FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Commission file number 33-22807-B
PEMI BANCORP, INC.
------------------
(exact name of registrant as specified in its charter)
New Hampshire 02-0386832
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
287 Highland Street
Plymouth, New Hampshire 03264
----------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 536-3339
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
- ------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
---------------
(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 (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of 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. [X] - Not Applicable.
The aggregate market value of the common stock held by non-affiliates of the
registrant was approximately $7,483,374 on February 28, 1997. On that date,
554,324 shares of common stock were held by non-affiliates of the registrant.
On March 7, 1997, 690,401 shares of common stock were issued and outstanding.
<PAGE>
TABLE OF CONTENTS
Part I
Item 1 - Business
Item 2 - Properties
Item 3 - Legal Proceedings
Item 4 - Submission of Matters to a Vote of
Security Holders
Part II
Item 5 - Market for Registrant's Common Stock
and Related Security Holder Matters
Item 6 - Selected Financial Data
Item 7 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations
Item 8 - Financial Statements and Supplementary
Data
Item 9 - Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure
Part III
Item 10 - Directors and Executive Officers
of the Registrant
Item 11 - Executive Compensation
Item 12 - Security Ownership of Certain
Beneficial Owners and Management
Item 13 - Certain Relationships and
Related Transactions
Part IV
Item 14 - Exhibits, Financial Statement
Schedules, and Reports on Form 8-K
Signatures
<PAGE>
BUSINESS OF THE COMPANY
THE COMPANY
The Company was organized in March of 1985 for the purpose of becoming
a bank holding company, to own and control one hundred percent (100%) of the
stock of Pemigewasset National Bank (the "Bank"). The Company's primary asset is
the stock of the Bank and the Company's primary activity is in connection with
the operation of the Bank.
THE BANK
The Bank is a national banking association organized under the laws of
the United States in 1881. The Bank has served the banking needs of the
Plymouth, New Hampshire community since its organization. The Bank has paid
dividends in each year since 1882. The Bank operates out of five locations: The
Downtown Plymouth office which was constructed in 1955 and served as the Main
Office until June 1990; the Campton office, constructed in 1975; the West
Plymouth office, constructed in 1979; the Ashland office, constructed in 1987;
and the North Woodstock office, opened in 1993. In 1990, the West Plymouth
office was refurbished with 16,000 sq. ft. of working space being added to the
facility. This location became the Main Office in June 1990. The Bank also
expects to open a branch facility within the Plymouth Regional High School in
September 1997. The Bank's deposits are insured by the Federal Deposit Insurance
Corporation in accordance with the Federal Deposit Insurance Act.
The Bank provides loans and services to individuals and businesses,
including commercial, industrial, consumer and real estate loans.
The Bank offers various types of checking accounts, including
commercial accounts, personal checking accounts, and money market accounts.
Various types of savings accounts, individual retirement accounts, certificates
of deposit and other time deposit accounts are also offered.
The Bank makes consumer loans, including automobile, education,
equipment and home improvement loans. In addition to consumer loans, the Bank
extends secured and unsecured business and personal loans, as well as mortgages,
on commercial and residential real estate.
EMPLOYEES
As of December 31, 1996 there were 73 full and 4 part-time employees of
the Company and the Bank. The employees of the Company and the Bank are not
represented by any collective bargaining unit. Relations between management and
employees are considered to be good.
<PAGE>
-2-
LOCATION
The Bank is located in Grafton County, Plymouth, New Hampshire.
Plymouth is located almost directly in the center of the State of New Hampshire.
The Bank is adjacent to the White Mountains, and the Lakes Region. The White
Mountain National Forest (one of the most popular public forest areas in the
United States), Waterville Valley, Cannon Mountain, Loon Mountain, and Gunstock
Mountain are also located nearby. Because of its location, vacationers are drawn
to the Plymouth area on a year round basis. Skiing continues to attract
individuals to the Plymouth area in the winter, while area lakes attract
potential business opportunities for the Bank to the Plymouth area in the
summer. Plymouth is also the home of Plymouth State College, a New Hampshire
State college with an enrollment of approximately 4,000 students. Interstate
I-93, a major interstate highway running north and south from Plymouth and the
Tenney Mountain Highway, the major highway leading west from Plymouth, offers
sites to attract new businesses. Toward the north, the
Campton-Thornton-Waterville Valley areas are the site of housing and condominium
projects. Although business in the Bank's market area, and New Hampshire in
general, was strong during the 1980s, during the early 1990's the area
experienced a slowdown in economic activity. The economic slowdown had a
negative effect on the economy and the business of the Company and the Bank.
More recently, regional and local economic conditions appear to have stabilized.
COMPETITION
The Bank encounters competition in all phases of its business. Several
competitive financial institutions have offices in the Plymouth, New Hampshire
banking market, including Bank of New Hampshire, Fleet Bank, Meredith Village
Savings Bank, Franklin Savings Bank and Citizens Bank. A number of these
institutions have higher lending limits and greater resources than the Bank and
provide certain services that the Bank does not provide. In addition, the Bank
faces competition from a savings bank in Plymouth, Community Guaranty Savings
Bank, which commenced operations in May, 1988.
Based on information published by the Federal Reserve Bank of Boston in
June 1995, the Plymouth, New Hampshire banking market consists of seven (7)
commercial and savings banks with a total of eleven (11) banking offices. As
reflected in said report, the Company has a 41.32 percent market share of
deposits in the market.
<PAGE>
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PLYMOUTH, NEW HAMPSHIRE
ALL INSTITUTIONS, BY TOTAL DEPOSITS
Number of Percent
Banking of Total
Offices Deposits
------- --------
1. Pemi Bancorp, Inc., Plymouth......... 5 41.32%
(Pemigewasset National Bank of
Plymouth)
2. Royal Bank of Scotland PLC, Edinburgh 1 13.95%
(First NH Bank)
3. Meredith Village Savings Bank........ 1 10.70%
4. Bank of New Hampshire Corp.,
Manchester........................... 1 10.44%
5. Community Guaranty Savings Bank...... 1 10.01%
6. Franklin Savings Bank................ 1 8.89%
7. Fleet Financial Group, Providence..... 1 4.69%
(Fleet Bank-NH) --- -------
All Commercial Banking and Thrift 11 100.00%
Organizations
NOTE: The table is based on June 30, 1995 deposit data and reflects all mergers
and bank holding company acquisitions completed by June 30, 1996 as
published by the Federal Reserve Bank of Boston.
Banks compete on the basis of price, including rates paid on deposits
and charged on borrowings, convenience and quality of service. Savings and loan
associations are able to compete aggressively with commercial banks in the
important area of consumer lending. Credit unions and small loan companies are
each significant factors in the consumer market. Insurance companies, investment
firms, credit and mortgage companies, brokerage firms, cash management accounts,
money-market funds and retailers are all significant competitors for various
types of business. Many non-bank competitors are not subject to the extensive
regulation described below under "BUSINESS OF THE COMPANY" and thus in certain
respects may have a competitive advantage over banks in providing certain
services.
In marketing its services, the Bank emphasizes its position as a
hometown bank with personal service, continuity of personnel, flexibility and
prompt responsiveness to the needs of its customers. Moreover, the Bank competes
for both deposits and loans by offering competitive rates, well positioned
branch and ATM locations and convenient business hours. In addition to providing
banking services to customers in its primary service areas, the Bank is a member
of the NYCE, CIRRUS and Mastercard automatic teller machine networks which allow
the Bank to deliver certain financial services to customers regardless of their
proximity to the primary service area of the Bank.
<PAGE>
-4-
RECENT DEVELOPMENTS
During 1996, the Bank purchased certain assets and assumed certain
deposits from First NH's branch office on U.S. Route 49, Campton, New Hampshire.
The purchase was approved by the Office of the Comptroller of the Currency and
was consummated in April, 1996. The transaction did not involve the
establishment of a new branch by the Bank, because the Bank and First NH Bank
shared the Campton facility since 1975. The Bank continues to operate a branch
at the same location. As a result of the transaction, there was no change in the
Community Reinvestment Act Statement of the Bank, which received an
"outstanding" Community Reinvestment Act Compliance rating from the Office of
the Comptroller of Currency at its most recent examination.
On March 14, 1997, the Boards of Directors of the Company, the Bank,
The Berlin City Bank, a New Hampshire chartered commercial bank with its
principal place of business in Berlin, New Hampshire and Northway Financial,
Inc., a New Hampshire corporation, which is being formed by Berlin to become a
multi-bank holding company for Berlin and the Bank, executed a definitive
agreement and plan of merger. The financial information reflected in this Annual
Report does not take into account the potential effects of such transaction.
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Other Matters").
SUPERVISION AND REGULATION
The earnings of the Bank and, therefore, the earnings of the Company,
are affected not only by general economic conditions, both domestic and foreign,
but also by the policies of the Federal Government and regulatory authorities,
including the Federal Reserve Board, the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation. The Federal Reserve
Board influences conditions in the money and capital markets, which affect
interest rates and the growth in bank credit and deposits. Federal Reserve Board
monetary policies have had a significant effect on operating results of
commercial banks in the past and are expected to continue to do so in the
future. The Company cannot accurately predict changes in such policies or the
effect such policies may have on the Bank's future business and earnings. Bank
earnings are heavily dependent on both the change in loan volume and the margin
between the lending rate and the cost of bank funds.
As a bank holding company registered with the Federal Reserve Board,
the Company is required to file periodic reports and such additional information
as the Federal Reserve Board may require pursuant to the Bank Holding Company
Act of 1956, as amended. The Federal Reserve Board also conducts examinations of
the Company.
<PAGE>
-5-
The Bank Holding Company Act of 1956, as amended, generally requires
every bank holding company to obtain the prior approval of the Federal Reserve
Board before acquiring direct or indirect ownership or control of more than five
percent (5%) of the voting shares of any bank. However, no acquisition may be
approved if it is prohibited by applicable state law.
The Bank Holding Company Act of 1956, as amended, also generally
prohibits a bank holding company, with certain exceptions, from acquiring
control of any other company and from engaging in any business other than
banking or activities which are not incidental to managing or controlling banks
without the prior approval of the Federal Reserve Board. The Federal Reserve
Board is authorized to approve, among other things, the ownership of shares by a
bank holding company in any company the activities of which the Federal Reserve
Board has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In making such
determination, the Federal Reserve Board is required to weigh the expected
benefit to the public, such as greater convenience, increased competition, or
gains in efficiency, against the risks of possible adverse effects, such as
undue concentration of resources, decreased or unfair competition, conflicts or
unsound banking practices.
In addition, federal legislation prohibits the acquisition of control
of a bank or bank holding company without prior notice to appropriate federal
bank regulatory agencies.
The Bank is a national banking association, organized pursuant to the
provisions of the National Bank Act. As such, its primary regulatory authority
is the Comptroller of the Currency of the United States (the "Comptroller"). The
Comptroller regularly examines national banks and their operations. In addition,
operations of national banks are subject to federal statutes and regulations.
Such statutes and regulations relate to required reserves, investments, loans,
mergers, payment of dividends, issuance of securities and many other aspects of
operations.
With respect to the ability of a national bank to pay dividends, the
Comptroller's approval is required if the total dividends declared by a national
bank in any year will exceed the total of its net profits for that year combined
with its retained net profits for the preceding two years, less any required
transfer to surplus. The Comptroller also has authority to prohibit a national
bank from engaging in unsafe or unsound practices in conducting the business of
the Bank.
The Bank is also subject to applicable provisions of New Hampshire law
insofar as they do not conflict with or are not otherwise preempted by federal
banking law.
<PAGE>
-6-
The banking industry in the United States, which includes commercial
banks, savings and loan associations, mutual savings banks, capital stock
savings banks, credit unions, and bank and savings and holding companies, is
part of the broader financial services industry which includes insurance
companies, mutual funds, and the brokerage industry. In recent years, intense
market demands and economic pressures have eroded once clearly defined industry
classifications and have forced the financial services institutions to diversify
their services, increase returns on deposits, and become more cost effective as
a result of competition with one another and with new types of financial
services companies, including non-bank competitors.
The present bank regulatory scheme is undergoing significant change,
both as it affects the banking industry itself and as it affects competition
between banks and non-bank financial institutions. There has been significant
regulatory change in the bank merger and acquisitions area, in the products and
services banks can offer, and in the non-banking activities in which bank
holding companies can engage. Banks are now actively competing with non-bank
financial institutions for products such as money market funds.
Federal banking laws now permit adequately capitalized bank holding
companies to venture across state lines to offer banking services through bank
subsidiaries to a wider geographic market. In light of this change in the law,
it is possible for large organizations to enter many new markets including the
market served by the Bank. Certain of these competitors, by virtue of their size
and resources, may enjoy certain efficiencies and competitive advantages over
the Bank in the pricing, delivery, and marketing of their products and services.
It is not possible to assess what impact these changes in the regulatory scheme
will have on the Company or the Bank.
STATISTICAL INFORMATION
The following supplementary information required under Guide 3
(Statistical Disclosure by Bank Holding Companies) should be read in conjunction
with the related financial statements and notes thereto which are a part of this
report.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDER'S EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The following tables present the condensed average balance sheets as
of December 31 of each of the years indicated. The total dollar amount of
interest income from earning assets and the resultant yields are calculated on a
taxable equivalent basis. The interest paid on interest bearing liabilities,
expressed both in dollars and rates, is also shown in the tables:
<PAGE>
-7-
<TABLE>
<CAPTION>
PEMI BANCORP, INC.
