain written internal real estate lending standards that are consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its real estate lending activities. The standards also must be consistent with accompanying OTS guidelines, which include loan-to-value ratios for the different types of real
estate loans. Associations are also permitted to make a limited amount of loans that do not conform to proposed loan-to-value limitations so long as such exemptions are reviewed and justified appropriately. The guidelines also list a number of
lending situations in which exceptions to the loan-to-value standards are justified.



Enforcement. Under the Federal Deposit Insurance Act (the FDI Act), the OTS has primary enforcement responsibility over savings associations and has the authority to bring enforcement action against all
institution affiliated parties, including any controlling stockholder, attorney, appraiser or accountant who knowingly or recklessly participates in any violation of applicable law or regulation or regulation or breach of fiduciary duty
or certain other wrongful actions that causes or is likely to cause more than a minimal loss or other significant adverse effect on an insured savings association. Civil penalties cover a wide range of violations and actions and range from $5,000
for each day during which violations of law, regulations, orders, and certain written agreements and conditions continue, up to $1 million per day for such violations if the person obtained a substantial pecuniary gain as a result of such violation
or knowingly or recklessly caused a substantial loss to the institution. Criminal penalties for certain financial institution crimes include fines up to $1 million and imprisonment for up to 30 years. In addition, regulators have substantial
discretion to take enforcement action against an institution that fails to comply with its regulatory requirements, particularly with respect to its capital requirements. Possible enforcement actions range from the imposition of a capital plan and
capital directive to receivership, conservatorship, or the termination of deposit insurance. Under the FDI Act, the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings
association. If action is not taken by the Director of the OTS, the FDIC has authority to take such action under certain circumstances.



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Standards for Safety and Soundness. The FDICIA, as amended by Riegle Community Development and Regulatory
Improvement Act of 1994 (the Community Development Act), the OTS and the federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to FDICIA, as amended. The guidelines
establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings standards, and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound
practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the OTS adopted regulations that
authorize, but do not require, the OTS to order an institution that has been given notice by the OTS that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails
to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing action to correct the deficiency 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 FDICIA. 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.



Prompt Corrective Regulatory Action.
Under the OTS prompt corrective action regulations, the OTS is required to take certain, and is authorized to take other, supervisory actions against undercapitalized savings associations. For this purpose, a savings association would be placed in
one of five categories based on the associations capital, consisting of well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. At December 31, 2003, the Bank met the criteria for being well-capitalized.



The severity of the action authorized or required to be taken under the prompt corrective action regulations increases as a banks capital decreases
within the three undercapitalized categories. All banks are prohibited from paying dividends or other capital distributions or paying management fees to any controlling person if, following such distribution, the bank would be undercapitalized.



Insurance of Deposit Accounts



The Bank is a member of the SAIF, and the Bank pays its deposit
insurance assessments to the SAIF. The FDIC also maintains another insurance fund, the BIF, which primarily insures the deposits of banks and state chartered savings banks.



Pursuant to FDICIA, the FDIC established a risk-based assessment system for determining the deposit insurance assessments to
be paid by insured depository institutions. Under the assessment system, the FDIC assigns an institution to one of three capital categories based on the institutions financial information as of its most recent quarterly report filed with the
applicable bank regulatory agency prior to the commencement of the assessment period. The three capital categories consist of (a) well-capitalized, (b) adequately capitalized or (c) undercapitalized. The FDIC also assigns an institution to one of
three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institutions primary federal regulator and information
that the FDIC determines to be relevant to the institutions financial condition and the risk posed to the deposit insurance funds. An institutions assessment rate depends on the capital category and supervisory category to which it is
assigned.



An institutions assessment rate depends on the
capital category and supervisory category to which it is assigned. Any increase in insurance assessments could have an adverse effect on the earnings of insured institutions, including the Bank.



In addition, all FDIC insured institutions are required to pay assessments to
the FDIC at an annual rate of approximately 0.0168% of insured deposits to fund interest payments on bonds issued by the Financing Corporation, an agency established to recapitalize the predecessor to the SAIF. The assessments will continue until
those bonds mature in 2017.



Under the FDICIA, insurance of
deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated



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any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition,
or violation that might lead to termination of deposit insurance.



New Privacy Regulations. Pursuant to the GLBA, the OTS has adopted final regulations implementing the privacy protection provisions of the GLBA. These regulations require each financial institution to adopt procedures to protect
customers nonpublic personal information. The new regulations generally require that the Bank disclose its privacy policy, including identifying with whom it shares a customers nonpublic personal information, to
customers at the time of establishing the customer relationship and annually thereafter. In addition, the Bank will be required to provide its customers with the ability to opt-out of having it share their personal information with
unaffiliated third parties and not to disclose account numbers or access codes to nonaffiliated third parties for marketing purposes. The Bank currently has a privacy protection policy in place and intends to review and amend that policy, if
necessary, for compliance with the regulations.



Prohibitions
Against Tying Arrangements. Federal savings associations are subject to the prohibitions of 12 U.S.C. § 1972 on certain tying arrangements. A depository institution is prohibited, subject to some 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 service from the institution or its affiliates or not obtain services of a competitor of the
institution.



