SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the fiscal year ended Commission File No. 0-14895
DECEMBER 31, 1995
GRANITE STATE BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
NEW HAMPSHIRE 02-0399222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
122 WEST STREET, KEENE, NEW HAMPSHIRE 03431
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (603) 352-1600
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK,
$1.00 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained to the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. ( )
Issuer's revenues for its fiscal year ended December 31, 1995 were
$27,097,000.
The aggregate market value of the voting common stock held by non-
affiliates of the Registrant, based on the closing bid price of March 15,
1996, was $27,022,174. For purposes of this calculation, the affiliates of
the Registrant include its directors and executive officers. Although
such directors and executive officers of the Registrant performing policy-
making functions were assumed to be "affiliates" of the Registrant, this
classification is not to be interpreted as an admission of such status.
As of March 15, 1996, the number of shares of the Registrant's
common stock outstanding of record (exclusive of treasury shares) was
2,022,781.
<PAGE> 1
DOCUMENTS INCORPORATED
BY REFERENCE
The following documents, in whole or in part, are specifically
incorporated by reference in the indicated Part of the Annual Report on
Form 10-KSB:
Document Part
Annual Report to Stockholders for Part I, Item 1 (c) (5),
the year ended December 31, 1995 "Statistical Information"
Part II, Item 6,
"Management's Discussion and
Analysis or Plan of Operation"
Part II, Item 7,
"Financial Statements"
Proxy Statement for the 1996 Part III, Item 9,
Annual Meeting of Stockholders "Directors, Executive Officers
Promoters and Control Persons,
Compliance with Section 16(a)
of the Exchange Act"
Part III, Item 10,
"Executive Compensation"
Part III, Item 11,
"Security Ownership of Certain
Beneficial Owners and
Management"
Part III, Item 12,
"Certain Relationships and
Related Transactions"
<PAGE> 2
FORM 10-KSB ANNUAL REPORT -- TABLE OF CONTENTS
PART I
Page
Item 1. Description of Business 5
a. General Development of Business 5
1. Current Market Conditions 5
b. Financial Information About Industry Segments 5
c. Narrative Description of Business 6
1. General Description of Business 6
2. Regulation & Supervision 6
3. Monetary Policies 10
4. Employees 11
5. Statistical Information 11
A. Distribution of Assets, Liabilities, and
Stockholders' Equity; Interest Rates
and Interest Differential 11
B. Rate/Volume Analysis 11
C. Investment Portfolio 11
D. Loan Portfolio 14
E. Maturity of Loans 14
F. Nonperforming Loans and Assets 15
G. Summary of Loan Loss Experience and
Allocation of the Allowance for Possible
Loan Losses 17
H. Risks Associated with Commercial Real Estate,
Commercial and Construction Loans 19
I. Deposits 19
J. Maturities of Time Deposits 20
K. Return on Equity and Assets 20
L. Borrowings 21
M. Competition 22
N. Subsidiaries 22
d. Financial Information About Foreign and Domestic Operations
and Export Sales 22
Item 2. Description of Property 23
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Additional Item Executive Officers 24
<PAGE> 3
PART II
Page
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 25
a. Market Information 25
b. Holders 26
c. Dividends 26
Item 6. Management's Discussion and Analysis or Plan of Operation 26
Item 7. Financial Statements 26
a. Financial Statements Required by Regulation S-X 26
b. Supplementary Financial Information 26
1. Selected Quarterly Financial Data 26
2. Information on the Effects of Changing Prices 26
3. Information About Oil and Gas Producing Activities 26
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 27
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons, Compliance with Section 16(a) of the
Exchange Act 27
Item 10. Executive Compensation 27
Item 11. Security Ownership of Certain Beneficial Owners and
Management 27
Item 12. Certain Relationships and Related Transactions 27
Item 13. Exhibits and Reports on Form 8-K 28
a. List of Documents filed as Part of this Report 28
1. Financial Statements 28
2. Financial Statement Schedules 28
b. Reports on Form 8-K 28
c. Exhibits 29
Signatures 30
<PAGE> 4
PART I
Item 1. Description of Business
(a) General Development of Business
Granite State Bankshares, Inc. ("Granite State" or "Company") is a
single-bank holding company which was formed in 1986 to acquire all of the
stock of the Granite Bank, formerly Granite Bank of Keene and Keene
Savings Bank, upon its conversion from a mutual savings bank to a state-
chartered guaranty (stock) savings bank. Since that time, the Company has
acquired the Durham Trust Company, First Northern Co-operative Bank, First
National Bank of Peterborough, and the Granite Bank of Amherst.
In March of 1987, Granite State organized a mortgage corporation,
GSBI Mortgage Corporation, for purposes of expanding the residential loan
programs it could offer, as well as improving the efficiency and
effectiveness of its participation in the secondary mortgage markets. The
mortgage corporation now operates as a division of Granite Bank and
services Cheshire, Hillsborough, Strafford, and Rockingham counties, New
Hampshire, with a wide variety of mortgage loan products.
In July of 1987, the Granite Bank of Amherst opened for business as
a state-chartered guaranty (stock) savings bank, and was the result of the
purchase from the Amoskeag Bank of their Amherst branch office. In June
of 1989 it was merged into the First National Bank of Peterborough under
the name of Granite Bank, N.A.. In March of 1990 Granite Bank, N.A. was
merged into Granite Bank.
In October of 1988, First Peterborough Bank Corp. was merged into
Granite State, leaving Granite State with the First National Bank of
Peterborough ("First National"). First National was a national bank
engaged in substantially all of the business operations customarily
conducted by a commercial bank in New Hampshire. In June of 1989 the name
was changed to Granite Bank, N.A., when it absorbed Granite Bank of
Amherst. In March of 1990, Granite Bank, N.A. was merged into Granite
Bank.
In August of 1991, Granite Bank entered into a purchase and
assumption agreement with the Resolution Trust Company ("RTC"), whereby it
acquired certain assets and assumed certain liabilities of First Northern
Co-operative Bank ("First Northern"), headquartered in Keene, New
Hampshire, which was under RTC conservatorship.
In November of 1991, Granite Bank entered into a purchase and
assumption agreement with the Federal Deposit Insurance Corporation
("FDIC"), whereby it acquired certain assets and assumed certain
liabilities of Durham Trust Company ("Durham"), headquartered in Durham,
New Hampshire. The FDIC was the liquidating agent of Durham Trust
Company.
Granite Bank completed its conversion from a state-chartered
guaranty (stock) savings bank to a New Hampshire state-chartered
commercial bank during 1991.
(1) Current Market Conditions
Excess residential and commercial real estate inventory still
continued to affect the New England real estate market in fiscal 1995 and
contributed to the Company's level of nonperforming assets during this
period. Although the real estate markets in the Company's market area and
the New Hampshire economy appear to have stabilized and shown signs of
improvement over the last 2 to 3 years, they may continue to adversely
impact the quality of the company's assets in future periods as well as
its results of operations.
(b) Financial Information about Industry Segments
Not applicable.
<PAGE> 5
(c) Narrative Description of Business
(1) General Description of Business
Granite State operates as a bank holding company by virtue of its
ownership of 100% of the stock of Granite Bank (referred to as the
"Bank"). Currently, the Company does not transact any significant
business other than through the Bank.
The principal business of the Bank is attracting deposits and
originating commercial loans and loans secured by first and second
mortgage liens on real estate located in New Hampshire.
In recent years, the Bank has concentrated its efforts on expanding
its franchise through increased emphasis on commercial real estate loans
and the introduction of new deposit products. The Company has, and
continues to devote considerable resources toward the enhancement of
computer systems and operating procedures to position itself to compete
effectively in its local markets. In this regard, during 1995, the Bank
upgraded its in-house loan and deposit computer application systems.
The Bank offers a wide range of consumer and commercial services,
including: commercial demand deposits, consumer regular and interest-
bearing (NOW) checking and regular savings accounts; certificates of
deposit; residential and commercial real estate loans; secured and
unsecured consumer and commercial loans; and cash management services.
The Company's distribution network for its services is comprised of
its main office in Keene, full-service banking offices in Portsmouth,
Durham, Peterborough, Amherst, Milford and Chesterfield and 17 automatic
teller machines ("ATMs") located in Chesterfield, Keene, Swanzey,
Peterborough, Amherst, Milford, Durham and Portsmouth.
(2) Regulation and Supervision
General
- -------
Granite State is a registered bank holding company under the Bank
Holding Company Act of 1956 ("BHCA"), and as such, is subject to
regulation by the Federal Reserve Board ("FRB"). Granite Bank is a New
Hampshire-chartered commercial bank, the deposit accounts of which are
insured by the FDIC. As such, it is subject to the regulation,
supervision and examination of the New Hampshire Bank Commissioner
("Commissioner") and the FDIC. See "New Hampshire Law" and "Insurance of
Deposits". It is a member of the Federal Home Loan Bank of Boston
("FHLB").
New Hampshire Law
- -----------------
As a New Hampshire-chartered commercial bank, Granite Bank is
subject to the applicable provisions of state law and the regulations
adopted thereunder by the Commissioner. Granite Bank derives its lending
and investments powers from New Hampshire law and is subject to periodic
examination by and reporting requirements of the Commissioner, who also
has specific statutory jurisdiction over certain banking activities,
mergers and the creation of new powers. The Commissioner has authority to
take various enforcement actions against banks, or bank directors or
officers, that engage in violations of law or unsafe or unsound practices.
The Commissioner also may appoint a receiver or conservator for a bank
under certain circumstances.
The Bank is required under New Hampshire law to maintain a reserve
of the lesser of not less than 12% of the amount of demand deposits and 5%
of the amount of time and savings deposits in cash or in specified short-
term investments, or the reserve requirements established by the FRB. At
December 31, 1995 this requirement was satisfied.
<PAGE> 6
Granite State is also subject to the periodic examination and
reporting requirements of the Commissioner. Under New Hampshire law,
Granite State may not acquire ownership or control of more than 12 banking
affiliates, including (i) banking institutions chartered by the state and
actively engaged in business as such in the State and (ii) national banks
authorized to transact business in the State, neither may it acquire
ownership or control of any of the foregoing if, as a result, the Company
and its banking affiliates would hold deposits in New Hampshire in excess
of 20% of the total deposits of all federal and state-chartered banking
institutions, including savings associations, operating in New Hampshire.
At the present time the total of the Bank's deposits are substantially
less than 20% of total New Hampshire deposits.
The Bank pays assessments to the Commissioners office to support its
operations. In 1995, these assessments totaled $5,337.
Federal Deposit Insurance Corporation
- -------------------------------------
Safety and Soundness Regulations
- --------------------------------
The federal regulatory agencies, including the FDIC were required to
adopt and enforce final regulations prescribing standards relating to a
variety of operating matters such as internal controls, information
systems and internal audit systems, loan documentation and credit
underwriting, interest rate risk exposure, asset growth and quality and
employee compensation. The federal banking agencies have adopted a final
rule containing Interagency Guidelines Prescribing Standards for Safety
and Soundness ("Guidelines") to implement safety and soundness standards
required under the Federal Deposit Insurance Act. The Guidelines set
forth the safety and soundness standards that the federal banking agencies
use to identify and address problems at insured depository institutions
before capital becomes impaired. The standards set forth in the
Guidelines address internal controls and information systems; internal
audit systems; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; and compensation, fees and benefits. The agencies
are expected to adopt a proposed rule that specifies asset quality and
earnings standards which, if adopted in final, would be added to the
Guidelines. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the
agency may require the institution to submit to the agency an acceptable
plan to achieve compliance with the standard, as required by the Federal
Deposit Insurance Act. The final rule establishes deadlines for the
submission and review of such safety and soundness compliance plans when
such plans are required.
Investment Authority
- --------------------
The FDIC regulations restrict investments by and activities of
insured state banks such as the Bank. Effective December 19, 1992,
neither state banks nor their subsidiaries may engage in activities, as
principal, not permissible for national banks or their subsidiaries unless
the FDIC determines that the activity would pose no significant risk to
the deposit insurance fund and the bank is and continues to comply with
applicable federal capital standards. Additionally, subject to exceptions
for majority-owned subsidiaries and certain other limited exceptions,
state banks may not acquire or retain any equity investment of a type or
in an amount not permissible for national banks. Generally, nonconforming
investments must be divested over a five-year transition period. However,
nonconforming common and preferred stock investments must be reduced by at
least 1/3 of the amount by which the nonconforming common and preferred
stock investments exceed 100% of the bank's capital and all nonconforming
investments must be divested by three years after the Act's enactment.
The Act does contain a partial exception from these requirements for stock
and mutual fund ownership by banks which were authorized to make such
investments by state law and had made such investments during a specified
time period. The Bank believed it qualified for the exception and applied
to the FDIC for approval. During 1993, the Bank received approval from
the FDIC to invest in equity securities listed on a national exchange and
registered shares of mutual funds, which are otherwise impermissible
investments for national banks, in
<PAGE> 7
an amount not to exceed 100 percent of its Tier 1 capital, which amounted
to $24,320,000 at December 31, 1995.
Capital Requirements
- --------------------
The FDIC has issued regulations that require Bank Insurance Fund-
insured banks, such as the Bank, to maintain minimum levels of capital.
The regulations establish a minimum leverage capital requirement of not
less than 3% core capital to total assets for banks in the strongest
financial and managerial condition, with a CAMEL Rating of 1 (the highest
rating of the FDIC for banks). For all other banks, the minimum leverage
capital requirement is 3% plus an additional cushion of at least 1% to 2%.
Core capital is comprised of the sum of common stockholders' equity,
noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible
assets (other than qualifying servicing rights and purchased credit card
relationships), identified losses and investments in certain subsidiaries.
At December 31, 1995, the Bank's ratio of core capital to total assets
equaled 7.13%, which exceeded the minimum leverage requirement.
The FDIC also requires that banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of a
ratio of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8.00%. In determining the amount of
risk-weighted assets, all assets, including certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks
the FDIC believes are inherent in the type of asset. The components of
core capital are equivalent to those discussed earlier under the leverage
capital requirement. The components of supplementary capital currently
include cumulative perpetual preferred stock, long term perpetual
preferred stock, mandatory convertible securities, subordinated debt and
intermediate preferred stock and allowance for loan and lease losses.
Allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets. Overall, the
amount of capital counted toward supplementary capital cannot exceed 100%
of core capital. At December 31, 1995, the Bank met its risk based
capital requirements with a core risk-based capital to risk-weighted
assets ratio of 13.96% and a total risk-based capital to risk-weighted
assets ratio of 15.06%.
Prompt Corrective Action Regulations
- ------------------------------------
Effective December 19, 1992, the regulatory agencies, including the
FDIC, were required to take certain supervisory actions against
undercapitalized banks. The severity of such action depends upon the
degree of undercapitalization. The regulations generally require subject
to a narrow exception, the appointment of a receiver or conservator for
banks whose tangible capital level falls below 2% of assets, which
appointment is to be made within a maximum of 270 days after the threshold
is reached. At December 31, 1995, the subsidiary bank was considered
"well capitalized" for purposes of the FDIC's prompt corrective action
regulations.
The FDIC may institute proceedings against any insured bank or any
director, trustee, officer or employee of such bank who engages in unsafe
and unsound practices, or the violation of applicable laws and
regulations. The FDIC has the authority to terminate or suspend insurance
of accounts pursuant to procedures established for that purpose and may
appoint a receiver or conservator under certain circumstances.
Insurance of Deposits
- ---------------------
The deposit accounts of the Bank are insured by the FDIC up to
applicable limits, generally $100,000 per insured depositor. The FDIC
issues regulations, conducts periodic examinations, requires the filing of
reports and generally supervises the operations of its insured banks. The
approval of the FDIC is required prior to a merger or consolidation, or
the establishment or relocation of an office facility. The majority of
the Bank's deposits are insured by the Bank Insurance Fund ("BIF").
Approximately 15% of the Bank's
<PAGE> 8
deposits are OAKAR deposits, which are deposits purchased from institutions
previously insured by the Savings Association Insurance Fund ("SAIF").
During 1995, the Bank paid annual insurance premiums of $283,000
compared with $581,000 in 1994.
The Federal Deposit Insurance Corporation Improvement Act of 1991
required the FDIC to issue regulations which established a system for
setting deposit insurance premiums based upon the risks a particular bank
or savings association poses to the deposit insurance funds. A permanent
risk based deposit insurance premium system was adopted by the FDIC
effective January 1, 1994. Under the rule, the FDIC assigns an
institution to one of three capital categories consisting of 1) well
capitalized, 2) adequately capitalized or 3) undercapitalized, and one of
three supervisory subcategories. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned.
In view of the BIF's achieving a statutorily required capitalization
ratio, the FDIC adopted a new assessment rate of 4 to 31 basis points per
$100 of deposits. Under that schedule, approximately 91% of BIF members
paid the lowest assessment rate of 4 basis points. Most recently, the
FDIC has voted to reduce the BIF assessment schedule further for the first
half of 1996 so that most BIF members will pay the statutory minimum
semiannual assessment of $1,000.
Notwithstanding its status as a BIF-insured commercial bank,
approximately 15% of the Bank's deposit base consists of OAKAR deposits,
which are acquired SAIF deposits. These deposits are assessed at the
premium rate applicable to SAIF institutions. The FDIC adopted a final
rule retaining the existing assessment rate schedule for SAIF institution
members of 23 basis points to 31 basis points per $100 of deposits. The
FDIC has recently proposed to maintain the current rate schedule for SAIF
deposits.
A proposal is being considered by Congress under which SAIF-insured
institutions would pay a one-time special assessment designed to bring the
SAIF reserve ratio to the level already achieved by BIF. Under the
proposal, OAKAR deposits would be subject to this special assessment.
This special assessment could be approximately 85 basis points per $100 of
deposits based upon the Bank's March 31, 1995 OAKAR deposits of
approximately $35,500,000. If such an assessment is enacted, the
Company's potential pretax liability could be approximately $302,000.
Management cannot predict when and whether this legislation will be
enacted and if enacted whether or when ongoing SAIF insurance premiums
will be reduced to a level equal to that of BIF premiums. Management also
cannot predict whether or when the BIF and SAIF will merge.
Federal Reserve System
- ----------------------
Under FRB regulations, the Bank is required to maintain reserves
against its transaction accounts (primarily checking and NOW accounts),
non-personal money market deposit accounts, and non-personal time
deposits. Because reserves must generally be maintained in cash or in
non-interest bearing accounts, the effect of the reserve requirement is to
increase the Bank's cost of funds. For most of 1995, these regulations
required reserves of 3% of total transaction accounts of up to $54.0
million. Total transaction accounts amounting to over $54.0 million
required a reserve of $1.6 million plus 10% (this rate is set by the FRB
and can range from 8% to 14%) of that portion of total transaction
accounts in excess of such amount. In addition, reserves in the amount of
3% must be maintained on non-personal money market deposit accounts.
Institutions were permitted to designate and exempt $4.2 million of
reservable liabilities from these reserve requirements. These amounts and
percentages are subject to adjustment by the FRB. The Bank was in
compliance with its reserve requirements at December 31, 1995. The Bank
also has the authority to borrow from the Federal Reserve Board "discount
window" to meet its short-term liquidity needs.
During December, 1995, the amount of reservable liabilities exempt
from reserve requirements was increased to $4.3 million and the level at
which reservable liabilities would be subject to the 10% rate was
<PAGE> 9
lowered to $52.0 million. The effects of these recent actions will not
have any significant impact on the Bank's liquidity and profitability.
Under the Federal Change in Bank Control Act ("CIBCA"), a prior
notice must be submitted to the FRB if any person or group acting in
concert seeks to acquire 10% or more of Granite State common stock, unless
(if less than 25% is to be beneficially owned) the FRB finds that the
acquisition will not result in change in control. Under CIBCA, the FRB
has 60 days within which to act, taking into consideration factors similar
to those under the Bank Holding Company Act ("BHCA"). Under the BHCA, any
company would be required to obtain prior approval from the FRB before
obtaining control of the Holding Company. Control generally is defined as
beneficial ownership of 25 percent or more of any class of voting
securities of the Company. An existing bank holding company would need to
receive prior FRB approval before acquiring more than 5% of the voting
securities of the Company.
Granite State and its subsidiary are subject to examination,
regulation and periodic reporting by the FRB under the BHCA. FRB approval
is required for acquisitions of either financial institutions or other
entities, or the commencement of new activities by the Company. Pursuant
to recent legislation, interstate holding company acquisitions of banks
are permitted generally without regard to state law, except state laws
regarding deposit concentration. The legislation also contemplates
interstate expansion by bank merger or de novo branching if the states
involved allow. Granite State and its subsidiary may engage only in
activities that are deemed to be related to banking by the FRB. The FRB
has adopted capital adequacy guidelines for bank holding companies (on a
consolidated basis) substantially similar to those of the FDIC for the
Bank.
During 1989, the Federal Reserve Board issued final guidelines for a
risk-based approach to measuring the capital adequacy of bank holding
companies and state-chartered banks which are members of the Federal
Reserve System. These capital requirements generally call for an 8
percent total capital ratio, of which 4 percent must be comprised of Tier
I capital. Risk-based capital ratios are calculated by weighting assets
and off-balance sheet instruments according to their relative credit
risks. In addition to the risk-based capital standard, bank holding
companies such as the Company must maintain a minimum leverage ratio of
Tier I capital to total assets of at least 4 percent, with Tier I capital
for this purpose being defined consistent with the risk-based capital
guidelines. At December 31, 1995, Granite State had consolidated Tier I
and total risk-based capital ratios of 14.76% and 15.85%, respectively and
a leverage ratio of Tier I capital to total assets of 7.54%.
Federal Home Loan Bank System
- -----------------------------
Granite Bank is a member of the FHLB of Boston, which is one of 12
regional Federal Home Loan Banks. The FHLB serves as a reserve or central
bank for its members. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the Federal Home Loan Bank system.
It makes advances (i.e., loans) to members in accordance with policies and
procedures established by the Board of Directors of the FHLB. The Bank's
membership in the FHLB is voluntary and can be terminated by the Bank at
any time when its advances are paid.
As a member of the FHLB, the Bank is required to purchase and hold
stock in the FHLB in an amount equal to the greater of 1% of the aggregate
of unpaid residential mortgage loan balances and the carrying value of
mortgage-backed securities outstanding at the beginning of the year; 5% of
FHLB advances outstanding; or 1% of 30% of total assets. As of December
31, 1995, Granite Bank held stock in the FHLB in the amount of $3,215,000.
(3) Monetary Policies
Granite State and the Bank are affected by the monetary and fiscal
policies of various agencies of the United States Government, including
the Federal Reserve System. In view of changing conditions in the
<PAGE> 10
national economy and in the money markets, it is impossible for the
management of Granite State to accurately predict future changes in
monetary policy or the effect of such changes on the business or financial
condition of Granite State.
(4) Employees
As of December 31, 1995, Granite State and its subsidiary employed
132 full time equivalent officers and employees. Granite State considers
relations with its employees to be satisfactory. None of the employees of
the Company or its subsidiary are represented by a collective bargaining
group.
(5) Statistical Information
The statistical information on Granite State set forth in the
following sections is furnished pursuant to Industry Guide 3 under the
Securities Exchange Act of 1934.
(A) Distribution of Assets, Liabilities, and
Stockholders' Equity; Interest Rates and Interest
Differential
Information regarding the distribution of assets, liabilities and
stockholders' equity; interest rates and interest differential for each of
the three years in the period ended December 31, 1995, on page 15 of the
Annual Report to Stockholders for the year ended December 31, 1995 are
incorporated herein by reference.
(B) Rate/Volume Analysis
Information regarding the dollar amount of changes in interest
income and interest expense for interest earning assets and interest
bearing liabilities attributable to changes in interest rates, changes in
volume and changes attributable to rate and volume for each of the two
years in the period ended December 31, 1995, on page 16 of the Annual
Report to Stockholders for the year ended December 31, 1995 are
incorporated herein by reference
(C) Investment Portfolio
Effective December 31, 1993, the Company adopted Financial
Accounting Standards Board Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Under SFAS No. 115, debt securities that the Company has the
positive intent and ability to hold to maturity are classified as held-to-
maturity and reported at amortized cost; debt and equity securities that
are bought and held principally for the purpose of selling in the near
term are classified as trading and reported at fair value, with unrealized
gains and losses included in earnings; and debt and equity securities not
classified as either held-to-maturity or trading are classified as
available-for-sale and reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
stockholders' equity, net of estimated income taxes. Upon adoption, the
Company classified its securities into three categories: held-to-
maturity, available-for-sale and held for trading. As a result of the
adoption, stockholders' equity was increased by approximately $288,000,
representing the net unrealized gain on securities available-for-sale,
less applicable income taxes. Prior to adoption, debt investment
securities were carried at amortized cost, marketable equity securities
were carried at the lower of aggregate cost or market value and investment
securities held for sale were carried at the lower of cost or market
value.