YIELDS EARNED AND RATES PAID SCHEDULE
Period Ended December 31, 1996 Period Ended December 31, 1995
------------------------------------------- -------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
--------- --------- ------- ----------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest bearing
deposits $ $ $ 11,471 $ 683 5.95%
Federal funds sold 1,384,863 76,596 5.53% 2,263,151 127,364 5.63
Taxable investment
securities 25,156,002 1,616,581 6.43 17,261,405 1,093,942 6.34
Tax-exempt investment
securities 4,537,938 377,979 8.33 2,557,887 239,064 9.35
Loans (net of unearned
income)(2)(3) 84,284,021 8,306,188 9.85 84,357,156 8,189,866 9.71
----------- ---------- ------------ ---------
Total interest
earning assets 115,362,824 10,377,344 9.00 106,451,070 9,650,919 9.07
---------- ---------
Non-interest earning
assets 9,495,505 8,970,001
------------ ------------
Total assets $124,858,329 $115,421,071
============ ============
Interest bearing
liabilities:
Now and Money Market $ 27,793,406 587,491 2.11 $ 28,301,004 626,646 2.21
Savings deposit 15,337,440 394,099 2.57 13,677,079 365,854 2.67
Time $100,000 and over 5,191,984 308,670 5.95 4,167,647 234,681 5.63
Other time 39,439,407 2,342,180 5.94 33,678,596 1,852,138 5.50
Short-term borrowings 7,499,657 436,240 5.82 7,201,797 451,440 6.27
Long-term borrowings 1,348,105 85,006 6.31 3,014,813 162,468 5.39
----------- --------- ------------ ---------
Total interest
bearing 96,609,999 4,153,686 4.30 90,040,936 3,693,227 4.10
liabilities ----------- --------- ------------ ---------
</TABLE>
Period Ended December 31, 1994
-------------------------------------------
Average Yield/
Balance Interest(1) Rate
---------- ------------ ------
Interest earning assets:
Interest bearing
deposits $ 23,407 $ 863 3.69
Federal funds sold 922,192 34,206 3.71
Taxable investment
securities 18,954,061 1,138,808 6.01
Tax-exempt investment
securities 2,558,120 242,877 9.49
Loans (net of unearned
income)(2)(3) 83,666,752 7,254,678 8.67
------------ ----------
Total interest
earning assets 106,124,532 8,671,432 8.17
----------
Non-interest earning
assets 9,265,614
------------
Total assets $115,390,146
============
Interest bearing
liabilities:
Now and Money Market $ 32,797,203 712,397 2.17
Savings deposit 14,669,681 361,663 2.47
Time $100,000 and over 3,979,398 182,893 4.60
Other time 30,556,971 1,371,466 4.49
Short-term borrowings 962,416 47,363 4.92
Long-term borrowings 7,604,542 376,319 4.95
----------- ---------
Total interest
bearing 90,570,211 3,052,101 3.37
liabilities ----------- ---------
<PAGE>
-8-
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing
liabilities:
Demand deposits 14,366,249 12,664,966
Other 2,024,270 1,591,422
------------ ------------
Total non-interest
bearing liabilities 16,390,519 14,256,388
------------ ------------
Stockholders' equity 11,857,811 11,123,747
------------ ------------
Total liabilities
and stockholders'
equity $124,858,329 $115,421,071
============ ============
Net interest income/
interest rate margin $6,223,658 4.70 $ 5,957,692 4.97
========== ===========
Earning balance/
net yield on interest
earning assets $ 18,752,825 5.39 $ 16,410,134 5.60
============ ============
</TABLE>
Non-interest bearing
liabilities:
Demand deposits 12,891,149
Other 1,500,588
------------
Total non-interest
bearing liabilities 14,391,737
------------
Stockholders' equity 10,428,198
------------
Total liabilities
and stockholders'
equity $115,390,146
============
Net interest income/
interest rate margin $5,619,331 4.80
==========
Earning balance/
net yield on interest
earning assets $ 15,554,321 5.30
============
(1) Tax effect increases in interest income on municipal loans and securities
were $177,594 for 1996, $148,105 for 1995 and $147,446 for 1994. The
federal tax rate of 34% was used for the three years ended December 31,
1996.
(2) Included in interest on loans are loan fees which totaled $319,841 for
1996, $199,164 for 1995 and $202,900 for 1994.
(3) Includes nonaccruing loan balances and interest received on such loans.
<PAGE>
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CHANGE IN NET INTEREST INCOME
The following table shows, for each period indicated, the effect on
net interest income of volume and rate changes. The combined effect of changes
in both volume and rate which cannot be separately identified has been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
1996 as compared to 1995 1995 as compared to 1994
Due to a change in Due to a change in
-------------------------------------- -------------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest and
dividend income:
Interest bearing
deposits $ (683) $ $ (683) $ (562) $ 382 $ (180)
Federal funds sold (48,546) (2,222) (50,768) 68,706 24,452 93,158
Taxable investment
securities 506,906 15,733 522,639 (105,249) 60,383 (44,866)
Tax-exempt
investment
securities 167,491 (28,576) 138,915 (23) (3,790) (3,813)
Loans (net of
earned income) (6,799) 123,121 116,322 60,192 874,996 935,188
-------- -------- -------- --------- -------- --------
Total interest
and dividend
income 618,369 108,056 726,425 23,064 956,423 979,487
-------- -------- -------- --------- -------- --------
Interest and
dividend expense:
Now and money
market (11,115) (28,040) (39,155) (98,716) 12,965 (85,751)
Regular savings 42,490 (14,245) 28,245 (24,804) 28,995 4,191
Time deposits,
$100,000 and over 60,093 13,896 73,989 9,032 42,756 51,788
Other time 333,886 156,156 490,042 150,119 330,553 480,672
Short-term
borrowings 18,139 (33,339) (15,200) 387,669 16,408 404,077
Long-term
borrowings (101,574) 24,112 (77,462) (244,728) 30,877 (213,851)
-------- -------- -------- --------- -------- --------
Total interest
and dividend
expense 341,919 118,540 460,459 178,572 462,554 641,126
-------- -------- -------- --------- -------- --------
Net interest income $276,450 $(10,484) $265,966 $(155,508) $493,869 $338,361
======== ======== ======== ========= ======== ========
</TABLE>
<PAGE>
-10-
INVESTMENT PORTFOLIO
As of December 31, 1993, the Company adopted Statement of Financial
Accounting Standard No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and Equity Securities". SFAS 115 provides for the categorization of
investments into three groups and further provides for the accounting and
reporting treatment of each group. Investments may be classified as
held-to-maturity, available-for-sale, or trading. The Company does not purchase
or hold any investment securities for the purpose of trading such investments.
The following table sets forth the carrying amounts of the Company's investment
securities as of December 31, 1996 and 1995:
1996 1995
---------- ----------
Investments available-for-sale
(at market):
U.S. Treasury Securities and $ 2,489,922 $1,011,563
obligations of government
corporation and agencies
Obligations of states and
political subdivisions 3,259,182 2,055,546
Mortgage-backed Securities 12,707,554 5,046,368
----------- ----------
Total........................ $18,456,658 $8,113,477
=========== ==========
1996 1995
----------- -----------
Investments held-to-maturity (at amortized cost):
U.S. Treasury Securities and $ 500,528 $ 1,301,634
obligations of government
corporation and agencies
Obligations of states and
political subdivisions 1,531,166 1,717,256
Mortgage-backed Securities 9,943,442 11,980,920
----------- -----------
Total..................... $11,975,136 $14,999,810
=========== ===========
Federal Reserve Bank Stock $ 80,250 $ 80,250
Federal Home Loan Bank Stock $ 739,600 $ 739,600
<PAGE>
-11-
The following table sets forth the maturities of investment securities as of
December 31, 1996 and the weighted average yields of such securities (calculated
on the basis of the cost and effective yields weighted for the scheduled
maturity of each security). Various securities included below are redeemable at
various times. Fully taxable equivalent adjustments have been made in
calculating yields on obligations of states and political subdivisions. For
securities with variable or adjustable interest rates, the rate in effect as of
December 31, 1996 was used for this schedule.
<TABLE>
<CAPTION>
Under 1-5 5-10 Over 10
1 Year Yield Years Yield Years Yield Years Yield Total Yield
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity
securities
U.S. Treasury
securities and
obligations of
U.S. government
corporations and
agencies $ 500,528 6.74% $ % $ % $ $ 500,528 6.74%
Obligations of
states and
political
subdivisions 160,466 6.73 1,370,700 6.72 1,531,166 6.72
Mortgage-backed
securities 139,181 8.93 985,380 7.87 4,438,222 6.69 4,380,659 6.99 9,943,442 6.93
---------- ---------- ---------- ---------- -----------
Total $ 800,175 7.21 $2,356,080 7.25 $4,438,222 6.69 $4,380,659 6.99 $11,975,136 6.92
========= ========== ========== ========== ===========
Available-for-sale
securities
U.S. Treasury
securities and
obligations of
U.S. government
corporations and
agencies $ 501,247 6.86% $1,987,694 6.52% $ % $ % $2,488,941 6.53%
Obligation of
states and political
subdivisions 171,690 7.16 834,274 5.41 2,213,027 5.33 3,218,991 5.37
Mortgage-backed
securities 170,038 6.11 545,540 7.63 2,055,462 6.61 10,013,040 6.89 12,784,080 6.88
---------- ---------- ---------- ----------- -----------
Total
$ 671,285 6.50 $2,704,924 6.80 $2,889,736 6.26 $12,226,067 6.63 $18,492,012 6.60
========== ========== ========== =========== ===========
Total portfolio * $1,471,460 6.96 $5,061,004 6.98 $7,327,958 6.54 $16,606,726 6.74 $30,467,148 6.72
========== ========== ========== =========== ===========
</TABLE>
* Does not include Federal Home Loan Bank stock and Federal Reserve Bank stock
with carrying amounts of $739,600 and $80,250, respectively.
LOAN PORTFOLIO
Four areas in which the Bank has directed most of its lending
activities are (i) commercial and commercial real estate loans, (ii) residential
real estate loans, (iii) municipal loans, and (iv) consumer loans. As of
December 31, 1996, these four categories accounted for approximately 30.32%,
60.15%, 1.05% and 8.41% respectively, of the Bank's loan portfolio.
The following table summarizes the distribution of the Bank's loan
portfolio as of December 31 of each of the years indicated:
<PAGE>
-12-
(In Thousands)
1996 1995
---- ----
Commercial and
Commercial Real Estate $26,841 $24,431
Residential Real Estate 53,243 50,127
Municipal 931 1,054
Consumer 7,441 6,081
Other Loans 60 16
------- -------
Total* $88,516 $81,709
======= =======
* Before unearned income and allowance for possible loan losses. Loans are
not categorized according to the same criteria used in the annual report.
Loan maturities for commercial, real estate, municipal, and consumer
loans at December 31, 1996 were as follows:
Maturities (In Thousands)
-------------------------------------------------------
Within One to Over Five
One Year Five Years Years Total
-------- ----------- ----- -----
Commercial
and Commercial
Real Estate. $2,623 $ 5,775 $18,443 $26,841
Residential
Real Estate. 758 907 51,578 53,243
Municipal... 568 107 256 931
Consumer.... 695 6,684 62 7,441
Other....... 60 0 0 60
------ ------- ------- -------
Total* $4,704 $13,473 $70,339 $88,516
====== ======= ======= =======
Loan maturities for variable and fixed rate loans with a maturity of
greater than one year at December 31, 1996 were as follows before allowance for
possible loan losses and unearned income:
Maturities (In Thousands)
---------------------------
One to Over Five
Five Years Years
---------- -----
Variable rate $ 4,267 $53,745
Fixed rate 9,206 16,594
------- -------
Total* $13,473 $70,339
======= =======
* The figures used in the maturity analysis also include loans subject to
interest rate adjustment within the specified time categories.
<PAGE>
-13-
NONACCRUAL AND PAST DUE LOANS
It is the policy of the Bank to discontinue the accrual of interest on
loans when, in management's judgment, the collection of the full amount of the
loan is doubtful. This will generally occur once the loan has become 90 days
past due, unless the loan is well secured and in the process of collection. The
following table sets forth information on nonaccrual and past due loans as of
December 31 for each of the years indicated:
1996 1995
-------- -------
Loans on nonaccrual $530,784 $495,705
Loans past due 90 days or
more and still accruing 87,141 45,598
-------- --------
Total $617,925 $541,303
======== ========
The amount of interest income recorded during 1996 and 1995 on
nonaccrual loans outstanding at December 31, 1996 and 1995 amounted to $49,312
and $22,470, respectively. Had these loans performed in accordance with their
original terms, the amount recorded would have been $114,920 and $70,303 in 1996
and 1995, respectively.
Total loans not included above which are "troubled debt restructurings"
as defined in Statement of Financial Accounting Standards No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructuring" is $260,943. If such
restructured loans had been current in accordance with their original terms, the
gross interest income that would have been recorded in the year ended December
31, 1996 would have been $27,078. The amount of interest income on such
restructured loans included in net income for the year ended December 31, 1996
was $22,901.
Loans past due 90 days or more still accruing interest as of December
31, 1996 consisted primarily of first mortgage loans which are currently in the
process of collection and as to which management believes there is adequate
security.
The difference between gross interest income that would have been
reported for the fiscal year ended December 31, 1996 had the nonaccrual loans
above been current, and interest income on these loans that was included in net
income, is $65,608.
<PAGE>
-14-
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes historical data of the Bank with respect
to loans outstanding, loan losses and recoveries, and changes in the allowance
for possible loan losses:
1996 1995
---------- ----------
Allowance for possible loan losses,
beginning of period $1,359,979 $1,566,919
---------- ----------
Charge offs:
Real estate-mortgage loans (103,600) (172,612)
Real estate commercial/
industrial loans (105,500) (177,280)
Loans to individuals ( 31,601) ( 24,514)
---------- -----------
(240,701) (374,406)
---------- -----------
Recoveries:
Real estate-mortgage loans 10,494 23,563
Real estate
Commercial/industrial loans 10,906 29,547
Loans to individuals 13,626 1,856
--------- ----------
35,026 54,966
--------- ----------
Net charge offs (205,675) (319,440)
--------- ----------
Provision for loan losses 152,000 112,500
--------- ----------
Allowance for possible loan
losses, end of period $1,306,304 $1,359,979
========== ==========
Ratio of net charge offs to
average loans .24% .38%
Ratio of allowance for loan
losses to year-end loans 1.48% 1.66%
The provisions to the allowance for possible loan losses are sufficient
to maintain the allowance at a level which in the judgment of management is
adequate to absorb any potential loss in existing loans.