Federal Reserve System



Under regulations of the Federal Reserve Board (the FRB), the
Bank is required to maintain non-interest-earning reserves against its transaction accounts. FRB regulations generally require that reserves of 3% must be maintained against aggregate transaction accounts of $42.1 million or less, subject to
adjustment by the FRB, and an initial reserve of $1.083 million plus 10%, subject to adjustment by FRB between 8% and 14%, against that portion of total transaction accounts in excess of $42.1 million. The first $6.0 million of otherwise reservable
balances, subject to adjustments by FRB, are exempted from the reserve requirements. The Bank is in compliance with these requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at
an Federal Reserve bank or a pass-through account as defined by FRB, the effect of this reserve requirement is to reduce the Banks interest-earning assets, to the extent the requirement exceeds vault cash.



Regulations of Savings Association Holding Companies



NHTB is a non-diversified unitary savings association holding company within
the meaning of the HOLA. As such, NHTB is required to register with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over NHTB and its non-savings
association subsidiaries, if any. 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 association.
Unlike bank holding companies, federal savings and loan holding companies are not subject to any regulatory capital requirement or to the suspension of the FRB.



The HOLA prohibits a savings association holding company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings
association or holding company thereof, without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, a non-subsidiary holding company, or a non-subsidiary company
engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating an application by a holding company to acquire a savings association, the OTS
must consider the financial and managerial resources and future prospects of the company and savings association involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive
factors.



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 only controls one thrift, the Bank. Under the GLBA, 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 the Company, are grandfathered under the GLBA and may continue to operate as a unitary savings and loan holding company without any



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limitations in the types of business activities in which it can engage at the holding company level, provided the Bank continues to satisfy the QTL Test.



In addition, for grandfathered savings and loan holding
companies, such as the Company, the GLBA also prohibits the sale of such entities to nonfinancial companies. This prohibition is intended to restrict the transfer of grandfathered rights to other entities and, thereby, prevent evasion of the
limitation on the creation of new unitary savings and loan holding companies.



Federal Home Loan Bank System



The Bank is a member of the FHLB of Boston, which is one of the regional Federal Home Loan Banks composing the Federal Home Loan Bank System. Each Federal Home Loan Bank 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. Each member of the FHLB of Boston must maintain a minimum investment in FHLB of Boston stock in an
amount equal to the sum of (i) 0.35% of member eligible collateral (subject to a minimum of $10,000 and a maximum of $25,000,000 per member) and (ii) 4.50% of the members activity-based assets. The Bank was in compliance with this requirement
with an investment in the capital stock of the FHLB of Boston at December 31, 2003, of $2.2 million. Any advance from a Federal Home Loan Bank 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 Federal Home Loan Banks 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 Federal Home Loan
Banks can pay as dividends to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. The Bank earned dividends on the FHLB of Boston capital stock in amounts equal to
$61,585, $88,171 and $142,975 during the years ended December 31, 2003, 2002 and 2001, respectively. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, the Banks net interest income would likely also be
reduced.



Under the GLBA, membership in the Federal Home Loan
Bank System is now voluntary for all federally-chartered savings associations, such as the Bank. The GLBA also replaces the existing redeemable stock structure of the Federal Home Loan Bank System with a capital structure that requires each Federal
Home Loan Bank to meet a leverage limit and a risk-based permanent capital requirement. Two classes of stock are authorized: Class A (redeemable on 6-months notice) and Class B (redeemable on 5-years notice).



Liquidity



The Bank is required to maintain sufficient liquidity for safe and sound operations. At year-end 2003 the
Banks liquidity was sufficient to cover the Banks anticipated needs for funding loan commitments of approximately $22 million. The Banks source of funds comes primarily from net deposit inflows, loan amortizations, principal pay
downs from loans, sold loan proceeds, and advances from the FHLB. The Banks average long-term liquidity ratio for the month ended December 31, 2003 was 14.89%, which exceeded the applicable requirements. The Bank has never been subject to
monetary penalties for failure to meet its liquidity requirements.



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.



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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 (BPT) 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. During 1993, the State of New Hampshire instituted a Business Enterprise Tax
(BET), 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 2003, the tax amounted to $32,900.



USA PATRIOT Act



In response to the events of September 11th, President George W. Bush signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal government new powers to address terrorist threats
through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures
intended to encourage information sharing among 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, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions:



| |  | Pursuant to Section 352, all 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Pursuant to Section 326, on May 9, 2003 the Secretary of the Department of Treasury, in conjunction with other bank regulators, issued Final Joint Rules that provide for minimum
standards with respect to customer identification and verification. These Rules became effective on October 1, 2003.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Section 312 requires 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) to establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report
money laundering. Effective December 25, 2001, 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 will be subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Bank regulators are directed to consider a holding companys effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Sarbanes-Oxley Act



On July 30, 2002, President George W. Bush signed into law the
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from



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the type of corporate wrongdoing that occurred in Enron, WorldCom and similar companies. The Sarbanes-Oxley Acts principal legislation 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;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | requirement that companies disclose whether at least one member of the committee is a financial expert (as such term will be 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.
| | - | -------------------------------------------------------------



Although we anticipate that we 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 our results of operations or financial condition.



