Forward-looking Statements

Statements included in this discussion, in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases, and in oral statements made on behalf of the Company with the approval of an authorized executive officer, which are not historical or current facts, are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events or circumstances.

General

New Hampshire Thrift Bancshares, Inc. (the "Company" or "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 organized in 1868. The Bank is a member of the Federal Deposit Insurance Corporation ("FDIC") and its deposits are insured by the FDIC. The Bank is regulated by the Office of Thrift Supervision ("OTS").

The Company's profitability is derived primarily from the Bank. The Bank's earnings in turn are generated from the net income from the earnings on its loan and investment portfolios less the cost of its deposit accounts and borrowings. These core revenues are supplemented by the gain on sales of loans originated for sale, retail banking service fees, the gain on the sale of investment securities and brokerage fees. The Bank passes on its earnings to the Company to the extent allowed by OTS regulations. As of August 11, 2009, the Company had $387,275 in cash available which it plans to use, along with its dividends from the Bank, to continue to pay quarterly dividends on preferred and common stocks and the interest on its subordinated debentures.

Overview

• Total assets were $912,271,721 at June 30, 2009, an increase of $69,073,307 from December 31, 2008.

• Net loans receivable outstanding decreased $5,576,033 to $631,144,257 at June 30, 2009, from December 31, 2008.

• The Company earned $3,014,412, or $0.48 per diluted common share, for the six months ended June 30, 2009, compared to $2,790,600, or $0.48 per diluted common share, for the same period in 2008.

• The Company earned $1,682,259, or $0.27 per diluted common share, for the quarter ended June 30, 2009, compared to $1,406,143, or $0.24 per diluted common share, for the same period in 2008.

• For the quarter ended June 30, 2009, the Bank originated $105,076,611 in loans, compared to $74,724,851 in originated loans for the quarter ended June 30, 2008.

• The Bank's loan servicing portfolio totaled $333,893,613 at June 30, 2009, an increase from $317,054,244 at June 30, 2008.

• The Bank's interest rate margin increased to 3.39% at June 30, 2009 from 3.35% at June 30, 2008, as the decrease in short-term interest rates enabled the Bank to reprice its maturing liabilities faster than its assets.

• On July 9, 2009, the Company announced a quarterly shareholder dividend in the amount of $0.13 per share payable on July 31, 2009.

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 an 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 15-17 of this report.

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

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 June 30, 2009, there were no valuation allowances set aside against any deferred tax assets.

Interest Income Recognition

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

Capital Securities

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

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

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

On March 30, 2004, NHTB Capital Trust III ("Trust III"), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of 6.06% 5 Year Fixed-Floating Capital Securities ("Capital Securities III"). Trust III also issued common securities to the Company and used the net proceeds from the offering to purchase a like amount of 6.06% Junior Subordinated Deferrable Interest Debentures ("Debentures III") of the Company. Debentures III are the sole assets of Trust III. Total expenses associated with the offering of $160,402 are included in other assets and are being amortized on a straight-line basis over the life of Debentures III. On June 17, 2009, the rate of Trust III converted to a rate that adjusts quarterly at three-month LIBOR plus 2.79%.

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

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

Interest Rate Swap

On May 1, 2008, the Company entered into an interest rate swap agreement with PNC Bank, effective on June 17, 2008. The interest rate agreement converts Trust II's interest rate from a floating rate to a fixed-rate basis. The interest rate swap agreement has a notional amount of $10.0 million maturing June 17, 2013. Under the swap agreement, the Company is to receive quarterly interest payments at a floating rate based on three-month LIBOR plus 2.79% and is obligated to make quarterly interest payments at a fixed rate of 6.65%.

For the six months ended June 30, 2009, total assets increased $69,073,307, or 8.19%, from $843,198,414 at December 31, 2008 to $912,271,721 at June 30, 2009 due primarily to an increase in securities available-for-sale. Securities available-for-sale increased $87,280,553, or 106.45%, to $169,269,041 over the same period, as the Bank purchased additional mortgage-backed securities.

Net loans receivable decreased $5,576,033, or 0.88%, from $636,720,290 at December 31, 2008 to $631,144,257 at June 30, 2009. For the six months ended June 30, 2009, the Bank originated $182.3 million in loans, compared to $128.8 million in loans for the six months ended June 30, 2008. The decrease of loans held in portfolio was primarily due to an increase in refinancings resulting from a decrease in rates for fixed rate mortgage loans which the Bank typically sells into the secondary market. At June 30, 2009, the Bank's mortgage servicing loan portfolio amounted to $333,893,613, compared to $317,054,244 at June 30, 2008. The Bank expects to continue to sell fixed-rate loans into the secondary market in order to manage interest rate risk. Market risk exposure during the production cycle is managed through the use of secondary market forward commitments. At June 30, 2009, adjustable-rate mortgage loans comprised approximately 73.1% of the Bank's real estate mortgage loan portfolio.