<PAGE>
-15-
The following table reflects the allocation of the allowance for
possible loan losses and the percent (based on loan portfolio schedule on page
12) of loans in each category of total outstanding loans as of December 31 for
each of the years indicated:
1996 1995
---- ----
Amount Percent Amount Percent
Residential Real
Estate $ 473,431 60.15% $ 486,327 61.35%
Commercial and
Commercial Real Estate 793,789 30.32% 824,329 29.90%
Consumer 37,516 8.41% 46,481 7.44%
Municipal 1,568 1.05% 2,842 1.29%
Other Loans 0 .07% 0 .02%
---------- ------- ---------- -------
Total $1,306,304 100.00% $1,359,979 100.00%
========== ======= ========== =======
The provisions to the allowance for possible loan losses are charged to
operating expenses and are based on past experience, current economic conditions
and management's judgment of the amount necessary to cover possible losses on
the collection of loans. The Bank records provisions for estimated loan losses
which are charged against earnings in the period they are established.
DEPOSITS
Most of the Bank's deposits have been obtained from individuals and
from small and medium-sized businesses. In addition, the Bank attracts deposits
from municipalities and other governmental agencies. Customer deposits are
insured by the Federal Deposit Insurance Corporation, up to applicable limits.
As of December 31, 1996, the Bank had a total of $16,116,453 in demand
deposit accounts and $89,568,915 in NOW and money market, time and savings
deposit accounts for individuals, corporations and other entities. Of total
deposits of $105,685,368, eighty-five percent (85%) were in interest bearing
categories and fifteen percent (15%) were in non-interest bearing categories.
<PAGE>
-16-
The following table shows the average deposits and average interest
rate paid for the last two years:
Year Ended Year Ended
December 31, 1996 December 31, 1995
---------------------- -----------------------
Average Yield/ Average Yield/
Balance Rate Balance Rate
------------ ------ ----------- ------
Demand deposits $ 14,366,249 0% $12,664,966 0%
NOW and Money Market
Accounts 27,793,406 2.11% 28,301,004 2.21%
Savings 15,337,440 2.57% 13,677,079 2.67%
Time, $100,000 and over 5,191,984 5.95% 4,167,647 5.63%
Other time deposits 39,439,407 5.94% 33,678,596 5.50%
------------ -----------
Total $102,128,486 $92,489,292
============ ===========
As of December 31, 1996, the Bank had time deposits in amounts of
$100,000 or more aggregating $5,392,466. These certificates of deposit mature as
follows:
Maturity Amount
-------- ------
3 months or less $1,338,677
Over 3 months through 6 months 1,147,289
Over 6 months through 12 months 601,321
Over 12 months 2,305,179
----------
Total $5,392,466
==========
RETURN ON EQUITY AND ASSETS
The following summarizes various operating ratios of the Company for
the last two years:
1996 1995
-------- --------
Return on average total assets
(net income divided by average
total assets) 1.02% 1.10%
Return on average stockholders'
equity (net income divided
by average stockholders' equity) 10.77% 11.46%
Dividend payout ratio (dividends
declared per share divided by
net income per share) 35.13% 27.07%
Equity to assets ratio (average
stockholders' equity divided by
average total assets) 9.50% 9.64%
<PAGE>
-17-
SHORT-TERM BORROWINGS
The Company engages in certain borrowing arrangements throughout the
year. These are ordinary consequences of bank business. Such short-term
borrowings consist of Federal Funds purchased and Federal Home Loan Bank (FHLB)
advances. The following table summarizes short-term borrowings whose average
balance outstanding during the year exceeded thirty percent (30%) of total
stockholders' equity at December 31 for the years indicated:
Federal Home Loan Bank
advances
December 31,
-------------------------
1996 1995
---- ----
Balance at end of period $ 4,908,225 $7,000,000
Maximum amount outstanding
at any month-end during period $10,691,525 $9,000,000
Average amount outstanding $ 7,499,657 $7,201,797
Weighted Average interest rate 5.82% 6.27%
Weighted Average interest rate at
end of period 5.92% 6.09%
ITEM 2 - PROPERTIES
The Bank owns its main office in West Plymouth, New Hampshire and its
branch offices in Plymouth, Campton, Ashland and North Woodstock New Hampshire.
The Bank conducts its banking business through its principal office in West
Plymouth, New Hampshire and through its four branch offices. In general, all
premises occupied by the Bank are considered to be in good condition.
While the Bank does not have any plans to close any of its branch
offices, the federal banking laws and regulations impose certain notification
and filing requirements on depository institutions which must be complied with
prior to the closing of any branches.
The following table lists the properties owned by the Company. The
Company owns all of the offices, from which the Company and Bank currently
operate.
<PAGE>
-18-
OFFICE LOCATION
Highland Street
W. Plymouth, NH
(Main Office)
1-3 Highland Street
Plymouth, NH
Route 49
Campton, NH
Route 3
Ashland, NH
Route 3
North Woodstock, NH
At December 31, 1996 the total net book value of the Company's premises
and equipment was $3,979,403. Net book value amounts represent the net book
value of land and improvements of these properties.
The following table sets forth information with regard to automated
teller machines owned and operated by the Company.
LOCATION
287 Highland Street
Plymouth, NH
1-3 Highland Street
Plymouth, NH
Shop-N-Save
Old Route 25
Plymouth, NH
Route 49
Campton, NH
North Main Street
Ashland, NH
<PAGE>
-19-
ITEM 3 - LEGAL PROCEEDINGS
There are no known pending material legal proceedings to which the
Company or the Bank are a party, or to which any of their properties are
subject, other than ordinary litigation arising in the normal course of
business.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, no matter was submitted to a vote of
stockholders of the Company.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
DIVIDEND HISTORY AND POLICY
The Company has paid dividends to stockholders on a semi-annual basis
since its organization as a bank holding company for the Bank in 1985. Prior to
that time, to the best knowledge and belief of management, the Bank has paid
dividends in every year since 1882.
The following table summarizes the Company's dividend history for the
fiscal years ended December 31, 1996, December 31, 1995 and December 31, 1994,
respectively.
Per Share Dividend History
Years Ended December 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
Dividends Per Share* $ .65 $ .50 $ .40
Net Income Per Share* 1.85 1.85 1.53
Dividends/Net Income 35.13% 27.07% 26.13%
* Based on 690,401 weighted average shares outstanding for 1996, 691,188
weighted average shares outstanding for 1995 and 751,020 weighted average
shares outstanding for 1994.
Consistent with prudent banking practices and applicable law, the
Company intends to continue its practice of declaring dividends on a semiannual
basis to stockholders of record as of the date of declaration. However, there
can be no assurance that dividends per share will not be reduced or limited in
the future.
<PAGE>
-20-
The Company's ability to pay dividends is limited by the prudent
banking principles applicable to all bank holding companies and by the
provisions of New Hampshire Corporate law, which limit the payment of dividends
by a corporation to an amount not to exceed the unrestricted earned surplus of
the corporation or the unrestricted net earnings of the current fiscal year and
the next preceding fiscal year taken as a single period, unless such dividends
would render a corporation insolvent.
As a practical matter, the Company's ability to pay dividends is
generally limited by the Bank's ability to dividend funds to the Company. As a
national bank, the declaration and payment of dividends by the Bank must be in
accordance with the National Bank Act. More specifically, applicable law
provides that the Board of Directors may declare quarterly, semiannual and
annual dividends so long as the Bank carries at least ten percent (10%) of its
net profits for the preceding half year in its surplus fund, and, in the case of
annual dividends, has carried not less than one-tenth of its net profits of the
preceding two consecutive half year periods in its surplus fund. National banks
are required to obtain the approval of the Office of the Comptroller of the
Currency if the total dividends declared by it in any calendar year exceed the
total of its net profits for that year combined with any retained net profits of
the preceding two years less any required transfers. In addition to such
statutory requirements, the payment of an excessive dividend which would deplete
a bank's capital base to an inadequate level could be considered to be an unsafe
or unsound banking practice and be a basis for supervisory action by the Office
of the Comptroller of the Currency. As of December 31, 1996, approximately
$2,407,449, of the undistributed net income of the Bank was theoretically
available for distribution to the Company as dividends. However, the ability of
the Bank to declare and pay such dividends would be subject to safe and sound
banking practices.
The current and future dividend practices of the Bank and the Company
will continue to bear a correlation to the level of the Company's and the Bank's
current and expected earnings stream, the capital needs of the Bank, and the
perceptions of the marketplace. Subject to the foregoing, and consistent with
the terms of the Agreement and Plan of Merger which the Company and Bank signed
on March 14, 1997 with The Berlin City Bank of Berlin, New Hampshire and
Northway Financial, Inc. during 1997, the Company intends to maintain its
mid-year dividend in the range of $.15 per share and yearly dividend in the
range of $.29 per share. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Other Matters").
<PAGE>
-21-
NATURE OF TRADING MARKET
As of March 1, 1997, the Company's Common Stock is owned by
approximately 412 stockholders of record. The Common Stock of the Company is not
actively traded and is not listed on any public exchange or the National
Association of Securities Dealer's Automatic Quotation System ("NASDAQ"). On
rare occasions, shares are traded between individuals or through one or more
local broker-dealers. Because there is no established market for the Company's
shares, the following table represents management's best knowledge and belief of
the prices paid in the isolated transactions which have occurred during the past
two years. However, the prices set forth may not be indicative of current value.
PRICE
----------------------
FOR THE QUARTER ENDED HIGH LOW
- --------------------- ---- ---
March 31, 1995 $ 9.00 $ 8.50
June 30, 1995 9.25 9.00
September 30, 1995 10.25 9.00
December 31, 1995 11.50 10.25
March 31, 1996 $10.50 $ 9.50
June 30, 1996 11.00 10.00
September 30, 1996 12.00 11.00
December 31, 1996 12.00 11.00
March 14, 1997 13.50 13.00
During the fourth quarter of 1994 and the first quarter of 1995, the
Company redeemed an aggregate of 61,500 shares of its outstanding common stock
from eleven (11) shareholders. During the fourth quarter of 1994, a total of
29,800 shares were redeemed from six (6) shareholders at a price of $10.00 per
share. The aggregate gross consideration for the redemption amounted to
$298,000. The Company did not incur any debt in connection with the redemption.
During the first quarter of 1995, a total of 31,700 shares were redeemed
from five (5) shareholders at a price of $10.00 per share. The aggregate gross
consideration for the redemption amounted to $317,000. The Company did not incur
any debt in connection with the redemption.
The net effect of the redemptions resulted in a reduction in the Company's
outstanding common stock by 8.2% hereby slightly increasing the net per share
book value to remaining shareholders.
Regulation Y of the Bank Holding Company Act requires bank holding
companies to provide the Federal Reserve Board with written notice before
purchasing or redeeming equity securities if the gross consideration for the
purchase or redemption, when aggregated with the net consideration paid by the
Company for all such purchases or redemptions during the preceding twelve
months, is equal to 10% or more of the company's consolidated net worth. For
purposes of Regulation Y, "net consideration" is the gross consideration paid by
a Company for all of its equity securities purchased or redeemed during the
period, minus the gross consideration received for all of its equity securities
sold during the period other than as part of a new issue.
<PAGE>
-22-
ITEM 6 - SELECTED FINANCIAL DATA
The following selected financial information for the periods ended
December 31, 1996, 1995, 1994, 1993 and 1992 is based on the Company's audited
consolidated financial statements.
<TABLE>
<CAPTION>
Selected Financial Data
Balance Sheet Data 1996 1995 1994 1993 1992
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Total assets $128,979,132 $117,322,517 $113,169,496 $115,449,751 $112,539,477
Interest bearing
deposits with other
banks 99,527
Net loans 87,095,923 80,087,042 83,931,150 81,407,257 79,818,995
Investment in
Securities 31,251,644 23,933,137 19,677,672 24,187,508 19,529,109
Deposits 105,685,368 96,416,217 91,765,597 93,769,761 97,981,681
Borrowings 8,702,525 7,491,525 8,991,525 9,850,700 3,139,000
Stockholders' equity 12,213,909 11,394,058 10,719,723 10,243,299 9,597,961
Operating data
Interest and dividend
income $ 10,199,750 $ 9,502,814 $ 8,523,986 $8,147,431 $ 9,355,064
Interest expense 4,153,686 3,693,227 3,052,101 3,265,243 4,272,141
------------ ------------ ------------ ---------- ------------
Net interest and
dividend income 6,046,064 5,809,587 5,471,885 4,882,188 5,082,923
Provision for loan
losses 152,000 112,500 120,000 180,000 975,000
----------- ------------ ------------ ---------- ------------
Net interest and
dividend income after
provision for loan
losses 5,894,064 5,697,087 5,351,885 4,702,188 4,107,923
Other income 673,525 680,156 724,390 684,249 781,679
Other expense 4,662,318 4,474,249 4,372,877 4,423,205 4,426,466
----------- ------------ ------------ ---------- ------------
Income before income
taxes 1,905,271 1,902,994 1,703,398 963,232 463,136
Provision for income
taxes 628,020 627,700 552,416 131,414 23,500
----------- ------------ ------------ ---------- ------------
Net income $ 1,277,251 $ 1,275,294 $ 1,150,982 $ 831,818 $ 439,636
=========== =========== =========== =========== ============
Per share data
Earnings per share(1) $1.85 $1.85 $1.53 $1.11 $ .58
Dividends declared per
share .65 .50 .40 .25 .20
Book value per share 17.69 16.50 14.85 13.62 12.76
Financial ratios
Net yield on interest
earning assets 5.39% 5.60% 5.30% 4.94% 5.15%
Interest rate margin 4.70 4.97 4.80 4.46 4.62
Net income as a
percentage of
Average assets 1.02 1.10 1.00 .74 .39
Average equity 10.77 11.46 11.04 8.33 4.58
Dividend payout ratio 35.13 27.07 26.13 22.60 34.21
Average equity to
average assets 9.50 9.64 9.04 8.91 8.53
---------------------
(1) Computed using the number of weighted average shares outstanding.