Other State and Federal Regulation



The Companys common stock is registered with the SEC under Section 12 (g) of the Securities Exchange Act of 1934, as amended (the Exchange
Act). The Company is subject to information, proxy solicitation, insider trading restrictions and other requirements of the Exchange Act.



Numerous other federal and state laws also affect the Companys earnings and activities including federal and state consumer protection laws.
Legislation may be enacted or regulation imposed in the U.S. or its political subdivisions to further regulate banking and financial services or to limit finance charges or other fees or charges earned in such activities. There can be no assurance
whether any such legislation or regulation will place additional limitations on the Companys operations or adversely affect its earnings.



EMPLOYEES



At December 31, 2003, LSB had a total of 143 full-time employees and 26 part-time employees. These employees are not represented by collective bargaining
agents. LSB believes that its relationship with its employees is good.



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|Item 2. | Properties
|------- | ----------



The following table sets forth the location of the LSB offices and certain additional information relating to these offices at December 31, 2003:



|                     |  |             |        |                |         |                          |   |                     |  |      |  |         
|-------------------- |  | ----------- | ------ | -------------- | ------- | ------------------------ | - | ------------------- |  | ---- |  | --------
|                     |  | Year Opened |        | Net Book Value |         | Expiration Date of Lease |   | Lease RenewalOption
|Location             |  |             | Leased |                | Owned   |                          |  
|9 Main Street        |  |             |        |                |         |                          |   |                     |  |      |  |         
|Newport, NH          |  | 1868        |        |                |         |                          | $ | 1,247,721           |  |      |  |         
|565 Route 11         |  |             |        |                |         |                          |   |                     |  |      |  |         
|Sunapee, NH          |  | 1965        |        |                |         |                          | $ | 70,060              |  |      |  |         
|115 East Main Street |  |             |        |                |         |                          |   |                     |  |      |  |         
|Bradford, NH         |  | 1975        |        |                |         |                          | $ | 114,485             |  |      |  |         
|300 Sunapee Street   |  |             |        |                |         |                          |   |                     |  |      |  |         
|Newport, NH          |  | 1978        |        |                |         |                          | $ | 88,489              |  |      |  |         
|165 Route 10 South   |  |             |        |                |         |                          |   |                     |  |      |  |         
|Grantham, NH         |  | 1980        |        |                |         |                          | $ | 287,576             |  |      |  |         
|24 Newport Road      |  |             |        |                |         |                          |   |                     |  |      |  |         
|New London, NH       |  | 1981        |        |                |         |                          | $ | 550,989             |  |      |  |         
|200 Heater Road      |  |             |        |                |         |                          |   |                     |  |      |  |         
|Lebanon, NH          |  | 1986        |        |                |         |                          | $ | 498,278             |  |      |  |         
|106 Hanover Street   |  |             |        |                |         |                          |   |                     |  |      |  |         
|Lebanon, NH          |  | 1997        |        |                |         |                          | $ | 1,934,913           |  |      |  |         
|150 Main Street      |  |             |        |                |         |                          |   |                     |  |      |  |         
|New London, NH       |  | 1999        |        |                |         |                          | $ | 1,115,422           |  |      |  |         
|15 Antrim Road(1)    |  |             |        |                |         |                          |   |                     |  |      |  |         
|Hillsboro, NH        |  | 1994        |        | $              | 189,792 |                          |   |                     |  | 2004 |  | 4 Years 
|83 Main Street(1)    |  |             |        |                |         |                          |   |                     |  |      |  |         
|West Lebanon, NH     |  | 1994        |        | $              | 116,777 |                          |   |                     |  | 2004 |  | 10 Years
|12 Centerra Pkwy.(1) |  |             |        |                |         |                          |   |                     |  |      |  |         
|Lebanon, NH          |  | 1997        |        | $              | 121,477 |                          |   |                     |  | 2007 |  | 5 Years 
|Route 103(1)         |  |             |        |                |         |                          |   |                     |  |      |  |         
|Newbury, NH          |  | 1999        |        | $              |        |                          |   |                     |  | 2004 |  | 1 Year  
|7 Lawrence Street(1) |  |             |        |                |         |                          |   |                     |  |      |  |         
|Andover, NH          |  | 2003        |        | $              | 363,783 |                          |   |                     |  | 2007 |  | 20 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.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------



No matters were submitted to the security holders of the company during the fourth quarter of 2003.