<PAGE> 11
The following table sets forth the amortized cost, unrealized gains
and losses, and estimated market values of held to maturity, available for
sale and trading securities at December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
AT DECEMBER 31, 1995
US Treasury obligations $ 59,016 $ 452 $ 16 $ 59,452
US Government agency obligations 17,000 7 17,007
Other corporate obligations 9,495 51 9,444
Mutual Fund 3,000 9 3,009
Marketable equity securities 4,036 2,077 9 6,104
--------- --------- ---------- ----------
Total securities available for sale $ 92,547 $ 2,545 $ 76 $ 95,016
========= ========= ========== ==========
SECURITIES HELD TO MATURITY
AT DECEMBER 31, 1994
Other corporate obligations $ 15,499 $ 239 $ 15,260
---------- --------- ---------- ----------
Total securities held to maturity $ 15,499 $ 0 $ 239 $ 15,260
========== ========= ========== ==========
SECURITIES AVAILABLE FOR SALE
AT DECEMBER 31, 1994
US Treasury obligations $ 58,912 $ 1,410 $ 57,502
US Government agency obligations 3,000 45 2,955
Other corporate obligations 9,484 202 9,282
Marketable equity securities 2,701 $ 664 72 3,293
---------- ---------- ---------- ----------
Total securities available for sale $ 74,097 $ 664 $ 1,729 $ 73,032
========== ========== ========== ==========
SECURITIES HELD TO MATURITY
AT DECEMBER 31, 1993
US Treasury obligations $ 5,503 $ 28 $ 5,531
Other corporate obligations 23,994 154 24,148
---------- ---------- ---------- ----------
Total securities held to maturity $ 29,497 $ 182 $ 0 $ 29,679
========== ========== ========== ==========
SECURITIES AVAILABLE FOR SALE
AT DECEMBER 31, 1993
US Treasury obligations $ 14,989 $ 58 $ 15,047
US Government agency obligations 3,000 $ 30 2,970
Other corporate obligations 2,991 9 2,982
Marketable equity securities 1,486 418 1,904
---------- ---------- ---------- ----------
Total securities available for sale $ 22,466 $ 476 $ 39 $ 22,903
========== ========== ========== ==========
TRADING SECURITIES
AT DECEMBER 31, 1993
US Treasury obligations $ 16,269 $ 4 $ 16,273
Other corporate obligations 3,500 $ 4 3,496
Marketable equity securities 3,500 3,500
---------- ---------- ---------- ----------
Total trading securities $ 23,269 $ 4 $ 4 $ 23,269
========== ========== ========== ==========
</TABLE>
<PAGE> 12
As a member of the Federal Home Loan Bank (FHLB) of Boston, the Bank
is required to invest in $100 par value stock of the FHLB of Boston in the
amount of 1% of its outstanding loans secured by residential housing, or
1% of 30% of total assets, or 5% of its outstanding advances from the FHLB
of Boston, whichever is higher. When such stock is redeemed, the Bank
would receive from the FHLB of Boston an amount equal to the par value of
the stock. As of December 31, 1995, 1994 and 1993, the Company had
investments in FHLB of Boston stock of $3,215,000, $3,215,000, and
$1,219,000 respectively. At December 31, 1995 the weighted average yield
on FHLB of Boston stock was 6.70%.
The following table sets forth the maturity distribution of
securities available for sale at December 31, 1995 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).
<TABLE>
<CAPTION>
Amortized Weighted
Cost Average Yield
----------- -----------
(In Thousands)
<S> <C> <C>
US Treasury obligations
Due within 1 year $ 42,962 6.27%
Due after 1 but within 5 years 16,054 5.91%
-----------
Total 59,016 6.17%
-----------
US Government Agency obligations
Due within 1 year 0 0.00%
Due after 1 but within 5 years 17,000 6.33%
-----------
Total 17,000 6.33%
-----------
Other corporate obligations
Due within 1 year 5,998 5.67%
Due after 1 but within 5 years 3,497 6.37%
-----------
Total 9,495 5.93%
-----------
Total debt securities 85,511 6.18%
Mutual fund shares<F*> 3,000 6.14%
Marketable equity securities<F*> 4,036 4.76%
Net unrealized gains on
securities available for sale 2,469
-----------
Total securities available for sale $ 95,016 6.11%
===========
<FN>
<F*> Mutual fund shares and marketable equity securities have no stated
maturity, and are therefore considered to be due after 10 years.
</FN>
</TABLE>
Securities available for sale with a book value in excess of 10% of
stockholders' equity, excluding U.S. Treasury and U.S. Government agency
obligations, at December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Par Value Book Value Market Value Coupon Maturity Date
------------ ------------ ------------ ------------ ------------
($ In Thousands)
<S> <C> <C> <C> <C> <C>
Dean Witter/Discover & Co $ 3,500 $ 3,456 $ 3,456 6.35% 2-Feb-99
International Lease Finance $ 3,000 $ 2,988 $ 2,988 4.75% 15-Jul-96
Xerox $ 3,000 $ 3,000 $ 3,000 6.25% 15-Jan-96
Asset Management Fund, Inc. -
Mutual Fund Shares (301,811 shares) N/A $ 3,009 $ 3,009 N/A N/A
</TABLE>
<PAGE> 13
(D) Loan Portfolio
The following table shows Granite State's loan distribution as of
December 31:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, Financial & Agricultural $ 10,696 $ 11,787 $ 14,746 $ 20,374 $ 19,713
Real Estate-Residential 113,563 119,311 117,674 106,503 105,442
Real Estate-Commercial 52,555 48,185 39,332 35,169 33,813
Real Estate-Construction and Land Development 2,676 3,436 3,832 1,890 1,871
Installment 4,438 3,685 4,588 5,753 8,611
Other 8,426 8,847 8,937 10,348 13,482
---------- ---------- ---------- ---------- ----------
Total Loans 192,354 192,251 189,109 180,037 182,932
Less:
Allowance for Possible Loan Losses (3,704) (4,230) (4,004) (3,864) (4,570)
Unearned Income (2,356) (2,930) (3,364) (4,174) (5,483)
---------- ---------- ---------- ---------- ----------
Loans, net $ 186,294 $ 188,091 $ 181,741 $ 171,999 $ 172,879
========== ========== ========== ========== ==========
</TABLE>
(E) Maturity of Loans
The following table shows the maturity/repricing distribution of
loans outstanding, excluding non-accrual loans of $1,798,000 as of
December 31, 1995. Fixed rate loans are entered by remaining maturity
while adjustable rate loans are included by repricing frequency. This
table does not reflect scheduled loan amortization.
<TABLE>
<CAPTION>
One Year Over One Year Over
or Less to Five Year Five Years Total
------------ ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C>
Commercial, Financial & Agricultural $ 9,906 $ 755 $ 0 $ 10,661
Real Estate-Residential 92,458 13,198 6,566 112,222
Real Estate-Commercial 51,274 653 296 52,223
Real Estate-Construction and Land Development 2,574 0 14 2,588
Installment 1,462 2,921 53 4,436
Other 712 7,343 371 8,426
------------ ------------ ------------ ------------
$ 158,386 $ 24,870 $ 7,300 $ 190,556
============ ============ ============ ============
Loans maturing after one year:
Fixed Interest Rate $ 6,559 $ 7,300 $ 13,859
Variable Interest Rate 18,311 0 18,311
------------ ------------ ------------
$ 24,870 $ 7,300 $ 32,170
============ ============ ============
</TABLE>
<PAGE> 14
(F) Nonperforming Loans and Assets
The following table summarizes Granite State's nonperforming loans
and assets at December 31. Amounts shown reflect principal only.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
($ In Thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming Loans:
Commercial, Financial & Agricultural $ 35 $ 81 $ 17 $ 390 $ 646
Real Estate-Residential 1,341 1,495 1,801 1,166 2,279
Real Estate-Commercial 332 646 103 399 1,178
Real Estate-Construction and Land Development 88 54 177 67 684
Installment and other 2 8 17 366 301
---------- ---------- ---------- ---------- ----------
Total nonperforming loans 1,798 2,284 2,115 2,388 5,088
Other real estate owned 2,691 3,009 4,269 6,839 8,655
---------- ---------- ---------- ---------- ----------
Total nonperforming loans and other real estate owned $ 4,489 $ 5,293 $ 6,384 $ 9,227 $ 13,743
========== ========== ========== ========== ==========
Percentage of nonperforming loans and
other real estate owned to total loans receivable 2.33% 2.71% 3.38% 5.13% 7.51%
========== ========== ========== ========== ==========
Percentage of nonperforming loans and
other real estate owned to total assets 1.30% 1.70% 2.11% 3.03% 4.28%
========== ========== ========== ========== ==========
Loans delinquent 90 days or more included in
nonperforming loans above $ 1,057 $ 872 $ 807 $ 1,584 $ 3,642
========== ========== ========== ========== ==========
Loans delinquent 90 days or more still accruing,
not included in above $ 0 $ 21 $ 0 $ 0 $ 0
========== ========== ========== ========== ==========
</TABLE>
Accrual of interest on loans is discontinued either when reasonable
doubt exists as to the full, timely collection of interest or principal,
or when a loan becomes contractually past due by ninety days unless the
loan is well secured and in the process of collection. When a loan is
placed on nonaccrual status, all interest previously accrued and not
received is reversed against current period earnings.
For the year ended December 31, 1995, the gross interest income on
nonperforming loans that would have been recorded, had such loans been
current in accordance with their original terms amounted to $230,000. The
amount of interest income on those loans included in net earnings for the
year ended December 31, 1995 amounted to $56,000.
The Company adopted SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan," on January 1, 1995. This new standard requires
that a creditor measure impairment based on the present
<PAGE> 15
value of expected future cash flows discounted at the loan's effective
interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. Regardless
of the measurement method, a creditor must measure impairment based on the
fair value of the collateral when the creditor determines that foreclosure
is probable. In October 1994, SFAS No. 114 was amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures," which allows creditors to use their existing methods for
recognizing interest income on impaired loans. Because the Company
already recognized such reductions of value on impaired loans through its
provision for possible loan losses, the adoption of SFAS No. 114, as
amended by SFAS No. 118, did not have a material impact on its financial
condition or results of operations. The balance of impaired loans was
$1,022,000 at December 31, 1995. The Company has identified a loan as
impaired when it is probable that interest and principal will not be
collected according to the contractual terms of the loan agreements. The
allowance for possible loan losses associated with impaired loans
allocated from and part of the general allowance for possible loan losses,
upon the adoption of SFAS No. 114, on January 1, 1995 was $864,000.
During 1995, provisions to the allowance for impaired loans amounted to
$553,000 and impaired loans charged-off amounted to $1,050,000. The
allowance for possible loan losses associated with impaired loans at
December 31, 1995 was $367,000. The average recorded investment in
impaired loans was $1,482,000 in 1995 and the income recognized on
impaired loans during 1995 was $19,000. Total cash collected on impaired
loans during 1995 was $103,000, of which $84,000 was credited to the
principal balance outstanding on such loans. Interest which would have
been accrued on impaired loans during 1995, had they performed in
accordance with the terms of their contracts, was $166,000. The company's
policy for interest income recognition on impaired loans is to recognize
income on nonaccrual loans under the cash basis when the loans are both
current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Company; if these factors do not exist, the
Company does not recognize income.
Other real estate owned is comprised of properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure.
Real estate formally acquired in settlement of loans is recorded at the
lower of the carrying value of the loan or the fair value of the property
received less an allowance for estimated costs to sell. Loan losses
arising from the acquisition of such properties are charged against the
allowance for loan losses. Provisions to reduce the carrying value to net
realizable value are charged to current period earnings as realized and
reflected as an addition to the valuation allowance. Operating expenses
and gains and losses upon disposition are reflected in earnings as
realized.
Other real estate owned at December 31 was comprised as follows:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Condominiums and apartment projects $ 266 $ 701 $ 492 $ 449 $ 414
Single family housing projects 787 1,050 1,024 1,230 1,050
Retail and office 426 481 691 2,327 4,098
Non-retail commercial 1,593 1,166 1,760 1,519 1,763
Residential 75 107 711 1,564 1,330
---------- ---------- ---------- ---------- ----------
3,147 3,505 4,678 7,089 8,655
Less: Valuation allowance 456 496 409 250
---------- ---------- ---------- ---------- ----------
$ 2,691 $ 3,009 $ 4,269 $ 6,839 $ 8,655
========== ========== ========== ========== ==========
</TABLE>
As of December 31, 1995, there were no loan concentrations exceeding
10% of total loans.
As of December 31, 1995, neither Granite State nor its subsidiary,
Granite Bank, had any foreign loans.
<PAGE> 16
(G) Summary of Loan Loss Experience and Allocation
of the Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained through
provisions for possible loan losses based upon management's ongoing
evaluation of the risks inherent in the loan portfolio. Management's
evaluation of the loan portfolio includes many factors, such as
identification and review of individual problem situations that may affect
the borrower's ability to repay; review of overall portfolio quality
through an analysis of current charge-offs, delinquency, and nonperforming
loan data; review of regulatory authority examinations and evaluations of
loans; an assessment of current and expected economic conditions; and
changes in the size and character of the loan portfolio. At December 31,
1992 and 1993, the level of the allowance was lower than the 1991 level
due to management's assessment of reductions in nonperforming loans as
well as an apparent stabilization of the New Hampshire economy and the
regional real estate markets. At December 31, 1994, the level of the
allowance was higher than the 1993 level, due to an increase in
nonperforming loans as well as an increase in the balance of the loan
portfolio. The level of the allowance at December 31, 1995 was lower than
the 1994 level, due primarily to a reduction in the level of nonperforming
loans, as well as a reduction in the balance of the loan portfolio. While
management believes that the allowance for possible loan losses at
December 31, 1995 is adequate based on its current review and estimates,
further provisions to the allowance may be necessary if the market in
which the Company operates deteriorates. Additionally, regulatory
agencies review the Company's allowance for loan losses as part of their
examination process. Such agencies may require the Company to recognize
additions to the allowance based upon judgements which may be different
from those of management.
Changes in the allowance for possible loan losses for the year ended
December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,230 $ 4,004 $ 3,864 $ 4,570 $ 4,459
Allowance of acquired loan portfolios 1,900
Provision for possible loan losses 735 600 637 752 2,654
Loans charged off (1,405) (421) (573) (1,660) (4,663)
Recoveries of loans previously charged off 144 47 76 202 220
---------- ---------- ---------- ---------- ----------
Balance at end of year $ 3,704 $ 4,230 $ 4,004 $ 3,864 $ 4,570
========== ========== ========== ========== ==========
</TABLE>
A summary of loan charge-offs by loan category for the year ended
December 31, follows:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 766 $ 9 $ 123 $ 159 $ 1,446
Real estate-Residential 333 204 165 622 1,372
Real estate-Commercial 300 199 143 352 1,058
Real estate-Construction and land development 186 436
Installment and other loans 6 9 142 341 351
---------- ---------- ---------- ---------- ----------
$ 1,405 $ 421 $ 573 $ 1,660 $ 4,663
========== ========== ========== ========== ==========
</TABLE>
Recoveries on previously charged-off loans are not broken down by
loan category due to the immateriality of the totals.
<PAGE> 17
The ratio of net loan charge offs to average loans outstanding for
the year ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
($ In Thousands)
<S> <C> <C> <C> <C> <C>
Net loan chargeoffs $ 1,261 $ 374 $ 497 $ 1,458 $ 4,443
========== ========== ========== ========== ==========
Average loans outstanding $ 187,866 $ 185,332 $ 177,139 $ 171,333 $ 154,210
========== ========== ========== ========== ==========
Ratio of net loan chargeoffs
to average loans outstanding 0.67% 0.20% 0.28% 0.85% 2.88%
========== ========== ========== ========== ==========
</TABLE>
An allocation of the allowance for possible loan losses as of
December 31 follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------- ---------------------------- ----------------------------
Percent of loans Percent of loans Percent of loans
in each category in each category in each category
Amount to total loans Amount to total loans Amount to total loans
------------ -------------- ------------ -------------- ------------ --------------
($ In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 366 5.56% $ 1,349 6.04% $ 704 7.80%
Real estate-Residential 1,079 59.04% 1,003 61.10% 1,742 62.23%
Real estate-Commercial 1,997 27.32% 1,642 24.68% 1,184 20.80%
Real estate-Construction
and land development 98 1.39% 91 1.76% 174 2.02%
Installment and other loans 164 6.69% 145 6.42% 200 7.15%
------------ -------------- ------------ -------------- ------------ --------------
$ 3,704 100.00% $ 4,230 100.00% $ 4,004 100.00%
============ ============== ============ ============== ============ ==============
</TABLE>
<TABLE>
<CAPTION>
1992 1991
---------------------------- ----------------------------
Percent of loans Percent of loans
in each category in each category
Amount to total loans Amount to total loans
------------ -------------- ------------ --------------
($ In Thousands)
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 1,062 11.32% $ 855 10.78%
Real estate-Residential 1,122 59.16% 1,566 57.64%
Real estate-Commercial 1,193 19.53% 1,688 18.48%
Real estate-Construction
and land development 62 1.05% 82 1.02%
Installment and other loans 425 8.94% 379 12.08%
------------ -------------- ------------ --------------
$ 3,864 100.00% $ 4,570 100.00%
============ ============== ============ ==============
</TABLE>
The allowance for possible loan losses as a percentage of loans
outstanding at December 31 of each reported period is as follows:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for possible
loan losses as a percentage
of total loans outstanding 1.93% 2.17% 2.12% 2.15% 2.50%
========== ========== ========== ========== ==========
</TABLE>
<PAGE> 18
(H) Risks Associated with Commercial Real Estate,
Commercial and Construction Loans
Commercial real estate and commercial lending involves significant
additional risks compared with one-to-four family residential mortgage
lending, and therefore typically accounts for a disproportionate share of
delinquent loans and real estate owned through foreclosure or by deed in
lieu of foreclosure. Such lending generally involves larger loan balances
to single borrowers or groups of related borrowers than does residential
lending, and repayment of the loan depends in part on the underlying
business and financial condition of the borrower and is more susceptible
to adverse future developments. If the cash flow from income-producing
property is reduced, for example, because leases are not obtained or
renewed, the borrower's ability to repay the loan may be materially
impaired. These risks can be significantly affected by considerations of
supply and demand in the market for office, manufacturing and retail space
and by general economic conditions. As a result, commercial real estate
and commercial loans are likely to be subject, to a greater extent than
residential real estate loans, to adverse conditions in the general
economy.
Construction loans are, in general, subject to the same risks as
commercial real estate loans, but involve additional risks as well. Such
additional risks are due to uncertainties inherent in estimating
construction costs, delays arising from labor problems, shortages of
material, uncertain marketability of a complete project and other
unpredictable contingencies that make it relatively difficult to determine
accurately the total loan funds required to complete a project or the
value of the completed project. Construction loan funds are advanced on
the security of the project under construction, which is of uncertain
value prior to the completion of construction. This uncertainty is
increased in depressed real estate markets. When a construction project
encounters cost overruns, marketing or other problems, it may become
necessary, in order to sustain the project and preserve collateral values,
for the lender to advance additional funds and to extend the maturity of
its loan. In a declining market, there is no assurance that this strategy
will successfully enable the lender to recover outstanding loan amounts
and interest due. Moreover, foreclosing on such properties results in
administrative expense and substantial delays in recovery of outstanding
loan amounts and provides no assurance that the lender will recover all
monies due to it, either by developing the property, subject to regulatory
limitations and to the attendant risks of development, or by selling the
property to another developer.
(I) Deposits
The average balance of deposits and the average rates paid thereon
are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ---------- ---------- ---------- ---------- ----------
($ In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits:
Interest bearing NOW deposits $ 71,367 2.89% $ 50,403 1.63% $ 46,146 2.04%
Money market deposits 22,181 2.95% 34,476 2.61% 39,080 2.88%
Savings deposits 49,147 2.90% 64,454 2.62% 62,926 2.96%
Time deposits 99,248 5.38% 76,967 3.81% 91,432 4.01%
---------- ---------- ---------
Total interest bearing deposits $ 241,943 3.92% $ 226,300 2.80% $ 239,584 3.17%
========== ========== ========== ========== ========= ==========
Noninterest bearing deposits $ 27,685 N/A $ 27,027 N/A $ 25,203 N/A
========== ========== =========
</TABLE>
<PAGE> 19
(J) Maturities of Time Deposits
The maturity distribution of time certificates of deposit of
$100,000 or more at December 31, 1995 follows:
<TABLE>
<CAPTION>
REMAINING MATURITY BALANCE
- ------------------------ ----------
(In Thousands)
<S> <C>
3 months or less $ 4,380
Over 3 through 6 months 2,950
Over 6 through 12 months 2,861
Over 12 through 36 months 1,590
Over 36 months 202
----------
$ 11,983
==========
</TABLE>
(K) Return on Equity and Assets
Operating and capital ratios for the year ended December 31 follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings to average assets 1.05% 0.91% 0.71%
Net earnings applicable to common
stockholders to average assets 1.05% 0.91% 0.63%
Net earnings to average
stockholders' equity 12.23% 10.73% 8.76%
Net earnings applicable to common
stockholders' equity to average common
stockholders' equity 12.23% 10.73% 9.03%
Dividend pay out ratio on common stock -primary 30.38% 28.35% 8.08%
-fully diluted 30.57% 28.57% 8.42%
Average equity to average total assets 8.59% 8.48% 8.06%
Average common equity to average total assets 8.59% 8.48% 6.98%
</TABLE>
Average stockholders' equity for the year ended December 31 utilized
in calculating certain of the ratios above is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Common stockholders' equity $ 28,094 $ 26,303 $ 21,031
Preferred stockholders' equity 3,246
---------- ---------- ----------
Total stockholders' equity $ 28,094 $ 26,303 $ 24,277
========== ========== ==========
</TABLE>
<PAGE> 20
(L) Borrowings
Information regarding the borrowings in Note K to the consolidated
Financial Statements in the Annual Report to Stockholders for the year
ended December 31, 1995 is incorporated herein by reference.
Short-Term Borrowings
- ---------------------
Outstanding short-term borrowings at December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Demand borrowings under available lines of credit $ 0 $ 20,904 $ 0
========== ========== ==========
Securities sold under agreements to repurchase $ 26,189 $ 21,968 $ 13,764
========== ========== ==========
</TABLE>
The maximum amount of short-term borrowings outstanding at any month
end during the year ended December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Demand borrowings under available
lines of credit $ 23,336 $ 28,795 $ 0
========== ========== ==========
Securities sold under agreements to repurchase $ 28,298 $ 21,968 $ 13,764
========== ========== ==========
</TABLE>
The average balance of short-term borrowings and weighted average
interest rates thereon for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------ ------------------------ ------------------------
Average Weighted Average Weighted Average Weighted
Balance Average Rate Balance Average Rate Balance Average Rate
----------- ----------- ----------- ----------- ----------- -----------
($ in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand borrowings under
available lines of credit $ 5,742 6.36% $ 13,304 5.24% $ 0 N/A
=========== =========== =========== =========== =========== ===========
Securities sold under
agreements to repurchase $ 21,133 5.24% $ 15,500 4.16% $ 10,841 2.82%
=========== =========== =========== =========== =========== ===========
Short-term fixed rate borrowings $ 0 N/A $ 0 N/A $ 0 N/A
=========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE> 21
(M) Competition
The Bank continues to experience substantial competition in
attracting and retaining deposit accounts and in making mortgage and other
loans. There are numerous federally-insured banks and thrifts with
offices within Granite Bank's principal market areas, many of which are
headquartered there. In addition, the Bank experiences competition from
credit unions and other financial intermediaries which are not subject to
similar State and Federal regulations.
The primary factors in competing for deposit accounts are service,
interest rates, convenience and, to a lesser extent, products offered.
Competitors for deposit accounts include other depository institutions and
other investment vehicles such as mutual funds, government and corporation
obligations, and the equity capital markets.
The primary factors in competing for loans are interest rates, loan
origination fees and the quality and range of lending products and
services offered. Competition for origination of loans comes primarily
from savings institutions, mortgage banking firms, and other commercial
banks.
(N) Subsidiaries
Granite State owns 100% of the capital stock of Granite Bank, a New
Hampshire chartered commercial bank, its sole subsidiary.
(d) Financial Information about Foreign and Domestic Operations
and Export Sales
Not applicable.
<PAGE> 22
Item 2. Description of Property
The following table sets forth the location of the Company's
offices, ATM facilities and other related information as of December 31,
1995. All offices and ATM facilities are located in New Hampshire. See
also Notes G and L to the Consolidated Financial Statements in the Annual
Report to Stockholders for the year ended December 31, 1995 which is
incorporated herein by reference.
<TABLE>
<CAPTION>
Office Type Location City/Town Status
- -------------- ----------- ------------ ---------
<S> <C> <C> <C>
Full service 122 West Street Keene Owned<F*>
(Headquarters)
Full service Routes 9 and 63 Chesterfield Owned<F*>
Full service Elm Street at Route 101 Milford Owned<F*>
Full service Route 101A & 122 Amherst Owned<F*>
Full service 21 Grove Street Peterborough Owned
Full service Jct Route 101 & 202 Peterborough Leased<F*>
Full service 70 Main Street Durham Owned<F*>
Full service Southgate Plaza, Route 1 Portsmouth Owned<F*>
ATM facility Gomarlo's, Route 10 West Swanzey Owned<F**>
ATM facility Colony Mill Marketplace Keene Owned<F**>
ATM facility West Street Plaza Keene Owned<F**>
ATM facility Wilbur Brothers, Route 12 North Swanzey Owned<F**>
ATM facility PAKS, Park Avenue Keene Owned<F**>
ATM facility PAKS, Winchester Street Keene Owned<F**>
ATM facility Keene Mill Outlet Keene Owned<F**>
ATM facility Durham Marketplace Durham Owned<F**>
ATM facility DeMoulas Market Milford Owned>F**>
The above table does not include a new branch office at 93 Middle St.