</TABLE>
<PAGE>
-23-
ITEM 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and related consolidated financial statements
include Pemi Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, the
Pemigewasset National Bank (the "Bank"). The Bank operates four branches.
In light of the economic climate in the region, Management is pleased
with the results for the fiscal year ended December 31, 1996, which resulted in
net income of $1,277,251 and the declaration of dividends amounting to $448,761
or $.65 per share. The Bank's capital ratios and reserves are considered to be
healthy, the lending staff is seasoned, the Bank's traditional, conservative
practices will continue, and the Bank's facilities are modern, with ample space
for any foreseeable growth. As a community bank, the Bank's health and
profitability is somewhat dependent upon the local economy and other pressures
on community banks, such as the increasing costs of regulation and FDIC
insurance premiums.
Growth of the Bank during the late 1980s resulted in crowded conditions
which necessitated an increase in working space. In 1990 the West Plymouth
office became the main office of the Bank.
The Bank's market area is reasonably stable with no business
concentrations other than the resort business.
RESULTS OF OPERATIONS
Net income for the fiscal year ended December 31, 1996 was $1,277,251
as compared with $1,275,294 for the year ended 1995 and $1,150,982 for the year
ended 1994. Interest and fees on loans, the Company's primary source of income,
for the year ended December 31, 1996 amounted to $8,257,107, $8,123,043 in 1995
and $7,189,810 in 1994. This represents an increase of 1.65% from 1995 to 1996.
An increase in loan rates is the primary reason for this increase. Total
interest expense for the fiscal year ended December 31, 1996 was $4,153,686 as
compared with $3,693,227 for 1995 and $3,052,101 for 1994. These increases
reflect an increase in short term rates.
<PAGE>
-24-
For the fiscal year ending December 31, 1996 other income decreased by
$6,631 or .97% from December 31, 1995 and decreased $44,234 or 6.1% from
December 31, 1994 to December 31, 1995. Other expense in 1996 increased by
$188,069 or 4.2% compared to an increase of $101,372 or 2.3% from 1994 to 1995.
An increase in equipment expenses primarily contributed to this result.
At December 31, 1996, the Bank's Allowance for Possible Loan Losses
("APLL") amounted to $1,306,304, which was $53,675 less than the $1,359,979
balance at December 31, 1995. During 1996, the Bank made provisions to the APLL
of $152,000 for loan losses as compared to $112,500 in 1995. This compares with
provisions of $120,000 in 1994. Provisions are based on the evaluation by
management and the Board of current and anticipated economic conditions, changes
in character and size of the loan portfolio and other indicators. The balance in
the APLL is considered adequate by management and the Board to absorb the risk
of loss inherent in the Bank's loan portfolio. Increased provisions during 1996
reflect the growth of the loan portfolio.
In this regard, the APLL was $1,306,304 or 1.48% of total loans at
December 31, 1996, as compared with $1,359,979 or 1.66% of total loans for the
fiscal year ended December 31, 1995.
As of December 31, 1996, non-performing loans (nonaccrual loans and
loans past due 90 days or more) totaled $617,925, or .70% of total loans as
compared to $541,303 or .66% at December 31, 1995. This represents an increase
of $76,622.
The ratio of APLL to nonaccrual loans for December 31, 1996 was 246.1%
as compared to 274.3% for December 31, 1995.
The ratio of APLL to nonaccrual loans plus loans which are past due
ninety (90) days or more for December 31, 1996 was 211.4% as compared to 251.2%
for December 31, 1995.
The ratio of nonperforming assets (non-performing loans and OREO) to
total assets for December 31, 1996 was .52% as compared to .51% for December 31,
1995.
Net charge-offs totaled $205,675 or .23% of total loans as of December
31, 1996 as compared to $319,440 or .39% of total loans as of December 31, 1995.
The Company's assets increased to $128,979,132 at year end December 31,
1996 as compared to $117,322,517 at year end December 31, 1995 and $113,169,496
at year end 1994. This represents a 9.94% increase from December 31, 1995. Net
loans increased by 8.8% from December 31, 1995 to the period ended December 31,
1996 and deposits increased by 9.61% for the same period.
<PAGE>
-25-
The average yield on interest earning assets for 1996, 1995 and 1994
was 9.00%, 9.07% and 8.17%, respectively. For 1996, this represents a 7 basis
point decrease in yield on assets. The cost of interest bearing liabilities was
4.30% in 1996, 4.10% in 1995 and 3.37% in 1994. For 1996, this represents a 20
basis point increase in cost of funds.
Nonaccrual loans totaled $530,784 as of December 31, 1996, as compared
with $495,705 at December 31, 1995. Management devotes significant time and
resources to the resolution of nonaccrual loans and does not believe that this
$35,079 increase in aggregate nonaccrual loans is indicative of any trend.
LIQUIDITY AND CAPITAL RESOURCES
Banking institutions measure liquidity as the ability to meet
unexpected deposit withdrawals of a short-term nature and to meet increased loan
demand. It is Management's objective to ensure a continuous ability to meet cash
needs as they arise. As of December 31, 1996 the Bank's liquidity ratio stood at
14.1% as compared to 11.6% at December 31, 1995. With available Federal Home
Loan Bank of Boston (FHLB) Advances included, these ratios become 32.8% and
35.5% respectively.
The liquidity ratio is determined by the use of the Bank's Basic
Surplus Model which represents a static analysis of the relationship between
liquid assets and short-term liabilities which are vulnerable to non-replacement
under abnormally stringent conditions. This controlled level of liquidity
reflects the efforts of the Bank to redeploy its assets into loans to respond to
the credit needs of the community and hopefully improve the Bank's return on
assets. Management believes the Bank's liquidity to be adequate to meet the
needs of the Bank.
Liquidity is measured by the Bank's ability to raise cash when needed
at a reasonable cost and with a minimum of loss. The Bank must be capable of
meeting all obligations to customers at any time and, therefor, the active
management of liquidity is important.
Given the uncertain nature of customers' demands as well as the Bank's
desire to take advantage of earnings enhancement opportunities, the Bank must
have available adequate sources of on and off balance sheet funds that can be
acquired in time of need. Accordingly, in addition to the liquidity provided by
balance sheet cash flows, liquidity must be supplemented with alternative
sources such as Fed Funds and Lines of Credit, Federal Home Loan Bank Advances,
and wholesale and retail repurchase agreements.
<PAGE>
-26-
Accordingly, when making investments and loans, their marketability and
collateral value must be considered. When the necessity for pledging arises, the
least marketable should generally be used.
Two methods of measuring liquidity are generally utilized. The first is
a static analysis of the relationship between liquid assets and short-term
liabilities which are vulnerable to non-replacement under abnormally stringent
conditions. The second measure of liquidity operationalizes the static analysis.
It is a cash-flow forecast expressed in terms of the relationship between
identified funding needs and the estimated level of cash in flows over a 90-day
horizon.
Monitoring and managing both liquidity measurements is important in
developing prudent and effective deposit pricing and investment strategies.
The equity capital of the Company as of December 31, 1996 amounted to
$12,213,909. This represents a 7.20% increase over the equity capital at
December 31, 1995. The increase is attributable to a 9.32% increase in retained
earnings. Equity capital as a percent of total assets amounted to 9.47% as of
December 31, 1996, a decrease of approximately .24% from year end 1995.
The Bank and the Company are required to maintain capital levels
consistent with the "risk-based capital guidelines" adopted by the Office of the
Comptroller of the Currency and the Federal Reserve System. The Office of the
Comptroller of the Currency's capital guidelines require a ratio of Total
Capital (consisting of capital, surplus and the allowance for loan losses up to
1.25% of risk weighted assets), to be equal to at least 8.0%. Additionally, the
Bank must maintain Tier 1 capital (which under the regulations, consists of
Common Stockholders equity, noncumulative perpetual preferred stock and related
surplus, and minority interests in the equity accounts of consolidated
subsidiaries) in amounts not less than 4.00% of adjusted total assets (or 100 to
200 basis points higher in the case of the banks which do not receive the best
composite ratings). At December 31, 1996 the actual Risk Based Capital of the
Bank was 16.01% for Tier 1 and 17.35% for Total Capital and the Leverage Capital
was 9.46%, substantially exceeding current applicable and any known future
minimum regulatory requirements.
<PAGE>
-27-
Effects of Inflation
Inflation affects the growth of total assets by increasing the level of
loan demand and creating the need to increase equity capital at higher than
normal rates in order to maintain an appropriate ratio of equity to assets.
Interest rates in particular are significantly affected by inflation. In
addition to its effects on interest rates, inflation directly affects the
Company by increasing the Company's cost of funds and operating expenses.
Interest Rate Sensitivity Analysis
The following discussion of Interest Rate Sensitivity Analysis should
be read in conjunction with the GAP Table set forth following the discussion
which reflects how the timing and repricing of assets and liabilities would
impact liquidity and interest rate spread.
The Bank's rate sensitivity analysis format is divided into four (4)
sections. The first section details information concerning various maturities of
rate sensitive assets. The second section identifies rate sensitive liabilities.
The third section identifies interval GAPS and the fourth, cumulative GAP
analysis.
Rate sensitive assets can be divided into two component parts:
Investments in Securities and Loans. Investments have various maturities, are
normally fixed rates, and when they mature, the proceeds are available for
reinvestment. As these securities approach maturity, it is important for the
investment officer to be aware of the rate on the maturing investment, current
rates available on similar investments and liquidity requirements of the bank.
As the securities mature, the proceeds will be invested in rates higher or lower
than the maturing security, thus affecting the rate of return.
The final section of rate sensitive assets consists of commercial
loans, real estate loans and consumer loans. Commercial loans are comprised of
both maturing loans that will be paid off, and loans that mature but will in all
likelihood be rewritten. Real estate loans are comprised of those loans whose
rates will be repriced at maturity and consumer loans are those that will be
repriced and paid in full at maturity.
Rate Sensitive Liabilities are primarily time deposits. As the savings
instruments reach maturity, the Bank, in order to retain the deposits, will need
to offer competitive rates or be faced with disintermediation. Falling rates
indicate it may cost the Bank less to retain these funds, thus increasing
profits. Conversely, rising rates may adversely affect profits.
<PAGE>
-28-
The section on interval GAPS indicate the difference between Rate
Sensitive Assets and Rate Sensitive Liabilities at different maturity intervals.
It is a snapshot of the GAPS at specific time periods. The ratios measure a
tolerance range for various time periods.
The final section on Cumulative GAPS measure the overall GAP position
at different time periods.
In analyzing the Bank's GAP, several general principles should be
considered. First, in a more risky interest rate environment, you would expect a
smaller GAP tolerance range associated with a given appetite for interest rate
risk. Conversely, the greater the tolerance range, the greater the expected
return and risk.
The GAPS at time intervals indicate the timing of the effect of
interest rate changes on income. The Cumulative GAP indicates the overall
magnitude and direction of rate risk exposure.
The GAP measures interest rates risk exposure, not liquidity of funding
risk.
It may be less costly to adjust the GAP in a negative direction than in
a positive direction because capital losses may be generated if the maturity of
the investment portfolio is shortened to move the GAP in a positive direction.
However, the greater the Bank's ability to replace short-term liabilities with
long-term liabilities, the easier it is to adjust the GAP in a positive
direction.
Prudent adjustment of the GAP to capitalize on expected interest rate
trends will usually result in a negative impact on short term earnings. For
example, if rates are expected to rise by more than the consensus rate forecast,
a somewhat positive GAP is appropriate.
Generally, the smaller the GAP, the smaller the fluctuation in the net
interest margin resulting from changes in levels of interest rates.
If Risk Sensitivity Analysis indicated that the Bank was Asset
Sensitive (meaning that it had more rate sensitive assets than rate sensitive
liabilities), then rising rates will have a positive impact on earnings;
however, falling rates will negatively affect earnings.
Should the analysis indicate liability sensitivity, then rising rates
will tend to reduce earnings and falling rates will tend to have a positive
impact on earnings.
<PAGE>
-29-
The Bank's primary tool in managing Interest Rate Risk will be
asset/liability funding matrix reports. Income simulation will be utilized to
quantify the potential impact on earnings of changes in interest rates. A
standard gap report will also be utilized to provide supporting detailed
information. Management has monitored deposit runoff in both rising and falling
rate environments, and based upon this analysis, has developed simulation models
of interest rate risk as well as liquidity cash flows that reflect the results
of assumptions.
<PAGE>
-30-
PEMI BANCORP, INC.
RATE SENSITIVITY ANALYSIS
AS OF DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
0-3 3 months 6 months 1 year to Over 5
Months to 6 months to 1 year 5 years years Total
------ ----------- --------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans $ 18,951 $ 8,528 $ 15,326 $27,692 $17,619 $ 88,116
FHLB/FRB Bank stock 740 80 820
Available-for-sale
securities* 501 170 2,705 15,116 18,492
Held-to-maturity
securities* 500 300 2,356 8,819 11,975
-------- -------- -------- ------- ------- --------
Total interest
earning assets $ 20,192 $ 9,028 $ 15,796 $32,753 $41,634 $119,403
======== ======== ======== ======= ======= ========
Interest bearing
liabilities:
Time CD's $100,000 and
over $ 1,467 $ 1,019 $ 501 $ 2,405 $ $ 5,392
Other time deposits 9,924 5,945 10,770 13,962 35 40,636
Money market accounts 13,493 13,493
Regular savings 4,227 11,412 15,639
NOW accounts 128 14,281 14,409
FHLB advances 1,211 3,500 197 3,795 8,703
-------- -------- -------- ------- ------- --------
Total interest
bearing liabilities $ 26,223 $ 10,464 $ 15,695 $20,162 $25,728 $ 98,272
======== ======== ======== ======= ======= ========
Period sensitivity gap $ (6,031) $ (1,436) $ 101 $12,591 $15,906 $ 21,131
Cumulative sensitivity
gap (6,031) (7,467) (7,366) 5,225 21,131
Period sensitivity gap
as a percentage of
interest earning assets (5.05)% (1.20)% .08% 10.54% 13.32%
Cumulative sensitivity
gap as a percentage
of interest earning
assets (5.05)% (6.25)% (6.17)% 4.38% 17.70%
* Amortized cost
</TABLE>
<PAGE>
-31-
OTHER MATTERS
On March 14, 1997, the Boards of Directors of the Company, the Bank,
The Berlin City Bank ("Berlin"), a New Hampshire chartered commercial bank with
its principal place of business in Berlin, New Hampshire and Northway Financial,
Inc. ("Northway"), a New Hampshire corporation, which is being formed by Berlin
to become a multi-bank holding company for Berlin and the Bank, executed a
definitive agreement and plan of merger (the "Agreement").