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PART II.



|Item 5. | Market for the Registrants Common Stock and Related Stockholder Matters
|------- | ------------------------------------------------------------------------



The following table shows the market range for the Companys Common Stock based on reported sales prices on the NASDAQ Market System.
New Hampshire Thrift Bancshares, Inc. is traded under the symbol NHTB.



|     |  |                |  |      |        |     |   |       
|---- |  | -------------- |  | ---- | ------ | --- | - | ------
|     |  | Period         |  | High |        | Low
|2003 |  | First Quarter  |  | $    | 21.000 |     | $ | 18.300
|     |  | Second Quarter |  |      | 25.250 |     |   | 20.300
|     |  | Third Quarter  |  |      | 27.040 |     |   | 24.000
|     |  | Fourth Quarter |  |      | 34.270 |     |   | 24.750
|2002 |  | First Quarter  |  | $    | 16.400 |     | $ | 15.000
|     |  | Second Quarter |  |      | 19.600 |     |   | 15.940
|     |  | Third Quarter  |  |      | 19.120 |     |   | 15.750
|     |  | Fourth Quarter |  |      | 19.770 |     |   | 15.000



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 4, 2004, New Hampshire Thrift Bancshares, Inc. had approximately 600 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:



|               |  |      |     |      |   |    
|-------------- |  | ---- | --- | ---- | - | ---
|               |  | 2003 |     | 2002
|First Quarter  |  | $    | .18 |      | $ | .16
|Second Quarter |  |      | .18 |      |   | .16
|Third Quarter  |  |      | .18 |      |   | .16
|Fourth Quarter |  |      | .18 |      |   | .16



For information regarding limitations
of the declaration and payment of dividends by New Hampshire Thrift Bancshares, Inc., see Note 14 of the Notes to Consolidated Financial Statements.



|Item 6. | Selected Financial Data
|------- | -----------------------



|                             |  |                                       |         |      |   |         |  |      |         |      |   |         |  |   |        
|---------------------------- |  | ------------------------------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                             |  | At December 31,                      
|                             |  | 2003                                  |         | 2002 |   | 2001    |  | 2000 |         | 1999
|                             |  | (In thousands, except per share data)
|Selected Balance Sheet Data: |  |                                       |        
|Total Assets                 |  | $                                     | 526,246 |      | $ | 496,645 |  | $    | 493,937 |      | $ | 463,397 |  | $ | 461,448
|Investments                  |  |                                       | 126,179 |      |   | 85,828  |  |      | 56,784  |      |   | 50,724  |  |   | 59,581 
|Loans, net                   |  |                                       | 344,573 |      |   | 317,144 |  |      | 337,183 |      |   | 348,388 |  |   | 346,492
|Mortgage loans held-for-sale |  |                                       | 870     |      |   | 5,556   |  |      | 8,636   |      |   | 1,651   |  |   |       
|Deposits                     |  |                                       | 428,477 |      |   | 429,328 |  |      | 422,737 |      |   | 394,112 |  |   | 366,638
|FHLB Advances                |  |                                       | 22,000  |      |   |        |  |      |        |      |   | 10,000  |  |   | 22,000 
|Shareholders equity         |  |                                       | 39,125  |      |   | 33,766  |  |      | 28,966  |      |   | 26,697  |  |   | 27,243 
|Allowance for loan losses    |  |                                       | 3,899   |      |   | 3,876   |  |      | 4,405   |      |   | 4,433   |  |   | 4,321  
|Non-performing loans         |  |                                       | 1,158   |      |   | 664     |  |      | 2,521   |      |   | 1,871   |  |   | 1,750  
|Non-performing assets        |  |                                       | 1,158   |      |   | 685     |  |      | 2,621   |      |   | 1,916   |  |   | 1,969  
|Book value per share         |  | $                                     | 19.48   |      | $ | 17.24   |  | $    | 14.95   |      | $ | 13.53   |  | $ | 12.93  



75



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|                                                    |  |                                           |        |      |   |        |  |      |        |      |   |        |  |   |       
|--------------------------------------------------- |  | ----------------------------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                    |  | For years ended December 31,             
|                                                    |  | 2003                                      |        | 2002 |   | 2001   |  | 2000 |        | 1999
|                                                    |  | (in thousands, except for per share data)
|Selected Operating Data:                            |  |                                           |       
|Interest income                                     |  | $                                         | 21,494 |      | $ | 25,133 |  | $    | 30,245 |      | $ | 32,657 |  | $ | 24,739
|Interest expense                                    |  |                                           | 5,706  |      |   | 10,293 |  |      | 16,220 |      |   | 17,122 |  |   | 11,857
|                                                    |  |                                           |        |      |   |        |  |      |        |      |   |        |  |   |       
|Net interest income                                 |  |                                           | 15,788 |      |   | 14,840 |  |      | 14,025 |      |   | 15,535 |  |   | 12,882
|Provision for loan losses                           |  |                                           | 100    |      |   | 120    |  |      | 90     |      |   | 60     |  |   | 120   
|                                                    |  |                                           |        |      |   |        |  |      |        |      |   |        |  |   |       
|Net interest income after provision for loan losses |  |                                           | 15,688 |      |   | 14,720 |  |      | 13,935 |      |   | 15,475 |  |   | 12,762
|Total noninterest income                            |  |                                           | 6,199  |      |   | 4,934  |  |      | 3,471  |      |   | 2,812  |  |   | 2,759 
|Total noninterest expense                           |  |                                           | 12,609 |      |   | 12,879 |  |      | 12,630 |      |   | 14,480 |  |   | 10,544
|                                                    |  |                                           |        |      |   |        |  |      |        |      |   |        |  |   |       
|Income before income taxes                          |  |                                           | 9,278  |      |   | 6,775  |  |      | 4,776  |      |   | 3,807  |  |   | 4,977 
|Income taxes                                        |  |                                           | 3,507  |      |   | 2,475  |  |      | 1,676  |      |   | 1,395  |  |   | 1,667 
|                                                    |  |                                           |        |      |   |        |  |      |        |      |   |        |  |   |       
|Net income                                          |  |                                           | 5,771  |      | $ | 4,300  |  | $    | 3,100  |      | $ | 2,412  |  | $ | 3,310 
|                                                    |  |                                           |        |      |   |        |  |      |        |      |   |        |  |   |       
|Per Share Data:                                     |  |                                           |       
|Basic earnings                                      |  | $                                         | 2.92   |      | $ | 2.20   |  | $    | 1.60   |      | $ | 1.17   |  | $ | 1.57  
|Diluted earnings                                    |  | $                                         | 2.84   |      | $ | 2.19   |  | $    | 1.59   |      | $ | 1.17   |  | $ | 1.56  
|Dividends paid                                      |  | $                                         | 0.72   |      | $ | 0.64   |  | $    | 0.64   |      | $ | 0.64   |  | $ | 0.64  