Portsmouth, New Hampshire scheduled to open in April 1996, nor does it
include two ATM facilities in Amherst, New Hampshire and Fitzwilliam, New
Hampshire, which opened during the first quarter of 1996.
<FN>
<F*> Office includes an ATM facility. The Durham branch has two ATM
facilities on site.
<F**> ATM facilities and their enclosures are owned by the company; the
property upon which they are located is leased.
</FN>
</TABLE>
<PAGE> 23
Item 3. Legal Proceedings
The Company is a defendant in various legal actions incident to its
business, none of which is believed by management to be material to the
financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Additional Item. Executive Officers
Information regarding executive officers not listed as directors in
the Proxy Statement is as follows:
Charles B. Paquette (age 43) is the Executive Vice President,
Secretary and Chief Operations Officer of the Holding Company and Senior
Executive Vice President, Secretary and Chief Operations Officer of
Granite Bank, positions he assumed in 1986 and 1991, respectively. Mr.
Paquette has been employed in a management position by the company and
Granite Bank since 1980.
William C. Henson (age 40) is the Executive Vice President of the
Holding Company and President-Seacoast Region of Granite Bank, positions
he assumed in 1986 and 1991, respectively. Mr. Henson joined the Bank in
1980, and has since served in a management capacity.
William G. Pike (age 44) is the Executive Vice President and Chief
Financial Officer of the Holding Company and Granite Bank, positions he
assumed in December 1991 when he joined the Company. From 1987 to
December of 1991, Mr. Pike was a partner in the firm of Grant Thornton,
Accountants and Management Consultants.
William D. Elliott (age 48) is Executive Vice President and Senior
Loan Officer of Granite Bank. Mr. Elliott joined Granite Bank as Senior
Vice President and Senior Loan Officer in April, 1990 and became Executive
Vice President in February 1992. From December 1981 to December 1989, Mr.
Elliott was Executive Vice President and Senior Loan Officer of Indian
Head National Bank of Keene. In December of 1989 Indian Head National
Bank of Keene was acquired by Fleet Bank, where Mr. Elliott assumed the
position of Vice President and Regional Commercial Banking Manager until
he joined Granite Bank.
<PAGE> 24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
(a) Market Information
Granite State's common stock is quoted on the Nasdaq Stock Market
under the symbol GSBI. Cash dividends were paid on these shares
commencing in the third quarter of 1986 through the third quarter of 1991.
Payments of dividends on common stock were suspended in the 4th quarter of
1991, due to current economic conditions, the significant net growth in
1991 related to the acquisitions of First Northern Bank and Durham Trust
Company and the Board of Directors primary consideration of preserving
capital. The Board of Directors continued to evaluate quarterly the
payment of dividends, taking into account the Company's earnings, growth,
capital position, the State of New Hampshire's economic condition and the
limitations on the Bank's ability to pay dividends to the Company. In the
4th quarter of 1993 the Board of Directors reinstated the dividend by
declaring an $.08 cash dividend payable January 14, 1994 to stockholders
of record December 30, 1993. The Board of Directors declared cash
dividends of $.08 per share in each of the first three quarters of 1994
and a cash dividend of $.12 per share in the 4th quarter of 1994 and in
each of the four quarters of 1995.
On June 14, 1994, the Company announced a Stock Repurchase Plan
("Plan"), whereby the Company's Board of Directors authorized the
repurchase of up to 9% of its outstanding common shares from time to time.
Shares repurchased under the Plan may be held in treasury, retired or used
for general corporate purposes. As of March 15, 1996, the Company has
repurchased 144,600 shares under the Plan, representing 6.69% of common
shares outstanding at the date of announcement of the Plan.
Since November 1, 1988 the Company has repurchased 520,252 shares,
or approximately 20.5% of its common stock. No treasury shares have been
sold to date.
The following table shows the range of the high and low prices, the
last sale price and dividend information on a quarterly basis for Granite
State's common stock for 1995 and 1994. The table does not reflect inter-
dealer prices, potential mark-ups, mark-downs or commissions, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
1995
----------------------------------------------
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Dividends declared per share................ $ .12 $ .12 $ .12 $ .12
Stock Price
High........................................ 17.25 17.25 13.63 13.25
Low......................................... 16.13 13.06 12.25 11.38
Last Sale................................... 16.38 16.75 13.13 12.25
</TABLE>
<TABLE>
<CAPTION>
1994
----------------------------------------------
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Dividends declared per share................ $ .12 $ .08 $ .08 $ .08
Stock Price
High........................................ 12.38 12.50 11.88 10.63
Low......................................... 11.00 11.00 9.38 9.00
Last Sale................................... 11.38 11.88 11.50 10.00
</TABLE>
<PAGE> 25
(b) Holders
As of March 15, 1996, Granite State had 787 common shareholders.
(c) Dividends
The holders of common stock of Granite State are entitled to receive
and share pro-rata in such dividends as may be declared by the Board of
Directors of Granite State out of funds legally available therefore.
Granite State is permitted by New Hampshire corporate law to pay dividends
out of unreserved and unrestricted earned surplus or from unreserved and
unrestricted net earnings of a current fiscal year and the next preceding
fiscal year taken as a single period, as and when declared by its Board of
Directors.
New Hampshire banking regulations prohibit the payment of a cash
dividend if the effect thereof would cause the net worth of the Bank to be
reduced below either the amount required for its liquidation account or
applicable capital requirements. The liquidation account was established
in connection with Granite Bank's conversion from a mutual to a stock
savings bank ("conversion") for the benefit of certain depositors in the
event of a liquidation of the Bank. The initial amount of the liquidation
account, as originally established, equaled the Bank's net worth at
February 28, 1986, and has since been declining as deposits have been
reduced or withdrawn (it will never be increased, despite additional
deposits). The Federal Deposit Insurance Act prohibits the Bank from
making a capital distribution, including payment of a cash dividend, if
the Bank would not meet applicable capital requirements after the payment.
Furthermore, the Federal Deposit Insurance Act prohibits the Bank from
paying dividends on its capital stock if it is in default in the payment
of any assessment to the FDIC.
Item 6. Management's Discussion and Analysis or Plan of Operation
Management's Discussion and Analysis or Plan of Operation on pages 9
to 21, inclusive, of the Annual Report to Stockholders for the year ended
December 31, 1995 is incorporated herein by reference.
Item 7. Financial Statements
(a) Financial Statements Required by Regulation S-X
Information relating to financial statements on pages 23 to 46,
inclusive, of the Annual Report to Stockholders for the year ended
December 31, 1995 is incorporated herein by reference.
(b) Supplementary Financial Information
(1) Selected Quarterly Financial Data
The Selected Quarterly Financial Data on pages 47 to 48 of the
Annual Report to Stockholders for the year ended December 31, 1995 is
incorporated herein by reference.
(2) Information on the Effects of Changing Prices
Management's discussion of the effects of inflation on page 20 of
the Annual Report to Stockholders for the year ended December 31, 1995 is
incorporated herein by reference.
(3) Information About Oil and Gas Producing Activities
Not applicable.
<PAGE> 26
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act
Information regarding directors and executive officers of Granite
State on pages 3 to 5 of the Proxy Statement for the 1996 Annual Meeting
of Stockholders is incorporated herein by reference.
Information regarding compliance with Section 16(a) on page 7 of the
Proxy Statement for the 1996 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 10. Executive Compensation
Information regarding executive compensation on pages 4 to 7 of the
Proxy Statement for the 1996 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial
owners and Granite State's management on pages 2 to 4 of the Proxy
Statement for the 1996 Annual Meeting of Stockholders is incorporated
herein by reference.
Item 12. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions
on page 7 of the Proxy Statement for the 1996 Annual Meeting of
Stockholders is incorporated herein by reference.
<PAGE> 27
Item 13. Exhibits and Reports on Form 8-K
(a) List of Documents Filed as Part of this Report
(1) Financial Statements
The financial statements listed below and the report of independent
certified public accountants are incorporated herein by reference to the
Annual Report to Stockholders for the year ended December 31, 1995, in
Item 7. Page references are to such Annual Report.
Financial Statements Page Reference
-------------------- --------------
Granite State Bankshares, Inc. and Subsidiary
Report of Independent Certified Public Accountants 23
Consolidated Statements of Financial Condition 24
Consolidated Statements of Earnings 25
Consolidated Statements of Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28-46
(2) Financial Statements Schedules
Schedules of the Consolidated Financial Statements required by the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.
The remaining information appearing in the Annual Report to
Stockholders for the year ended December 31, 1995, is not deemed to be
filed as part of this report, except as expressly provided herein.
(b) Reports on Form 8-K
None.
<PAGE> 28
(c) Exhibits
The exhibits listed below are filed herewith or are incorporated by
reference to other filings.
<TABLE>
EXHIBIT INDEX TO FORM 10-KSB
<S> <C>
Exhibit 3.1 Articles of Incorporation<F*>
Exhibit 3.2 Bylaws
Exhibit 10.1 Stock Option Plan<F*>
Exhibit 10.2 Executive Incentive Plan<F*>
Exhibit 10.3 Employment Agreement with Charles W. Smith<F*>
Exhibit 10.4 Employment Agreement with Charles B. Paquette<F*>
Exhibit 10.5 Employment Agreement with William C. Henson<F*>
Exhibit 10.6 Employee Stock Ownership Plan<F*>
Exhibit 10.7 Purchase and Assumption Agreement and related Indemnity
Agreement between Granite Bank and the Resolution Trust
Corporation dated August 2, 1991<F**>
Exhibit 10.8 Purchase and Assumption Agreement and related Indemnity
Agreement between Granite Bank and the Federal Deposit
Insurance Corporation dated November 15, 1991<F***>
Exhibit 11 Calculations of Earnings Per Common and Common
Equivalent Share and Earnings Per Common Share Assuming
Full Dilution
Exhibit 13 Portions of the Annual Report to Stockholders for the
year ended December 31, 1995
Exhibit 21 Subsidiary of Granite State Bankshares, Inc.<F****>
Exhibit 23 Consent of Independent Certified Public Accountants
Exhibit 27 Financial Data Schedule
<FN>
<F*> Incorporated by reference from Granite State Bankshares, Inc.,
Form S-1, filed on April 18, 1986.
<F**> Incorporated by reference from Granite State Bankshares, Inc.,
Form 8-K, Exhibits 2.1 and 2.2, filed on August 16, 1991.
<F***> Incorporated by reference from Granite State Bankshares, Inc.,
Form 8-K, Exhibits 2.1 and 2.2, filed on December 2, 1991.
<F****> See Part I, Item 1(a) and Item 1 (c)(5)(N) of Form 10-KSB.
</FN>
</TABLE>
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Granite State Bankshares, Inc., the
registrant, has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GRANITE STATE BANKSHARES, INC.
/s/ Charles W. Smith
Dated : March 27, 1996 -----------------------
By: Charles W. Smith
Chairman of the Board
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.
/s/ Charles W. Smith 3/27/96 Chief Executive Officer
- ---------------------------- (Principal Executive
Charles W. Smith Officer) and Chairman of
the Board
/s/ William G. Pike 3/27/96 Executive Vice President
- ---------------------------- and Chief Financial
William G. Pike Officer(Principal
Financial and
Accounting Officer)
/s/ Stacey W. Cole 3/27/96 Director
- ----------------------------
Stacey W. Cole
/s/ James L. Koontz 3/27/96 Director
- ----------------------------
James L. Koontz
<PAGE> 30
/s/ Jane B. Reynolds 3/27/96 Director
- ----------------------------
Jane B. Reynolds
/s/ William Smedley V 3/27/96 Director
- ----------------------------
William Smedley V
/s/ C. Robertson Trowbridge 3/27/96 Director
- ----------------------------
C. Robertson Trowbridge
/s/ Philip M. Hamblet 3/27/96 Director
- ----------------------------
Philip M. Hamblet
/s/ James C. Wirths III 3/27/96 Director
- ----------------------------
James C. Wirths III
<PAGE> 31
EXHIBIT 3.2
AMENDED AND RESTATED
BY-LAWS OF
GRANITE STATE BANKSHARES, INC.
ARTICLE I. HOME OFFICE
The home office of Granite State Bankshares, Inc. (the "Company")
shall be at in the City of Keene, Cheshire County, State of New Hampshire.
ARTICLE II. STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS. All annual and special meetings of
stockholders shall be held at the corporate headquarters of the Company or
at such other place in the State of New Hampshire as the board of directors
may determine.
SECTION 2. ANNUAL MEETING. A meeting of the stockholders of the
Company for the election of directors and for the transaction of any other
business of the Company shall be held annually within 120 days after the
end of the Company's fiscal year at such date and time within such 120 day
period as the board of directors may determine.
SECTION 3. SPECIAL MEETINGS. Special meetings of the stockholders,
relating to changes in control of the Company or amendments to its charter,
may be called at any time only by or upon direction of the board of
directors of the Company. Special meetings for any other purpose, unless
otherwise prescribed by applicable law or regulation may be called at any
time by the chairman of the board, the president, or a majority of the
board of directors and shall be called by the chairman of the board, the
president, or the secretary upon the written request of the holders of not
less than one-tenth of all the outstanding capital stock of the Company
entitled to vote at the meeting. Such written request shall state the
purpose or purposes of the meeting and shall be delivered at the corporate
headquarters of the Company addressed to the chairman of the board, the
president or the secretary.
Amendment or repeal of this Section 3 of this Article II or the
adoption of any provision inconsistent with this Section 3 of this Article
II shall be permitted only by the affirmative vote of the holders of 80% or
more of the total votes eligible to be cast at a legal meeting, voting
together as a single class.
SECTION 4. CONDUCT OF MEETINGS. Annual and special meetings shall be
conducted in accordance with the most current edition of Robert's Rules of
Order unless otherwise prescribed by applicable law or regulation or these
bylaws. The board of directors shall designate, when present, either the
chairman of the board or president to preside at such meetings.
SECTION 5. NOTICE OF MEETINGS. Written notice stating the place, day
and hour of the meeting and the purpose or purposes for which the meeting
is called shall be delivered not less than 20 nor more than 50 days before
the date of the meeting, either personally or by mail, by or at the
direction of the chairman of the board, the president, the secretary or the
directors calling the meeting, to each stockholder of record entitled to
vote at such meeting. If mailed, such notice shall be deemed to be
delivered when deposited in the U.S. mail, addressed to the stockholder at
his address as it appears on the stock transfer books or records of the
Company as of the record date prescribed in Section 6 of this Article II,
with postage thereon prepaid. When any stockholders' meeting, either annual
or special, is adjourned for thirty days or more, notice of the adjourned
meeting shall be given as in the case of an original meeting. It shall not
be necessary to give any notice of the time and place of any meeting
adjourned for less than thirty days or of the business to be transacted
thereat, other than an announcement at the meeting at which such
adjournment is taken.
SECTION 6. FIXING OF RECORD DATE. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or stockholders entitled to
receive payment of any dividend, or in order to make a determination of
stockholders for any other proper purpose, the board of directors shall fix
in advance a date as the record date for any such determination of
stockholders. Such date in any case shall be not more than 60 days and, in
case of a meeting of stockholders, not less than 20 days prior to the date
on which the particular action, requiring such determination of
stockholders, is to be taken. When a determination of stockholders entitled
to vote at any meeting of stockholders has been made as provided in this
section, such determination shall apply to any adjournment thereof.
SECTION 7. VOTING LISTS. The officer or agent having charge of the
stock transfer books for shares of the Company shall make, at least twenty
days before each meeting of the stockholders, a complete list of the
stockholders entitled to vote at such meeting, or any adjournment thereof,
arranged in alphabetical order, with the address of and the number of
shares held by each, which list shall be kept on file at the corporate
headquarters of the Company and shall be subject to inspection by any
stockholder at any time during usual business hours, for a period of 20
days prior to such meeting. Such list shall also be produced and kept open
at the time and place of the meeting and shall be subject to the inspection
of any stockholder during the whole time of the meeting. The original stock
transfer book shall be prima facie evidence as to who are the stockholders
entitled to examine such list or transfer books or to vote at any meeting
of stockholders.
SECTION 8. QUORUM. A majority of the outstanding shares of the
Company entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than a majority
of the outstanding shares are represented at a meeting, a majority of the
shares so represented may adjourn the meeting from time to time without
further notice. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have
been transacted at the meeting as originally notified. The stockholders
present at a duly organized meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave
less than a quorum.
SECTION 9. PROXIES. At all meetings of stockholders, a stockholder
may vote by proxy executed in writing by the stockholder or by his duly
authorized attorney in fact. Proxies solicited on behalf of the management
shall be voted as directed by the stockholder or, in the absence of such
direction, as determined by a majority of the board of directors. No proxy
shall be valid after eleven months from the date of its execution except
for a proxy coupled with an interest.
SECTION 10. VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS. When
ownership stands in the name of two or more persons, in the absence of
written directions to the Company to the contrary, at any meeting of the
stockholders of the Company, any one or more of such stockholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In
the event an attempt is made to cast conflicting votes, in person or by
proxy, by the several persons in whose names shares of stock stand, the
vote or votes to which those persons are entitled shall be cast as directed
by a majority of those holding such stock and present in person or by proxy
at such meeting, but no votes shall be cast for such stock if a majority
cannot agree.
SECTION 11. VOTING SHARES BY CERTAIN HOLDERS. Shares standing in the
name of another corporation may be voted by any officer, agent or proxy as
the bylaws of such corporation may prescribe, or, in the absence of such
provision, as the board of directors of such corporation may determine.
Shares held by an administrator, executor, guardian or conservator may be
voted by him, either in person or by proxy, without a transfer of such
shares into his name. Shares standing in the name of a person holding a
power under a trust instrument may be voted by him, either in person or by
proxy, but no such person shall be entitled to vote shares held by him
without a transfer of such shares into his name. Shares standing in the
name of a receiver may be voted by such receiver, and shares held by or
under the control of a receiver may be voted by such receiver without the
transfer thereof into his name if authority to do so is contained in an
appropriate order of the court or other public authority by which such
receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee
and thereafter the pledgee shall be entitled to vote the shares so
transferred.
Neither treasury shares of its own stock held by the Company, nor
shares held by another corporation, if a majority of the shares entitled to
vote the election of directors of such other corporation are held by the
Company, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
SECTION 12. INSPECTORS OF ELECTION. In advance of any meeting of
stockholders, the board of directors may appoint any persons other than
nominees for office as inspectors of election to act at such meeting or any
adjournment thereof. The number of inspectors shall be either one or three.
If the board of directors so appoints either one or three such inspectors
that appointment shall not be altered at the meeting. If inspectors of
election are not so appointed, the chairman of the board or the president
may, and on the request of not less than ten percent of the votes
represented at the meeting shall, make such appointment at the meeting. If
appointed at the meeting, the majority of the votes present shall determine
whether one or three inspectors are to be appointed. In case any person
appointed as inspector fails to appear or refuses to act, the vacancy may
be filled by appointment by the board of directors in advance of the
meeting by the chairman of the board of the president.
Unless otherwise prescribed by applicable law or regulation, the
duties of such inspectors shall include: determining the number of shares
of stock and the voting power of each share, the shares of stock
represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies; receiving votes, ballots or consents;
hearing and determining all challenges and questions in any way arising in
connection with the right to vote; counting and tabulating all votes or
consents; determining the result; and such acts as may be proper to conduct
the election or vote with fairness to all stockholders.
SECTION 13. NOMINATING COMMITTEE. The board of directors shall act as
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the
death or other incapacity of a management nominee, the nominating committee
shall deliver written nominations to the secretary at least 20 days prior
to the date of the annual meeting. Provided such committee makes such
nominations, no nominations for directors except those made by the
nominating committee shall be voted upon at the annual meeting unless other
nominations by stockholders are made in writing and delivered to the
secretary of the Company at least 120 days in advance of the date of the
Company's proxy statement released to stockholders in connection with the
previous year's annual meeting except that if no annual meeting was held in
the previous year or the date of the annual meeting has been delayed by
more than 30 calendar days from the date of the previous year's proxy
statement, any such nomination shall be stated in writing and filed with
the secretary of the Company at least 60 days in advance of the annual
meeting. Ballots bearing the names of all the persons nominated by the
nominating committee and by stockholders shall be provided for use at the
annual meeting. If the nominating committee shall fail or refuse to act at
least 20 days prior to the annual meeting, nominations for directors may be
made at the annual meeting by any stockholder entitled to vote and shall be
voted upon.
SECTION 14. NEW BUSINESS. Any new business to be taken up at the
annual meeting other than new business proposed by the directors of the
Company shall be stated in writing and filed with the secretary of the
Company at least 120 days in advance of the date of the Company's proxy
statement released to stockholders in connection with the previous year's
annual meeting except that if no annual meeting was held in the previous
year or the date of the annual meeting has been changed by more than 30
calendar days from the date of the previous year's proxy statement, any new
business shall be stated in writing and filed with the secretary of the
Company at least 60 days in advance of the annual meeting, and all business
so stated, proposed and filed shall be considered at the annual meeting,
but no other proposal other than new business proposed by the directors of
the Company shall be acted upon at the annual meeting. Any stockholder may
make any other proposal at the annual meeting and the same may be discussed
and considered, but unless stated in writing and filed with the secretary
at least 120 days in advance of the meeting, as provided above, such
proposal shall be laid over for action at any adjourned, special or annual
meeting of the stockholders taking place thirty days or more thereafter.
This provision shall not prevent the consideration and approval or
disapproval at the annual meeting of reports of officers, directors and
committees, but in connection with such reports, no new business other than
new business proposed by the directors of the Company, shall be acted upon
at such annual meeting unless stated and filed as herein provided.
ARTICLE III. BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the Company
shall be under the direction of its board of directors. The board of
directors shall annually elect a chairman of the board and a president from
among its members and shall designate, when present, either the chairman of
the board or the president to preside at its meetings.
SECTION 2. NUMBER AND TERM. The Board of Directors shall consist of
eight members and shall be divided into three classes, one class consisting
of two directors and two classes, each consisting of three directors. The
stockholder of the Company shall have no power to amend the number of
directors of the Company; this power is expressly reserved to the Board of
Directors, as provided in the Company's articles of incorporation. The
members of each class shall be elected for a term of three years and until
their successors are elected and qualified. One class shall be elected by
ballot annually.
SECTION 3. QUALIFICATION. Each director shall at all times be the
beneficial owner of
shares of capital stock of the Company with a fair market value, as of the
date of purchase of $1000.
SECTION 4. REGULAR MEETINGS. A regular meeting of the board of
directors shall be held without other notice than this bylaw immediately
after, and at the same place as, the annual meeting of stockholders. The
board of directors may provide, by resolution, the time and place, within
the State of New Hampshire, for the holding of additional regular meetings
without other notice than such resolution.
SECTION 5. SPECIAL MEETINGS. Special meetings of the board of
directors may be called by or at the request of the chairman of the board,
the president or one-third of the directors. The persons authorized to call
special meetings of the board of directors may fix any place, within the
State of New Hampshire, as the place for holding any special meeting of the
board of directors called by such persons.
Members of the board of directors may participate in special meetings
by means of conference telephone or in similar communications equipment by
which all persons participating in the meeting can hear each other. Such
participation shall constitute presence in person but shall not constitute
attendance for the purpose of compensation pursuant to Section 13 of this
Article III.
SECTION 6. NOTICE. Written notice of any special meeting shall be
given to each director at least two days previously thereto delivered
personally or by telegram or at least five days previously thereto
delivered by mail at the address at which such director has furnished to
the Company. Such notice shall be deemed to be delivered when deposited in
the U.S. mail so addressed, with postage thereon prepaid if mailed or when
delivered to the telegraph Company if sent by telegram. Any director may
waive notice of any meeting by a writing filed with the secretary. The
attendance of a director at a meeting shall constitute a waiver of notice
of such meeting, except where a director attends a meeting for the express
purpose of objecting to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted
at, nor the purpose of, any meeting of the board of directors need be
specified in the notice or waiver of notice of such meeting.
SECTION 7. QUORUM. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction
of business at any meeting of the board of directors, but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting
shall be given in the same manner as prescribed by Section 6 of this
Article III.
SECTION 8. MANNER OF ACTING. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the
act of the board of directors, unless a greater number is prescribed by
applicable law or regulations or by these bylaws.
SECTION 9. ACTION WITHOUT MEETING. Any action required or permitted
to be taken by the board of directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall
be signed by all of the directors.
SECTION 10. RESIGNATION. Any director may resign at any time by
sending a written notice of such resignation to the corporate headquarters
of the Company, addressed to the chairman of the board or the president.
Unless otherwise specified therein, such resignation shall take effect upon
receipt thereof by the chairman of the board or the president. Any director
who has been absent from one-third or more of the meetings of the board of
directors during the preceding calendar year, unless such absences are for
good cause shown, shall not accept reelection as a director at the next
annual meeting of stockholders.
SECTION 11. REMOVAL. The directors of the Company may, individually
or as a group, be removed from their positions as directors before the
expiration of their respective terms only for cause. "Cause" shall be
defined as breach of fiduciary duty involving personal dishonesty or
intentional failure to perform stated duties as a director, which results
in loss to the Company or willful violation of any law, rule, regulation or
final cease-and-desist order which results in substantial loss to the
Company.
Amendment or repeal of this Section 11 of this Article III or the
adoption of any provision inconsistent with this Section 11 of this Article
III shall be permitted only by the affirmative vote of the holders of
either 80% or more of the directors of the Company, other than such
directors who are the subject of the removal action, or 80% of the total
votes eligible to be cast at a legal meeting, voting together as a single
class.