Pursuant to the terms of the Agreement, Northway will become the bank
holding company for Berlin in a transaction whereby each issued and outstanding
share of Berlin common stock will be exchanged for 16 shares of Northway common
stock (the "Northway Common Stock"). Thereafter, Northway will acquire the
common stock of the Company in a transaction whereby each share of the Company's
common stock issued and outstanding prior to the effective time will be
exchanged for 1.0419 shares of Northway Common Stock.
The transaction, which is subject to approval by state and federal
regulators and by the respective shareholders of each institution, has been
structured to be tax-free to the shareholders of each institution.
Upon consummation, the Board of Directors of Northway will consist of
six of the current directors of Berlin and four of the current directors of the
Company. William J. Woodward, the current Chairman, President and Chief
Executive Officer of Berlin will serve as Chairman of the Board, President and
Chief Executive Officer of Northway. Fletcher W. Adams, the current President
and Chief Executive Officer of the Company and the Bank, will serve as Vice
Chairman of the Board of Directors of Northway.
The parties anticipate consummating the transactions contemplated by
the Agreement in the second half of 1997. The financial information reflected in
this Annual Report does not take into account the potential effects of such
transaction.
<PAGE>
-32-
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements Page
----------------------------- ----
Accountants' Opinion, January 16, 1997
except for Note 10, as to which the
date is March 7, 1997...................... F-1
Consolidated Balance Sheets at December
31, 1996 and 1995.......................... F-2
Consolidated Statements of Income for
Years Ended December 31, 1996, 1995
and 1994................................... F-3
Consolidated Statements of Changes in
Stockholders' Equity for Years Ended
December 31, 1996, 1995 and 1994........... F-4
Consolidated Statements of Cash Flows
for Years Ended December 31, 1996,
1995 and 1994.............................. F-5
Notes to Financial Statements.............. F-7
<PAGE>
The Board of Directors
and Stockholders
Pemi Bancorp, Inc.
Plymouth, New Hampshire
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Pemi Bancorp,
Inc. and Subsidiary as of December 31, 1996 and 1995 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 Pemi
Bancorp, Inc. and Subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 16, 1997, except for Note 10,
as to which the date is March 7, 1997
F-1
<PAGE>
PEMI BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ------ ------------ ------------
<S> <C> <C>
Cash and due from banks $ 4,979,633 $ 4,918,670
Federal funds sold 3,300,000
------------ ------------
Cash and cash equivalents 4,979,633 8,218,670
Investments in available-for-sale securities (at fair value) 18,456,658 8,113,477
Investments in held-to-maturity securities (fair values of $11,879,497 as of
December 31, 1996 and $14,926,264 as of December 31, 1995) 11,975,136 14,999,810
Federal Reserve Bank stock, at cost 80,250 80,250
Federal Home Loan Bank stock, at cost 739,600 739,600
Loans, net 87,095,923 80,087,042
Premises and equipment 3,979,403 3,481,386
Other real estate owned 54,193 61,701
Accrued interest receivable 863,612 855,135
Other assets 754,724 685,446
------------ ------------
$128,979,132 $117,322,517
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Demand deposits $ 16,116,453 $ 14,023,174
Savings and NOW deposits 43,540,576 40,933,371
Time deposits 46,028,339 41,459,672
------------- -------------
Total deposits 105,685,368 96,416,217
Advances from Federal Home Loan Bank of Boston 8,702,525 7,491,525
Other liabilities 2,377,330 2,020,717
------------- -------------
Total liabilities 116,765,223 105,928,459
------------- -------------
Stockholders' equity:
Common stock, par value $1.00 per share; authorized 2,000,000 shares;
issued 751,901 shares; outstanding 690,401 shares 751,901 751,901
Paid-in capital 2,384,329 2,384,329
Retained earnings 9,714,379 8,885,889
Treasury stock, at cost (61,500 shares) (615,000) (615,000)
Net unrealized holding loss on available-for-sale securities (21,700) (13,061)
------------- ------------
Total stockholders' equity 12,213,909 11,394,058
------------- ------------
$128,979,132 $117,322,517
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-2
<PAGE>
PEMI BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
Interest and dividend income:
<S> <C> <C> <C>
Interest and fees on loans $ 8,257,107 $8,123,043 $7,189,810
Interest and dividends on securities:
Taxable 1,616,581 1,093,942 1,138,808
Tax-exempt 249,466 157,782 160,299
Other interest 76,596 128,047 35,069
----------- ---------- ----------
Total interest and dividend income 10,199,750 9,502,814 8,523,986
----------- ---------- ----------
Interest expense:
Interest on deposits 3,632,440 3,079,319 2,628,419
Interest on advances from FHLB 519,604 610,675 418,929
Interest on other borrowed funds 1,642 3,233 4,753
----------- ---------- ----------
Total interest expense 4,153,686 3,693,227 3,052,101
----------- ---------- ----------
Net interest and dividend income 6,046,064 5,809,587 5,471,885
Provision for loan losses 152,000 112,500 120,000
----------- ---------- ----------
Net interest and dividend income after provision
for loan losses 5,894,064 5,697,087 5,351,885
----------- ---------- ----------
Other income:
Service charges on deposit accounts 259,879 253,302 266,532
Securities gains, net 22,405
Other income 216,325 241,273 241,159
Other deposit fees 178,022 178,781 161,369
Gain on sales of other real estate owned, net 19,299 6,800 32,925
----------- ---------- ----------
Total other income 673,525 680,156 724,390
----------- ---------- ----------
Other expense:
Salaries and employee benefits 2,390,189 2,376,100 2,282,176
Occupancy expense 340,735 297,112 308,864
Equipment expense 525,625 446,449 407,169
Writedown of other real estate owned 25,000 79,494 47,500
Other real estate owned expense 16,400 13,450 42,560
FDIC deposit insurance premium 2,000 135,165 240,722
Stationery and supplies 135,582 123,672 109,353
Postage expense 116,380 101,773 95,298
Other expense 1,110,407 901,034 839,235
----------- ---------- ----------
Total other expense 4,662,318 4,474,249 4,372,877
----------- ---------- ----------
Income before income taxes 1,905,271 1,902,994 1,703,398
Income taxes 628,020 627,700 552,416
----------- ---------- ----------
Net income $ 1,277,251 $1,275,294 $1,150,982
=========== ========== ==========
Net income per share $ 1.85 $ 1.85 $ 1.53
=========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PEMI BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Net Unrealized
Holding Gain
(Loss) On
Common Paid-in Retained Treasury Available-For-
Stock Capital Earnings Stock Sale Securities Total
----------- ----------- ---------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $751,901 $2,384,329 $7,105,574 $ $ 1,495 $10,243,299
Net income 1,150,982 1,150,982
Net change in unrealized
holding gain on available-
for-sale securities (75,797) (75,797)
Dividends declared ($.40
per share) (300,761) (300,761)
Treasury stock purchased (298,000) (298,000)
-------- ---------- ---------- --------- --------- -----------
Balance, December 31, 1994 751,901 2,384,329 7,955,795 (298,000) (74,302) 10,719,723
Net income 1,275,294 1,275,294
Net change in unrealized
holding loss on available-
for-sale securities 61,241 61,241
Dividends declared ($.50
per share) (345,200) (345,200)
Treasury stock purchased (317,000) (317,000)
-------- ---------- ---------- --------- --------- -----------
Balance, December 31, 1995 751,901 2,384,329 8,885,889 (615,000) (13,061) 11,394,058
Net income 1,277,251 1,277,251
Net change in unrealized
holding loss on available-
for-sale securities (8,639) (8,639)
Dividends declared ($.65
per share) (448,761) (448,761)
-------- ---------- ---------- --------- --------- -----------
Balance, December 31, 1996 $751,901 $2,384,329 $9,714,379 $(615,000) $(21,700) $12,213,909
======== ========== ========== ========= ========= ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
PEMI BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ----------- -----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 1,277,251 $ 1,275,294 $ 1,150,982
Adjustments to reconcile net income to net cash provided by
operating activities:
Donation of other real estate owned 5,000
Securities gains, net (22,405)
Amortization, net of accretion of securities 134,807 110,687 194,800
Depreciation and amortization 354,777 317,405 284,257
Provision for loan losses 152,000 112,500 120,000
Deferred tax expense 100,020 108,700 152,985
Increase (decrease) in taxes payable (10,856) (160,143) 170,430
Increase in interest receivable (8,477) (98,319) (16,763)
Increase (decrease) in interest payable 281,263 471,682 (58,962)
Increase (decrease) in accrued expenses 40,979 (80,240) (94,948)
(Increase) decrease in prepaid expenses (71,657) (67,966) 7,255
Increase (decrease) in other liabilities 24,254 4,277 (88)
Amortization of core deposit intangible 13,125
(Increase) decrease in other assets (394) 266 64,226
Change in unearned income (148,754) (33,647) (12,202)
Gain on sales of other real estate owned, net (19,299) (6,800) (32,925)
Writedown of other real estate owned 25,000 79,494 47,500
------------ ----------- -----------
Net cash provided by operating activities 2,144,039 2,038,190 1,954,142
------------ ----------- -----------
Cash flows from investing activities:
Proceeds from sales of other real estate owned 134,307 78,506 206,765
Purchases of Federal Home Loan Bank stock (143,600) (46,500)
Purchases of available-for-sale securities (12,513,768) (5,421,630) (97,489)
Proceeds from maturities of available-for-sale securities 2,120,332 258,355 881,886
Purchases of held-to-maturity securities (1,590,598) (2,760,777)
Proceeds from maturities of held-to-maturity securities 2,926,048 2,631,095 6,236,832
Net (increase) decrease in loans (7,175,272) 3,715,789 (2,721,844)
Capital expenditures (627,794) (248,004) (300,226)
Recoveries of previously charged-off loans 35,026 54,966 164,778
------------ ----------- -----------
Net cash provided by (used in) investing activities (15,101,121) (665,121) 1,563,425
------------ ----------- -----------
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
PEMI BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(continued)
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Cash received from acquisition of branch 6,355,157
Purchases of treasury stock (317,000) (298,000)
Repayment of advances from FHLB (37,391,621) (25,589,000) (19,052,000)
Advances from FHLB 38,602,621 24,089,000 18,192,825
Net increase (decrease) in demand deposits, NOW and
savings accounts 924,325 (3,134,595) 330,315
Net increase (decrease) in time deposits 1,586,572 7,785,215 (2,334,479)
Dividends paid (359,009) (330,360) (210,533)
------------ ------------ ------------
Net cash provided by (used in) financing activities 9,718,045 2,503,260 (3,371,872)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (3,239,037) 3,876,329 145,695
Cash and cash equivalents at beginning of year 8,218,670 4,342,341 4,196,646
------------ ------------ ------------
Cash and cash equivalents at end of year $ 4,979,633 $ 8,218,670 $ 4,342,341
============ ============ ============
Supplemental disclosures:
Loans transferred to other real estate owned $ 195,000 $ 8,000 $ 190,000
Loans originating from sales of other real estate owned 62,500 13,500 264,625
Held-to-maturity securities transferred to available-
for-sale securities 1,389,021 468,862
Interest paid 3,872,423 3,221,545 3,111,063
Income taxes paid 538,856 679,143 229,001
Assets acquired and liabilities assumed from another
financial institution:
Cash received $ 6,355,157
Overdraft protection loans 4,381
Premises and equipment 225,000
Core deposit intangible 175,000
Deposits 6,758,254
Miscellaneous liabilities 1,284
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE>
PEMI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - NATURE OF OPERATIONS
Pemi Bancorp, Inc. (Company) is a New Hampshire corporation that was organized
in 1985 to become the holding company of The Pemigewasset National Bank (Bank).
The Company's primary activity is to act as the holding company for the Bank.
The Bank is a federally chartered bank which was incorporated in 1881 and is
headquartered in Plymouth, New Hampshire. The Bank operates its business from
five banking offices located in New Hampshire. The Bank is engaged principally
in the business of attracting deposits from the general public and investing
those deposits in residential and real estate loans, and in consumer and small
business loans.
NOTE 2 - ACCOUNTING POLICIES
The accounting and reporting policies of the Company and its subsidiary conform
to generally accepted accounting principles and predominant practices within the
banking industry. The consolidated financial statements of the Company were
prepared using the accrual basis of accounting. The significant accounting
policies of the Company and its subsidiary are summarized below to assist the
reader in better understanding the financial statements and other data contained
herein.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from the estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, the Bank. All significant
intercompany accounts and transactions have been eliminated in the
consolidation.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items, Federal Home Loan Bank overnight deposits,
demand deposits due from banks and federal funds sold.
SECURITIES:
Investments in debt securities are adjusted for amortization of
premiums and accretion of discounts computed on the straight-line
method which has substantially the same effect as using the interest
method. Gains or losses on sales of investment securities are computed
on a specific identification basis.
The Company classifies debt and equity securities into one of three
categories: held-to-maturity, available-for-sale, or trading. This
security classification may be modified after acquisition only under
certain specified conditions. In general, securities may be classified
as held-to-maturity only if the Company has the positive intent and
ability to hold them to maturity. Trading securities are defined as
those bought and held principally for the purpose of selling them in
the near term. All other securities must be classified as
available-for-sale.
F-7
<PAGE>
-- Held-to-maturity securities are measured at amortized cost
in the balance sheet. Unrealized holding gains and losses
are not included in earnings or in a separate component of
capital. They are merely disclosed in the notes to the
consolidated financial statements.