Securities available-for-sale increased $87,280,553 to $169,269,041 at June 30, 2009, from $81,988,488 at December 31, 2008. The Bank's net unrealized gain (after tax) on its investment portfolio was $92,711 at June 30, 2009 compared to an unrealized gain (after tax) of $222,501 at December 31, 2008. The investments in the Bank's securities portfolio that are temporarily impaired as of June 30, 2009 consist of debt securities issued by U.S. government corporations and agencies, corporate debt with strong credit ratings and preferred stock issued by corporations and government sponsored enterprises with strong credit ratings and stable credit outlooks. The unrealized losses are primarily attributable to changes in market interest rates and recent uncertainties in the financial markets. Management does not intend to sell these securities in the near term. Since the Bank has the ability to hold debt securities until maturity and equity securities for the foreseeable future, no declines are deemed to be other than temporary.

Real estate owned ("OREO") and property acquired in settlement of loans amounted to $100,500 as of June 30, 2009, compared to $288,305 as of December 31, 2008.

Goodwill and other intangible assets amounted to $29,574,003, or 3.24% of total assets, as of June 30, 2009, as compared to $29,853,997, or 3.54% of total assets, as of December 31, 2008 due to normal amortization of core deposit intangible assets.

Deposits increased $30,469,113 to $683,822,438 at June 30, 2009, from $653,353,325 at year-end December 31, 2008. Non-interest bearing checking accounts increased $3,556,513, or 7.74%, savings and interest-bearing checking accounts increased $9,464,771, or 3.01%, and time deposits increased $17,447,829, or 5.95%. The Bank's transaction accounts balances are influenced by the seasonal migration of its owners and balances in these accounts typically increase during the second quarter. The Bank's time deposits increased due to the need for depository services and the enhanced guarantee of FDIC insurance in light of uncertain credit markets.

Securities sold under agreements to repurchase decreased $3,343,510, or 22.18%, to $11,729,481 at June 30, 2009, from $15,072,991 at December 31, 2008 due to normal transactional fluctuations. Repurchase agreements are collateralized by some of the Bank's government and agency investment securities.

The Bank maintained balances of $96,090,498 in advances from the Federal Home Loan Bank of Boston ("FHLBB") as of June 30, 2009, an increase of $29,773,013, or 44.89%, from December 31, 2008. Short-term FHLBB advances were utilized to assist in the funding of the purchase of mortgage-backed securities during the second quarter.

Other borrowings decreased $80,000 to $2,157,500 at June 30, 2009, from December 31, 2008. During the six months ended June 30, 2009, the Company renewed a $2,000,000 line of credit from PNC Bank to the Company and paid $80,000 on an outstanding loan.

Allowance for Loan Losses

The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. Adjustments to the allowance 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 by preparing a worksheet applying loss factors to outstanding loans by type. In determining the loss factors, the Bank considers historical losses and market conditions. Loss factors may be adjusted for qualitative factors that, in management's judgment, affect the collectability of the portfolio.

The allowance for loan losses incorporates the results of measuring impairment for specifically identified non-homogeneous problem loans in accordance with 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 loan's contractual terms. Measurement of impairment is based on the present value of expected cash flows, market price of the loan, or the fair value of collateral. Measurement of impairment does not apply to large groups of smaller balance homogeneous loans such as residential mortgages, home equity loans or consumer loans.

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

The allowance for loan losses at June 30, 2009 was $7,232,737, compared to $5,567,859 at December 31, 2008. The increase comes from the net impact of $2,365,000 in provisions for loan loss and $700,123 in net charge-offs over the first six months of 2009. The provisions were made in response to economic and market conditions, higher levels of classified loans, and increases in loan delinquency and charge-offs. The larger allowance for loan loss is attributable to general portfolio trends and weaker economic conditions, not specific to any individual credits. At $7.2 million, the allowance for loan loss represents 1.14% of total loans, up from 0.87% at December 31, 2008.

In addition to the allowance for loan losses, the Bank maintains an allowance for losses from the fee for service overdraft program. At June 30, 2009, the allowance for overdraft losses was $21,813, compared to $26,453 at year-end 2008. The provision for overdraft losses was $30,000 for the six months ended June 30, 2009 compared to $77,000 over the same period in 2008. See the chart below showing a summary of activity in the allowance for overdraft losses for charge-offs and recoveries attributable to overdrafts.