|                                                                                 |  |                              |   |  |        |   |  |        |   |  |        |   |  |        |  
|-------------------------------------------------------------------------------- |  | ---------------------------- | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | -
|                                                                                 |  | For years ended December 31, |  
|                                                                                 |  | 2003                         |   |  | 2002   |   |  | 2001   |   |  | 2000   |   |  | 1999   |  
|Performance Ratios:                                                              |  |                              |  
|Return on average assets                                                         |  | 1.15                         | % |  | 0.88   | % |  | 0.65   | % |  | 0.52   | % |  | 0.91   | %
|Return on average equity                                                         |  | 15.83                        |   |  | 13.94  |   |  | 11.07  |   |  | 8.88   |   |  | 12.08  |  
|Average equity as a percent of average assets                                    |  | 7.28                         |   |  | 6.35   |   |  | 5.87   |   |  | 5.91   |   |  | 7.49   |  
|Interest rate spread                                                             |  | 3.44                         |   |  | 3.35   |   |  | 3.29   |   |  | 3.56   |   |  | 3.57   |  
|Net interest margin                                                              |  | 3.51                         |   |  | 3.42   |   |  | 3.33   |   |  | 3.64   |   |  | 3.75   |  
|Average interest-earning assets to average interest-bearing liabilities          |  | 105.94                       |   |  | 103.34 |   |  | 100.99 |   |  | 101.81 |   |  | 104.50 |  
|Operating expense as a percent of average total assets                           |  | 2.52                         |   |  | 2.65   |   |  | 2.65   |   |  | 3.15   |   |  | 2.36   |  
|Dividend payout ratio                                                            |  | 24.66                        |   |  | 29.09  |   |  | 40.00  |   |  | 54.70  |   |  | 41.03  |  
|Capital Ratios:                                                                  |  |                              |  
|Tier 1 leverage capital ratio                                                    |  | 7.56                         |   |  | 7.02   |   |  | 6.65   |   |  | 6.55   |   |  | 6.74   |  
|Total risk-based capital ratio                                                   |  | 11.88                        |   |  | 12.12  |   |  | 10.83  |   |  | 11.14  |   |  | 11.59  |  
|Asset Quality Ratios:                                                            |  |                              |  
|Nonperforming loans as a percent of loans receivable, net                        |  | 0.34                         |   |  | 0.21   |   |  | 0.40   |   |  | 0.29   |   |  | 0.21   |  
|Nonperforming assets as a percent of total assets                                |  | 0.22                         |   |  | 0.14   |   |  | 0.29   |   |  | 0.23   |   |  | 0.20   |  
|Allowance for loan losses as a percent of loans before allowance for loan losses |  | 1.12                         |   |  | 1.21   |   |  | 1.29   |   |  | 1.26   |   |  | 1.23   |  
|Allowance for loan losses as a percent of nonperforming loans                    |  | 336.68                       | % |  | 583.73 | % |  | 174.73 | % |  | 236.93 | % |  | 246.91 | %



76



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|Item 7. | Managements Discussion and Analysis of Financial Condition and Operating Results
|------- | ---------------------------------------------------------------------------------



The information called for by this item is contained on pages 5 through 23 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 23 of this document.



|I
tem 8. | Financial Statements
|-------- | --------------------



The report of independent accountants and the financial information called for by this item are contained on pages 24 through 53 of this document.



|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------



None.



|Item 9A. | Controls and Procedures
|-------- | -----------------------



Management, including the Companys President and Chief Executive Officer and Chief Financial Officer and Treasurer, 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 and Treasurer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange
Act is recorded, processed, summarized and reported as and when required.



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.



PART III.



|Item 10. | Directors and Executive Officers of the Registrant
|-------- | --------------------------------------------------



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 Shareholders to be held on May 13, 2004 which proxy statement will be
filed with the Securities and Exchange Commission on or about April 7, 2004.