SECTION 12. VACANCIES. Any vacancy occurring in the board of
directors may be filled by the affirmative vote of a majority of the
remaining directors although less than a quorum of the board of directors.
A director elected to fill a vacancy shall be elected to serve until the
next election of directors by the stockholders. Any directorship to be
filled by reason of an increase in the number of directors may be filled by
election by the board of directors for a term of office continuing only
until the next election of directors by the stockholders.
SECTION 13. COMPENSATION. Directors, as such, may receive a stated
salary for their services. By resolution of the board of directors, a
reasonable fixed sum, and reasonable expenses of attendance, if any, may be
allowed for actual attendance at each regular or special meeting of the
board of directors. Members of either standing or special committees may be
allowed such compensation for actual attendance at committee meetings as
the board of directors may determine.
SECTION 14. PRESUMPTION OF ASSENT. A director of the Company who is
present at a meeting of the board of directors at which action on any
Company matter is taken shall be presumed to have assented to the action
taken unless his dissent or abstention shall be entered in the minutes of
the meeting or unless he shall file his written dissent to such action with
the person acting as the secretary of the meeting before the adjournment
thereof or shall forward such dissent by registered mail to the secretary
of the Company within five days after the date he receives a copy of the
minutes of the meeting. Such right to dissent shall not apply to a director
who voted in favor of such action.
SECTION 15. AGE LIMITATIONS ON DIRECTORS. No person shall be
eligible to serve on the Board of Directors after attaining his or her
seventieth (70th) birthday. Except that in the case a Director who is
currently over age 70 are eligible to serve out their remaining term or
until they reach age 75 whichever comes first.
ARTICLE IV. EXECUTIVE AND OTHER COMMITTEES
SECTION 1. APPOINTMENT. The board of directors, by resolution
adopted by a majority of the full board, may designate the chief executive
officer and two or more of the other directors to constitute an executive
committee. The designation of any committee pursuant to this Article IV and
the delegation of authority thereto shall not operate to relieve the board
of directors, or any director, of any responsibility imposed by law or
regulation.
SECTION 2. AUTHORITY. The executive committee, when the board of
directors is not in session, shall have and may exercise all of the
authority of the board of directors except to the extent, if any, that such
authority shall be limited by the resolution appointing the executive
committee; and except also that the executive committee shall not have the
authority of the board of directors with reference to the amendment of the
charter or bylaws of the Company, or recommending to the stockholder's a
plan of merger, consolidation, or conversion; the sale, lease or other
disposition of all or substantially all of the property and assets of the
Company otherwise than in the usual and regular course of its business; a
voluntary dissolution of the corporation; a revocation of any of the
foregoing; or the approval of a transaction in which any member of the
executive committee, directly or indirectly, has any material beneficial
interest.
SECTION 3. TENURE. Subject to the provisions of Section 8 of this
Article IV, each member of the executive committee shall hold office until
the next regular annual meeting of the board of directors following his
designation and until his successor is designated as a member of the
executive committee.
SECTION 4. MEETINGS. Regular meetings of the executive committee may
be held without notice at such times and places as the executive committee
may fix from time to time by resolution. Special meetings of the executive
committee may be called by a member thereof upon not less than one day's
notice stating the place, date and hour of the meeting, which notice may be
written or oral. Any member of the executive committee may waive notice of
any meeting and no notice of any meeting need be given to any member
thereof who attends in person. The notice of a meeting of the executive
committee need not state the business proposed to be transacted at the
meeting.
SECTION 5. QUORUM. A majority of the members of the executive
committee shall constitute a quorum for the transaction of business at any
meeting thereof, and action of the executive committee must be authorized
by the affirmative vote of a majority of the members present at a meeting
at which a quorum is present.
SECTION 6. ACTION WITHOUT A MEETING. Any action required or
permitted to be taken by the executive committee at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so
taken, shall be signed by all of the members of the executive committee.
SECTION 7. VACANCIES. Any vacancy in the executive committee may
only be filled by a resolution adopted by a majority of the full board of
directors.
SECTION 8. RESIGNATIONS AND REMOVAL. Any member of the executive
committee may be removed at any time with or without cause by resolution
adopted by a majority of the full board of directors. Any member of the
executive committee may resign from the executive committee at any time by
giving written notice to the president or secretary of the Company. Unless
otherwise specified thereon, such resignation shall take effect upon
receipt. The acceptance of such resignation shall not be necessary to make
it effective.
SECTION 9. PROCEDURE. The presiding officer of the executive
committee shall be the chairman and chief executive officer of the Company.
The executive committee may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the board of directors for its
information at the meeting thereof held next after the proceedings shall
have been taken.
SECTION 10. OTHER COMMITTEES. The board of directors may by
resolution establish an audit committee, a loan committee, an investment
committee, or other committees composed of directors as they may determine
to be necessary or appropriate for the conduct of the business of the
Company and may prescribe the duties, constitution and procedures thereof.
ARTICLE V. OFFICERS
SECTION 1. POSITIONS. The officers of the Company shall be a
president, one or more vice presidents, a secretary and a treasurer, each
of whom shall be elected by the board of directors. The board of directors
may also designate the chairman of the board as an officer. The president
shall be the chief executive officer, unless the board of directors
designates the chairman of the board as chief executive officer. The
president shall be a director of the Company. The offices of the secretary
and treasurer may be held by the same person and a vice president may also
be either the secretary or the treasurer. The board of directors may
designate one or more vice presidents as executive vice president or senior
vice president. The board of directors may also elect or authorize the
appointment of such other officers as the business of the Company may
require. The officer shall have such authority and perform such duties as
the board of directors may from time to time authorize or determine. In the
absence of action by the board of directors, the officers shall have such
powers and duties as generally pertain to their respective officers.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the Company
shall be elected annually at the meeting of the board of directors held
after each annual meeting of the stockholders. If the election of officers
is not held at such meeting, such election shall be held as soon thereafter
as possible. Each officer shall hold office until his successor shall have
been duly elected and qualified or until his death or until he shall resign
or shall have been removed in the manner hereinafter provided. Election or
appointment of an officer, employee or agent shall not of itself create
contract rights. The board of directors may authorize the Company to enter
into an employment contract with any officer in accordance with applicable
law and regulations; but no such contract shall impair the right of the
board of directors to remove any officer at any time in accordance with
Section 3 of this Article V.
SECTION 3. REMOVAL. Any officer may be removed by the board of
directors whenever in its judgment the best interests of the Company shall
be served thereby, but such removal, other than for cause, shall be without
prejudice to the contract rights, if any, of the person so removed.
SECTION 4. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification of otherwise, may be filled by the
board of directors for the unexpired portion of the term.
SECTION 5. REMUNERATION. The remuneration of the officers shall be
fixed from time to time by the board of directors.
ARTICLE VI. INDEMNIFICATION
To the fullest extent permitted by New Hampshire law, the Company
shall indemnify each director and officer of the Company (and his heirs,
executors and administrators) against all expenses and liabilities
reasonably incurred by him or her in connection with or arising out of any
action, suit or proceeding in which he or she may be involved by reason of
his or her being or having been a director or officer of the Company
(whether or not he or she continues to be a director or officer at the time
of incurring such expenses or liabilities), such expenses and liabilities
to include, but not be limited to, judgments, court costs and attorneys'
fees and the cost of reasonable settlements. The Company shall not,
however, indemnify such director or officer with respect to matters at to
which he or she shall be finally adjudged in any such action, suit or
proceeding to have been liable for willful misconduct in the performance of
his or her duties as such director of officer. In the event that a
settlement or compromise is effected, indemnification may be had only if
the board of directors shall have determined that such settlement or
compromise is in the best interest of the Company and that such director or
officer is not liable for willful misconduct in the performance of his or
her duties with respect to such matters, and if the board of directors
shall have adopted a resolution approving such settlement or compromise.
The foregoing right of indemnification shall not be exclusive of other
rights to which any director or officer may be entitled as a matter of law.
ARTICLE VII. CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. CONTRACTS. To the extent permitted by applicable law or
regulation and except as otherwise prescribed by these bylaws with respect
to certificates for shares, the board of directors may authorize any
officer, employee, or agent of the Company to enter into any contract or
execute and deliver any instrument in the name of and on behalf of the
Company. Such authority may be general or confined to specific instances.
SECTION 2. LOANS. No loans shall be contracted on behalf of the
Company and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors or an appropriate committee thereof.
Such authority may be general or confined to specific instances.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders
for the payment of money, notes or other evidences of indebtedness issued
in the name of the Company shall be signed by one or more officers,
employees or agents of the Company in such manner as shall from time to
time be determined by the board of directors.
SECTION 4. DEPOSITS. All funds of the Company not otherwise employed
shall be deposited from time to time to the credit of the Company in any of
its duly authorized depositories as the board of directors may elect.
ARTICLE VIII. CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares
of capital stock of the Company shall be in such form as shall be
determined by the board of directors; subject to applicable law and
regulations. Such certificates shall be signed by the chief executive
officer or by any other officer of the Company authorized by the board of
directors, attested by the secretary or an assistant secretary, and sealed
with the corporate seal or a facsimile thereof. The signatures of such
officers upon a certificate may be facsimiles if the certificate is
manually signed on behalf of a transfer agent or a registrar, other than
the Company itself or one of its employees. Each certificate for shares of
capital stock shall be consecutively numbered or otherwise identified. The
name and address of the person to whom the shares are issued, with the
number of shares and date of issue, shall be entered on the stock transfer
books of the Company. All certificates surrendered to the Company for
transfer shall be canceled and no new certificate shall be issued until the
former certificate for a like number of shares shall have been surrendered
and canceled, except that in case of a lost or destroyed certificate, a new
certificate may be issued therefore upon such terms and indemnity to the
Company as the board of trustees may prescribe.
SECTION 2. TRANSFER OF SHARES. Transfer of shares of capital stock
of the Company shall be made only on its stock transfer books. Authority
for such transfer shall be given only by the holder of record thereof or by
his legal representative, who shall furnish proper evidence of such
authority, or by his attorney thereunto authorized by power of attorney
duly executed and filed with the Company. Such transfer shall be made only
on surrender for cancellation of the certificate for such shares. The
person in whose name shares of capital stock stand on the books of the
Company shall be deemed by the Company to be the owner thereof for all
purposes.
ARTICLE IX. FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Company shall end on the 31st day of December
of each year. The Company shall be subject to an annual audit as of the end
of its fiscal year by independent public accountants appointed by and
responsible to the board of directors. The appointment of such accountants
shall be subject to annual ratification by the stockholders.
ARTICLE X. DIVIDENDS
Subject to the terms of the Company's Articles of Incorporation and
applicable law and regulation, the board of directors may, from time to
time, declare, and the Company may pay, dividends on its outstanding shares
of capital stock.
ARTICLE XI. CORPORATE SEAL
The board of directors shall provide a Company seal which shall be two
concentric circles between which shall be the name of the Company. The
year of incorporation or an emblem may appear in the center.
ARTICLE XII. AMENDMENTS
These bylaws may be amended at any time by a majority vote of the full
board of directors, or by a majority vote of the votes cast by the
stockholders of the Company at any legal meeting, except as otherwise
provided herein or in the articles of incorporation of the company..
Notwithstanding the foregoing, any amendment, addition, alteration, change
or repeal of Article II, Section 3 and Article III, Section 11 of these
bylaws, or the adoption of any provision inconsistent with Article II,
Section 3 and Article III, Section 11 of the bylaws, shall be made only if
such amendment, addition, alteration, change, repeal or adoption of an
inconsistent provision is approved by the holders of 80% or more of the
total votes eligible to be cast at a legal meeting, voting together as a
single class. Any amendment acted upon in the manner provided in this
Article XII, shall be effective upon adoption.
EXHIBIT 11
GRANITE STATE BANKSHARES, INC. AND SUBSIDIARY
Calculations of Earnings Per Common and Common Equivalent
Share and Earnings Per Common Share Assuming Full Dilution
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
-------------------- -------------------- --------------------
Common and Common and Common and
Common Fully Common Fully Common Fully
Equivalent Diluted Equivalent Diluted Equivalent Diluted
--------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income available
to common stockholders $ 3,435 $ 3,435 $ 2,823 $ 2,823 $ 1,899 $ 1,899
Adjustments:
Preferred stock dividend $ 0 $ 0 $ 0 $ 0 $ 0 $ 228
------- ------- ------- ------- ------- -------
$ 3,435 $ 3,435 $ 2,823 $ 2,823 $ 1,899 $ 2,127
======= ======= ======= ======= ======= =======
Weighted average number
of shares outstanding 2,066 2,066 2,138 2,138 1,851 1,851
Adjustments:
Assumed issuance under
stock option plan 110 117 91 95 65 82
Assumed conversion of
preferred shares to
common shares 0 0 0 0 0 305
------- ------- ------- ------- ------- -------
2,176 2,183 2,229 2,233 1,916 2,238
======= ======= ======= ======= ======= =======
Earnings per
Common share $ 1.58 $ 1.57 $ 1.27 $ 1.26 $ 0.99 $ 0.95
======= ======= ======= ======= ======= =======
</TABLE>
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Granite State Bankshares, Inc. ("Granite State" or the "Company") is a
single-bank holding company which was formed in 1986 to acquire all of the
stock of the Granite Bank (the "subsidiary bank") upon its conversion from a
mutual savings bank to a state-chartered guaranty (stock) savings bank.
Since that time, the Company has acquired the Durham Trust Company, First
Northern Co-operative Bank, First National Bank of Peterborough and the
Granite Bank of Amherst. The acquired banks have all been merged into
Granite Bank. Additionally, during 1991, Granite Bank converted from a
state-chartered guaranty (stock) savings bank to a New Hampshire state-
chartered commercial bank. This discussion of the financial condition and
results of operations of the Company should be read in conjunction with the
financial statements and supplemental financial data contained elsewhere in
this report.
The principal business of the subsidiary bank consists of attracting
deposits from the general public and underwriting loans secured by
residential and commercial real estate and other loans. The subsidiary bank
also originates fixed rate residential real estate loans for sale in the
secondary mortgage market. Loans serviced for others were approximately
$173.0 million at December 31, 1995, compared to $168.3 million at December
31, 1994. The subsidiary bank has eight full service offices and an
additional nine remote automatic teller locations. The subsidiary bank is a
full service community bank with a diversified lending operation that
services Cheshire, Hillsborough, Strafford and Rockingham counties.
FINANCIAL CONDITION
Consolidated assets at December 31, 1995 were $346.4 million, up $35.6
million from $310.8 million at December 31, 1994.
Interest bearing deposits in the Federal Home Loan Bank of Boston
("FHLBB") were $24.2 million at December 31, 1995 and $26 thousand at
December 31, 1994. During the latter half of 1995, the yield curve on
interest rates flattened out and actually inverted as interest rates
declined, making short-term investments more attractive than investments in
2 to 3 year fixed income securities. Therefore, excess funds were invested
in interest bearing deposits in the FHLBB during the latter part of 1995.
Effective December 31, 1993, the Company adopted Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Accordingly, the Company classifies its investments in debt and
equity securities as securities held to maturity, securities available for
sale or trading securities. At December 31, 1995, there were no securities
classified as held to maturity, as compared to $15.5 million at December 31,
1994, with the decrease resulting from maturities. Securities available for
sale were $95.0 million at December 31, 1995 and $73.0 million at December
31, 1994. Securities purchases during 1995, in the amount of $31.2 million,
were all classified as securities available for sale. There were no
securities classified as trading securities at December 31, 1995 and
December 31, 1994.
At December 31, 1995 the net unrealized gains on securities available
for sale, net of related tax effects were $1.6 million, compared to net
unrealized losses of $703 thousand at December 31, 1994. These net
unrealized gains or losses are shown as a separate component of
stockholders' equity.
At December 31, 1995, the weighted average life of the Company's
investments in debt securities is approximately 17 months.
Loans outstanding before deductions for unearned income and the
allowance for possible loan losses decreased $2.9 million to $192.4 million
at December 31, 1995 from $195.3 million at December 31, 1994. The decrease
of 1.48%, reflects weak loan demand in the commercial and commercial real
estate sectors of the market. Additionally, as interest rates trended lower
in the latter part of 1995, many residential real estate borrowers with
adjustable rate loans refinanced into fixed rate loans which the Company
sells into the secondary mortgage market, thereby reducing the Company's
portfolio of residential real estate loans. Loan originations during 1995
and 1994 were $62.6 million and $46.5 million, respectively, of which $29.2
million and $19.0 million, respectively, were originated for sale in the
secondary mortgage market. Loan repayments for 1995 and 1994, were $33.9
million and $16.9 million, respectively. Cash received on sales of loans to
the secondary market were $28.2 million in 1995 and $21.9 million in 1994.
Loans charged-off, net during 1995 and 1994 were $1.3 million and $374
thousand, respectively. Loans transferred to other real estate owned during
1995 and 1994 amounted to $1.8 million and $1.4 million, respectively. At
December 31, 1995, the Company's total loan portfolio before unearned income
and the allowance for possible loan losses consisted of $113.6 million of
residential real estate loans, $52.6 million of commercial real estate
loans, $2.7 million of construction loans, $10.7 million of commercial,
financial and agricultural loans and $12.8 million of consumer and other
loans. For additional information see Note D of Notes to Consolidated
Financial Statements.
Although the Company's nonperforming assets decreased $804 thousand
from $5.3 million at December 31, 1994 to $4.5 million at December 31, 1995,
the real estate
<PAGE> 9
and economic environment in New England, which includes
excess residential and commercial real estate inventory, continues to affect
the Company's level of nonperforming assets. Although it appears that the
New Hampshire economy and the real estate market in the Company's market
areas have stabilized and even shown signs of improvement over the last 2 to
3 years, they may continue to adversely impact the quality of the Company's
assets in future periods, as well as its results of operations.
The following table sets forth the Company's nonperforming loans and
other real estate owned at the dates indicated. The Company generally does
not accrue interest on any loans that are 90 days or more past due, unless
the loan is well secured and in the process of collection. At the dates
indicated, all loans delinquent 90 days or more were on nonaccrual status
and therefore considered nonperforming, with the exception of $21 thousand
of commercial, financial and agricultural loans at December 31, 1994, which
were in the process of collection at that date.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994 1993
------------------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Nonperforming loans:
Residential real estate $1,341 $1,495 $1,801
Commercial real estate 332 646 103
Construction and land development real estate 88 54 177
Commercial, financial and agricultural 35 81 17
Consumer and other 2 8 17
------------------------
Total nonperforming loans 1,798 2,284 2,115
Total other real estate owned 2,691 3,009 4,269
------------------------
Total nonperforming assets $4,489 $5,293 $6,384
========================
Ratios:
Total nonperforming loans to total loans 0.93% 1.17% 1.12%
========================
Total nonperforming assets to total assets 1.30% 1.70% 2.11%
========================
</TABLE>
The Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," on January 1, 1995. This new standard requires that a
creditor measure impairment based on the present value of expected future
cash flows discounted at the loan's effective interest rate, except that as
a practical expedient, a creditor may measure impairment based on a loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. Regardless of the measurement method, a creditor must
measure impairment based on the fair value of the collateral when the
creditor determines that foreclosure is probable. In October 1994, SFAS No.
114 was amended by SFAS No. 118, "Accounting by Creditors for Impairment of
a Loan--Income Recognition and Disclosures," which allows creditors to use
their existing methods for recognizing interest income on impaired loans.
Because the Company already recognized such reductions of value on impaired
loans through its provision for possible loan losses, the adoption of SFAS
No. 114, as amended by SFAS No. 118, did not have a material impact on its
financial condition or results of operations. The balance of impaired loans
was $1.0 million at December 31, 1995. The Company has identified a loan as
impaired when it is probable that interest and principal will not be
collected according to the contractual terms of the loan agreements. The
allowance for possible loan losses associated with impaired loans allocated
from and part of the general allowance for possible loan losses, upon the
adoption of SFAS No. 114, on January 1, 1995 was $864 thousand. During 1995,
provisions to the allowance for impaired loans amounted to $553 thousand and
impaired loans charged-off amounted to $1.1 million. The allowance for
possible loan losses associated with impaired loans at December 31, 1995 was
$367 thousand. The average recorded investment in impaired loans was $1.5
million in 1995 and the income recognized on impaired loans during 1995 was
$19 thousand. Total cash collected on impaired loans during 1995 was $103
thousand, of which $84 thousand was credited to the principal balance
outstanding on such loans. Interest which would have been accrued on
impaired loans during 1995, had they performed in accordance with the terms
of their contracts, was $166 thousand. The Company's policy for interest
income recognition on impaired loans is to recognize income on nonaccrual
loans under the cash basis when the loans are both current and the
collateral on the loan is sufficient to cover the outstanding obligation to
the Company; if these factors do not exist, the Company does not recognize
income.
Other real estate owned is comprised of properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Real
estate acquired in settlement of loans are recorded at the lower of the
carrying value of the loan or the fair value of the property received less
an allowance for estimated costs to sell. Loan losses arising from the
acquisition of such properties are charged against the allowance for
possible loan losses. Provisions to reduce the carrying value to net
realizable value are charged to current period earnings as realized and
reflected as an additional valuation allowance. Operating expenses and gains
and losses upon disposition are reflected in earnings as realized. Other
real estate owned amounted to $2.7 million and $3.0 million at December 31,
1995 and 1994, respectively.
<PAGE> 10
See Note H of Notes to Consolidated Financial
Statements for further information on other real estate owned.
The allowance for possible loan losses is a significant factor in the
Company's operating results and is established through charges against
income and is maintained at a level considered adequate to provide for
potential loan losses based on management's evaluation of known and inherent
risks in the loan portfolio. When a loan, or a portion of a loan, is
considered uncollectible it is charged against the allowance. Recoveries of
loans previously charged off are credited to the allowance when received.
Management's evaluation of the allowance is based on a continuing
review of the loan portfolio, which includes many factors, including
identification and review of individual problem situations that may affect
the borrower's ability to repay; review of overall portfolio quality through
an analysis of current charge-off, delinquency, and nonperforming loan data;
review of regulatory authority examinations and evaluations of loans; an
assessment of current and expected economic conditions; and changes in the
size and character of the loan portfolio.
At December 31, 1995, 1994 and 1993, the allowance for possible loan
losses was $3.7 million, $4.2 million and $4.0 million, respectively, and
the ratio of the allowance to total loans outstanding was 1.93%, 2.17% and
2.12%, respectively. At December 31, 1995, 1994, and 1993, the allowance for
possible loan losses represented 206.0%, 185.2% and 189.3%, respectively, of
nonperforming loans.
Management is continuing to carefully monitor the allowance for
possible loan losses in light of existing nonperforming loans, impaired
loans and the trend in the New England real estate market and local economy.
While management believes that the allowance for possible loan losses at
December 31, 1995 is adequate based on its current review and estimate,
further provisions to the allowance may be necessary if the market in which
the Company operates deteriorates. Additionally, regulatory agencies review
the Company's allowance for possible loan losses as part of their
examination process. Such agencies may require the Company to recognize
additions to the allowance based on judgments which may be different from
those of management.
Deposits increased $47.1 million to $287.1 million at December 31, 1995
from $240.0 million at December 31, 1994. The increase resulted primarily
from the introduction of new deposit products, coupled with higher market
rates of interest. Interest bearing deposits increased $41.7 million and
noninterest bearing deposits increased $5.4 million. Of the $41.7 million
increase in interest bearing deposits, NOW and Super NOW accounts increased
$43.9 million and time certificates increased $29.4 million, while savings
accounts decreased $17.1 million and money market deposit accounts decreased
$14.5 million. Much of the decrease in savings and money market deposit
accounts related to transfers into a new NOW account product or into higher
yielding time certificates. Time certificates with minimum balances of $100
thousand increased $5.1 million, from $6.9 million at December 31, 1994 to
$12.0 million at December 31, 1995. The Company does not use brokers to
solicit deposits.
Securities sold under agreements to repurchase were $26.2 million at
December 31, 1995 and $22.0 million at December 31, 1994.
The Company had no short-term borrowings with the FHLBB at December 31,
1995 and $20.9 million at December 31, 1994. The increase in deposits and
securities sold under agreements to repurchase were more than sufficient to
allow the Company to repay all of its short- term borrowings with the FHLBB
during 1995.
Stockholders' equity was $29.8 million at December 31, 1995, an
increase of $4.2 million from $25.6 million at December 31, 1994. Book value
per share, was $14.63 at December 31, 1995, up $2.31 or 18.75% from $12.32
at December 31, 1994. See "Capital Resources and Liquidity" for further
information on stockholders' equity.
ASSET/LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY
The Company attempts to manage its liquidity, capital and interest rate
risk position so as to minimize its exposure to interest rate risk. At
December 31, 1995, the Company had interest rate sensitive assets which
repriced or matured within one year of $235.3 million and interest rate
sensitive liabilities which repriced or matured within one year of $260.2
million. At December 31, 1994, interest rate sensitive assets which repriced
or matured within one year were $190.7 million and interest rate sensitive
liabilities which repriced or matured within one year were $231.2 million.
The Company actively manages its interest rate sensitivity position.