Loan charge-offs were $800,416 during the first six months of 2009 compared to $545,404 during all of 2008. Recoveries were $100,293 over the first six months of 2009 compared to $42,635 for the 12-month period ended December 31, 2008. This resulted in net charge-offs of $700,123 for the first half of 2009 compared to $502,769 for all of 2008. The higher net charge-offs are a reflection of weaker market

conditions as borrowers are finding it more difficult to resolve financial problems. Two commercial loans and three residential rental income properties accounted for approximately two-thirds of the amount charged-off during the six months ended June 30, 2009. The loss experience in the first six months of 2009 influenced the decision to make provisions and build the allowance.

Classified loans include non-performing loans and performing loans that have been adversely classified. Total classified loans at June 30, 2009 were $15,119,744 compared to $9,122,365 at December 31, 2008. The increase comes from the change in risk ratings of some commercial relationships due to the weaker cash flows those companies are experiencing. About $1.1 million of the rise in the classified loan total is attributable to an increase in the loan balances over 90 days past due. Special mention loans were $12,637,010 at June 30, 2009, up slightly from $12,153,366 at year-end 2008. At June 30, 2009 the Bank had $100,500 in Other Real Estate Owned. That compares to $288,305 at December 31, 2008. During the first half of 2009 the Bank has been successful in keeping OREO from increasing by liquidating properties at public auction or selling them soon after the public auction. Losses are incurred in that liquidation process and the loss experience suggests it is prudent to continue funding provisions to build the allowance for loan loss. While, for the most part, quantifiable loss amounts have not been identified with individual credits; the Bank anticipates more charge-offs as loan issues are resolved.

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. For the six-month period ended June 30, 2009, all loans, for which management possesses information about possible borrower credit problems and doubts a borrowers ability to comply with present loan repayment terms, or to repay a loan through liquidation of collateral, are included in the tables below or discussed herein.

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

                                             For the six months ended
                                                     June 30,
                                               2009             2008
            Balance, beginning of period   $  5,567,859      $ 5,160,628
            Charged-off loans                  (800,415 )       (128,665 )
            Recoveries                          100,293           14,279
            Provision charged to income       2,365,000          100,000

            Balance, end of period         $  7,232,737      $ 5,146,242

                                                           For the year ended December 31,
                                      2008             2007             2006             2005             2004
Balance, beginning of period       $ 5,160,628      $ 3,950,986      $ 3,990,503      $ 4,019,450      $ 3,898,650
Charged-off loans                     (545,404 )       (128,566 )        (75,196 )        (36,766 )        (14,737 )
Recoveries                              42,635           34,847            5,979            7,819           60,540
Balance from acquisitions                             1,303,361               -                -                -
Provision charged to income            910,000               -            29,700               -            74,997

Balance, end of period             $ 5,567,859      $ 5,160,628      $ 3,950,986      $ 3,990,503      $ 4,019,450

             NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF

                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following is a summary of activity in the allowance for overdraft losses:



                                           Six Months            Twelve Months
                                         Ended June 30,        Ended December 31,
                                        2009        2008              2008
      Beginning balance               $  26,453   $  20,843   $             20,843
      Overdraft charge-offs           $ 152,642   $ 165,493   $            373,598
      Overdraft recoveries            $ 118,002   $  96,547   $            188,108

      Net Overdraft Losses            $  34,640   $  68,946   $            185,490
      Provision for overdraft loans   $  30,000   $  77,000   $            191,100

      Ending Balance                  $  21,813   $  28,897   $             26,453

The following table shows the breakdown of non-performing assets and non-performing assets as a percentage of total assets (dollars in thousands):

                                      June 30, 2009          December 31, 2008
       90-day delinquent loans (1)   $   4,146   0.45 %    $     3,004       0.36 %
       Non-accrual impaired loans        3,799   0.42 %          4,023       0.48 %
       Other real estate owned             100   0.01 %            288       0.03 %

       Total non-performing loans    $   8,045   0.88 %    $     7,315       0.87 %

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

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

                                                            June 30, 2009            December 31, 2008
Real estate loans-
Conventional                                              $  4,426        74 %     $     3,448         76 %
Construction                                                   765         2 %             421          2 %
Collateral and consumer                                        168        13 %             139         12 %
Commercial and municipal                                     1,642        11 %           1,376          9 %
Impaired Loans                                                 232         0 %             210          1 %


Total valuation allowance                                 $  7,233       100 %     $     5,594        100 %


Total valuation allowance as percentage of total loans        1.14 %                      0.87 %

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

. . .