Code of Ethics. NHTB has adopted a Code of Ethics Policy, which applies to all employees, directors and officers of NHTB and LSB. NHTB has also adopted a Code of Ethics for Senior Financial Officers of NHTB, which applies to NHTBs
principal executive officer, principal financial officer, principal accounting officer or controller or person performing similar functions for NHTB and LSB, and which requires compliance with the Conflict of Interest Policy and Code of Conduct. The
Code of Ethics for Senior Financial Officers of NHTB 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 is filed as Exhibit 14.1 to this report.



|Item 11. | Executive Compensation
|-------- | ----------------------



Certain information relating to directors and executive officers of the Company, executive compensation, security ownership of certain beneficial owners and management,
and certain relationships and related transactions is incorporated by reference herein from the Companys definitive proxy statement in connection with its Annual Meeting of Shareholders to be held on May 13, 2004, which proxy statement will be
filed with the Securities and Exchange Commission on or about April 7, 2004.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management
|-------- | --------------------------------------------------------------



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 Shareholders to be held on May 13, 2004, which proxy
statement will be filed with the Securities and Exchange Commission on or about April 7, 2004.



77



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##### Table of Contents

The following table sets forth the aggregate information of our equity compensation plans in effect as of
December 31, 2003.



|                                                           |  |                                                                                          |  |                                                                          |       |                                                                                                                                        |       
|---------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ----- | -------------------------------------------------------------------------------------------------------------------------------------- | ------
|Plan category                                              |  | Number of securitiesto be issued upon exercise ofoutstanding options,warrants and rights |  | Weighted-averageexercise price ofoutstanding options,warrants and rights |       | Number of securitiesremaining available forfuture issuance under equitycompensation plans(excluding
securitiesreflected in column (a))
|                                                           |  | (a)                                                                                      |  | (b)                                                                      |       | (c)                                                                                                                                   
|Equity compensation plans approved by security holders     |  | 268,500                                                                                  |  | $                                                                        | 20.68 |                                                                                                                                        | 22,205
|Equity compensation plans not approved by security holders |  |                                                                                         |  |                                                                          |      |                                                                                                                                        |      
|                                                           |  |                                                                                          |  |                                                                          |       |                                                                                                                                        |       
|Total                                                      |  | 268,500                                                                                  |  | $                                                                        | 20.68 |                                                                                                                                        | 22,205
|                                                           |  |                                                                                          |  |                                                                          |       |                                                                                                                                        |       



|Item 13. | Certain Relationships and Related Transactions
|-------- | ----------------------------------------------



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 Shareholders to be held on May 13, 2004, which proxy statement will be
filed with the Securities and Exchange Commission on or about April 7, 2004.



|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 Shareholders to be held on May 13, 2004, which proxy statement will be filed with the Securities and Exchange Commission on or about April 7, 2004.



PART IV.



|Item 15. | Exhibits, Lists and Reports on Form 8-K
|-------- | ---------------------------------------



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 statement of financial condition of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements
of income, change in shareholders equity and cash flows for each of the years in the three-year period ended December 31, 2003, together with the related notes and the independent auditors report of Shatswell, MacLeod & Company, P.C.
independent public accountants.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Schedules omitted as they are not applicable.
| | --- | ---------------------------------------------



| | (b) | Reports on Form 8-K
| | --- | -------------------



NHTB filed a Form 8-K on October 16, 2003 furnishing to the SEC a press release announcing NHTBs earnings for the period ended September 30, 2003.



| | (c) | List of Exhibits. (Filed herewith unless otherwise noted.)
| | --- | ----------------------------------------------------------