-- Available-for-sale securities are carried at fair value on
the balance sheet. Unrealized holding gains and losses are
not included in earnings, but are reported as a net amount
(less expected tax) in a separate component of capital until
realized.
-- Trading securities are carried at fair value on the balance
sheet. Unrealized holding gains and losses for trading
securities are included in earnings
LOANS:
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are reported at
their outstanding principal balances reduced by amounts due to
borrowers on unadvanced loans, any charge-offs, the allowance for loan
losses and net deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans.
Interest on loans is generally recognized on a simple interest basis.
Loan origination and commitment fees and certain direct origination
costs are deferred, and the net amount amortized as an adjustment of
the related loan's yield. The Company is generally amortizing these
amounts over the contractual life of the related loans.
Cash receipts of interest income on impaired loans is credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of
the cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is
deemed to be fully collectible. When recognition of interest income on
an impaired loan on a cash basis is appropriate, the amount of income
that is recognized is limited to that which would have been accrued on
the net carrying amount of the loan at the contractual interest rate.
Any cash interest payments received in excess of the limit and not
applied to reduce the net carrying amount of the loan are recorded as
recoveries of charge-offs until the charge-offs are fully recovered.
ALLOWANCE FOR POSSIBLE LOAN LOSSES:
An allowance is available for losses which may be incurred in the
future on loans in the current portfolio. The allowance is increased by
provisions charged to current operations and is decreased by loan
losses, net of recoveries. The provision for loan losses is based on
management's evaluation of current and anticipated economic conditions,
changes in the character and size of the loan portfolio, and other
indicators. The balance in the allowance for possible loan losses is
considered adequate by management to absorb any reasonably foreseeable
loan losses.
As of January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by SFAS No. 118. According to SFAS No. 114, a
loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. The Statement
requires that impaired loans be measured on a loan by loan basis by
either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's observable market price,
or the fair value of the collateral if the loan is collateral
dependent.
F-8
<PAGE>
The Statement is applicable to all loans, except large groups of
smaller balance homogeneous loans that are collectively evaluated for
impairment, loans that are measured at fair value or at the lower of
cost or fair value, leases, and convertible or nonconvertible
debentures and bonds and other debt securities. The Company considers
its residential real estate loans and consumer loans that are not
individually significant to be large groups of smaller balance
homogeneous loans.
Factors considered by management in determining impairment include
payment status, net worth and collateral value. An insignificant
payment delay or an insignificant shortfall in payment does not in
itself result in the review of a loan for impairment. The Company
applies SFAS No. 114 on a loan-by-loan basis. The Company does not
apply SFAS No. 114 to aggregations of loans that have risk
characteristics in common with other impaired loans. Interest on a loan
is not generally accrued when the loan becomes ninety or more days
overdue. The Company may place a loan on nonaccrual status but not
classify it as impaired, if (i) it is probable that the Company will
collect all amounts due in accordance with the contractual terms of the
loan or (ii) the loan is an individually insignificant residential
mortgage loan or consumer loan. Impaired loans are charged-off when
management believes that the collectibility of the loan's principal is
remote. Substantially all of the Company's loans that have been
identified as impaired have been measured by the fair value of existing
collateral.
The financial statement impact of adopting the provisions of this
Statement was not material.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Cost and related allowances for
depreciation and amortization of premises and equipment retired or
otherwise disposed of are removed from the respective accounts with any
gain or loss included in income or expense. Depreciation and
amortization are calculated principally on the straight-line method
over the estimated useful lives of the assets.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through
foreclosure and properties classified as in-substance foreclosures in
accordance with Financial Accounting Standards Board Statement No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructuring."
These properties are carried at the lower of cost or estimated fair
value less costs to sell. Any writedown from cost to estimated fair
value required at the time of foreclosure or classification as
in-substance foreclosure is charged to the allowance for possible loan
losses. Expenses incurred in connection with maintaining these assets,
subsequent writedowns and gains or losses recognized upon sale are
included in other expense.
Beginning in 1995, in accordance with Statement of Financial Accounting
Standards No. 114 "Accounting by Creditors for Impairment of a Loan,"
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.
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.
F-9
<PAGE>
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company
disclose estimated fair value for its financial instruments. Fair value
methods and assumptions used by the Company in estimating its fair
value disclosures are as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and federal funds sold approximate those assets' fair
values.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for 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. The carrying amount of accrued interest approximates its fair
value.
Deposit liabilities: The fair values disclosed for demand deposits
(e.g., interest and non-interest checking, passbook savings, and money
market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate certificates of deposit 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.
Off-balance sheet instruments: The fair value of commitments to
originate loans is estimated using the fees currently charged to enter
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments and the unadvanced portion of loans, fair
value also considers the difference between current levels of interest
rates and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation
with the counterparties at the reporting date.
F-10
<PAGE>
NOTE 3 - SECURITIES
Debt securities have been classified in the consolidated balance sheets
according to management's intent. The carrying amount of securities and their
approximate fair values are as follows as of December 31:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Holding Fair
Basis Gains Losses Value
--------- ----------- ------------- -------
Available-for-sale securities:
December 31, 1996:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies $ 2,488,941 $ 16,759 $ 15,778 $ 2,489,922
Debt securities issued by states of the United States
and political subdivisions of the states 3,218,991 45,320 5,129 3,259,182
Mortgage-backed securities 12,784,080 44,094 120,620 12,707,554
----------- -------- -------- ----------
$18,492,012 $106,173 $141,527 $18,456,658
=========== ======== ======== ===========
December 31, 1995:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies $ 1,009,035 $ 2,528 $ $ 1,011,563
Debt securities issued by states of the United States
and political subdivisions of the states 2,032,067 34,429 10,950 2,055,546
Mortgage-backed securities 5,093,654 11,789 59,075 5,046,368
------------ --------- --------- ------------
$ 8,134,756 $ 48,746 $ 70,025 $ 8,113,477
============ ========= ========= ============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Holding Fair
Basis Gains Losses Value
--------- ---------- ------------ -------
Held-to-maturity securities:
December 31, 1996:
Debt securities issued by the U.S. Treasury $ 500,528 $ 2,206 $ $ 502,734
Debt securities issued by states of the United States
and political subdivisions of the states 1,531,166 35,395 1,566,561
Mortgage-backed securities 9,943,442 18,391 151,631 9,810,202
----------- ------- -------- -----------
$11,975,136 $55,992 $151,631 $11,879,497
=========== ======= ======== ===========
December 31, 1995:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies $ 1,301,634 $ 7,167 $ 2,504 $ 1,306,297
Debt securities issued by states of the United States
and political subdivisions of the states 1,717,256 52,642 1,769,898
Mortgage-backed securities 11,980,920 31,463 162,314 11,850,069
----------- ------- -------- -----------
$14,999,810 $91,272 $164,818 $14,926,264
=========== ======= ======== ===========
</TABLE>
F-11
<PAGE>
The scheduled maturities of held-to-maturity securities and available-for-sale
securities were as follows as of December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Held-to-maturity Available-for-sale
securities: securities:
------------------------- ------------------------------
Amortized Amortized
Cost Fair Cost Fair
Basis Value Basis Value
--------- ------- ---------- -------
Debt securities other than mortgage-backed
securities:
Due within one year $ 660,994 $ 666,484 $ 501,247 $ 501,875
Due after one year through five years 1,370,700 1,402,811 2,159,384 2,168,680
Due after five years through ten years 834,274 844,112
Due after ten years 2,213,027 2,234,438
Mortgage-backed securities 9,943,442 9,810,202 12,784,080 12,707,553
----------- ---------- ----------- -----------
$11,975,136 $11,879,497 $18,492,012 $18,456,658
=========== =========== =========== ===========
</TABLE>
There were no sales of available-for-sale or held-to-maturity securities in
1996, 1995 and 1994.
In 1995, the Bank transferred at fair value certain debt securities from
securities classified as held-to-maturity to securities classified as
available-for-sale. The unrealized holding loss of $16,480 ($26,850 less tax
effect of $10,370) at the date of transfer has been recognized as a separate
component of shareholders' equity. The transfer was a result of a reassessment
of the appropriateness of the classification of all securities held at December
31, 1995. In accordance with a Special Report of the Financial Accounting
Standards Board regarding SFAS No. 115 this transfer will not call into question
the intent of the Bank to hold other debt securities to maturity in the future.
During 1994, the amortized cost of a security held-to-maturity that was
transferred to available-for-sale at fair value amounted to $468,862, and the
related unrealized loss amounted to $69,165. Such security was transferred as a
result of the Company's understanding that there was a significant deterioration
in the issuer's creditworthiness.
There were no securities of issuers whose aggregate carrying amount exceeded 10%
of stockholders' equity as of December 31, 1996.
A total par value of $1,545,062 and $1,144,343 of debt securities was pledged to
secure treasury tax and loan, deposits and office of U. S. Trustees (Bankruptcy
courts) as of December 31, 1996 and 1995, respectively.
NOTE 4 - LOANS
Loans consisted of the following as of December 31:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
----------- -----------
Commercial, financial and agricultural $13,749,755 $12,362,986
Real estate - construction and land development 882,416 363,295
Real estate - residential 53,242,528 50,126,739
Real estate - commercial 12,209,054 11,705,038
Consumer 7,440,546 6,081,178
Obligations of states and political subdivisions 931,444 1,054,165
Other 59,934 15,824
----------- -----------
88,515,677 81,709,225
Allowance for possible loan losses (1,306,304) (1,359,979)
Unearned income (113,450) (262,204)
----------- -----------
Net loans $87,095,923 $80,087,042
=========== ===========
</TABLE>
F-12
<PAGE>
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 1996.
Total loans to such persons and their companies amounted to $370,608 as of
December 31, 1996. During the year ended December 31, 1996, advances totaled
$78,932 and repayments totaled $149,892.
Changes in the allowance for possible loan losses were as follows for the years
ended December 31:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
Balance at beginning of period $1,359,979 $1,566,919 $1,730,493
Loans charged off (240,701) (374,406) (448,352)
Provision for loan losses 152,000 112,500 120,000
Recoveries of loans previously charged off 35,026 54,966 164,778
---------- ---------- ----------
Balance at end of period $1,306,304 $1,359,979 $1,566,919
========== ========== ==========
</TABLE>
Information about loans that meet the definition of an impaired loan in
Statement of Financial Accounting Standards No. 114 is as follows as of December
31:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1996 1995
-------------------------- -------------------------
Recorded Related Recorded Related
Investment Allowance Investment Allowance
In Impaired For Credit In Impaired For Credit
Loans Losses Loans Losses
----------- ---------- ----------- ----------
Loans for which there is a related allowance for credit losses $ 97,412 $9,048 $211,076 $22,691
Loans for which there is no related allowance for credit losses 413,366
-------- ------ -------- -------
Totals $ 97,412 $9,048 $624,442 $22,691
======== ====== ======== =======
Average recorded investment in impaired loans during the year
ended December 31 $132,269 $728,973
======== ========
Related amount of interest income recognized during the time, in the year ended
December 31, that the loans were impaired
Total recognized $ 25,245 $ 0
======== ========
Amount recognized using a cash-basis method of
accounting $ 25,245 $ 0
======== ========
</TABLE>
As of December 31, 1996, loans restructured in a troubled debt restructuring
before January 1, 1995, the effective date of SFAS No. 114, that are not
impaired based on the terms specified by the restructuring agreement totaled
$260,943. The gross interest income that would have been recorded in the year
ended December 31, 1996 if such restructured loans had been current in
accordance with their original terms was $27,078. The amount of interest income
on such restructured loans that was included in net income for the year ended
December 31, 1996 was $22,901.
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
---------- ----------
Land $ 448,851 $ 409,251
Buildings 3,229,269 3,061,241
Furniture and equipment 2,637,556 1,992,390
---------- ----------
6,315,676 5,462,882
Accumulated depreciation and amortization (2,336,273) (1,981,496)
---------- ----------
$3,979,403 $3,481,386
========== ==========
</TABLE>
F-13
<PAGE>
NOTE 6 - DEPOSITS
The aggregate amount of time deposit accounts (including CDs), each with a
minimum denomination of $100,000, was approximately $5,392,466 and $4,889,539 as
of December 31, 1996 and 1995, respectively.
For time deposits as of December 31, 1996, the aggregate amount of maturities
for each of the following five years ended December 31, and thereafter are:
1997 $31,162,674
1998 12,866,828
1999 1,398,527
2000 424,339
2001 175,971
-----------
$46,028,339
===========
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB). The components of these borrowings are as follows as of December 31,
1996:
Weighted
Average
Rate to
Maturity Date Balance Maturity
------------- ------- --------
1997 $4,908,225 5.92%
1998 3,711,700 6.12
1999 82,600 7.43
----------
Total $8,702,525
==========
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 8 - ACQUISITION OF BRANCH
On April 22, 1996, the Company purchased certain assets and assumed deposits
from First New Hampshire Bank's branch office in Campton, New Hampshire. On that
day, the Company recorded the following entries to record this transaction.
Loans $ 4,381
Premises and equipment 225,000
Core deposit intangible 175,000
Cash 6,355,157
Other liabilities 1,284
Deposits 6,758,254
The transaction was accounted for using the purchase method of accounting. The
results of operations of the acquired branch office are included in the 1996
income statement of the Company from the date of the transaction to December 31,
1996.
The core deposit intangible is being amortized over 10 years. During 1996
amortization expense amounted to $13,125.