The objectives of interest rate risk management are to control the exposure
of net interest income to risks associated with interest rate movements and
to achieve a stable and rising flow of net interest income. The
Asset/Liability Management Committee, using policies approved by the Board
of Directors, is responsible for managing the Company's rate sensitivity
position. GAP measurement attempts to analyze any mismatches in the timing
of interest rate repricing between assets and liabilities. It identifies
those balance sheet sensitivity areas which are vulnerable to unfavorable
interest rate movements. As a tool of asset/liability management, the GAP
position is compared with potential changes in interest rate levels in an
attempt to measure the favorable and unfavorable effect such changes would
have on net interest income. For example, when the GAP is positive, (i.e.,
assets reprice faster than liabilities) a rise in in-
<PAGE> 11
terest rates will
increase net interest income, and conversely, if the GAP is negative, a rise
in rates will decrease net interest income. The accuracy of this measure is
limited by unpredictable loan prepayments and the lags in the interest rate
indices used for repricing variable rate loans.
The Company's principal measure of interest rate risk is GAP analysis.
As shown in the following table, the Company's one year cumulative GAP was
negative 7.18% of total assets at December 31, 1995. The Company's one year
cumulative GAP at December 31, 1994 was negative 13.03% of total assets. The
change is primarily due to an increase in securities and interest bearing
deposits that reprice or mature within one year and a reduction in
borrowings maturing within one year, partially offset by a decrease in loans
and an increase in deposits which reprice or mature within one year. Assets
and liabilities shown in the table are considered to reprice at the earlier
of maturity or the next contractual repricing date. Nonperforming loans
totaling $1.8 million have been excluded from this analysis. Regular
savings, NOW and Super NOW and money market deposit accounts, totaling
$149.8 million, are subject to immediate withdrawal and repricing, and are
therefore included in the 0--6 month time period; however, this withdrawal
and repricing assumption is not likely to occur.
INTEREST RATE SENSITIVITY GAP ANALYSIS
AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
SENSITIVITY PERIOD
---------------------------------------------------------------
0--6 6 MONTHS-- 1--3 3--5 OVER
MONTHS 1 YEAR YEARS YEARS 5 YEARS TOTAL
---------------------------------------------------------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans $ 44,208 $114,178 $22,365 $ 2,505 $ 7,300 $190,556
Interest bearing deposits in FHLBB 24,239 24,239
Securities, including stock in FHLBB 22,466 30,226 27,208 6,003 12,328 98,231
---------------------------------------------------------------
Total $ 90,913 $144,404 $49,573 $ 8,508 $19,628 $313,026
===============================================================
Interest Bearing Liabilities:
Deposits $ 208,812 $ 25,153 $17,599 $ 3,388 $ 256 $255,208
Securities sold under agreements to repurchase
and other borrowings 26,207 20 83 93 514 26,917
---------------------------------------------------------------
Total $ 235,019 $ 25,173 $17,682 $ 3,481 $ 770 $282,125
===============================================================
Period Sensitivity Gap $(144,106) $119,231 $31,891 $ 5,027 $18,858 $ 30,901
Cumulative Sensitivity Gap $(144,106) $(24,875) $ 7,016 $12,043 $30,901 $ 30,901
Cumulative Sensitivity Gap as a Percent of
Total Assets (41.60)% (7.18)% 2.03% 3.48% 8.92% 8.92%
</TABLE>
RESULTS OF OPERATIONS
The operating results of the Company depend primarily on the net
interest and dividend income of its subsidiary bank, which is the difference
between interest and dividend income on interest-earning assets, primarily
loans and securities, and interest expense on interest-bearing liabilities,
primarily deposits and borrowings, and the level of its provision for
possible loan losses. The Company's operating results are also affected by
the level of its other income, including net gains on sales of securities
and loans, fee income, and its operating expenses.
NET EARNINGS
Operations in 1995 resulted in net earnings of $3.4 million, compared
with net earnings of $2.8 million in 1994 and $2.1 million in 1993. Net
earnings applicable to common stock was $3.4 million or $1.58 per share
($1.57 per share fully diluted) in 1995, $2.8 million or $1.27 per share
($1.26 per share fully diluted) in 1994 and $1.9 million or $0.99 per share
($0.95 per share fully diluted) in 1993.
Earnings before income taxes was $5.3 million in 1995, $4.1 million in
1994 and $2.9 million in 1993. Earnings increases in 1995 compared to 1994
related primarily to an increase in net interest and dividend income,
increases in net gains on securities transactions and sales of loans and
<PAGE> 12
a slight decrease in noninterest expenses, partially offset by an increase in
the provision for possible loan losses. Earnings increases in 1994 compared
to 1993 related primarily to an increase in net interest and dividend
income and a reduction in noninterest expenses, partially offset by
reductions in net gains from securities transactions, net gains on sales of
loans and other noninterest income.
Included in net earnings for 1993, is $205 thousand, or $0.11 per share
($0.09 per share fully diluted), which relates to the adoption of SFAS No.
109, accounting for income taxes effective January 1, 1993, as required.
SFAS No. 109 changed the Company's method of accounting for income taxes
from the deferred method previously required, to the asset and liability
method.
NET INTEREST AND DIVIDEND INCOME
Net interest and dividend income was $13.6 million, $12.6 million and
$10.9 million in 1995, 1994 and 1993, respectively. The increase in 1995
compared to 1994, relates primarily to an increase in the net yield on
interest earning assets to 4.61% in 1995 from 4.51% in 1994, coupled with an
increase in average interest earning assets to $295.2 million in 1995 from
$280.0 million in 1994. The increase in 1994 compared to 1993, relates
primarily to an increase in the net yield on interest earning assets to
4.51% in 1994, from 4.04% in 1993, coupled with an increase in average
interest earning assets to $280.0 million in 1994 from $268.6 million in
1993. Interest rate spreads for the years ended December 31, 1995, 1994 and
1993, were 4.25%, 4.25% and 3.83%, respectively.
Interest income on loans increased $2.7 million from $15.6 million in
1994 to $18.3 million in 1995 and increased $561 thousand to $15.6 million
in 1994 from $15.0 million in 1993. The increase in 1995 was primarily the
result of an increase in the average yield earned to 9.76% in 1995 from
8.41% in 1994 and a slight increase in average balances to $187.9 million
from $185.3 million. The increase in yield reflects the upward trend in
interest rates during the last three quarters of 1994 and through the first
quarter of 1995 with interest rates stabilizing throughout most of the
remainder of 1995 and trending downward slightly during the latter part of
1995. Therefore, adjustable rate loans, which comprise a majority of the
Company's loan portfolio adjusted for the most part to higher rates in 1995.
The slight increase in average balances in the loan portfolio in 1995
compared to 1994 reflects weak loan demand in the commercial and commercial
real estate sectors of the market. Additionally, as interest rates trended
lower in the latter part of 1995, many residential borrowers with adjustable
rate loans refinanced into fixed rate loans which the Company sells into the
secondary mortgage market, thereby reducing the Company's portfolio of
residential real estate loans. The increase in interest income on loans in
1994 compared to 1993, relates primarily to the increase in average loan
balances, while average yields declined only slightly. The increase in
average balances in 1994 compared to 1993, relates primarily to an increase
in loan demand in the commercial real estate sector, combined with the
acquisition of $5.1 million in one-to-four family residential mortgage loans
in September of 1993, which were outstanding for all of 1994. The relatively
stable yields in 1994 and 1993 resulted from the general decline in interest
rates throughout all of 1993 into early 1994, with adjustable rate loans
continuing to adjust to lower rates into early 1994. This resulted in lower
yields in each successive quarter in 1993 and for the first quarter of
1994. Interest rates then generally began to increase in February of 1994
and throughout the remainder of the year, with the resultant impact being
successive increases in yields in the second, third and fourth quarters of
1994.
Interest and dividend income on securities increased $833 thousand to
$5.4 million in 1995 from $4.6 million in 1994 and increased $1.6 million to
$4.6 million in 1994 from $3.0 million in 1993. The increase in 1995
compared to 1994, was primarily the result of an increase in the average
yield earned to 5.86% in 1995 from 5.13% in 1994 coupled with a slight
increase in average balances to $92.9 million in 1995 from $89.9 million in
1994. The increase in yield reflects the upward trend in interest rates
during the last three quarters of 1994 and the first quarter of 1995 with
maturing securities reinvested and new investments in securities invested at
higher interest rates during 1995 than during 1994. The increase in 1994
compared to 1993, was primarily the result of a $25.5 million increase in
average balances invested to $89.9 million in 1994 from $64.4 million in
1993, coupled with an increase in average yields earned to 5.13% in 1994
from 4.63% in 1993. The increase in average balances was primarily
attributable to a reduction in average balances of short-term interest
bearing deposits in the FHLBB. Management was able to reinvest most of the
securities portfolio and interest bearing deposits in the FHLBB into higher
yielding securities as rates increased during 1994, thereby increasing the
yield in the portfolio. This was able to be accomplished as a result of
management's overall philosophy of investing in short-term securities in
order to 1) avoid any significant interest rate risk and 2) respond to the
shift of deposit liabilities into either shorter term time deposits or
regular savings and transaction accounts, as interest rates on deposits
continued to decline during 1993 and remained at low levels during 1994.
Interest income on interest bearing deposits with the FHLBB, increased
$665 thousand to $814 thousand in 1995 from $149 thousand in 1994 and
decreased $627 thou-
<PAGE> 13
sand to $149 thousand in 1994 from $776 thousand in 1993.
The increase in 1995 compared to 1994, is primarily related to an increase
in average balances to $14.4 million in 1995 compared to $4.8 million in
1994, coupled with an increase in average yield earned to 5.64% in 1995 from
3.11% in 1994. The increase in average balances was primarily attributable
to the flattening and inversion of the interest rate yield curve during the
latter part of 1995, making these investments more attractive than
investments in 2 to 3 year fixed income securities from a yield standpoint.
The increase in yields relates to the higher yields realized on these
investments in 1995 as compared to lower rates in early 1994, which is when
the Company was invested in these investments in 1994. During the latter
part of 1994, as rates increased, these investments were transferred into
investments in 2 to 3 year fixed income securities. The decrease in 1994,
compared to 1993, is primarily the result of a decrease in average balances
to $4.8 million in 1994 from $27.1 million in 1993, as management was able
to invest these funds in higher yielding 2 to 3 year fixed income securities
during 1994.
Interest expense on deposits increased $3.2 million to $9.5 million in
1995 from $6.3 million in 1994 and decreased $1.3 million to $6.3 million in
1994 from $7.6 million in 1993. The increase in 1995 compared to 1994, is
the result of an increase of $15.6 million in the average balances of
interest bearing deposits to $241.9 million in 1995 from $226.3 million in
1994, coupled with an increase in the cost of those deposits to 3.92% in
1995 from 2.80% in 1994. New deposit account products, coupled with higher
market rates of interest offered by the subsidiary bank in 1995, resulted in
the higher average balances in deposits and the higher cost of deposits. The
decrease in 1994 compared to 1993, is the result of a decrease of $13.3
million in the average balances of interest bearing deposits to $226.3
million in 1994 from $239.6 million in 1993, coupled with a decrease in the
cost of those deposits to 2.80% in 1994 from 3.17% in 1993. The continued
low interest rate environment related to deposit rates being offered by
banks during 1994, resulted in the lower cost of deposits and the lower
average balances were the result of depositors looking to invest their funds
in alternate sources outside of banks to obtain higher yields.
Interest expense on securities sold under agreements to repurchase and
other borrowings increased $138 thousand to $1.5 million in 1995 from $1.4
million in 1994 and increased $1.1 million to $1.4 million in 1994 from $316
thousand in 1993. The increase in 1995 compared to 1994, was primarily the
result of an increase in the cost of borrowings to 5.48% in 1995 from 4.67%
in 1994, partially offset by a decrease in the average balances of
borrowings to $27.3 million in 1995 from $29.1 million in 1994. The increase
in 1994 compared to 1993, related primarily to an increase in the average
balances of borrowings of $18.1 million to $29.1 million in 1994 from $11.0
million in 1993, coupled with a higher cost of borrowings to 4.67% in 1994
from 2.86% in 1993, as interest rates increased during 1994. The increase in
the average balances of borrowings in 1994 from 1993, was used to fund
deposit outflows, as well as loan and securities growth.
<PAGE> 14
AVERAGE BALANCE SHEETS AND NET INTEREST AND DIVIDEND INCOME
The following table presents, for the periods indicated, average
balances, the total dollar amount of interest and dividend income from
interest earning assets and their resultant yields, as well as the interest
expense on interest bearing liabilities, and their resultant costs:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1995 1994 1993
--------------------------- --------------------------- ---------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------------------------------------------------------------------------------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Loans $187,866 $18,327 9.76% $185,332 $15,587 8.41% $177,139 $15,026 8.48%
Interest bearing deposits in FHLBB 14,426 814 5.64 4,793 149 3.11 27,052 776 2.87
Securities, including stock in FHLBB 92,902 5,441 5.86 89,857 4,608 5.13 64,449 2,981 4.63
-------- ------- -------- ------- -------- -------
Total interest earning assets 295,194 24,582 8.33 279,982 20,344 7.27 268,640 18,783 6.99
------- ------- -------
Non-interest earning assets 31,915 30,036 32,519
-------- -------- --------
Total assets $327,109 $310,018 $301,159
======== ======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities
Savings deposits $142,695 4,139 2.90 $149,333 3,412 2.28 $148,152 3,933 2.65
Time deposits 99,248 5,339 5.38 76,967 2,935 3.81 91,432 3,670 4.01
-------- ------- -------- ------- -------- -------
Total interest bearing deposits 241,943 9,478 3.92 226,300 6,347 2.80 239,584 7,603 3.17
Securities sold under agreements to
repurchase and other borrowings 27,269 1,495 5.48 29,086 1,357 4.67 11,044 316 2.86
-------- ------- -------- ------- -------- -------
Total interest bearing liabilities 269,212 10,973 4.08 255,386 7,704 3.02 250,628 7,919 3.16
------- ------- -------
Non-interest bearing liabilities
Demand deposits 27,685 27,027 25,203
Other liabilities 2,118 1,302 1,051
-------- -------- --------
Total non-interest bearing
liabilities 29,803 28,329 26,254
Stockholders' equity 28,094 26,303 24,277
-------- -------- --------
Total liabilities and
stockholders' equity $327,109 $310,018 $301,159
======== ======== ========
Net interest and dividend
income/interest rate spread $13,609 4.25% $12,640 4.25% $10,864 3.83%
======= ===== ======= ===== ======= =====
Net earning balance/net yield
on interest earning assets $ 25,982 4.61% $ 24,596 4.51% $ 18,012 4.04%
======== ===== ======== ===== ======== =====
<FN>
- -------------------
<F1> Loans on nonaccrual status are included in the average balances for
all periods presented.
</FN>
</TABLE>
<PAGE> 15
RATE VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest
and dividend income and interest expense for each major component of
interest-earning assets and interest-bearing liabilities, and the amount of
change attributable to changes in average balances, average rates, and
average balances and rates for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 vs. 1994
INCREASE (DECREASE) DUE TO
--------------------------------------
VOLUME RATE RATE/VOLUME TOTAL
--------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income on loans $ 213 $2,502 $ 25 $2,740
Interest income on interest bearing deposits in FHLBB 300 121 244 665
Interest and dividend income on securities and stock
in FHLBB 156 656 21 833
---------------------------------------
Total interest and dividend income 669 3,279 290 4,238
---------------------------------------
Interest expense on deposits 438 2,535 158 3,131
Interest expense on securities sold under agreements
to repurchase and other borrowings (85) 236 (13) 138
---------------------------------------
Total interest expense 353 2,771 145 3,269
---------------------------------------
Net interest and dividend income $ 316 $ 508 $ 145 $ 969
=======================================
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 VS. 1993
INCREASE (DECREASE) DUE TO
---------------------------------------
VOLUME RATE RATE/VOLUME TOTAL
---------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income on loans $ 695 $ (124) $ (10) $ 561
Interest income on interest bearing deposits in FHLBB (639) 65 (53) (627)
Interest and dividend income on securities and stock
in FHLBB 1,176 322 129 1,627
---------------------------------------
Total interest and dividend income 1,232 263 66 1,561
---------------------------------------
Interest expense on deposits (421) (886) 51 (1,256)
Interest expense on securities sold under agreements
to repurchase and other borrowings 516 200 325 1,041
---------------------------------------
Total interest expense 95 (686) 376 (215)
---------------------------------------
Net interest and dividend income $1,137 $ 949 $(310) $1,776
=======================================
</TABLE>
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses was $735 thousand, $600 thousand
and $637 thousand, respectively, in 1995, 1994 and 1993. Total loans charged
against the allowance were $1.4 million, $421 thousand and $573 thousand,
respectively, in 1995, 1994 and 1993. Recoveries of loans previously charged
off were $144 thousand, $47 thousand and $76 thousand, respectively, in
1995, 1994 and 1993. The increase in the provision in 1995 compared to 1994,
is primarily the result of the increased level of loan charge offs in 1995.
The increase in charge offs in 1995 compared to 1994, is primarily the
result of an increase in commercial, financial and agricultural loan charge
offs of $757 thousand, an increase in residential real estate loan charge
offs of $129 thousand and an increase in commercial real estate loan charge
offs of $101 thousand.
Management evaluates the adequacy of the allowance for possible loan
losses each quarter based upon their understanding of the facts and
circumstances existing at that time. During the fourth quarter of 1994,
management provided $600 thousand as an addition to the allowance for
possible loan losses. This provision was due to 1) writedowns of
approximately $150 thousand relating to three commercial real estate loans
where payments became delinquent during the fourth quarter, resulting in the
institution of foreclosure proceedings and revaluation of existing
collateral and 2) revaluation of existing collateral on a large commercial
loan where payments became delinquent during the fourth quarter, resulting
in an additional allowance requirement of approximately $450 thousand.
The allowance for possible loan losses was $3.7 million at December 31,
1995, $4.2 million at December
<PAGE> 16
31, 1994 and $4.0 million at December 31,
1993. See "FINANCIAL CONDITION" and Note E of Notes to Consolidated
Financial Statements.
NONINTEREST INCOME
Noninterest income was $2.5 million, $2.2 million and $3.1 million,
respectively, in 1995, 1994 and 1993.
The increase in 1995 of $318 thousand from 1994, was primarily
attributable to an increase in net gains on sales of available for sale
securities of $131 thousand and a decrease in net losses on trading
securities of $141 thousand.
The decrease in 1994 of $948 thousand from 1993, was primarily
attributable to a decrease in net gains on securities of $132 thousand, a
decrease in net gains on sales of loans of $293 thousand and net losses on
trading securities of $141 thousand in 1994, compared to net gains of $207
thousand in 1993.
NONINTEREST EXPENSE
Noninterest expense was $10.1 million, $10.2 million and $10.5 million
in 1995, 1994 and 1993, respectively. The Company has closely monitored and
continues its efforts to reduce noninterest expense.
Salaries and benefits expense increased $329 thousand to $5.0 million
in 1995 from $4.7 million in 1994. The increase in 1995 over 1994, was
primarily attributable to salary increases of $130 thousand, as a result of
average salary increases of 4.3% and an increase in health insurance costs
of $180 thousand, associated with the Company's self insured health
insurance plan. In 1994, salaries and benefits expense decreased $43
thousand to $4.7 million from $4.8 million in 1993, as the streamlining of
operations more than offset average salary increases of 3.4%.
Occupancy and equipment expense decreased $104 thousand to $1.7 million
in 1995 from $1.8 million in 1994. The decrease is primarily attributable to
a decrease in depreciation expense of $34 thousand and decreases in costs
associated with maintenance contracts of $29 thousand and insurance expense
of $18 thousand as a result of reviewing and renegotiating certain of these
contracts. Occupancy and equipment expense was stable at $1.8 million in
1994 and 1993.
Expenses associated with other real estate owned decreased $101
thousand to $388 thousand in 1995 from $489 thousand in 1994. The decrease
was primarily attributable to a reduction in net foreclosure and holding
costs of $36 thousand from $383 thousand in 1994 to $347 thousand in 1995,
as a result of lower levels of other real estate owned in the Company's
portfolio in 1995 compared to 1994, an increase in gains on sales of other
real estate owned of $95 thousand, to $162 thousand in 1995 from $67
thousand in 1994, partially offset by an increase in the provision for loss
subsequent to foreclosure of $30 thousand from $173 thousand in 1994 to $203
thousand in 1995. Expenses associated with other real estate owned decreased
$283 thousand to $489 thousand in 1994 from $772 thousand in 1993. The
decrease was attributable to a decrease in net foreclosure and holding costs
of $156 thousand from $539 thousand in 1993 to $383 thousand in 1994, as a
result of lower levels of other real estate owned in the Company's portfolio
in 1994 compared to 1993 and a decrease in provisions for loss subsequent to
foreclosure of $191 thousand from $364 thousand in 1993 to $173 thousand in
1994, partially offset by a reduction in gains on sales of other real estate
owned of $64 thousand, from $131 thousand in 1993 to $67 thousand in 1994.
Other noninterest expenses decreased $205 thousand to $2.9 million in
1995 from $3.1 million in 1994. The decrease was primarily attributable to a
reduction in FDIC deposit insurance premiums of $298 thousand to $283
thousand in 1995 from $581 thousand in 1994, partially offset by an increase
in advertising costs of $97 thousand to $332 thousand in 1995 from $235
thousand in 1994, associated with advertising new deposit account products
and higher market rates of interest offered by the subsidiary bank in 1995.
The decrease in FDIC deposit insurance premiums resulted primarily from the
reduction of Bank Insurance Fund ("BIF") deposit insurance premiums in
August of 1995, effective as of June 1, 1995. The majority of the Company's
deposits are insured by the BIF. A portion of the Company's deposits are
OAKAR deposits (approximately $42.4 million at December 31, 1995), which are
deposits purchased from institutions previously insured by the Savings
Association Insurance Fund ("SAIF"). A proposal is being considered by
Congress under which SAIF-insured companies would pay a one-time special
assessment designed to bring the SAIF reserve ratio to the level already
achieved by BIF. Under the proposal, OAKAR deposits would be subject to this
special assessment. This special assessment could be approximately 85 basis
points per $100 of deposits based upon the Company's March 31, 1995 OAKAR
deposits of approximately $35.5 million. If such an assessment is enacted,
the Company's potential pretax liability could be approximately $302
thousand. Other noninterest expenses were relatively stable, decreasing $56
thousand to $3.1 million in 1994 from $3.2 million in 1993. Increased
expenses relating to advertising and contributions were offset by decreases
in expenses associated with amortization of intangible assets, FDIC deposit
insurance premiums, insurance and supplies.
<PAGE> 17
INCOME TAXES
Income tax expense in 1995, 1994 and 1993, was $1.9 million, $1.3
million and $956 thousand, respectively. The increases in 1995 compared to
1994 and 1994 compared to 1993, relate primarily to increases in pretax
income.
Effective January 1, 1993 the Company adopted the asset and liability
method of accounting for income taxes as required by SFAS No. 109. The
adoption of SFAS No. 109 resulted in a one time credit to earnings of $205
thousand, representing the cumulative effect of adopting this statement.
Such amount was recognized in earnings in 1993. The adoption of SFAS No. 109
had no effect on the Company's 1993 earnings, other than the cumulative
effect adjustment.
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
The Company's capital base totaled $29.8 million, or 8.60% of total
assets at December 31,1995. Stockholders' equity increased $4.1 million, as
a result of earnings of $3.4 million, $2.3 million in unrealized gains on
available for sale securities net of related income taxes and a decrease of
$64 thousand in unearned compensation associated with the Company's Employee
Stock Ownership Plan, partially offset by cash dividends declared on common
stock of $989 thousand and the purchase of common stock for treasury in the
amount of $695 thousand.
On June 14, 1994, the Company announced a Stock Repurchase Plan
("Plan"), whereby the Company's Board of Directors authorized the repurchase
of up to 9% of its outstanding common shares from time to time. Shares
repurchased under the Plan may be held in treasury, retired or used for
general corporate purposes. As of December 31, 1995, the Company has
repurchased 124,600 shares under the Plan, representing 5.77% of common
shares outstanding at the date of announcement of the Plan.
Under the Federal Reserve Board's guidelines, bank holding companies
such as the Company currently are required to maintain a minimum ratio of
qualifying total capital to total assets and off-balance sheet instruments,
as adjusted to reflect their relative credit risks, of 8.0 percent. At least
one-half of total capital must be comprised of common equity, retained
earnings, non-cumulative perpetual preferred stock, and a limited amount of
cumulative perpetual preferred stock, less goodwill ("Tier I capital"). The
remainder of total capital may consist of a limited amount of subordinated
debt, other preferred stock, certain other instruments, and a limited amount
of general allowance for possible loan losses ("Tier II capital").
The Federal Reserve Board also has established an additional capital
adequacy guideline referred to as the Tier I leverage capital ratio, which
measures the ratio of Tier I capital to total assets less goodwill. Although
the most highly-rated bank holding companies will be required to maintain a
minimum Tier I leverage capital ratio of 3.0 percent, most bank holding
companies will be required to maintain Tier I leverage capital ratios of 4.0
percent to 5.0 percent or more. The actual required ratio will be based on
the Federal Reserve Board's assessment of the individual bank holding
company's asset quality, earnings performance, interest-rate risk, and
liquidity. The Company was in compliance with these requirements at December
31, 1995 and 1994.
Substantially similar rules have been issued by the FDIC with respect
to state-chartered banks which are not members of the Federal Reserve System
such as the subsidiary bank. At December 31, 1995 and 1994, the subsidiary
bank was in compliance with these requirements. In addition, as of December
31, 1995 and 1994, the subsidiary bank was considered "well capitalized" for
purposes of the FDIC's prompt corrective action regulations.