78



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##### Table of Contents

|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           | 
|2.1        |  | Agreement and Plan of Reorganization, dated as of July 26, 1996, by and among New Hampshire Thrift Bancshares, Inc. (NHTB), Lake Sunapee Bank, fsb (the Bank) and
Landmark Bank. (Landmark), including Annex A, Agreement and Plan of Merger, dated as of July 26, 1996, by and between Landmark and the Bank, and joined in by NHTB (previously filed as an Exhibit to the Companys Form S-4 (No.
333-12645) filed with the Securities and Exchange Commission (the Commission) on November 5, 1996 (the November 5, 1996 S-4))
|           | 
|2.2        |  | Acquisition Agreement, dated April 12, 1999, by and among Sun Life Assurance Company of Canada (U.S.); New London Trust, FSB, a federally-chartered savings bank in stock form; PM Trust
Holding Company, a Connecticut corporation; Cargill Bank, a state-chartered savings and loan association; Mascoma Savings Bank, a federally-chartered savings bank and Lake Sunapee Bank, fsb. (previously filed as an Exhibit to the Companys
March 31, 1999 Form 10-QSB filed on May 14, 1999).                                                
|           | 
|2.3        |  | Purchase and Assumption Agreement, dated April 12, 1999, among PM Trust Holding Company, a Connecticut corporation; PM Trust Holding Company, a Connecticut corporation; Cargill Bank, a
state-chartered savings and loan association; Mascoma Savings Bank, a federally-chartered savings bank and Lake Sunapee Bank, fsb. (previously filed as an Exhibit to the Companys March 31, 1999 Form 10-QSB filed on May 14,
1999).                                                                                                            
|           | 
|2.4        |  | Asset and Liability Allocation Agreement dated April 12, 1999, by and among Cargill Bank, a state-chartered savings and loan association; Mascoma Savings Bank, a federally chartered savings
bank and Lake Sunapee Bank, fsb. (previously filed as an Exhibit to the Companys March 31, 1999 Form 10-QSB filed on May 14, 1999).                                                                                                                                                                                                         
|           | 
|3.1        |  | Amended and Restated Certificate of Incorporation of NHTB (previously filed as an exhibit to the November 5, 1996 S-4).                                                                                                                                                                                                                                                                                                                                                                                                                    
|           | 
|3.2        |  | Amended and Restated Bylaws of NHTB (previously filed as an exhibit to the November 5, 1996 S-4).                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | 
|4.1        |  | Stock Certificate of New Hampshire Thrift Bancshares, Inc. (previously filed as an exhibit to the Companys Form S-4 (file No. 33-27192) filed with the Commission on March 1,
1989).                                                                                                                                                                                                                                                                                                                                                      
|           | 
|10.1       |  | Profit Sharing-Stock Ownership Plan of Lake Sunapee Bank, fsb (previously filed as an exhibit to the November 5, 1996 S-4).                                                                                                                                                                                                                                                                                                                                                                                                                
|           | 
|10.2       |  | New Hampshire Thrift Bancshares, Inc. 1996 Stock Option Plan (previously filed as an exhibit in the November 5, 1996 S-4).                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | 
|10.3       |  | Lake Sunapee Bank, fsb 1987 Incentive Stock Option Plan (previously filed as an exhibit to the Companys Form S-4 (file No. 33-27192), filed with the Commission on March 1,
1989).                                                                                                                                                                                                                                                                                                                                                        
|           | 
|10.4       |  | New Hampshire Thrift Bancshares, Inc. 1996 Incentive Stock Option Plan (previously filed as an exhibit to the Companys Form S-4 (file No. 33-27192), filed with the Commission on March
1, 1989).                                                                                                                                                                                                                                                                                                                                         
|           | 
|10.5       |  | Employment Agreement between NHTB and Stephen W. Ensign (previously filed as an exhibit in the November 5, 1996 S-4)                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | 
|10.6       |  | Employment Agreement between the Bank and Stephen R. Theroux (previously filed as an exhibit in the November 5, 1996 S-4)                                                                                                                                                                                                                                                                                                                                                                                                                  
|           | 
|11.1       |  | Computation of Per Share Earnings (see Note 1 to Consolidated Financial Statements).                                                                                                                                                                                                                                                                                                                                                                                                                                                       



79



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##### Table of Contents

|     |  |                                                                                                                                                                  
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|14.1 |  | Code of Ethics                                                                                                                                                   
|     | 
|21.1 |  | Subsidiaries of the Company (incorporated reference to the Registration Statement on Form S-4, as amended, as originally filed with the SEC on November 5, 1996.)
|     | 
|23.1 |  | Consent of Shatswell, MacLeod & Company, P.C.                                                                                                                    
|     | 
|31.1 |  | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                           
|     | 
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                           
|     | 
|32.1 |  | Section 1350 Certification                                                                                                                                       
|     | 
|32.2 |  | Section 1350 Certification                                                                                                                                       



80



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##### Table of Contents

Signatures



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



New Hampshire Thrift Bancshares, Inc.



|    |  |                                             |  |                                                                                           |  |               
|--- |  | ------------------------------------------- |  | ----------------------------------------------------------------------------------------- |  | --------------
|    |  |                                             | 
|By: |  | /s/    STEPHEN W.
ENSIGN(Stephen W.
Ensign) |  | Chairman of the Board President and Chief Executive Officer (Principal Executive Officer) |  | March 26, 2004



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(Stephen W.
Ensign)     |  | Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)                                                          |  | March 26, 2004
| |  |                                                 | 
| |  | /s/    STEPHEN R.
THEROUX(Stephen R.
Theroux)   |  | Vice Chairman of the Board, Executive Vice President, Chief Operating Officer, Chief Financial Officer and Secretary (Principal Accounting Officer) |  | March 26, 2004
| |  |                                                 | 
| |  | /s/    LEONARD R.
CASHMAN(Leonard R.
Cashman)   |  | Director                                                                                                                                            |  | March 26, 2004
| |  |                                                 | 
| |  | /s/    JOHN A. KELLEY,
JR.(John A. Kelley,
Jr.) |  | Director                                                                                                                                            |  | March 26, 2004
| |  |                                                 | 
| |  | /s/    PETER R.
LOVELY(Peter R.
Lovely)         |  | Director                                                                                                                                            |  | March 26, 2004
| |  |                                                 | 
| |  | /s/    DENNIS A.
MORROW(Dennis A.
Morrow)       |  | Director                                                                                                                                            |  | March 26, 2004
| |  |                                                 | 
| |  | /s/    JACK H.
NELSON(Jack H.
Nelson)           |  | Director                                                                                                                                            |  | March 26, 2004
| |  |                                                 | 
| |  | /s/    JOSEPH B.
WILLEY(Joseph B.
Willey)       |  | Director                                                                                                                                            |  | March 26, 2004



81



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##### Table of Contents

New Hampshire Thrift Bancshares, Inc.