F-14
<PAGE>
NOTE 9 - INCOME TAXES
The components of income tax expense are as follows for the years ended December
31:
1996 1995 1994
---------- ---------- -------
Current:
Federal $438,000 $431,000 $349,233
State 90,000 88,000 50,198
-------- -------- --------
528,000 519,000 399,431
-------- -------- --------
Deferred:
Federal 82,971 90,269 124,262
State 17,049 18,431 28,723
-------- -------- -------
100,020 108,700 152,985
-------- -------- -------
Total income tax expense $628,020 $627,700 $552,416
======== ======== ========
The reasons for the differences between the statutory federal income tax rates
and the effective tax rates are summarized as follows for the years ended
December 31:
1996 1995 1994
% of % of % of
Income Income Income
------ ------ ------
Federal i 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from:
Tax-exempt income (6.2) (5.1) (5.7)
Unallowable expenses .8 .6 .6
Other, net 1.3 .5 .5
State tax, net of 3.1 3.0 3.0
---- ---- ----
33.0% 33.0% 32.4%
==== ==== ====
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for loan $360,553 $379,099
Loan origination fees 76,921 96,151
Nonaccrual loans 25,634 30,326
Other real estate owned valuatio 13,650 7,800
Net unrealized holding loss on available-for-sale securities 13,654 8,218
Other, net 5,647
-------- --------
Gross deferred tax assets 490,412 527,241
-------- --------
Deferred tax liabilities:
Other, net (5,192)
Depreciation (136,780) (115,916)
Pension (40,666) (16,553)
-------- --------
Gross deferred tax liabilities (182,638) (132,469)
-------- --------
Net deferred tax assets $307,774 $394,772
======== ========
</TABLE>
Deferred tax assets as of December 31, 1996 and 1995 have not been reduced by a
valuation allowance because management believes that it is more likely than not
that the full amount of deferred tax assets will be realized.
As of December 31, 1996, the Company had no operating loss and tax credit
carryovers for tax purposes.
F-15
<PAGE>
NOTE 10 - CONTINGENCY
The Bank intends to file with the Internal Revenue Service an application to
resolve certain problems concerning the eligibility of its defined benefit
pension and 401K plans. Bank management and counsel estimate that the sanction
that would be imposed by the IRS is between $25,000 and $200,000.
NOTE 11 - EMPLOYEE BENEFITS
The Company has a qualified defined benefit pension plan covering substantially
all of its employees who meet certain eligibility requirements. The benefit
provision of the plan is 50% of monthly compensation reduced by 1/20 for each
year of service less than 20 years.
The following table sets forth the funded status of the plan and amounts
recognized in the Company's balance sheet as of December 31:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
----------- -----------
Actuarial present value of benefit obligations:
Accumulated benefit obligation (including vested benefits of
$1,304,460 and $1,092,112, respectively) $ 1,330,688 $ 1,108,148
=========== ===========
Projected benefit obligation for services rendered to date $(1,577,755) $(1,394,760)
Plan assets at fair value, primarily invested in individual
life insurance policies and investments 1,621,693 1,525,046
---------- -----------
Plan assets greater than projected benefit obligation 43,938 130,286
Unrecognized net transition asset (28,821) (32,938)
Unrecognized net loss (gain) 89,156 (54,905)
---------- ----------
Prepaid pension cost included in other assets on the balance sheets $ 104,273 $ 42,443
========== ==========
</TABLE>
Net periodic pension cost included the following components for the years ended
December 31:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Service cost-benefits earned during the period $ 93,526 $ 80,997 $ 72,773
Interest cost on projected benefit obligation 104,065 82,665 91,875
Actual (return) loss on plan assets (149,152) (254,441) 34,815
Net amortization and deferral 25,131 162,825 (122,656)
--------- --------- ---------
Net periodic pension cost $ 73,570 $ 72,046 $ 76,807
========= ========= =========
</TABLE>
The weighted-average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 8.0% and 4.0%. The expected long-term rate of return on assets
was 8.0%.
The Bank has a 401(k) plan. To be eligible, employees must have attained age
twenty-one, completed six months of service and be credited with 1,000 hours of
service. The Bank matches employee contributions on the first 4% of compensation
deposited as elective contributions. The 401(k) matching expense was $13,744,
$15,714 and $12,680 for the years ended December 31, 1996, 1995 and 1994,
respectively.
F-16
<PAGE>
NOTE 12 - FINANCIAL INSTRUMENTS
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to originate loans, standby letters of
credit and unadvanced funds on loans. The instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheets. The contract amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amounts of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies, but may
include secured interests in mortgages, accounts receivable, inventory,
property, plant and equipment and income-producing properties.
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. Of the total standby letters of
credit outstanding as of December 31, 1996, $33,000 are secured by deposit
accounts held by the Bank.
The provisions of Statement of Financial Accounting Standards No. 107
"Disclosures about Fair Value of Financial Instruments," as amended by SFAS
No. 119, became effective for the Company as of December 31, 1995.
The disclosures are the estimated fair values of the Company's financial
instruments, all of which are held or issued for purposes other than trading,
which are as follows as of December 31:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1996 1995
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 4,979,633 $ 4,979,633 $ 8,218,670 $ 8,218,670
Available-for-sale securities 18,456,658 18,456,658 8,113,477 8,113,477
Held-to-maturity securities 11,975,136 11,879,497 14,999,810 14,926,264
Federal Reserve Bank stock 80,250 80,250 80,250 80,250
Federal Home Loan Bank stock 739,600 739,600 739,600 739,600
Loans 87,095,923 86,753,000 80,087,042 80,678,000
Accrued interest receivable 863,612 863,612 855,135 855,135
Financial liabilities:
Deposits 105,685,368 105,984,000 96,416,217 96,672,000
Advances from FHLB 8,702,525 8,717,000 7,491,525 7,504,000
</TABLE>
The carrying amounts of financial instruments shown in the above table are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
F-17
<PAGE>
Notional amounts of financial instrument liabilities with off-balance sheet
credit risk are as follows as of December 31:
1996 1995
---------- ----------
Commitments to originate loans $1,768,044 $1,152,100
Standby letters of credit 211,114 141,656
Unadvanced portions of commercial real estate loans 45,000 47,526
Unadvanced portions of home equity loans 1,019,889 405,661
Unadvanced portions of commercial lines of credit 3,072,335 5,771,961
---------- ----------
$6,116,382 $7,518,904
========== ==========
There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.
The Company has no derivative financial instruments subject to the provisions of
SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair Value
of Financial Instruments."
NOTE 13 - SIGNIFICANT GROUP CONCENTRATIONS 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.
NOTE 14 - EARNINGS PER SHARE
Earnings per share for 1996, 1995 and 1994 were calculated using the weighted
average number of shares outstanding during those periods. For 1996, 1995 and
1994 earnings per share calculations, the weighted average number of shares
outstanding were 690,401, 691,188 and 751,020, respectively.
NOTE 15 - REGULATORY MATTERS
The Bank, as a National Bank is subject to the dividend restrictions set forth
by the Comptroller of the Currency. Under such restrictions, the Bank may not,
without the prior approval of the Comptroller of the Currency, declare dividends
in excess of the sum of the current year's earnings (as defined) plus the
retained earnings (as defined) from the prior two years. The dividends, as of
December 31, 1996 that the Bank could declare, without the approval of the
Comptroller of the Currency, amounted to approximately $2,407,449.
The Company and its subsidiary the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Their capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1996, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
F-18
<PAGE>
As of December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
----------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Greater than Greater than
As of December 31, 1996: or equal to: or equal to:
Total Capital (to Risk Weighted Assets): ------------ ------------
Consolidated $13,013 17.41% $5,978 8% N/A
Pemigewasset National Bank 12,964 17.35 5,978 8 $7,473 10%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 12,074 16.08 3,004 4 N/A
Pemigewasset National Bank 12,025 16.01 3,004 4 4,506 6
Tier 1 Capital (to Average Assets):
Consolidated 12,074 9.50 5,083 4 N/A
Pemigewasset National Bank 12,025 9.46 5,083 4 6,354 5
As of December 31, 1995:
Total Capital (to Risk Weighted Assets):
Consolidated 12,274 17.82 5,509 8 N/A
Pemigewasset National Bank 12,225 17.75 5,509 8 6,886 10
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 11,407 16.45 2,774 4 N/A
Pemigewasset National Bank 11,358 16.38 2,774 4 4,161 6
Tier 1 Capital (to Average Assets):
Consolidated 11,407 9.91 4,606 4 N/A
Pemigewasset National Bank 11,358 9.86 4,606 4 5,758 5
</TABLE>
NOTE 16 - RECLASSIFICATION
Certain amounts in the prior year have been reclassified to be consistent with
the current year's statement presentation.
NOTE 17 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following financial statements are for Pemi Bancorp, Inc. (Parent Company
Only) and should be read in conjunction with the consolidated financial
statements of Pemi Bancorp, Inc. and Subsidiary.
F-19
<PAGE>
PEMI BANCORP, INC.
(Parent Company Only)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS 1996 1995
- ------ ---------- ----------
Cash $ 394,360 $ 302,345
Investment in subsidiary, The Pemigewasset National Bank 12,164,750 11,344,568
Other assets 2,593
----------- -----------
$12,559,110 $11,649,506
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 345,201 $ 255,448
----------- -----------
Stockholders' equity:
Common stock, par value $1.00 per share; authorized 2,000,000 shares;
issued 751,901 shares; outstanding 690,401 shares 751,901 751,901
Paid-in capital 2,384,329 2,384,329
Retained earnings 9,714,379 8,885,889
Treasury stock, at cost (61,500 shares) (615,000) (615,000)
Net unrealized holding loss on available-for-sale securities (21,700) (13,061)
----------- -----------
Total stockholders' equity 12,213,909 11,394,058
----------- -----------
$12,559,110 $11,649,506
=========== ===========
</TABLE>
F-20
<PAGE>
PEMI BANCORP, INC.
(Parent Company Only)
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
Dividends from subsidiary $ 448,761 $ 547,201 $ 300,761
Management fee income from subsidiary 36,025 20,840 37,492
---------- ---------- ----------
484,786 568,041 338,253
---------- ---------- ----------
General and administrative expense 36,356 21,154 37,492
---------- ---------- ----------
Income before equity in undistributed net income of subsidiary 448,430 546,887 300,761
Equity in undistributed net income of subsidiary 828,821 728,407 850,221
---------- ---------- ----------
Net income $1,277,251 $1,275,294 $1,150,982
========== ========== ==========
</TABLE>
F-21
<PAGE>
PEMI BANCORP, INC.
(Parent Company Only)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
----------- ---------- -----------
Cash flows from operating activities:
Net income $1,277,251 $1,275,294 $1,150,982
Adjustments to reconcile net income to net cash provided by
operating activities:
(Increase) decrease in accrued dividend receivable 2,594 238,015 (90,228)
Undistributed net income of subsidiary (828,821) (728,407) (850,221)
---------- ---------- ----------
Net cash provided by operating activities 451,024 784,902 210,533
---------- ---------- ----------
Cash flows from financing activities:
Purchases of treasury stock (317,000) (298,000)
Dividends paid (359,009) (330,360) (210,533)
---------- ---------- ---------
Net cash used in financing activities (359,009) (647,360) (508,533)
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents 92,015 137,542 (298,000)
Cash and cash equivalents at beginning of year 302,345 164,803 462,803
---------- ----------- ----------
Cash and cash equivalents at end of year $ 394,360 $ 302,345 $ 164,803
========== ========== ==========
</TABLE>
The Parent Company Only Statements of Changes in Stockholders' Equity are
identical to the Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1996, 1995 and 1994, and therefore are not
reprinted here.
F-22
<PAGE>
-33-
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company had no disagreements with its independent accountants on
accounting and financial disclosure matters.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company (or where so
indicated, the Bank) are as follows:
Position(s) with
Name Age the Company
- ---- --- -----------
Fletcher W. Adams 60 President, Treasurer and
Chief Executive Officer
of the Company; President
and Chief Executive
Officer of the Bank;
Director
Frederick C. Anderson 45 Director of the Bank
Charles H. Clifford, Jr. 61 Director
James E. Currie 73 Vice President and
Secretary of the Company;
Director of the Company
Andrew L. Morse 54 Director
John H. Noyes 50 Director
Milton E. Pettengill 70 Chairman of the Board;
Director
Keith L. Philbrick 48 Chief Financial Officer
Ann M. Reever 52 Director
Robert R. Sargeant 45 Vice President and Senior
Loan Officer of the Bank
Dean H. Yeaton 59 Director
- ---------------------
With the exception of Mr. Anderson, a director of the Bank, (who is a
director of Whole Village Family Resource Center, Northeast Public Power
Association, Northeast Association of Electric Cooperatives) no director or
executive officer holds a directorship in any company with a class of securities
<PAGE>
-34-
registered pursuant to Section 12 of the Securities Exchange Act of 1934 or
subject to the requirements of Section 15(d) of such Act or any company
registered as an investment company under the Investment Company Act of 1940.
Fletcher W. Adams has been a director of the Company since it was
organized in 1985. From 1985 until 1990, Mr. Adams was the Executive Vice
President of the Company. In January, 1990, Mr. Adams became President and Chief
Executive Officer of the Company. Mr. Adams is also the President, Chief
Executive Officer and a director of the Bank. Mr. Adams joined the Bank as
Executive Vice President in June of 1984. Prior to joining the Bank, Mr. Adams
was the President of Adams Supermarket, Inc., a company which owned a
supermarket. Mr. Adams has been a director of the Bank since 1973.
Frederick C. Anderson has been a director of the Bank since January of
1997. Mr. Anderson has served as the General Manager and Chief Executive Officer
of New Hampshire Electric Cooperative, Inc. since August 1992. Prior to that, he
served as the Assistant General Manager of New Hampshire Electric Cooperative,
Inc.
Charles H. Clifford, Jr. has been a director of the Company since it
was organized in 1985. Mr. Clifford has been a director of the Bank since 1980.
Mr. Clifford is a partner in the business firm of Clifford-Nicol Printing and is
that firm's President.
James E. Currie has been a director of the Company since it was
organized in 1985. Prior to retiring in July of 1986, Mr. Currie was Vice
President and Senior Loan Officer of the Bank. Mr. Currie also served as a
director of the Bank.
Mr. Morse has been a director of the Bank since January of 1996 and a
director of the Company since May of 1996. Mr. Morse has been the owner of
Waynes Market since 1991 and Woodstock Cheese Shoppe since 1995.
John H. Noyes has been a director of the Company and the Bank since
1994. Mr. Noyes is the Treasurer of Noyes Insurance Agency, Inc. and since 1991
has served as President of Central Square Insurance, Inc.