At December 31, 1995 the Company's and the subsidiary bank's regulatory
capital ratios as a percentage of assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------
SUBSIDIARY
COMPANY BANK
-------------------
<S> <C> <C>
Tier I leverage capital 7.54% 7.13%
Tier I capital to risk-weighted assets 14.76% 13.96%
Total capital to risk-weighted assets 15.85% 15.06%
</TABLE>
Liquidity
The principal source of funds for the payment of dividends and expenses
by the Company, is dividends paid to it by the subsidiary bank. Bank
regulatory authorities generally restrict the amounts available for payment
of dividends by the subsidiary bank to the Company if the effect thereof
would cause the capital of the subsidiary bank to be reduced below either
the amount required for the liquidation account (see Note P of Notes to
Consolidated Financial Statements) or applicable capital requirements. These
restrictions indirectly affect the Company's ability to pay dividends.
Dividends paid to the Company by the subsidiary bank in 1995, 1994 and 1993
were $2.0 million, $1.9 million and $250 thousand, respectively. The primary
source of liquidity in the Company is its interest bearing deposit with its
subsidiary bank of $1.5 million at December 31, 1995. Man-
<PAGE> 18
agement believes
that these funds are adequate to provide for the Company's needs.
The subsidiary bank monitors its level of short-term assets and
liabilities, maintaining an appropriate balance between liquidity, risk and
return. The major sources of liquidity are securities, interest bearing
deposits in FHLBB and amortization, prepayments and maturities of
outstanding loans.
The Company's and subsidiary bank's liquidity, represented by cash and
due from banks, is a product of its operating activities, investing
activities and financing activities. These activities are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
--------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and due from banks at beginning of year $ 9,255 $ 9,593 $ 8,284
Operating activities:
Net earnings 3,435 2,823 2,127
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities 354 25,939 (23,310)
--------------------------------
Net cash provided by (used in) operating activities 3,789 28,762 (21,183)
Net cash provided by (used in) investing activities (24,398) (35,466) 28,250
Net cash provided by (used in) financing activities 29,125 6,366 (5,758)
--------------------------------
Cash and due from banks at end of year $ 17,771 $ 9,255 $ 9,593
================================
</TABLE>
Cash provided by operating activities in 1995 related primarily to net
earnings. Cash provided by operating activities in 1994 was primarily
attributable to net earnings and a decrease in trading securities. Cash used
in operating activities in 1993 was primarily attributable to an increase in
trading securities, reduced by net earnings.
The Company's and subsidiary bank's primary investing activities are
loans, securities and interest bearing deposits with the FHLBB. Net lending
activities provided $1.2 million in cash in 1995 and used $10.5 million and
$10.0 million in cash in 1994 and 1993, respectively. Cash provided in
lending activities in 1995 reflects the weak loan demand for 1995, whereas
the use of cash in lending activities in 1994 and 1993 reflects stronger but
still sluggish loan demand in those years. During 1995, purchases of
securities available for sale and increases in interest bearing deposits in
the FHLBB exceeded proceeds from sales of securities available for sale and
maturities of securities available for sale and securities held to maturity
by $26.7 million. The cash used for these net purchases came primarily from
increases in deposits. During 1994, purchases of securities held to
maturity, securities available for sale and stock in the FHLBB, exceeded
proceeds from sales and maturities and decreases in interest bearing
deposits in the FHLBB by $26.8 million. The funds used for these net
purchases came primarily from operating activities. During 1993, proceeds
from sales and maturities of investments held for sale, investment
securities, stock in the FHLBB and a decrease in interest bearing deposits
with the FHLBB exceeded purchases by $34.0 million. These net proceeds in
1993, were used to fund the increase in trading securities and to partially
fund loan growth and deposit outflows.
Cash was provided by financing activities in 1995 and 1994 and used in
financing activities in 1993. The Company's and subsidiary bank's primary
financing activities are deposits, securities sold under agreements to
repurchase and other borrowings. Total deposits increased by $47.1 million
in 1995 and decreased by $21.3 million and $8.7 million in 1994 and 1993,
respectively. The increase in 1995 related to the introduction of new
deposit account products, coupled with higher market rates of interest. The
funds provided by this increase were utilized to purchase securities and
interest bearing deposits in the FHLBB, as well as to pay off all short-term
borrowings with the FHLBB. The decreases in deposits in 1994 and 1993
related to the low interest rate environment, which continued to encourage
depositors to seek other financial instruments outside of traditional
banking products with higher yields. Short-term borrowings in the form of
securities sold under agreements to repurchase increased $4.2 million, $8.2
million and $3.3 million, respectively, in 1995, 1994 and 1993. The increase
in 1995 contributed to an increase in cash on hand and due from banks, while
the increases in 1994 and 1993 were used to fund deposit outflows. In 1994,
the subsidiary bank borrowed $21.2 million from the FHLBB, $20.9 million of
which was short-term overnight advances. During 1995, these short-term
overnight borrowings were paid off with funds provided by deposit increases.
In 1994, these borrowings were used to fund deposit outflows.
<PAGE> 19
Liquidity management is both a daily and long-term function of
management. Excess liquidity is generally invested in short-term investments
such as interest bearing deposits in the FHLBB and 2 to 3 year fixed income
US Government and agency securities and, to a lesser extent, corporate
securities. If the subsidiary bank requires funds beyond its ability to
generate them internally, borrowing arrangements with the FHLBB can provide
additional funds. At December 31, 1995, the subsidiary bank had $728
thousand of outstanding borrowings from the FHLBB, with an additional
borrowing capacity of approximately $139.0 million. The outstanding FHLBB
borrowings were used to fund affordable housing projects in the subsidiary
bank's market area.
The Company anticipates that the subsidiary bank will have sufficient
funds available to meet its current loan commitments. At December 31, 1995,
the subsidiary bank had outstanding loan commitments of $20.8 million. For
additional information as to loan commitments, see Note L of Notes to
Consolidated Financial Statements. Time deposits which are scheduled to
mature in one year or less at December 31, 1995, totalled $84.1 million.
Management believes that a significant portion of such deposits will remain
with the subsidiary bank.
For a discussion of the limitations that federal law places on
extensions of credit from banks to their parent holding company, see Note Q
of Notes to Consolidated Financial Statements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related consolidated
financial data herein have been presented in accordance with generally
accepted accounting principles which require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due
to inflation. Inflation can affect the Company in a number of ways,
including increased operating costs and interest rate volatility. Unlike
most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than
the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices
of goods and services. Management attempts to minimize the effects of
inflation by maintaining an approximate match between interest rate
sensitive assets and interest rate sensitive liabilities and, where
practical, by adjusting service fees to reflect changing costs.
LEGAL PROCEEDINGS
The Company is a defendant in ordinary and routine pending legal
actions incident to its business, none of which is believed by management to
be material to the financial condition of the Company.
RECENT ACCOUNTING DEVELOPMENTS
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. In March 1995, the FASB issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No. 121 is effective for
years beginning after December 15, 1995 and establishes accounting standards
for the impairment of long-lived assets, certain identifiable intangibles,
and goodwill related to those assets to be held and used and for long-lived
assets and certain identifiable intangibles to be disposed of. This
statement requires that long-lived assets, certain identifiable intangibles
and goodwill related to those assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
does not expect SFAS No. 121 to have a significant effect on its financial
statements.
Accounting for Mortgage Servicing Rights. In May 1995, the FASB issued
SFAS No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS No. 122").
SFAS No. 122 is effective for years beginning after December 15, 1995 and
requires that mortgage banking enterprises recognize as separate assets the
right to service mortgage loans regardless of whether such rights are
obtained through the direct purchase of servicing rights or from the
origination of mortgage loans intended to be sold with servicing retained.
SFAS No. 122 also requires assessments of capitalized servicing rights for
impairment based on the fair value of those rights. The Company does not
expect SFAS No. 122 to have a significant effect on its financial
statements.
Accounting for Stock-Based Compensation. In October 1995, the FASB
issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123"). SFAS No. 123 establishes a fair value based method of accounting for
stock-based compensation arrangements with employees, rather than the
intrinsic value based method that is contained in Accounting Principles
Board Opinion No. 25 ("Opinion 25"). However, SFAS No. 123 does not require
an entity to adopt the new fair value based method for purposes of preparing
its basic financial statements. Entities are allowed (1) to continue to use
the Opinion 25 method or (2) to adopt the SFAS No. 123 fair value based
method. The SFAS No. 123 fair value based method is considered by the
<PAGE> 20
FASB to be preferable to the Opinion 25 method, and thus, once the fair value
based method is adopted, an entity cannot change back to the Opinion 25
method. SFAS No. 123 applies to all transactions in which an entity acquires
goods or services by issuing equity instruments or by incurring liabilities
where the payment amounts are based on the entity's common stock price,
except for employee stock ownership plans. For entities not adopting the
SFAS No. 123 fair value based method, SFAS No. 123 requires the entity to
display in the footnotes to the financial statements pro forma net earnings
and earnings per share information as if the fair value based method had
been adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in years that begin after December 15, 1995. The
disclosure requirements are effective for financial statements for years
beginning after December 15, 1995. The Company intends to implement SFAS No.
123 in 1996, by continuing to account for stock-based compensation under the
Opinion 25 method. As required by SFAS No. 123, the pro forma effects on net
earnings and earnings per share will be determined as if the fair value
based method had been applied and disclosed in the notes to consolidated
financial statements.
<PAGE> 21
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated financial statements of Granite State Bankshares,
Inc. have been prepared by management, which is responsible for their
content and accuracy. The statements present the results of operations,
cash flows, and financial position of the Company in conformity with
generally accepted accounting principles and, accordingly, include amounts
based on management's judgments and estimates. Information in other
sections of this annual report is consistent with that included in the
financial statements.
Granite State Bankshares, Inc. and its subsidiary have established
and maintain an internal control structure designed to provide reasonable
assurance that assets are safeguarded and that transactions are properly
authorized by management and recorded in conformity with generally
accepted accounting principles. This structure includes accounting
controls, written policies and procedures, and a code of corporate conduct
which stresses the highest ethical standards and is routinely communicated
to all employees.
The Audit Committee of the Board of Directors, which is composed
solely of outside directors, meets periodically with management, the
internal auditor, and the independent auditors to review audit findings,
adherence to corporate policies and other financial matters.
The firm of Grant Thornton LLP, Certified Public Accountants, has
been engaged to audit and report on the Company's consolidated financial
statements. Its audit was conducted in accordance with generally accepted
auditing standards and included a review of internal accounting controls
to the extent deemed necessary for the purpose of its report, which
follows.
/s/ CHARLES W. SMITH /s/ WILLIAM G. PIKE
Charles W. Smith William G. Pike
Chairman and Chief Executive Officer Executive Vice President and
Chief Financial Officer
(principal accounting officer)
<PAGE> 22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Granite State Bankshares, Inc.
We have audited the accompanying consolidated statements of
financial condition of Granite State Bankshares, Inc. and subsidiary as of
December 31, 1995 and 1994, and the related consolidated statements of
earnings, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1995. These financial statements are the
responsibility of the management of Granite State Bankshares, Inc. Our
responsibility is to express an opinion on these 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 financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of
Granite State Bankshares, Inc. and subsidiary as of December 31, 1995 and
1994 and the consolidated results of their operations and their
consolidated cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in note A of notes to the consolidated financial
statements, the Company changed its methods of accounting for income taxes
and securities during 1993.
/s/ GRANT THORNTON LLP
Boston, Massachusetts
January 10, 1996
<PAGE> 23
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------------------
(IN THOUSANDS)
ASSETS
<S> <C> <C>
Cash and due from banks $ 17,771 $ 9,255
Interest bearing deposits in Federal Home Loan Bank of
Boston, at cost, which approximates market value 24,239 26
Securities available for sale (amortized cost
$92,547,000 in 1995 and $74,097,000 in 1994) 95,016 73,032
Securities held to maturity (market value
$15,260,000 in 1994) 15,499
Stock in Federal Home Loan Bank of Boston 3,215 3,215
Loans 192,354 195,251
Less: Unearned income (2,356) (2,930)
Allowance for possible loan losses (3,704) (4,230)
--------------------
Net loans 186,294 188,091
Premises and equipment 9,937 9,776
Other real estate owned 2,691 3,009
Other assets 7,251 8,937
--------------------
$346,414 $310,840
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits $255,208 $213,478
Noninterest bearing deposits 31,922 26,551
--------------------
Total deposits 287,130 240,029
Securities sold under agreements to repurchase 26,189 21,968
Short-term borrowings from the Federal Home Loan
Bank of Boston 20,904
Long-term debt 728 328
Other liabilities 2,578 1,970
--------------------
Total liabilities 316,625 285,199
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; authorized
7,500,000 shares; none issued
Common stock, $1.00 par value; authorized
12,500,000 shares; 2,535,833 shares issued at
December 31, 1995 and 1994 2,536 2,536
Additional paid-in capital 19,218 19,218
--------------------
21,754 21,754
Unrealized gain (loss) on securities available for
sale, net of related tax effects 1,630 (703)
Retained earnings 10,529 8,083
--------------------
33,913 29,134
Less: Treasury stock, at cost, 500,252 and
453,752 shares at December 31, 1995 and 1994,
respectively (4,124) (3,429)
Unearned compensation--Employee Stock
Ownership Plan (64)
--------------------
29,789 25,641
--------------------
$346,414 $310,840
====================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 24
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
-----------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest and dividend income
Loans $18,327 $15,587 $15,026
Trading securities 395 496
Securities available for sale 4,687 2,915
Securities held to maturity 533 1,114
Investment securities 1,531
Securities held for sale 859
Interest bearing deposits in Federal Home Loan Bank
of Boston 814 149 776
Dividends on Federal Home Loan Bank of Boston stock 221 184 95
-----------------------------
Total interest and dividend income 24,582 20,344 18,783
Interest expense
Deposits 9,478 6,347 7,603
Short-term borrowings 1,483 1,342 305
Long-term debt 12 15 11
-----------------------------
Total interest expense 10,973 7,704 7,919
-----------------------------
Net interest and dividend income 13,609 12,640 10,864
Provision for possible loan losses 735 600 637
-----------------------------
Net interest and dividend income after provision
for possible loan losses 12,874 12,040 10,227
Noninterest income
Mortgage service fees 703 696 834
Net gains (losses) on trading securities (141) 207
Net gains on securities 326 195 327
Net gains on sales of loans 316 261 554
Other 1,170 1,186 1,223
-----------------------------
2,515 2,197 3,145
Noninterest expense
Salaries and benefits 5,044 4,715 4,758
Occupancy and equipment 1,728 1,832 1,782
Other real estate owned 388 489 772
Other 2,921 3,126 3,182
-----------------------------
10,081 10,162 10,494
-----------------------------
Earnings before income taxes and cumulative
effect of a change in accounting principle 5,308 4,075 2,878
Income taxes 1,873 1,252 956
-----------------------------
Earnings before cumulative effect of a change
in accounting principle 3,435 2,823 1,922
Cumulative effect on years prior to 1993 of a change
in accounting principle 205
-----------------------------
NET EARNINGS $ 3,435 $ 2,823 $ 2,127
=============================
Preferred stock dividends $ 228
=============================
Net earnings applicable to common stock $ 3,435 $ 2,823 $ 1,899
=============================
Net earnings per common share--primary:
Before cumulative effect of change in accounting
principle $ 1.58 $ 1.27 $ .88
Cumulative effect on years prior to 1993 of a
change in accounting principle .11
-----------------------------
$ 1.58 $ 1.27 $ .99
=============================
Net earnings per common share--fully diluted:
Before cumulative effect of change in accounting
principle $ 1.57 $ 1.26 $ .86
Cumulative effect on years prior to 1993 of a
change in accounting principle .09
-----------------------------
$ 1.57 $ 1.26 $ .95
=============================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
7% UNREALIZED
CUMULATIVE GAIN (LOSS) ON
CONVERTIBLE ADDITIONAL SECURITIES UNEARNED
PREFERRED COMMON PAID-IN RETAINED TREASURY AVAILABLE COMPENSATION
STOCK STOCK CAPITAL EARNINGS STOCK FOR SALE, NET ESOP TOTAL
----------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1992 $412 $2,104 $19,137 $ 4,303 $(2,540) $(236) $23,180
Net earnings 2,127 2,127
Payment of Employee Stock
Ownership Plan Indebtedness 86 86
Cash dividends declared on
preferred stock (228) (228)
Cash dividends declared on common
stock, $.08 per share (173) (173)
Issuance of common stock upon
exercise of stock options 20 81 101
Conversion of preferred stock
to common stock (412) 412
Unrealized gain on securities
available for sale, net of related
income taxes $ 288 288
------------------------------------------------------------------------------------------
Balance as of December 31, 1993 0 2,536 19,218 6,029 (2,540) 288 (150) 25,381
Net earnings 2,823 2,823
Payment of Employee Stock
Ownership Plan Indebtedness 86 86
Cash dividends declared on
common stock, $.36 per share (769) (769)
Unrealized loss on securities available
for sale, net of related income taxes (991) (991)
Purchase of common stock for treasury (889) (889)
------------------------------------------------------------------------------------------
Balance as of December 31, 1994 0 2,536 19,218 8,083 (3,429) (703) (64) 25,641
Net earnings 3,435 3,435
Payment of Employee Stock
Ownership Plan Indebtedness 64 64
Cash dividends declared on
common stock, $.48 per share (989) (989)
Unrealized gain on securities available
for sale, net of related income taxes 2,333 2,333
Purchase of common stock for treasury (695) (695)
------------------------------------------------------------------------------------------
Balance as of December 31, 1995 $ 0 $2,536 $19,218 $10,529 $(4,124) $1,630 $ 0 $29,789
==========================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 26
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
--------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) in cash and due from banks
Cash flows from operating activities
Net earnings $ 3,435 $ 2,823 $ 2,127
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities
Provision for possible loan losses 735 600 637
Provision for depreciation and amortization 1,199 1,295 1,421
Accretion of security discounts net of premium amortizaton (125) (391) (26)
Net (increase) decrease in trading securities 23,362 (23,054)
Provision for loss on other real estate owned 203 173 364
Lower of cost or market adjustment--investments held for sale (205)
Deferred income taxes (benefits) (107) (139) 554
Realized gains on investment securities, net (97)
Realized gains on investments held for sale, net (25)
Realized gains on securities available for sale, net (326) (195)
Realized (gains) losses on trading securities 141 (207)
Loans originated for sale (29,159) (19,003) (41,666)
Proceeds from sale of loans originated for sale 28,154 21,891 40,700
(Increase) decrease in other assets 883 (2,329) 157
Increase (decrease) in other liabilities (115) 1,210 (181)
Decrease in unearned compensation--ESOP 64 86 86
Realized gains on sales of loans (316) (261) (554)
Realization of unearned income (574) (434) (1,083)
Realized gains on sales of other real estate owned (162) (67) (131)
--------------------------------
Net cash provided by (used in) operating activities 3,789 28,762 (21,183)
--------------------------------
Cash flows from investing activities
Proceeds from sales of investments held for sale 21,816
Purchases of investments held for sale (5,990)
Proceeds from sales of securities available for sale 1,238 4,244
Proceeds from maturities of securities available for sale 11,998 15,000
Purchase of securities available for sale (31,236) (70,522)
Purchase of securities held to maturity (503)
Proceeds from maturities of securities held to maturity 15,500 14,500
Proceeds from sales of investment securities 8,329
Purchase of investment securities (769)
Purchase of Federal Home Loan Bank of Boston stock (1,996)
Proceeds from sale of Federal Home Loan Bank of Boston stock 59
Loan (originations) repayments, net 1,183 (10,506) (4,894)
Purchase of loans (5,073)
Purchase of premises and equipment (913) (623) (406)
Advances made on other real estate owned (22) (52) (65)
Advances on real estate held for investment (6) (57)
Net (increase) decrease in interest-bearing deposits with
other banks (24,213) 12,480 10,650
Proceeds from sales of other real estate owned 2,073 2,569 4,593
--------------------------------
Net cash provided by (used in) investing activities (24,398) (35,466) 28,250
--------------------------------
Cash flows from financing activities
Net increase (decrease) in demand, NOW, money market and
savings accounts 17,656 (14,323) 7,585
Net increase (decrease) in time certificates 29,445 (7,020) (16,318)
Net increase in securities sold under agreements to repurchase 4,221 8,204 3,264
Increase (decrease) in short-term borrowings from Federal Home
Loan Bank of Boston (20,904) 20,904
Long-term borrowings from Federal Home Loan Bank of Boston 464 264
Repayment on liability relating to ESOP (64) (86) (86)
Dividends paid on common stock (998) (688)
Dividends paid on preferred stock (304)
Issuance of common stock upon exercise of stock options 101
Purchase of treasury stock (695) (889)
--------------------------------
Net cash provided by (used in) financing activities 29,125 6,366 (5,758)
--------------------------------
Net increase (decrease) in cash and due from banks 8,516 (338) 1,309
Cash and due from banks at beginning of year 9,255 9,593 8,284
--------------------------------
Cash and due from banks at end of year $ 17,771 $ 9,255 $ 9,593
================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Granite State Bankshares,
Inc. (the "Company") conform to generally accepted accounting principles
and to general practices within the banking industry.
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the dates of the balance sheets, and income and
expense for the periods. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to change in
the near-term relate to the determination of the allowance for possible
loan losses and valuation of other real estate owned. In connection with
the determination of the allowance for possible loan losses and the
carrying value of other real estate owned, management obtains independent
appraisals for significant properties.
A substantial portion of the Company's loans are secured by real
estate in New Hampshire. In addition, a majority of other real estate
owned is located in New Hampshire. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan portfolio
and the recovery of all the other real estate owned is susceptible to
changing conditions in New Hampshire.
Certain 1994 and 1993 information has been reclassified to conform
with the 1995 presentation. The following is a description of the
significant accounting policies.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Granite Bank (the "subsidiary
bank"). All significant intercompany transactions and balances have been
eliminated in consolidation.
2. Securities
Effective December 31, 1993, the Company adopted Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." Under SFAS No. 115, debt securities that the
Company has the positive intent and ability to hold to maturity are
classified as held to maturity and reported at amortized cost; debt and
equity securities that are bought and held principally for the purpose of
selling in the near term are classified as trading and reported at fair
value, with unrealized gains and losses included in earnings; and debt and
equity securities not classified as either held to maturity or trading are
classified as available for sale and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity, net of estimated income taxes.
Upon adoption, the Company classified its securities into three
categories: held to maturity, available for sale and trading. As a result
of the adoption, stockholders' equity was increased by approximately
$288,000, representing the net unrealized gain on securities available for
sale, less applicable income taxes.
Premiums and discounts on securities are amortized or accreted into
income on the straight-line method over the life of the investments.
Income recognized by use of this method does not differ materially from
that which would be recognized by use of the level-yield method. If a
decline in fair value below the amortized cost basis of a security is
judged to be other than temporary, the cost basis of the security is
written down to fair value as a new cost basis and the amount of the
write-down is included as a charge against net gains on securities. Gains
and losses on the sale of securities are recognized at the time of sale on
a specific identification basis.
In October 1994, the FASB issued SFAS No. 119, "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments."
SFAS No. 119 is effective for financial statements issued after December
15, 1994 and requires financial statement disclosure of certain derivative
financial instruments, defined as futures, forwards, swaps, option
contracts, or other financial instruments with similar characteristics.
The disclosure requirements of SFAS No. 119 had no material effect on the
Company's consolidated financial condition or results of operations, as
the Company does not invest in derivative financial instruments, as
defined in SFAS No. 119.
3. Loans
Real estate mortgage loans and other loans are stated at the amount
of unpaid principal, less unearned income and the allowance for possible
loan losses.
Interest on loans is included in income as earned based on rates
applied to principal amounts outstanding. Accrual of interest on loans is
discontinued either when reasonable doubt exists as to the full, timely
collection of interest or principal, or when a loan becomes contractually
past due by ninety days, unless the loan is well secured and in the
process of collection. When a loan is placed on nonaccrual status, all
interest previously accrued is reversed against current period interest
income. Interest subsequently received on nonaccrual loans is either
applied against prin-
<PAGE> 28
cipal or recorded as income according to management's
judgment as to the collectibility of principal.
The Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," on January 1, 1995. This new standard requires that
a creditor measure impairment based on the present value of expected
future cash flows discounted at the loan's effective interest rate, except
that as a practical expedient, a creditor may measure impairment based on
a loan's observable market price, or the fair value of the collateral if
the loan is collateral dependent. Regardless of the measurement method, a
creditor must measure impairment based on the fair value of the collateral
when the creditor determines that foreclosure is probable. In October
1994, SFAS No. 114 was amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosures," which
allows creditors to use their existing methods for recognizing interest
income on impaired loans. Because the Company already recognized such
reductions of value on impaired loans through its provision for possible
loan losses, the adoption of SFAS No. 114, as amended by SFAS No. 118, did
not have a material impact on its financial condition or results of
operations.
Loan origination and commitment fees and certain direct loan
origination costs are being deferred and amortized as an adjustment of the
related loan yield over the contractual life of the loans.