Directors



Stephen W. Ensign, Chairman

Stephen R. Theroux, Vice Chairman

Leonard R.
Cashman

William C. Horn

John A. Kelley, Jr.

Peter R. Lovely

Dennis A. Morrow

Jack H. Nelson

Joseph B. Willey



Officers



Stephen W. Ensign

Chairman of the Board,

President and Chief Executive
Officer



Stephen R. Theroux

Vice Chairman of the Board

Executive Vice President, Chief

Operating Officer, Chief Financial

Officer and
Corporate Secretary



Sandra M. Blackington

Assistant Corporate Secretary



Lake Sunapee Bank, fsb



Directors



John J. Kiernan, Chairman

Stephen W. Ensign, Vice Chairman

Stephen R. Theroux

Leonard R. Cashman

William C. Horn

John A. Kelley, Jr.

Peter R. Lovely

Dennis A. Morrow

Jack H. Nelson

Priscilla W. Ohler

Kenneth D. Weed

Joseph B. Willey



Executive Officers



John J. Kiernan

Chairman of the Board



Stephen W. Ensign

Vice Chairman of the Board,

President and Chief
Executive Officer



Stephen R. Theroux

Executive Vice President, Chief

Operating Officer, and Chief

Financial Officer



Sandra M. Blackington

Assistant Corporate Secretary



Senior Vice Presidents



Douglas S. Baxter

Marketing



H. Bliss Dayton

Compliance and Internal Audit



W. Grant MacEwan

Commercial Lending



William J. McIver

Chief Information Officer and

Retail Banking



Robert C. OBrien

Loan Origination



Sharon L. Whitaker

Mortgage Lending



Vice Presidents



Richard G.
Biron

Lake Sunapee Financial Services



Colin S. Campbell

Commercial Lending



Frances E. Clow

Human Resources



Stephen B. Ellis

Loan Origination



Paul Faber

Commercial Lending



Dana C. Favor

Loan Review



Albert S. Freeman III

Commercial Lending



Assistant Vice Presidents



Arlene F. Adams

Commercial Banking



Erik C. Cinquemani

Commercial Lending



Juanita A. Dupont

Loan Processing



Marlene H. Gardner

Security Officer



Christopher H. Head

Lake Sunapee Financial Services



Koreen
M. Henne

Retail Banking



Laura Jacobi

Accounting and Finance



Peter N. Jennings

Loan Origination



Suzanne Johnson

Loan Servicing



Francetta Raymond

Loan Operations



Pellegrino A. Rossi

Lake Sunapee Group



Roxanne M. Shedd

Retail Banking



Terri G. Spanos

Retail Banking



Marie A. Stevens

Retail Operations



Angie L. Stocker

Retail Banking



82



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##### Table of Contents

Board of Advisors



O. Prunella Anastos

Benjamin K. Barton

Kenneth O. Barton

William S. Berger

George O. Binzel

William A. Bittinger

Paul R. Boucher

James F. Briggs

Robert S. Burgess

Ruth I. Clough

J. D. Colcord

Jacqueline C. Cote

Robert J. Cricenti

Ernest G. Dennis, Jr.

Harry Dorman III

William J. Faccone, Sr.

Gordon B. Flint, Sr.

John W. Flynn, Jr.

John W. Flynn, Sr.

Sheffield J. Halsey

Douglas J. Homan

Rita M. Hurd

Alf E. Jacobson

Curtis A. Jacques

Sharon J. Jacques

Michael D. Johnson

Edward T. Kerrigan

David H. Kidder

Janet R. Kidder

John J. Kiernan, Jr.

Victor W. Laro

Paul J. Linehan

Robert MacNeil

Elizabeth W. Maiola

John J. Marcotte

Thomas F. McCormick

J. David McCrillis

John C. McCrillis

Maureen McNamara

F. Graham McSwiney

Kenneth Miller

Thomas J. Mills

Linda L. Oldham

Paul Olsen

Daniel P. ONeill

Betty H. Ramspott

David N. Reney

Genelle M. Richards

Chris Scott

Edwin G. Sielewicz

William J. Simms

Fredric M. Smith

Earl F. Strout

James R. Therrien

Stefan Timbrell

Janis H. Wallace

James P. Wheeler

Bradford C. White

John W. Wiggins, Sr.

Bruce Williamson

Thomas B. Woodger

Michael J. Work

Elizabeth Young



Shareholder 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

Thacher Proffitt & Wood LLP

1700 Pennsylvania Avenue, NW

Washington, DC 20006



Information on Common Stock



The common stock is traded over-the-counter and quoted on the NASDAQ National Market under the symbol NHTB. There were approximately 603 shareholders of record on December 31, 2003.



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



|               |  |      |        |     |   |       
|-------------- |  | ---- | ------ | --- | - | ------
|2003           |  | High |        | Low
|First Quarter  |  | $    | 21.000 |     | $ | 18.300
|Second Quarter |  |      | 25.250 |     |   | 20.300
|Third Quarter  |  |      | 27.040 |     |   | 24.000
|Fourth Quarter |  |      | 34.270 |     |   | 24.750



This Annual Report
has been written by the Banks staff.



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