Milton E. Pettengill has been the President, Chief Executive Officer
and a director of the Company since it was organized in 1985. In January of
1990, he became Chairman of the Company. Mr. Pettengill has been with the Bank
since 1951. He has been an executive officer of the Bank since 1974, and a
director of the Bank since 1973. Retiring in January of 1990, he now serves as
Chairman of the Board.
<PAGE>
-35-
Keith L. Philbrick has been the Chief Financial Officer of the Bank
since November 1994. From October 1980 through November 1994, Mr. Philbrick
served as the Bank's senior mortgage officer. Mr. Philbrick has been with the
Bank since 1970.
Ann M. Reever has been a director of the Company since 1993. Mrs.
Reever, a self-employed business manager, has been a member of the Pemi-Baker
Regional School Board since 1989 and a Director of the Swift Water Girl Scout
Council since 1991.
Robert R. Sargeant has been the Senior Loan Officer of the Bank since
1987. From 1980 to 1987, Mr. Sargeant served as the Commercial and Consumer Loan
Officer of the Bank. Mr. Sargeant has been with the Bank since 1974.
Dean H. Yeaton has been a director of the Company since 1986. Mr.
Yeaton has been a director of the Bank since 1986. Mr. Yeaton is the President
of Dean H. Yeaton, Inc., and the President of Yeaton Oil Company.
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended December 31,
1996, 1995 and 1994, respectively, the remuneration received by the President,
Treasurer and Chief Executive Officer of the Company and Bank, respectively. No
individual employed by the Bank or Company received more than $100,000 in
compensation during fiscal years 1996, 1995 and 1994, respectively.
SUMMARY COMPENSATION TABLE
Name and
Principal Position Year Salary Bonus
- ------------------ ---- ------ -----
Fletcher W. Adams 1996 $97,000 (1) $1,965 (2)
President, Treasurer and 1995 $93,600 (1) $1,830 (3)
Chief Executive Officer of 1994 $87,100 (1) $1,715 (4)
the Company and the Bank
- ------------------
(1) Includes salary and monthly fee received for attendance at Board of
Directors Meetings of the Bank and Company.
(2) This amount includes a bonus of $1,865 equal to one week of salary. Every
full time employee of the Bank with seniority of one year or more received
a year end bonus equivalent to one week of salary. This amount also
includes a $100 Christmas bonus received by each full-time employee of the
Bank with seniority of one year or more.
<PAGE>
-36-
(3) This amount includes a bonus of $1,730 equal to one week of salary. Every
full time employee of the Bank with seniority of one year or more received
a year end bonus equivalent to one week of salary. This amount also
includes a $100 Christmas bonus received by each full-time employee of the
Bank with seniority of one year or more.
(4) This amount includes a bonus of $1,615 equal to one week of salary. Every
full time employee of the Bank with seniority of one year or more received
a year end bonus equivalent to one week of salary. This amount also
includes a $100 Christmas bonus received by each full-time employee of the
Bank with seniority of one year or more.
In addition to the cash compensation, officers and other full-time
employees of the Company or the Bank receive group life, health, hospitalization
and medical reimbursement insurance coverage. However, these plans do not
discriminate in scope, terms, or operation, in favor of officers of the Company
and the Bank and are available generally to all full-time employees.
Employment Contracts
There are no employment agreements between the Company, the Bank and
any employees of the Company or Bank.
Pension Plan
The Bank has a qualified pension plan covering substantially all of its
employees meeting certain eligibility requirements. Benefits paid under this
plan are based on fifty percent (50%) of monthly compensation reduced by 1/20
for each year of service less than twenty (20) years.
In March 1997, the Bank filed an application with the Internal Revenue
Service (the "IRS") to resolve certain ambiguities and potential issues
concerning the eligibility of its defined benefit pension and 401k plans. As
reflected in footnotes to the Consolidated Financial Statements of the Company
for the year-ended December 31, 1996, it is estimated that the sanction that
would be imposed by the IRS to resolve these issues is between $25,000 and
$200,000.
Compensation of Directors
The Directors of the Company and the Bank receive $300 for each Board
of Directors meeting they attend except for the Chairman of the Board of
Directors who receives $500 and the Clerk of the Board of Directors who receives
$375 for each Board of Directors meeting they attend. In addition, members of
various Board of Director's Committees receive a fee of $175 per committee
meeting attended.
<PAGE>
-37-
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table includes certain information as of March 1, 1997
regarding the principal stockholders of the Company. With the exception of the
stockholders listed below, the Company is not aware of any beneficial owner of
five percent (5%) or more of the Company's Common Stock.
Name and Address of Amount of Shares Percent
Beneficial Owner Beneficially Owned(1) of Class
- ---------------- --------------------- --------
American Global Insurance Co. 43,200 6.26%
c/o Fiduciary Trust Co. Int.
Two World Trade Center
New York, NY 10048
Fletcher W. Adams 57,927(2) 8.39%
President, Treasurer and
Chief Executive Officer
of the Company and the Bank; Director
(1) Percentages are based upon the 690,401 shares of Common Stock outstanding as
of March 1, 1997. The definition of a beneficial owner of a security includes
any person who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares voting power or
investment power with respect to such security.
(2) Includes 44,250 shares owned individually by Mr. Adams, 4,000 shares owned
jointly with his wife, 1,700 shares owned by his son, 1,700 shares owned by his
daughter and 6,277 shares owned by an estate of which Mr. Adams is Trustee.
<PAGE>
-38-
DIRECTORS
The following table includes certain share ownership and biographical
information as of March 1, 1997 regarding each director of the Company and share
ownership of all directors and executive officers as a group:
Director of
PEMI BANCORP, Shares of
Name, INC. since and Common Stock
Title and (Expiration Beneficially
(Principal Date of Owned As of Percentage
Occupation) Age Current Term) March 1, 1997(1) of Class
- ----------- --- ------------- ---------------- --------
Fletcher W.
Adams 60 1985; 57,927(2) 8.39%
Director; (1998)
(President,
Treasurer, and
Chief Executive
Officer of the
Company)
Charles H.
Clifford, Jr. 61 1985; 2,400(3) .35%
Director; (1998)
(President of
Clifford-Nicol
Printing, Inc.)
James E.
Currie 73 1985; 3,600(4) .52%
Director; (1997)
(Vice President
and Secretary of
the Company)
Andrew L.
Morse 54 1996; 1,000(5) .14%
Director; (1999)
(Owner of
Waynes
Market and
Woodstock
Cheese Shoppe)
- ------------------
Footnotes follow table
<PAGE>
-39-
Director of
PEMI BANCORP, Shares of
Name, INC. since and Common Stock
Title and (Expiration Beneficially
(Principal Date of Owned As of Percentage
Occupation) Age Current Term) March 1, 1997(1) of Class
- ----------- --- ------------- ---------------- --------
John H.
Noyes 50 1994; 11,350(6) 1.64%
Director; (1998)
(Treasurer; Noyes
Insurance Agency,
Inc., President;
Central Square
Insurance, Inc.)
Milton E.
Pettengill 70 1985; 8,800(7) 1.28%
Chairman of (1997)
the Board of
Directors;
(Retired President
and Chief
Executive Officer
of the Company
and the Bank)
Ann M. 52 1993; 2,450(8) .35%
Reever (1999)
Director;
(Self-employed
business manager;
Member of Pemi-
Baker Regional
School Board;
Director of
Swift Water
Girl Scout
Council)
- -------------------
Footnotes follow table
<PAGE>
-40-
Director of
PEMI BANCORP, Shares of
Name, INC. since and Common Stock
Title and (Expiration Beneficially
(Principal Date of Owned As of Percentage
Occupation) Age Current Term) March 1, 1997(1) of Class
- ----------- --- ------------- ---------------- --------
Dean H.
Yeaton 59 1986; 5,350(9) .78%
Director; (1999)
(President
Yeaton Oil Co,;
President Dean
H. Yeaton, Inc.)
All Directors (as a group 92,877 13.45%
eight(8) individuals) ====== ======
- --------------------
(1) Percentages are based upon the 690,401 shares of Common Stock outstanding
as of March 1, 1997. The definition of beneficial owner includes any person
who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares voting power or
investment power with respect to such security.
(2) Includes 44,250 shares owned individually by Mr. Adams, 4,000 shares owned
jointly with his wife, 1,700 shares owned by his son, 1,700 shares owned by
his daughter and 6,277 shares owned by an estate of which Mr. Adams is
Trustee.
(3) All shares are owned individually by Mr. Clifford.
(4) Includes 1,400 shares owned individually by Mr. Currie and 2,200 shares
owned jointly with his wife.
(5) All shares are owned individually by Mr. Morse.
(6) All shares are owned individually by Mr. Noyes.
(7) Includes 1,000 shares owned individually by Mr. Pettengill and 7,800 shares
owned jointly with his wife.
(8) All shares are owned individually by Mrs. Reever.
(9) Includes 2,000 shares owned individually by Mr. Yeaton, 1,000 shares owned
by his wife and 2,350 shares owned jointly with his wife.
<PAGE>
-41-
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the Directors and Executive Officers of the Company and
companies or organizations with which they are associated, have had, and may
have in the future, banking transactions with the Bank in the ordinary course of
the Bank's business. As of December 31, 1996, the Bank had outstanding $370,608
in loans to Directors and Executive Officers of the Company and the Bank and
immediate family members of such Executive Officers and Directors, which
represents 3.03% of capital.
Federal banking laws and regulations limit the aggregate amount of
indebtedness of all insiders. Pursuant to such laws and regulations, banks may
extend credit to executive officers, directors, principal stockholders or any
related interest of such persons, if the extension of credit to such persons is
in an amount that, when aggregated with the amount of all outstanding extensions
of credit to such individuals, does not exceed the banks unimpaired capital and
unimpaired surplus. As of December 31, 1996, the aggregate amount of extensions
of credit to Bank insiders was well below this limit.
All loans and commitments to loan to the Company's and Bank's
Directors, Executive Officers and their associates are made on substantially the
same terms, including interest rates, collateral and repayment terms, as those
prevailing at the time for comparable transactions with other persons and, in
the opinion of Management, do not involve more than a normal risk of collection
or, present other unfavorable features.
<PAGE>
-42-
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a)
1. Financial Statements
The financial statements filed as part of this report are listed in the
index appearing at Item 8.
2. Financial Statement Schedules
Schedules are omitted because they are not applicable.
3. Exhibits
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger dated March 14, 1997 by
and among Pemi Bancorp, Inc., Pemigewasset National
Bank, The Berlin City Bank and Northway Financial,
Inc. was filed on March 26, 1997 as Exhibit 2 to Pemi
Bancorp, Inc.'s Current Report on Form 8-K and is
incorporated by reference.
3.1-3.2 Restated and Amended Articles of Organization of the
Registrant filed as Exhibits 3.1, to the Registrant's
Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1992, and are incorporated herein by
reference.
21 List of Subsidiaries of the Company is filed as
Exhibit 21 to the Registrant's Annual Report on Form
10-K for the Fiscal Year Ended December 31, 1994 and
is incorporated herein by reference.
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the 1996
fiscal year.
<PAGE>
-43-
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.
Date: March 17, 1997 PEMI BANCORP, INC.
By /s/ Fletcher W. Adams
-------------------------------
Fletcher W. Adams
President, Treasurer and
Chief Executive Officer
Date: March 17, 1997 By /s/ Keith L. Philbrick
-------------------------------
Keith L. Philbrick
Chief Financial Officer
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
The Company's Annual Report and Proxy Material will be furnished to the
Company's Stockholders prior to the Annual Meeting and copies will be furnished
to the Commission at that time.
<PAGE>
-44-
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/ Fletcher W. Adams President, Treasurer March 17, 1997
- ---------------------------- Chief Executive
Fletcher W. Adams Officer and Director
/s/ Charles H. Clifford, Jr. Director March 17, 1997
- ----------------------------
Charles H. Clifford, Jr.
Director March __, 1997
- ----------------------------
James E. Currie
/s/ Andrew L. Morse Director March 17, 1997
- ----------------------------
Andrew L. Morse
/s/ John H. Noyes Director March 17, 1997
- ----------------------------
John H. Noyes
Director March __, 1997
- ----------------------------
Milton E. Pettengill
/s/ Ann M. Reever Director March 17, 1997
- ----------------------------
Ann M. Reever
/s/ Dean H. Yeaton Director March 17, 1997
- ----------------------------
Dean H. Yeaton
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend, if applicable)
</LEGEND>
<CIK> 0000768868
<NAME> PEMI BANCORP
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<EXCHANGE-RATE> 1
<CASH> 4,979,633
<INT-BEARING-DEPOSITS> 89,568,915
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,456,658
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 11,975,136
<LOANS> 88,515,677
<ALLOWANCE> 1,306,304
<TOTAL-ASSETS> 128,979,132
<DEPOSITS> 105,685,368
<SHORT-TERM> 4,908,225
<LIABILITIES-OTHER> 2,377,330
<LONG-TERM> 3,794,300
0
0
<COMMON> 751,901
<OTHER-SE> 11,462,008
<TOTAL-LIABILITIES-AND-EQUITY> 128,979,132
<INTEREST-LOAN> 8,257,107
<INTEREST-INVEST> 1,866,047
<INTEREST-OTHER> 76,596
<INTEREST-TOTAL> 10,199,750
<INTEREST-DEPOSIT> 3,632,440
<INTEREST-EXPENSE> 4,153,686
<INTEREST-INCOME-NET> 5,894,064
<LOAN-LOSSES> 152,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,662,318
<INCOME-PRETAX> 1,905,271
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,277,251
<EPS-PRIMARY> 1.85
<EPS-DILUTED> 0
<YIELD-ACTUAL> 5.39
<LOANS-NON> 530,784
<LOANS-PAST> 87,141
<LOANS-TROUBLED> 210,955
<LOANS-PROBLEM> 3,540,938
<ALLOWANCE-OPEN> 1,359,979
<CHARGE-OFFS> 240,701
<RECOVERIES> 35,026
<ALLOWANCE-CLOSE> 1,306,304
<ALLOWANCE-DOMESTIC> 1,306,304
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