4. Allowance for Possible Loan Losses
The adequacy of the allowance for possible loan losses is evaluated
on a regular basis by management. Factors considered in evaluating the
adequacy of the allowance include previous loss experience, current
economic conditions and their effect on borrowers and the performance of
individual loans in relation to contract terms. The provision for possible
loan losses charged to operations is based upon management's judgment of
the amount necessary to maintain the allowance at a level adequate to
absorb possible losses. Loan losses are charged against the allowance when
management believes the collectibility of the principal is unlikely, and
recoveries are credited to the allowance when received.
Management believes that the allowance for possible loan losses is
adequate. While management evaluates the allowance for possible loan
losses based upon available information, future additions to the allowance
may be necessary. Additionally, regulatory agencies review the Company's
allowance for possible loan losses as part of their examination process.
Such agencies may require the Company to recognize additions to the
allowance based on judgments which may be different from those of
management.
5. Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets.
Gains or losses on routine dispositions are credited or charged to
income. Maintenance and repairs are charged to expense as incurred, and
improvements are capitalized.
6. Other Real Estate Owned
Other real estate owned is comprised of properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure.
Other real estate owned is recorded at the lower of the carrying value of
the loan or the fair value of the property received less a valuation
allowance for estimated costs to sell. Loan losses arising from the
acquisition of such properties are charged against the allowance for
possible loan losses. Provisions to reduce the carrying value to net
realizable value are charged to current period earnings as realized and
are reflected as an additional valuation allowance. Operating expenses and
gains and losses upon disposition are reflected in earnings as realized.
7. Intangible Assets
Goodwill arising from acquisitions is included in other assets, net
of accumulated amortization, and is amortized on the straight-line basis
over 15 years.
Core deposit intangibles arising from acquisitions are included in
other assets, net of accumulated amortization, and are amortized on an
accelerated method over 8 years.
Purchased mortgage servicing rights are included in other assets,
net of accumulated amortization, and are amortized on the level-yield
method over the estimated lives of the loans being serviced.
8. Fair Value of Financial Instruments
In accordance with SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, the Company is required to disclose estimated fair
values of financial instruments. Fair value estimates, methods, and
assumptions are set forth below in note T of Notes to Consolidated
Financial Statements.
<PAGE> 29
9. Income Taxes
Effective January 1, 1993, the Company adopted the asset and
liability method of accounting for income taxes. The cumulative effect of
the adoption was $205,000 and was included in the earnings of the Company
for the quarter ended March 31, 1993. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and the
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109,
the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in earnings in the period that includes the enactment date.
Tax credits are accounted for under the flow-through method as a
reduction of income tax expense in the period they are realized.
10. Retirement and Benefit Plans
The Company and its subsidiary bank have a non-contributory defined
benefit Pension Plan covering substantially all of the Company's
employees. Contributions are intended to provide for benefits attributed
to services rendered to date and for those expected to be earned in the
future.
Effective January 1, 1993, the Company sponsors an unfunded
Supplemental Executive Retirement Plan ("SERP"). The SERP is a
nonqualified plan designed to provide supplemental defined pension
benefits to certain key employees, whose benefits under the Company's
other retirement plans are limited by Federal tax laws.
On August 19, 1986, the Company established an Employee Stock
Ownership Plan ("ESOP"), covering eligible employees with one year of
service as defined by the ESOP. In November 1993, the American Institute
of Certified Public Accountants issued Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans" ("SOP 93-6").
SOP 93-6 addresses the accounting for shares of stock issued to employees
by an employee stock ownership plan. SOP 93-6 requires that the employer
record compensation expense in an amount equal to the fair value of shares
committed to be released from the ESOP to employees. SOP 93-6 was
effective for years beginning after December 15, 1993 and relates to
shares purchased by an ESOP after December 31, 1992. For shares purchased
by the ESOP prior to December 31, 1992, the shares allocated method is
used to recognize compensation expense in the consolidated statements of
earnings. The Company's adoption of SOP 93-6 on January 1, 1994 had no
significant impact on consolidated financial position or results of
operations at December 31, 1994 or for the year then ended.
11. Earnings Per Common Share
Primary earnings per common share for 1995, 1994 and 1993 were
determined by dividing net earnings applicable to common stock by the
weighted average number of common shares outstanding. Outstanding common
shares also include common stock equivalents which consist of certain
outstanding stock options utilizing the treasury stock method, based upon
the average market price of common stock during the year. Fully diluted
earnings per share for 1995, 1994 and 1993 were determined by dividing net
earnings by the weighted average number of outstanding shares on a fully
diluted basis. On a fully diluted basis, outstanding common shares include
the outstanding stock options utilizing the treasury stock method, based
upon the year end market price of the common stock. Additionally, in 1993,
outstanding shares on a fully diluted basis assume the conversion of all
outstanding preferred shares to common. The Company's adoption of SOP 93-6
effective January 1, 1994 (see note A 10), had no significant impact on
the Company's earnings per common share for the year ended December 31,
1994. The average number of common shares outstanding (including common
stock equivalents) for 1995, 1994 and 1993 were 2,175,734, 2,229,075 and
1,915,953, respectively (2,183,478, 2,232,986 and 2,237,799 fully
diluted).
12. Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, cash and
cash equivalents include cash and due from banks.
NOTE B--CASH AND DUE FROM BANKS
The Federal Reserve Bank requires the subsidiary bank to maintain
average reserve balances. The average amount of these reserve balances for
the year ended December 31, 1995 was approximately $5,870,000.
<PAGE> 30
NOTE C--SECURITIES
The amortized cost and estimated market values of securities at
December 31, were as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
AT DECEMBER 31, 1995
US Treasury obligations $59,016 $ 452 $ 16 $59,452
US Government agency obligations 17,000 7 17,007
Other corporate obligations 9,495 51 9,444
Mutual Fund 3,000 9 3,009
Marketable equity securities 4,036 2,077 9 6,104
------------------------------------------
Total securities available for sale $92,547 $2,545 $ 76 $95,016
===========================================
SECURITIES HELD TO MATURITY
AT DECEMBER 31, 1994
Other corporate obligations $15,499 $ $ 239 $15,260
------------------------------------------
Total securities held to maturity $15,499 $ 0 $ 239 $15,260
==========================================
SECURITIES AVAILABLE FOR SALE
AT DECEMBER 31, 1994
US Treasury obligations $58,912 $1,410 $57,502
US Government agency obligations 3,000 45 2,955
Other corporate obligations 9,484 202 9,282
Marketable equity securities 2,701 $ 664 72 3,293
------------------------------------------
Total securities available for sale $74,097 $ 664 $1,729 $73,032
==========================================
</TABLE>
As a member of the Federal Home Loan Bank of Boston ("FHLBB"), the
Bank is required to invest in $100 par value stock of the FHLBB in the
amount of 1% of its outstanding loans secured by residential housing, or
1% of 30% of total assets, or 5% of its outstanding advances from the
FHLBB, whichever is higher. When such stock is redeemed, the Bank would
receive from the FHLBB an amount equal to the par value of the stock. As
of December 31, 1995 and 1994, the Company had investments in FHLBB stock
of $3,215,000 and $3,215,000, respectively.
Gross realized gains and gross realized losses on sales of
securities (excluding trading securities), for the years ended December 31
were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------ ------------------ ------------------
REALIZED REALIZED REALIZED REALIZED REALIZED REALIZED
GAIN LOSS GAIN LOSS GAIN LOSS
------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SECURITIES
Debt securities $ 8 $22 $ 83 $33
Marketable equity securities $326 209 76 4
-------------------------------------------------------
$326 $ 0 $217 $22 $159 $37
=======================================================
</TABLE>
<PAGE> 31
Included in net gains on securities for the years ended December 31,
1995 and 1994, are net realized gains on securities available for sale of
$326,000 and $195,000, respectively. Net gains on securities in 1993
includes realized gains on sales of securities of $122,000 and the
recovery of previously recorded unrealized losses on investments held for
sale of $205,000.
At December 31, 1995, U. S. Treasury securities with carrying and
market values of $37,784,000 were pledged as collateral for securities
sold under agreements to repurchase and for government deposit accounts.
The following tables set forth the maturity distribution of debt
securities available for sale at amortized cost and estimated market value
at December 31, 1995.
<TABLE>
<CAPTION>
OVER 1 YEAR
WITHIN THROUGH
1 YEAR 5 YEARS TOTAL
------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
AMORTIZED COST
AT DECEMBER 31, 1995
US Treasury obligations $42,962 $16,054 $59,016
US Government agency obligations 17,000 17,000
Other corporate obligations 5,998 3,497 9,495
--------------------------------
$48,960 $36,551 $85,511
================================
ESTIMATED MARKET VALUE
AT DECEMBER 31, 1995
US Treasury obligations $43,248 $16,204 $59,452
US Government agency obligations 17,007 17,007
Other corporate obligations 5,988 3,456 9,444
--------------------------------
$49,236 $36,667 $85,903
================================
</TABLE>
NOTE D--LOANS
Loans consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------------------
(IN THOUSANDS)
<S> <C> <C>
Commercial, financial and agricultural $ 10,696 $ 11,787
Real estate--residential 113,563 119,311
Real estate--commercial 52,555 48,185
Real estate--construction and land development 2,676 3,436
Installment 4,438 3,685
Other 8,426 8,847
---------------------
Total loans 192,354 195,251
Less:
Unearned income (2,356) (2,930)
Allowance for possible loan losses (3,704) (4,230)
---------------------
Net loans $186,294 $188,091
=====================
</TABLE>
At December 31, 1995 and 1994, loans which were on nonaccrual status
were $1,798,000 and $2,284,000, respectively. Interest income which would
have been accrued on nonaccrual loans, had they performed in accordance
with the terms of their contracts, for the years ended December 31, 1995,
1994 and 1993, was $230,000, $238,000 and $171,000, respectively.
Interest income recognized on nonaccrual loans in 1995, 1994 and 1993
amounted to $56,000, $39,000 and $30,000, respectively.
The balance of impaired loans was $1,022,000 at December 31, 1995.
The Company has identified a loan as impaired when it is probable that
interest and principal will not be collected according to the contractual
terms of the loan agreements. The allowance for possible loan losses
associated with impaired loans allocated from and part of the general
allowance for possible loan losses (see note E), upon the adoption of SFAS
No. 114, on January 1, 1995 was $864,000. During 1995, provisions to the
allowance for impaired loans amounted to $553,000 and impaired loans
charged off amounted to $1,050,000. The allowance for possible loan losses
associated with impaired loans at December 31, 1995 was $367,000. The
average recorded investment in impaired loans was $1,482,000 in 1995 and
the income recognized on impaired loans during 1995 was $19,000. Total
cash collected on impaired loans during 1995 was $103,000, of which
$84,000 was credited to the principal balance outstanding on such loans.
Interest which would have been accrued on impaired loans during 1995, had
they performed in accordance with the terms of their contracts, was
$166,000. The Company's policy for interest income recognition on impaired
loans is to recognize
<PAGE> 32
income on nonaccrual loans under the cash basis when
the loans are both current and the collateral on the loan is sufficient to
cover the outstanding obligation to the Company; if these factors do not
exist, the Company does not recognize income.
Unearned income at December 31, 1995 and 1994, includes $1,743,000
and $2,237,000, respectively, in net loan discounts on loans acquired in
connection with the acquisition of First Northern Co-operative Bank in
August of 1991. Additionally, at December 31, 1995 and 1994 unearned
income includes $144,000 and $168,000, respectively, in net loan discounts
on other loans acquired. Discounts on acquired loans are amortized as a
yield adjustment over the estimated lives of the respective loans.
The Company's lending activities are conducted principally in New
Hampshire and to a lesser extent in selected areas in other New England
states. The Company grants single family and multi-family residential
loans, commercial real estate loans, commercial loans, and a variety of
consumer loans. In addition, the Company grants loans for the construction
of residential homes, multi-family properties and commercial real estate
properties. Most loans granted by the Company are collateralized by real
estate. The ability and willingness of the single family residential and
consumer borrowers to honor their repayment commitments is generally
dependent on the level of overall economic activity within the borrowers'
geographic areas, and real estate values. The ability and willingness of
commercial real estate, commercial and construction loan borrowers to
honor their repayment commitments is generally dependent on the health of
the real estate economic sector in the borrowers' geographic areas, and
the general economy.
The Company's subsidiary bank originates residential real estate
loans for sale in the secondary market in the normal course of business.
Loans held for sale are carried at the lower of aggregate cost or market
value and totaled $1,985,000 and $664,000 at December 31, 1995 and 1994,
respectively. These loans are committed for sale at the time of the loan
closing.
At December 31, 1995 and 1994, the Company's subsidiary serviced
real estate loans sold to others in the amounts of $173,017,000 and
$168,344,000, respectively.
NOTE E--ALLOWANCE FOR POSSIBLE LOAN LOSSES
Changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
---------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 4,230 $4,004 $3,864
Provision for possible loan losses 735 600 637
Loans charged off (1,405) (421) (573)
Recoveries of loans previously charged off 144 47 76
---------------------------
Balance at end of year $ 3,704 $4,230 $4,004
===========================
</TABLE>
Management evaluates the adequacy of the allowance for possible loan
losses each quarter based upon their understanding of the facts and
circumstances existing at that time. During the fourth quarter of 1994,
management provided $600,000 as an addition to the allowance for possible
loan losses. This provision was due to 1) writedowns of approximately
$150,000 relating to three commercial real estate loans where payments
became delinquent during the fourth quarter, resulting in the institution
of foreclosure proceedings and revaluation of existing collateral and 2)
revaluation of existing collateral on a large commercial loan where
payments became delinquent in the fourth quarter, resulting in an
additional allowance requirement of approximately $450,000.
NOTE F--LOANS TO RELATED PARTIES
The Company's banking subsidiary has granted loans to its officers
and directors, and those of the Company and to their associates. The
aggregate amount of these loans was $2,141,000 and $2,103,000 at December
31, 1995 and 1994, respectively. During 1995, $322,000 of new loans were
made and repayments totaled $239,000. Approximately $45,000 of related
party loans at December 31, 1994 were loans to officers and directors who
were no longer associated with the Company in those capacities at December
31, 1995.
<PAGE> 33
NOTE G--PREMISES AND EQUIPMENT
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------------------
(IN THOUSANDS)
<S> <C> <C>
Bank buildings $ 8,870 $ 8,796
Leasehold improvements 187 187
Furniture and equipment 5,128 4,258
------------------
14,185 13,241
Less: Accumulated depreciation 6,305 5,552
------------------
7,880 7,689
Land 2,040 2,040
Construction in progress 17 47
------------------
$ 9,937 $ 9,776
==================
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and
1993 was $796,000, $785,000 and $790,000, respectively.
NOTE H--OTHER REAL ESTATE OWNED
A summary of other real estate owned follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
-----------------
(IN THOUSANDS)
<S> <C> <C>
Condominiums and apartment projects $ 266 $ 701
Single family housing projects 787 1,050
Retail and office 426 481
Non-retail commercial 1,593 1,166
Residential 75 107
-----------------
3,147 3,505
Less: Valuation allowance 456 496
-----------------
$2,691 $3,009
=================
</TABLE>
An analysis of other real estate owned follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
-----------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 3,009 $ 4,269 $ 6,839
Other real estate owned acquired 1,774 1,363 2,191
Advances for construction and other 22 52 65
Sales proceeds (2,073) (2,569) (4,593)
Gains on sales, net 162 67 131
Provisions for loss subsequent to foreclosure (203) (173) (364)
-----------------------------
Balance at end of year $ 2,691 $ 3,009 $ 4,269
=============================
</TABLE>
An analysis of other real estate owned expense follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
-----------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Foreclosure and holding costs, net $ 347 $ 383 $ 539
Provision for loss subsequent to foreclosure 203 173 364
Gains on sales, net (162) (67) (131)
-----------------------
$ 388 $ 489 $ 772
=======================
</TABLE>
Changes in the valuation allowance for other real estate owned are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
-----------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 496 $ 409 $ 250
Provision for loss 203 173 364
Charge offs, net (243) (86) (205)
-----------------------
Balance at end of year $ 456 $ 496 $ 409
=======================
</TABLE>
<PAGE> 34
NOTE I--GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, included in other assets at
December 31, consist of the following:
<TABLE>
<CAPTION>
1995
-------------------------------
NET
ORIGINAL ACCUMULATED BOOK
AMOUNT AMORTIZATION VALUE
-------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill $3,682 $1,308 $2,374
================================
Core deposit intangibles $ 879 $ 833 $ 46
================================
Purchased mortgage servicing rights $ 729 $ 556 $ 173
================================
<CAPTION>
1994
-------------------------------
NET
ORIGINAL ACCUMULATED BOOK
AMOUNT AMORTIZATION VALUE
-------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill $3,682 $1,062 $2,620
================================
Core deposit intangibles $ 879 $ 786 $ 93
================================
Purchased mortgage servicing rights $ 729 $ 446 $ 283
================================
</TABLE>
Amortization expense for the years ended December 31, 1995, 1994 and
1993 was $403,000, $468,000 and $574,000, respectively.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("SFAS No. 121"). SFAS No. 121 is effective for years beginning after
December 15, 1995 and establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. This statement
requires that long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company does not expect SFAS No. 121 to have a significant effect on its
financial statements.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights" ("SFAS No. 122"). SFAS No. 122 is effective for years
beginning after December 15, 1995 and requires that mortgage banking
enterprises recognize as separate assets the right to service mortgage
loans regardless of whether such rights are obtained through the direct
purchase of servicing rights or from the origination of mortgage loans
intended to be sold with servicing retained. SFAS No. 122 also requires
assessments of capitalized servicing rights for impairment based on the
fair value of those rights. The Company does not expect SFAS No. 122 to
have a significant effect on its financial statements.
NOTE J--INTEREST BEARING DEPOSITS
Interest bearing deposits consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
-----------------------
(IN THOUSANDS)
<S> <C> <C>
NOW and Super NOW accounts $ 90,681 $ 46,811
Savings accounts 41,914 59,003
Money market deposit accounts 17,249 31,745
Time certificates 105,364 75,919
-----------------------
$ 255,208 $ 213,478
=======================
</TABLE>
Maturities of time certificates after December 31, 1995 are
$84,121,000 in 1996, $12,878,000 in 1997, $4,721,000 in 1998, $1,834,000
in 1999, $1,554,000 in 2000 and $256,000 in years thereafter.
Time certificates with balances of $100,000 or more at December 31,
1995 and 1994 totaled $11,983,000 and $6,949,000, respectively.
NOTE K--BORROWINGS
Securities Sold Under Agreements to Repurchase
Short-term overnight borrowings in the form of securities sold under
agreements to repurchase at December 31, 1995 and 1994, totaled
$26,189,000 and $21,968,000, respectively. Such borrowings were
collateralized at December 31, 1995 by a portion of the Company's U.S.
Treasury securities with a carrying value and estimated market value of
$36,259,000 (see note C). The collateral is maintained under the control
of the Company in a separate custodial account at the Federal Home Loan
Bank of Boston. The weighted average interest rate on those borrowings was
4.72% and 5.38%, respectively, at December 31, 1995 and 1994.
The maximum amount of securities sold under agreements to repurchase
at any month end during 1995,
<PAGE> 35
1994 and 1993, were $28,298,000, $21,968,000
and $13,764,000, respectively. The average amount of securities sold under
agreements to repurchase in 1995, 1994 and 1993 were $21,133,000,
$15,500,000 and $10,841,000, respectively. The average cost of securities
sold under agreements to repurchase was 5.24%, 4.16% and 2.82% during
1995, 1994 and 1993, respectively.
Other Short-term Borrowings
The Company's subsidiary maintains a line of credit with the FHLBB
to meet short or long-term financing needs that may arise. As of December
31, 1995, there were no outstanding short-term FHLBB borrowings. As of
December 31, 1994, short-term borrowings with the FHLBB amounted to
$20,904,000, at an interest rate of 6.65%.
Short and long-term borrowings from the FHLBB are secured by a
blanket lien on substantially all unencumbered interest-earning assets and
FHLBB stock held. The Company's subsidiary bank is able to commingle,
encumber or dispose of any collateral held subject to its ability to
maintain specific "qualifying" collateral levels in excess of collateral
maintenance requirements and meet minimum capital ratios, both of which
were met as of December 31, 1995.
Based upon "qualifying" collateral held, the Company's subsidiary
bank had a total borrowing capacity with the FHLBB as of December 31, 1995
of approximately $140,000,000, of which approximately $139,000,000 was
still available.
Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
----------------
(IN THOUSANDS)
<S> <C> <C>
FHLBB long term borrowings
Advances with monthly payments of principal
and interest, weighted average interest rate
of 6.13%, final payment due in October, 2005 $ 467
Advances with monthly payments of principal
and interest, with interest at the rate of
5.00% per annum, final payment due in
August, 2014 75 $ 78
Advances maturing at various dates in 2014,
with monthly payments of interest only at
the rate of 5.00% per annum 186 186
ESOP Obligation (Note O) 64
---------------
$ 728 $ 328
===============
</TABLE>
Principal payments due on long-term debt after December 31, 1995 are
$38,000 in 1996, $40,000 in 1997, $43,000 in 1998, $45,000 in 1999,
$48,000 in 2000 and $514,000 in years thereafter.
NOTE L--COMMITMENTS AND CONTINGENCIES
Financial Instruments With Off-Balance Sheet Risk
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 forward commitments. The instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated statement of financial
condition. The contract or notional amount of those instruments reflects
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,
standby letters of credit and recourse arrangements is represented by the
contractual amount of those instruments. The Company uses the
<PAGE> 36
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. For forward commitments, the contract
or notional amounts do not represent exposure to credit loss. The Company
controls the credit risk of its forward commitments through credit
approvals, limits, and monitoring procedures. There were no forward
commitments outstanding at December 31, 1995 and 1994.
Financial instruments with off-balance sheet risk at December 31,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
------------------
1995 1994
------------------
(IN THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk
Commitments to originate loans $ 7,646 $ 3,714
Unused lines and standby letters of credit 12,646 13,197
Unadvanced portions of construction loans 532 1,109
</TABLE>
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 upon management's credit
evaluation of the borrower.
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.
Lease Commitments
The Company, through its subsidiary bank, leases a branch office and
various parcels of land on which it has constructed automatic teller
machines. The leases are classified as operating leases and expire at
various dates through 1999. Most of the leases have renewal options.
Minimum lease payments through 1999 are not significant. Rent expense for
the years ending December 31, 1995, 1994 and 1993 was $91,000, $83,000 and
$80,000, respectively.
Employment Agreements
The subsidiary bank and the Company have entered into Employment
Agreements with three of its senior officers, one of which provides for a
specified minimum annual compensation. However, such employment may be
terminated for cause without incurring any continuing obligations. Also,
the subsidiary bank and the Company have entered into Special Termination
Agreements with such senior officers. The agreements generally provide for
certain lump sum severance payments following a "change in control" as
defined in the agreements.
OAKAR Deposits
The majority of the Company's deposits are insured by the Bank
Insurance Fund ("BIF"). A portion of the Company's deposits are OAKAR
deposits (approximately $42,400,000 at December 31, 1995), which are
deposits purchased from institutions previously insured by the Savings
Association Insurance Fund ("SAIF"). A proposal is being considered by
Congress under which SAIF-insured companies would pay a one-time special
assessment designed to bring the SAIF reserve ratio to the level already
achieved by BIF. Under the proposal, OAKAR deposits would be subject to
this special assessment. This special assessment could be approximately 85
basis points per $100 of deposits based upon the Company's March 31, 1995
OAKAR deposits of approximately $35,500,000. If such an assessment is
enacted, the Company's potential pretax liability could be approximately
$302,000.
Legal Proceedings
The Company is a defendant in ordinary and routine pending legal
actions incident to its business, none of which is believed by management
to be material to the financial condition of the Company.
NOTE M--INCOME TAXES
The Company and its subsidiary file a consolidated Federal income
tax return on the accrual basis for taxable years ending December 31.
<PAGE> 37
Income taxes (benefits) reflected in the consolidated statements of
earnings for years ended December 31, are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current $ 1,980 $ 1,391 $ 160
Deferred (107) (139) 759
State:
Current 37
---------------------------
$ 1,873 $ 1,252 $ 956
===========================
</TABLE>
The above amounts reflect a tax provision on securities transactions
of $111,000, $66,000 and $111,000, in 1995, 1994 and 1993, respectively.
The difference between the total expected income tax expense
computed by applying the Federal income tax rate to earnings before income
tax expense and the reported income tax expense for years ended December
31, is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" Federal income tax
expense at statutory rate $ 1,805 $ 1,386 $ 979
Increase (decrease) resulting from:
Other 68 (134) (23)
-------------------------
$ 1,873 $ 1,252 $ 956
=========================
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
---------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Writedown of marketable equity securities $ 101 $ 101
Writedowns of other real estate owned 50 82
Core deposit intangibles 135 140
Provision for loan losses 115 121
Deferred loan fees 58 65
Capitalized interest 45 50
Purchased mortgage servicing rights 94 87
Unrealized losses on securities available for sale 362
Supplemental retirement 62 32
Other 39 23
---------------
699 1,063
Less: Valuation allowance 0 0
---------------
Total deferred tax assets 699 1,063
---------------
Deferred tax liabilities:
Unearned income 559 649
Book over tax basis of premises and equipment 412 417
Unrealized gains on securities available for sale 840
Other 36 50
---------------
Total deferred tax liabilities 1,847 1,116
---------------
Net deferred tax liability $1,148 $ 53
===============
</TABLE>
At December 31, 1995 and 1994, net deferred tax liabilities includes
$840,000 in deferred tax liabilities and $362,000 in deferred tax assets,
respectively, which are attributable to the tax effects of net unrealized
gains at December 31, 1995 and net unrealized losses at December 31, 1994,
on securities available for sale. Pursuant to SFAS No. 115 and SFAS No.
109, the corresponding charge or credit has been made directly to
stockholders' equity.
Based upon management's evaluation of the likelihood of realization,
no valuation allowance on deferred tax assets has been provided.
<PAGE> 38
NOTE N--PENSION PLANS
Defined Benefit Pension Plan
The following table sets forth the funded status of the Company's
defined benefit pension plan as of September 30, 1995 and 1994 (the most
recent actuarial valuations):
<TABLE>
<CAPTION>
1995 1994
----------------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $1,653,000 and $1,471,000, respectively $1,810 $1,588
================
Projected benefit obligation for service rendered
to date $2,281 $2,032
Plan assets at fair value, primarily fixed income
and equity securities 2,331 1,920
----------------
Plan assets in excess of (less than) projected
benefit obligation 50 (112)
Unrecognized net gain from past experience different
from that assumed and effects of changes in assumptions (493) (489)
Unrecognized net liability being recognized over
approximately 13 years 301 453
----------------
Accrued pension cost $ (142) $ (148)
================
</TABLE>
Net periodic pension expense included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
-----------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 129 $ 146 $ 111
Interest cost on projected benefit obligation 156 152 142
Actual return on plan assets (378) (169) (264)
Net amortization and deferral 251 52 161
-----------------------
Net periodic pension expense $ 158 $ 181 $ 150
=======================
</TABLE>
The weighted average discount rate of 7.50% in 1995, 8.25% in 1994
and 7.00% in 1993, and the rate of increase in future compensation levels
of 5.50% in 1995, 6.00% in 1994 and 5.50% in 1993, were used in
determining the actuarial present value of the projected benefit
obligation. The expected long-term rate of return on assets was 8.00% for
each year.
Supplemental Executive Retirement Plan
Effective January 1, 1993, the Company established a SERP. The
following table sets forth the status of the unfunded SERP as of September
30, 1995 and 1994 (the most recent actuarial valuations):
<TABLE>
<CAPTION>
1995 1994
----------------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $0 and $0, respectively $ 235 $ 175
================
Projected benefit obligation for service rendered to date $ 670 $ 494
Plan assets 0 0
----------------
Projected benefit obligation in excess of plan assets (670) (494)
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions 232 120
Unrecognized net liability being recognized over 13 years 255 281
Additional minimum liability (52) (82)
----------------
Accrued pension cost $ (235) $ (175)
================
</TABLE>
Net periodic pension expense under the SERP included the following
components:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1994 1993
------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost $ 16 $ 14 $ 16
Interest cost on projected benefit obligation 41 19 12
Net amortization and deferral 33 16 16
------------------
Net periodic pension expense $ 90 $ 49 $ 44
==================
</TABLE>
<PAGE> 39
The weighted average discount rate was 7.50%, 8.25% and 7.00% in
1995, 1994 and 1993, respectively and the rate of increase in future
compensation levels was 5.00%, 5.00% and 5.50% in 1995, 1994 and 1993,
respectively.
NOTE O--EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
On August 19, 1986, the Company's ESOP purchased 102,900 shares of
the common stock issued in the Company's initial public offering for
$858,000. These funds were obtained by the ESOP through a loan from a
third party lender and repayment of the loan was guaranteed by the
Company. Borrowings under this loan agreement were repaid in full during
1995. Prior to repayment, principal was payable in quarterly installments
of $21,500, with interest at approximately 80% of the prime rate. Company
contributions were the primary source of funds for the ESOP's repayment of
the loan. The amount of this loan was $64,000 at December 31, 1994 and is
included in Long-term Debt with an offsetting reduction in Stockholders'
Equity in the Consolidated Statements of Financial Condition. There were
no outstanding borrowings under this loan agreement at December 31, 1995.
Interest expense incurred on ESOP debt was $2,000, $6,000 and
$10,000, respectively, for the years ended December 31, 1995, 1994 and
1993.
Compensation expense related to the ESOP amounted to $114,000,
$136,000 and $136,000, respectively, for the years ended December 31,
1995, 1994 and 1993 and included an additional contribution in excess of
amounts required to service the ESOP debt of $50,000 in each of those
years.
Dividends on unallocated shares were insignificant during 1995 and
1994 and there were no dividends received on unallocated shares in 1993.
The total shares held by the ESOP were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------------------
<S> <C> <C>
Allocated shares 172,694 164,913
Unallocated shares 0 5,145
-------------------
Total ESOP shares 172,694 170,058
===================
</TABLE>
The fair value of unallocated shares at December 31, 1994 was
$59,000. There were no unallocated shares at December 31, 1995.
Unallocated shares were allocated to employees as the ESOP debt was
repaid.
NOTE P--STOCKHOLDERS' EQUITY
Liquidation Account
Pursuant to certain bank conversion regulations, Granite Bank
established a liquidation account in an amount equal to its net worth of
$5,603,000 as of February 28, 1986, for the benefit of eligible account
holders who maintain their savings accounts in Granite Bank after
conversion. In the event of a complete liquidation, eligible account
holders would be entitled to their interest in the liquidation account
before any liquidation distribution may be made to stockholders. Their
interest as to each savings account will be in the same proportion of the
total liquidation amount as the balance of their savings account on
February 28, 1986 was to the balance in all savings accounts in Granite
Bank on that date. However, if the amount in the savings account on any
annual closing date of Granite Bank is less than the amount in such
account on February 28, 1986, then their interest in the liquidation
account will be reduced by an amount proportionate to any such reduction,
and their interest will cease to exist if such savings accounts are
closed. Their interest in the liquidation account will never be increased
despite any increase in the related savings account after February 28,
1986.
Incentive Stock Option Plan
On March 18, 1986, the Company adopted an Incentive Stock Option
Plan, whereby options may be granted to certain key employees of the
Company or its subsidiary to purchase up to an aggregate of 210,000 shares
of common stock of the Company at a price not less than fair market value
at the date of grant. Effective April 24, 1992, options to purchase
189,000 shares of the Company's common stock were granted. Such options
vested 100% one year after the date of grant and are exercisable over a
period not to exceed 10 years from the date of grant.
<PAGE> 40
The following summarizes the stock option transactions:
<TABLE>
<CAPTION>
OPTION SHARES
-----------------------------
1995 1994 1993
-----------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 168,800 168,800 189,000
Granted 0 0 0
Cancelled 0 0 0
Exercised 0 0 20,200
Outstanding at end of year 168,800 168,800 168,800
Exercisable at end of year 168,800 168,800 168,800
Price range of options
Outstanding $5.00 $5.00 $5.00
Exercised -- -- $5.00
Average price of options outstanding $5.00 $5.00 $5.00
</TABLE>
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a
fair value based method of accounting for stock-based compensation
arrangements with employees, rather than the intrinsic value based method
that is contained in Accounting Principles Board Opinion No. 25 ("Opinion
25"). However, SFAS No. 123 does not require an entity to adopt the new
fair value based method for purposes of preparing its basic financial
statements. Entities are allowed (1) to continue to use the Opinion 25
method or (2) to adopt the SFAS No. 123 fair value based method. The SFAS
No. 123 fair value based method is considered by the FASB to be preferable
to the Opinion 25 method, and thus, once the fair value based method is
adopted, an entity cannot change back to the Opinion 25 method. SFAS No.
123 applies to all transactions in which an entity acquires goods or
services by issuing equity instruments or by incurring liabilities where
the payment amounts are based on the entity's common stock price, except
for employee stock ownership plans. For entities not adopting the SFAS No.
123 fair value based method, SFAS No. 123 requires the entity to display
in the footnotes to the financial statements pro forma net earnings and
earnings per share information as if the fair value based method had been
adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in years that begin after December 15, 1995. The
disclosure requirements are effective for financial statements for years
beginning after December 15, 1995. The Company intends to adopt SFAS No.
123 in 1996, by continuing to account for stock-based compensation under
the Opinion 25 method. As required by SFAS No. 123, the pro forma effects
on net earnings and earnings per share will be determined as if the fair
value based method had been applied and disclosed in the notes to
consolidated financial statements.
Stock Repurchase Plan
On June 14, 1994, the Company announced a Stock Repurchase Plan
("Plan"), whereby the Company's Board of Directors authorized the
repurchase of up to 9% of its outstanding common shares from time to time.
Shares repurchased under the Plan may be held in treasury, retired or used
for general corporate purposes. As of December 31, 1995, the Company has
repurchased 124,600 shares under the Plan, representing 5.77% of common
shares outstanding at the date of announcement of the Plan.
Preferred Stock
During the third quarter of 1993, 12,000 shares of the 7% cumulative
convertible preferred stock ("Preferred Stock") were exchanged for 12,000
shares of common stock. Effective at the close of business September 30,
1993, the remaining outstanding shares of Preferred Stock, under its
terms, converted share for share into common stock. As a result, 399,675
shares of common stock were issued in exchange for the outstanding 399,675
shares of Preferred Stock, which were immediately retired.
Capital Requirements
During 1989, the Federal Reserve Board issued final guidelines for a
risk-based approach to measuring the capital adequacy of bank holding
companies and state-chartered banks which are members of the Federal
Reserve System. These capital requirements generally call for an 8 percent
total capital ratio, of which 4 percent must be comprised of Tier I
capital. Risk-based capital ratios are calculated by weighting assets and
off-balance sheet instruments according to their relative credit risks. In
addition to the risk-based capital standard, bank holding companies such
as the Company must maintain a minimum leverage ratio of Tier I capital to
total assets of at least 4 percent, with Tier I capital for this purpose
being defined consistent with the risk-based capital guidelines. The
Company was in compliance with these requirements at December 31, 1995 and
1994.
Substantially similar rules have been issued by the FDIC with
respect to state-chartered banks which are not members of the Federal
Reserve System, such as the subsidiary bank. At December 31, 1995 and
1994, the subsidiary bank was in compliance with these requirements. In
addition, as of December 31, 1995 and 1994, the subsidi-
<PAGE> 41
ary bank was considered "well capitalized" for purposes of the FDIC's prompt
corrective action regulations.
At December 31, 1995 the Company's and the subsidiary bank's
regulatory capital ratios as a percentage of assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------
SUBSIDIARY
COMPANY BANK
--------------------
<S> <C> <C>
Leverage capital 7.54% 7.13%
Tier I capital to risk-weighted assets 14.76% 13.96%
Total capital to risk-weighted assets 15.85% 15.06%
</TABLE>
NOTE Q--RESTRICTIONS ON SUBSIDIARY'S LOANS, ADVANCES AND DIVIDENDS
Bank regulatory authorities restrict the amounts available for the
payment of dividends by the subsidiary bank to the Company if the effect
thereof would cause the capital of the subsidiary bank to be reduced below
either the amount required for the liquidation account (see note P) or
applicable capital requirements. These restrictions indirectly restrict
the Company's ability to pay common stock dividends.
Federal laws and regulations prohibit the Company from borrowing
from the subsidiary bank unless the loans are secured by specified amounts
of collateral. In addition, such secured loans to the Company from the
subsidiary bank generally are limited to 10 percent of the subsidiary
bank's capital surplus. At December 31, 1995 and 1994, no such
transactions existed between the Company and the subsidiary bank.
NOTE R--OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
Components of other noninterest income were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
-----------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposit account fees and service charges $ 792 $ 795 $ 826
Loan account fees and service charges 177 193 121
Other 201 198 276
-------------------------
$1,170 $1,186 $1,223
=========================
</TABLE>
Components of other noninterest expense were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
--------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Advertising $ 332 $ 235 $ 90
Amortization of intangibles 403 468 574
FDIC deposit insurance assessments 283 581 686
Legal fees 190 134 169
Postage and freight 243 226 217
Printing and supplies 247 185 242
Other 1,223 1,297 1,204
--------------------------
$2,921 $3,126 $3,182
==========================
</TABLE>
NOTE S--SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
-------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid for
Interest $10,797 $7,710 $8,001
Income taxes 1,875 1,450 885
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities
In connection with the December 31, 1993 adoption of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the
Company transferred $20,999,000 of debt securities from investments held
for sale to securities available for sale. Additionally $1,904,000 of
marketable equity securities were transferred from investment securities
to securities available for sale.
The subsidiary bank acquired other real estate owned through
foreclosure in settlement of loans or accepted deeds in lieu of
foreclosures on real estate loans in the amount of $1,774,000, $1,363,000
and $2,191,000 during the years ended December 31, 1995, 1994 and 1993,
respectively.
Dividends declared and unpaid on common stock at December 31, 1995,
1994 and 1993 were $244,000, $253,000 and $173,000, respectively.
<PAGE> 42
NOTE T--FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the subsidiary bank's
entire holdings of a particular financial instrument. Because no market
exists for a significant portion of the subsidiary bank's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Other significant assets and
liabilities that are not considered financial assets or liabilities and
therefore, are not valued pursuant to SFAS No. 107, include the mortgage
banking operation, premises and equipment, other real estate owned, core
deposit intangibles, purchased mortgage servicing rights, and goodwill. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in many of the estimates.
The following methods and assumptions were used by the Company in
estimating fair values of its financial instruments:
CASH, DUE FROM BANKS AND INTEREST BEARING DEPOSITS IN FEDERAL HOME LOAN
BANK OF BOSTON.
For cash and short term investments having maturities of 90 days or
less, the carrying amounts reported in the consolidated statements of
financial condition approximate fair values.
SECURITIES HELD TO MATURITY, SECURITIES AVAILABLE FOR SALE AND STOCK IN
FEDERAL HOME LOAN BANK OF BOSTON.
The fair value of securities held to maturity and securities
available for sale is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. Ownership
of stock in FHLBB is restricted to member banks; therefore, the stock is
not traded. The estimated fair value of stock in FHLBB, which approximates
carrying value, represents the price at which the subsidiary bank could
liquidate its holdings.
LOANS
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage, construction,
and other consumer. Each loan category is further segmented into fixed and
adjustable rate interest terms and by performing and nonperforming
categories.
The fair value of performing loans, except residential mortgage
loans, is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the
credit and interest rate risk inherent in the loan. The estimate of
maturity is based on the subsidiary bank's historical experience with
repayments for each loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions. For
performing residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources adjusted to reflect
differences in servicing and credit costs.
Fair value for significant nonperforming loans is based on recent
external appraisals. If appraisals are not available, estimated cash flows
are discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined using available market
information and specific borrower information.
ACCRUED INTEREST RECEIVABLE
The carrying value of accrued interest receivable on securities and
loans, included in other assets, approximates its fair value.
DEPOSITS
Under SFAS No. 107, the fair value of deposits with no stated
maturity, such as non-interest bearing deposits, NOW, Super NOW, regular
savings and money market deposit accounts, is equal to the amount payable
on demand. The fair value estimates do not include the benefit that
results from the low-cost funding provided by the deposit liabilities
compared to the cost of borrowing funds in the market. The fair value
estimate of time certificates is based on the discounted value of
contractual cash flows.
<PAGE> 43
The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The fair value estimate of securities sold under agreements to
repurchase approximates carrying value because they mature within ninety
days and bear market interest rates.
SHORT-TERM BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF BOSTON
The fair value estimate of the short-term borrowings from the FHLBB
approximates carrying value, because the borrowings mature daily and bear
market interest rates.
LONG-TERM DEBT
The fair value of long-term debt is based upon the discounted value
of contractual cash flows. The discount rate is estimated using the rates
currently offered for borrowings of similar maturities.
ACCRUED INTEREST PAYABLE
The carrying value of accrued interest payable on deposits and
borrowings, included in other liabilities, approximates its fair value.
OFF-BALANCE SHEET INSTRUMENTS
The fair value of commitments to extend credit is estimated using
the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments,
excluding those committed for sale to the secondary market, fair value
also considers the difference between current levels of interest rates and
the committed rates. The fair value of financial guarantees written and
letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle
the obligations with the counterparties. It is management's belief that
the fair value estimate of commitments to extend credit approximates
carrying value, which is $0, at December 31, 1995 and 1994, because most
mature within one year, do not present any unanticipated credit concerns
and bear market interest rates.
The following presents the carrying value and estimated fair value
of the Company's financial instruments at December 31, 1995 and 1994.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1995 1994
-------------------- --------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks $ 17,771 $ 17,771 $ 9,255 $ 9,255
Interest bearing deposits in Federal Home
Loan Bank of Boston 24,239 24,239 26 26
Securities held to maturity 15,499 15,260
Stock in Federal Home Loan Bank of Boston 3,215 3,215 3,215 3,215
Securities available for sale 95,016 95,016 73,032 73,032
Net loans 186,294 192,695 188,091 194,710
Accrued interest receivable 2,471 2,471 2,348 2,348
Financial Liabilities
Deposits (with no stated maturity) 181,766 181,766 164,110 164,110
Time deposits 105,364 104,844 75,919 75,704
Securities sold under agreements to repurchase 26,189 26,189 21,968 21,968
Short-term borrowings from the Federal Home
Loan Bank of Boston 20,904 20,904
Long-term debt 728 711 328 328
Accrued interest payable 410 410 234 234
</TABLE>
<PAGE> 44
NOTE U--CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial statements of Granite State Bankshares, Inc.
(the "Parent Company"), as of December 31, 1995 and 1994, and for the
years ended December 31, 1995, 1994 and 1993, are as follows:
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Interest bearing deposits in subsidiary bank $ 1,467 $ 1,158
Investment in subsidiary bank, at equity 28,369 24,601
Other assets 231 234
------------------
$30,067 $25,993
==================
LIABILITIES $ 278 $ 352
STOCKHOLDERS' EQUITY 29,789 25,641
------------------
$30,067 $25,993
==================
</TABLE>
Statements of Earnings
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994 1993
------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Interest income from subsidiary bank $ 31 $ 22 $ 18
Dividend income from subsidiary bank 2,000 1,900 250
--------------------------
Total revenue 2,031 1,922 268
Operating expenses 31 22 18
--------------------------
Earnings before equity in undistributed
earnings of subsidiary bank 2,000 1,900 250
Equity in undistributed earnings of
subsidiary bank 1,435 923 1,877
--------------------------
Net earnings $3,435 $2,823 $2,127
==========================
</TABLE>
<PAGE> 45
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
--------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,435 $ 2,823 $ 2,127
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary bank (1,435) (923) (1,877)
(Increase) decrease in other assets 3 (4) (5)
Increase (decrease) in other liabilities (1) 13 25
Decrease in unearned compensation--ESOP 64 86 86
-----------------------------
Net cash provided by operating activities 2,066 1,995 356
-----------------------------
Cash flows from investing activities:
Increase in interest bearing deposits with subsidiary
bank (309) (332) (67)
-----------------------------
Net cash used in investing activities (309) (332) (67)
-----------------------------
Cash flows from financing activities:
Dividends paid on common stock (998) (688)
Dividends paid on preferred stock (304)
Issuance of common stock in connection with exercise of
stock options 101
Purchase of treasury stock (695) (889)
Payments made on long-term debt (64) (86) (86)
-----------------------------
Net cash used in financing activities (1,757) (1,663) (289)
-----------------------------
Net increase (decrease) in cash 0 0 0
Cash at beginning of year 0 0 0
-----------------------------
Cash at end of year $ 0 $ 0 $ 0
=============================
</TABLE>
The Parent Company's Statements of Stockholders' Equity are
identical to the Consolidated Statements of Stockholders' Equity and
therefore, are not reprinted here.
The Company has no material contingencies, commitments or long-term
obligations other than those disclosed elsewhere in the accompanying Notes
to Consolidated Financial Statements.
<PAGE> 46
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following is a summary of the quarterly results of operations for
the years ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995
----------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest and dividend income
Loans $4,622 $4,622 $4,668 $4,415
Securities available for sale 1,260 1,146 1,128 1,153
Securities held to maturity 124 199 210
Interest bearing deposits in Federal Home Loan Bank of Boston 455 334 23 2
Federal Home Loan Bank of Boston stock 53 54 57 57
---------------------------------
Total interest and dividend income 6,390 6,280 6,075 5,837
---------------------------------
Interest expense
Deposits 2,700 2,597 2,367 1,814
Other borrowed funds 284 322 300 589
---------------------------------
Total interest expense 2,984 2,919 2,667 2,403
---------------------------------
Net interest and dividend income 3,406 3,361 3,408 3,434
Provision for possible loan losses 285 225 175 50
---------------------------------
Net interest and dividend income after provision for possible loan losses 3,121 3,136 3,233 3,384
Noninterest income 632 616 743 524
Noninterest expense 2,445 2,430 2,620 2,586
---------------------------------
Earnings before income taxes 1,308 1,322 1,356 1,322
Income taxes 438 458 498 479
---------------------------------
NET EARNINGS $ 870 $ 864 $ 858 $ 843
=================================
Net earnings per common share--primary $ 0.40 $ 0.40 $ 0.39 $ 0.39
Net earnings per common share--fully diluted <F1> $ 0.40 $ 0.40 $ 0.39 $ 0.39
Annualized Returns
Return on average assets 1.00% 1.02% 1.08% 1.10%
Return on average stockholders' equity 11.60% 11.91% 12.44% 13.09%
<FN>
- -------------------
(F1) Earnings per common share is calculated by dividing net earnings by the
average common shares outstanding for each quarter. Therefore, the sum of
earnings per common share for the quarters may not equal total earnings per
share for the year.
</FN>
</TABLE>
<PAGE> 47
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)--CONTINUED
<TABLE>
<CAPTION>
1994
----------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest and dividend income
Loans $4,171 $4,025 $3,779 $3,612
Trading securities 60 67 102 166
Securities available for sale 1,116 916 589 294
Securities held to maturity 205 241 333 335
Interest bearing deposits in Federal Home Loan Bank of Boston 10 47 92
Federal Home Loan Bank of Boston stock 68 69 26 21
---------------------------------
Total interest and dividend income 5,630 5,318 4,876 4,520
---------------------------------
Interest expense
Deposits 1,610 1,591 1,559 1,587
Other borrowed funds 522 448 284 103
---------------------------------
Total interest expense 2,132 2,039 1,843 1,690
---------------------------------
Net interest and dividend income 3,498 3,279 3,033 2,830
Provision for possible loan losses 600
---------------------------------
Net interest and dividend income after provision for possible loan losses 2,898 3,279 3,033 2,830
Noninterest income 652 527 508 510
Noninterest expense 2,716 2,548 2,479 2,419
---------------------------------
Earnings before income taxes 834 1,258 1,062 921
Income taxes 170 453 334 295
---------------------------------
NET EARNINGS $ 664 $ 805 $ 728 $ 626
=================================
Net earnings per common share--primary<F1> $ 0.30 $ 0.36 $ 0.32 $ 0.28
Net earnings per common share--fully diluted $ 0.30 $ 0.36 $ 0.32 $ 0.28
Annualized Returns
Return on average assets 0.84% 1.01% 0.95% 0.85%
Return on average stockholders' equity 9.84% 12.09% 11.14% 9.85%
<FN>
- -------------------
(F1) Earnings per common share is calculated by dividing net earnings by the
average common shares outstanding for each quarter. Therefore, the sum of
earnings per common share for the quarters may not equal total earnings per
share for the year.
</FN>
</TABLE>
<PAGE> 48
EXHIBIT 23
Consent of Independent Certified Public Accountants
We have issued our report dated January 10, 1996, accompanying the
consolidated financial statements incorporated by reference in the Annual
Report of Granite State Bankshares, Inc. and Subsidiary on Form 10-KSB for
the year ended December 31, 1995. We hereby consent to the incorporation
by reference of said report in the Registration Statement of Granite State
Bankshares, Inc. and Subsidiary on Form S-8 (File No. 33-57720, effective
February 1, 1993).
/s/ GRANT THORNTON LLP
Boston, Massachusetts
March 29, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-KSB and is qualified in its entirety by reference to such finacial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 17,771
<INT-BEARING-DEPOSITS> 24,239
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 95,016<F1>
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 189,998<F2>
<ALLOWANCE> 3704
<TOTAL-ASSETS> 346,414
<DEPOSITS> 287,130
<SHORT-TERM> 26,189<F3>
<LIABILITIES-OTHER> 2,578
<LONG-TERM> 728
0
0
<COMMON> 2,536
<OTHER-SE> 27,253
<TOTAL-LIABILITIES-AND-EQUITY> 346,414
<INTEREST-LOAN> 18,327
<INTEREST-INVEST> 5,220
<INTEREST-OTHER> 1,035
<INTEREST-TOTAL> 24,582
<INTEREST-DEPOSIT> 9,478
<INTEREST-EXPENSE> 10,973
<INTEREST-INCOME-NET> 13,609
<LOAN-LOSSES> 735
<SECURITIES-GAINS> 326
<EXPENSE-OTHER> 10,081
<INCOME-PRETAX> 5,308
<INCOME-PRE-EXTRAORDINARY> 3,435
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,435
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.57
<YIELD-ACTUAL> 4.61
<LOANS-NON> 1,798
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,230
<CHARGE-OFFS> 1,405
<RECOVERIES> 144
<ALLOWANCE-CLOSE> 3,704
<ALLOWANCE-DOMESTIC> 3,704
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> Available for sale securities, at market value
<F2> Loans net of unearned income and gross of allowance for possible loan losses
<F3> Securities sold under agreements to repurchase
</FN>
</TABLE>
